<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended October 3, 1999
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-26137
DRUGSTORE.COM, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 04-3416255
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
</TABLE>
13920 Southeast Eastgate Way, Suite 300
Bellevue, Washington 98005
(Address of principal executive offices)
(425) 372-3200
(Registrant's telephone number)
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes No XXX
The number of shares of common stock, $.0001 par value, outstanding on
October 3, 1999 was 43,366,681.
----------------
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DRUGSTORE.COM, INC.
CONTENTS
PART I -- FINANCIAL INFORMATION
<TABLE>
<C> <S> <C>
Item 1. Condensed Financial Statements................................... 1
Condensed Consolidated Balance Sheets as of October 3, 1999 and
December 31, 1998................................................ 1
Condensed Consolidated Statements of Operations for the Three
Months Ended October 3, 1999 and September 30, 1998, the Nine
Months Ended October 3, 1999 and the Period from April 2, 1998
(Inception) to September 30, 1998............................... 2
Condensed Consolidated Statement of Stockholders' Equity for the
Nine Months Ended October 3, 1999............................... 3
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended October 3, 1999 and the Period from April 2, 1998
(Inception) to September 30, 1998............................... 4
Notes to Condensed Consolidated Financial Statements............. 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk....... 13
PART II -- OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds........................ II-1
Item 5. Other Information................................................ II-1
Item 6. Exhibits and Reports on Form 8-K................................. II-2
SIGNATURES................................................................ II-3
</TABLE>
i
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PART I -- FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
DRUGSTORE.COM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
October 3, December 31,
1999 1998
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $160,302 $14,408
Accounts receivable.................................. 2,266 --
Inventories.......................................... 2,311 --
Prepaid marketing expenses........................... 9,612 4,317
Other prepaid expenses and current assets............ 923 520
-------- -------
Total current assets................................ 175,414 19,245
Fixed assets, net of accumulated depreciation of
$1,912 and $66....................................... 10,353 2,616
Intangible assets, net of accumulated amortization of
$5,371 and $33....................................... 206,043 230
Prepaid marketing expenses............................ 20,038 --
Note receivable from officer.......................... 265 250
Deposits and other assets............................. 1,292 176
-------- -------
Total assets.......................................... $413,405 $22,517
======== =======
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................... $ 11,737 $ 1,254
Accrued compensation................................. 2,425 327
Accrued marketing expenses........................... 3,855 --
Other current liabilities............................ 1,257 142
Current portion of capital lease obligations......... 1,435 472
-------- -------
Total current liabilities........................... 20,709 2,195
Capital lease obligations, less current portion....... 1,008 975
Stockholders' equity:
Preferred stock, $.0001 par value:
Authorized shares--10,000,000
Series A preferred stock
Issued and outstanding shares--none and 10,000,000
as of
October 3, 1999 and December 31, 1998,
respectively.................................... -- 7,986
Series B preferred stock
Issued and outstanding shares--none and 5,446,268
as of
October 3, 1999 and December 31, 1998,
respectively.................................... -- 18,237
Common stock, $.0001 par value:
Authorized shares--250,000,000
Issued and outstanding shares--43,366,681 and
2,323,000 as of
October 3, 1999 and December 31, 1998,
respectively.................................... 4 --
Additional paid-in capital........................... 485,450 5,080
Deferred stock-based compensation.................... (13,413) (3,929)
Accumulated deficit.................................. (80,353) (8,027)
-------- -------
Total stockholders' equity.......................... 391,688 19,347
-------- -------
Total liabilities and stockholders' equity............ $413,405 $22,517
======== =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
1
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DRUGSTORE.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Period from
April 2, 1998
Three Months Ended Nine Months (Inception)
------------------------- Ended to
October 3, September 30, October 3, September 30,
1999 1998 1999 1998
---------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Net sales................ $ 12,158 $ -- $ 16,360 $ --
Cost of sales............ 14,066 -- 19,617 --
---------- --------- ---------- ---------
Gross profit (loss)..... (1,908) -- (3,257) --
Operating expenses:
Marketing and sales..... 16,471 313 32,988 313
Product development..... 4,232 522 10,174 626
General and
administrative......... 3,120 511 7,037 582
Charitable
contributions.......... 3,600 -- 3,600 --
Amortization of
intangible assets...... 5,300 10 5,338 18
Amortization of stock-
based compensation..... 9,267 350 12,850 516
---------- --------- ---------- ---------
Total operating
expenses.............. 41,990 1,706 71,987 2,055
---------- --------- ---------- ---------
Operating loss........... (43,898) (1,706) (75,244) (2,055)
Interest income, net..... 1,925 36 2,918 36
---------- --------- ---------- ---------
Net loss................. $ (41,973) $ (1,670) $ (72,326) $ (2,019)
========== ========= ========== =========
Basic and diluted net
loss per share.......... $ (1.33) $ (2.38) $ (6.54) $ (5.30)
========== ========= ========== =========
Pro forma basic and
diluted net loss per
share................... $ (1.04) $ (.20) $ (2.66) $ (.45)
========== ========= ========== =========
Weighted average shares
outstanding used to
compute basic and
diluted net loss per
share................... 31,512,007 700,502 11,062,231 380,746
========== ========= ========== =========
Weighted average shares
outstanding used to
compute pro forma basic
and diluted net loss per
share................... 40,322,521 8,444,388 27,237,976 4,535,097
========== ========= ========== =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
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DRUGSTORE.COM, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
Convertible Preferred Stock
---------------------------------------------------------------------------------------------------------
Series A Series B Series C Series D Series E
------------------- ------------------- ------------------- ------------------- ---------------------
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount
----------- ------ ---------- ------- ---------- ------- ---------- ------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January
1, 1999............. 10,000,000 $7,986 5,446,268 $18,237 -- $ -- -- $ -- -- $ --
Issuance of Series C
preferred stock net
of offering costs of
$19................. -- -- -- -- 4,472,844 34,981 -- -- -- --
Issuance of Series D
preferred stock net
of offering costs of
$18................. -- -- -- -- -- -- 2,266,289 44,982 -- --
Issuance of Series E
preferred stock net
of offering costs of
$396................ -- -- -- -- -- -- -- -- 12,282,599 243,567
Conversion of
preferred stock to
common stock in
conjunction with
initial public
offering............ (10,000,000) (7,986) (5,446,268) (18,237) (4,472,844) (34,981) (2,266,289) (44,982) (12,282,599) (243,567)
Issuance of common
stock for cash in
initial public
offering, net of
offering costs of
$8,921.............. -- -- -- -- -- -- -- -- -- --
Private placement of
common stock........ -- -- -- -- -- -- -- -- -- --
Contribution of
common stock to
charitable
foundation.......... -- -- -- -- -- -- -- -- -- --
Issuance of warrants
to purchase common
stock............... -- -- -- -- -- -- -- -- -- --
Exercise of common
stock options and
warrants............ -- -- -- -- -- -- -- -- -- --
Deferred stock-based
compensation........ -- -- -- -- -- -- -- -- -- --
Amortization of
stock-based
compensation........ -- -- -- -- -- -- -- -- -- --
Net loss and
comprehensive loss.. -- -- -- -- -- -- -- -- -- --
----------- ------ ---------- ------- ---------- ------- ---------- ------- ----------- --------
Balance at October
3, 1999............. -- $ -- -- $ -- -- $ -- -- $ -- -- $ --
=========== ====== ========== ======= ========== ======= ========== ======= =========== ========
<CAPTION>
Common Stock Additional Deferred
----------------- Paid-in Stock-Based Accumulated
Shares Amount Capital Compensation Deficit Total
---------- ------ ---------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at January
1, 1999............. 2,323,000 $-- $ 5,080 $ (3,929) $ (8,027) $ 19,347
Issuance of Series C
preferred stock net
of offering costs of
$19................. -- -- -- -- -- 34,981
Issuance of Series D
preferred stock net
of offering costs of
$18................. -- -- -- -- -- 44,982
Issuance of Series E
preferred stock net
of offering costs of
$396................ -- -- -- -- -- 243,567
Conversion of
preferred stock to
common stock in
conjunction with
initial public
offering............ 34,468,000 3 349,750 -- -- --
Issuance of common
stock for cash in
initial public
offering, net of
offering costs of
$8,921.............. 5,750,000 1 94,578 -- -- 94,579
Private placement of
common stock........ 555,555 -- 10,000 -- -- 10,000
Contribution of
common stock to
charitable
foundation.......... 200,000 -- 3,600 -- -- 3,600
Issuance of warrants
to purchase common
stock............... -- -- 24 -- -- 24
Exercise of common
stock options and
warrants............ 70,126 -- 84 -- -- 84
Deferred stock-based
compensation........ -- -- 22,334 (22,334) -- --
Amortization of
stock-based
compensation........ -- -- -- 12,850 -- 12,850
Net loss and
comprehensive loss.. -- -- -- -- (72,326) (72,326)
---------- ------ ---------- ------------ ----------- ---------
Balance at October
3, 1999............. 43,366,681 $ 4 $485,450 $(13,413) $(80,353) $391,688
========== ====== ========== ============ =========== =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
DRUGSTORE.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Period from
Nine Months April 2, 1998
Ended (Inception) to
October 3, 1999 September 30, 1998
--------------- ------------------
<S> <C> <C>
Operating Activities:
Net loss.................................... $(72,326) $(2,019)
Adjustments to reconcile net loss to net
cash used in operating activities:
Non-cash expenses:
Depreciation............................. 1,974 5
Marketing and sales...................... 4,374 --
Charitable contributions................. 3,600 --
Amortization of intangible assets........ 5,338 18
Amortization of stock-based
compensation............................ 12,850 516
Changes in:
Accounts receivable...................... (2,266) --
Inventories.............................. (2,311) --
Prepaid marketing expenses............... (1,763) (458)
Other prepaid expenses and current
assets.................................. (447) (25)
Deposits and other assets................ (1,116) (106)
Accounts payable and accrued expenses.... 16,746 195
Other.................................... (98) (14)
-------- -------
Net cash used in operating activities....... (35,445) (1,838)
Investing Activities:
Purchase of fixed assets.................... (7,893) (192)
Purchase of intangible assets............... (95) (90)
-------- -------
Net cash used in investing activities....... (7,988) (282)
Financing Activities:
Proceeds from sales of common stock......... 104,578 90
Proceeds from exercise of stock options and
warrants................................... 85 --
Net proceeds from the issuance of Series A
preferred stock............................ -- 3,986
Net proceeds from the issuance of Series C
preferred stock............................ 34,981 --
Net proceeds from the issuance of Series D
preferred stock............................ 39,982 --
Net proceeds from the issuance of Series E
preferred stock............................ 9,635 --
Proceeds from capital lease obligations..... 538 --
Principal payments on capital lease
obligations................................ (472) --
-------- -------
Net cash provided by financing activities... 189,327 4,076
-------- -------
Net increase in cash and cash equivalents... 145,894 1,956
Cash and cash equivalents at beginning of
period..................................... 14,408 --
-------- -------
Cash and cash equivalents at end of period.. $160,302 $ 1,956
======== =======
Supplemental Cash Flow Information:
Cash paid for interest...................... $ 56 $ --
Equipment acquired through capital lease
agreements................................. $ 945 $ --
Issuance of Series A preferred stock in
exchange for technology license and
advertising agreement...................... $ -- $ 4,000
Issuance of Series D preferred stock in
exchange for cable television advertising.. $ 5,000 $ --
Issuance of Series E preferred stock in
exchange for access to insurance coverage,
advertising commitments and a vendor
agreement.................................. $233,932 $ --
Issuance of warrants to purchase common
stock in exchange for intangible asset..... $ 24 $ --
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
DRUGSTORE.COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of
drugstore.com, inc. and its subsidiaries (collectively the "Company"), have
been prepared in conformity with generally accepted accounting principles for
interim financial information and with the instructions for Form 10-Q and
Article 10 of Regulation S-X. Accordingly, certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed, or omitted,
pursuant to the rules and regulations of the Securities and Exchange
Commission. In the opinion of the Company's management, the statements include
all adjustments necessary (which are of a normal and recurring nature) for the
fair presentation of the results of the interim periods presented. These
consolidated financial statements should be read in conjunction with the
Company's audited consolidated financial statements for the year ended December
31, 1998 and the Company's unaudited interim consolidated financial statements
for the six months ended July 4, 1999, included in the Company's Prospectus,
dated July 27, 1999, filed with the Securities and Exchange Commission in
connection with the Company's initial public offering. The results of
operations for any interim period are not necessarily indicative of the results
of operations for any other interim period or for a full fiscal year.
Reclassifications: Certain prior period amounts have been reclassified to
conform with the current period presentation.
2. 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 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.
5
<PAGE>
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
Three Months Three Months Nine Months April 2, 1998
Ended Ended Ended (Inception) to
October 3, September 30, October 3, September 30,
1999 1998 1999 1998
------------ ------------- ----------- --------------
(unaudited)
<S> <C> <C> <C> <C>
Numerator:
Net loss (in
thousands)............ $ (41,973) $ (1,670) $ (72,326) $ (2,019)
========== ========== ========== =========
Denominator:
Weighted average common
shares outstanding.... 32,880,973 1,938,260 12,284,572 1,044,448
Less weighted average
common shares issued
subject to repurchase
agreements............ (1,368,966) (1,237,758) (1,222,341) (663,702)
---------- ---------- ---------- ---------
Denominator for basic
and diluted
calculation........... 31,512,007 700,502 11,062,231 380,746
Weighted average effect
of pro forma
conversion of
securities:
Series A convertible
preferred stock..... 2,637,363 7,743,886 7,572,464 4,154,351
Series B convertible
preferred stock..... 1,436,378 -- 4,124,167 --
Series C convertible
preferred stock..... 1,179,651 -- 2,917,072 --
Series D convertible
preferred stock..... 597,703 -- 582,995 --
Series E convertible
preferred stock..... 2,969,419 -- 979,047 --
---------- ---------- ---------- ---------
Denominator for pro forma
basic and diluted
calculation............. 40,332,521 8,444,388 27,237,976 4,535,097
========== ========== ========== =========
Net loss per share:
Basic and diluted...... $ (1.33) $ (2.38) $ (6.54) $ (5.30)
========== ========== ========== =========
Pro forma basic and
diluted............... $ (1.04) $ (.20) $ (2.66) $ (.45)
========== ========== ========== =========
</TABLE>
At October 3, 1999 there were 4,094,634 stock options outstanding 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.
6
<PAGE>
3. Stockholders' Equity
Issuance of Warrants
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. The fair value of such
warrants was estimated at $24,000, was recorded as an intangible asset and is
being amortized over three years. These warrants were exercised in July 1999
and resulted in net proceeds of approximately $78,000.
Convertible Preferred Stock
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 million.
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 $5 million in
cable television advertising obligations. The cable television advertising is
expected to be aired within the next 12 months and has been classified as a
current asset in prepaid marketing expenses.
In July 1999, the Company consummated a series of agreements with Rite Aid
Corporation (Rite Aid) and General Nutrition Companies, Inc. (GNC) 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 access to insurance
coverage, advertising commitments and a vendor agreement with an estimated fair
value of $233.9 million. The $233.9 million non-cash portion of the
consideration from the Rite Aid and GNC agreements was allocated to the
following components based on a valuation obtained from an independent
valuation expert (in millions):
<TABLE>
<S> <C>
Access to insurance coverage.................... $182.0
Advertising commitments......................... 22.9
Vendor agreement................................ 29.0
------
$233.9
======
</TABLE>
The access to insurance coverage and the vendor agreement have been
classified as intangible assets and the advertising commitments have been
classified within prepaid marketing expenses. All of the assets are to be
amortized on a straight-line basis over their contractual life of 10 years.
Initial Public Offering of Common Stock
On July 27, 1999, the Company completed its initial public offering of
5,750,000 shares of common stock resulting in approximately $94.6 million in
net proceeds. In connection with the closing of the offering, all of the
outstanding convertible preferred stock was converted into an aggregate of
34,468,000 shares of common stock. Through a separate private placement
transaction, the Company also issued 555,555 shares of common stock to
Amazon.com, Inc., resulting in proceeds of approximately $10 million.
Subsequent to the Company's initial public offering, the total number of
authorized shares was changed to 260,000,000 shares, of which 250,000,000
shares are common stock and 10,000,000 shares are undesignated preferred stock.
Additionally, the par value of the Company's common and preferred stock was
changed to $.0001 per share. The accompanying financial statements have been
restated to reflect the change in the par value of the common stock.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Special Note Regarding Forward-Looking Statements
This discussion 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
7
<PAGE>
such terms or other comparable terminology. These statements are only
predictions. Actual events or results may differ materially. In evaluating
these statements, you should consider various factors, including the risks
outlined in the Risk Factors section of our prospectus related to our initial
public offering filed with the Securities and Exchange Commission (SEC) on July
28, 1999 pursuant to Rule 424(b)(4) of the Securities Act of 1933 and, from
time to time, in other reports we file with the SEC. 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 Quarterly Report on Form 10-Q to conform such
statements to actual results or to changes in our expectations.
Results of Operations
Because we commenced commercial operations on February 24, 1999 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 compares the quarter ended October 3, 1999 to the quarter
ended July 4, 1999.
The following table sets forth unaudited quarterly statement of operations
data for the six quarters ended October 3, 1999. This unaudited quarterly
information has been derived from our unaudited financial statements and, in
the opinion of management, includes 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, September 30, December 31, April 4, July 4, October 3,
1998 1998 1998 1999 1999 1999
-------- ------------- ------------ -------- -------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Net sales............... $ -- $ -- $ -- $ 652 $ 3,550 $ 12,158
Cost of sales........... -- -- -- 672 4,879 14,066
----- ------- ------- -------- -------- --------
Gross profit (loss).... -- -- -- (20) (1,329) (1,908)
Operating expenses:
Marketing and sales.... -- 313 2,779 5,189 11,328 16,471
Product development.... 104 522 1,552 2,713 3,229 4,232
General and
administrative........ 71 511 1,279 1,713 2,204 3,120
Charitable
contributions......... -- -- -- -- -- 3,600
Amortization of
intangible assets..... 8 10 15 18 20 5,300
Amortization of stock-
based compensation.... 166 350 521 1,257 2,326 9,267
----- ------- ------- -------- -------- --------
Total operating
expenses.............. 349 1,706 6,146 10,890 19,107 41,990
----- ------- ------- -------- -------- --------
Operating loss.......... (349) (1,706) (6,146) (10,910) (20,436) (43,898)
Interest income, net.... -- 36 138 318 675 1,925
----- ------- ------- -------- -------- --------
Net loss................ $(349) $(1,670) $(6,008) $(10,592) $(19,761) $(41,973)
===== ======= ======= ======== ======== ========
</TABLE>
Net Sales and Cost of Sales. Net sales includes product sales and charges to
customers for shipping and handling less any allowances for product returns,
promotional discounts and coupons. Cost of sales includes related cost of
products shipped to customers and outbound and inbound shipping costs.
Net sales for the third quarter of 1999 were $12.2 million, a 242% increase
over net sales for the second quarter of 1999 of $3.6 million. Our cumulative
customer accounts increased from 168,000 at the end of second quarter 1999 to
428,000 customer accounts at the end of third quarter 1999, an increase of
155%. Orders from repeat customers also increased during the third quarter to
more than 30% of total orders. The
8
<PAGE>
increase in net sales was a result of the increase in our customer base, the
increase in our repeat orders as a percentage of total orders, and growth in
pharmacy orders, primarily associated with the Rite Aid Corporation (Rite Aid)
local pickup service for prescription refills, which commenced in the third
quarter of 1999. 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.
Gross margin improved from negative 37.4% in the second quarter of 1999 to
negative 15.7% during the third quarter of 1999. The negative gross margins
were primarily the result of promotional sales discounts associated with new
customer acquisition. The improvement in the gross margin is primarily
attributable to a decrease in the number of customer orders placed using
promotional discounts as a percentage of total customer orders. 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 gross margins in future periods. Our gross margin will
continue to 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 through inventory management practices.
Marketing and Sales. 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. Marketing and
sales expenses increased from $11.3 million in the second quarter of 1999 to
$16.5 million in the third quarter of 1999. The increase was primarily due to
expenses associated with the addition of marketing and sales personnel, an
increase in advertising media and promotional costs and increased distribution
expenses related to the increase in order volume.
We intend to continue to pursue an aggressive branding and marketing
campaign and, therefore, expect marketing and sales expenses to increase
significantly in absolute 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 the distribution center we
intend to establish in the first quarter of 2000.
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<PAGE>
Product Development. 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. Product development expenses increased from $3.2 million
in the second quarter of 1999 to $4.2 million in the third quarter of 1999. The
increase was primarily due to increased expenses associated with the addition
of product development personnel.
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;
. Continuing to enhance and develop our systems as necessary to provide
for in-store prescription pickup at Rite Aid stores;
. Enhancing our Web site to display additional product offerings; 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. General and administrative expenses consist of
payroll and related expenses for executive and administrative personnel,
corporate facility expenses, professional services expenses, and other general
corporate expenses. General and administrative expenses increased from $2.2
million in the second quarter of 1999 to $3.1 million in the third quarter of
1999. The increase was primarily due to increased expenses associated with the
addition of general and administrative personnel, recruiting and relocation
expenses and the cost of corporate facilities. 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.
Charitable Contributions. During the third quarter of fiscal 1999, we
donated 200,000 shares of our common stock to a charitable foundation
established by us. We recognized expense of $3.6 million based on the fair
value of the common stock donated to the foundation.
Amortization of Intangible Assets. Amortization of intangible assets
increased to $5.3 million in third quarter of 1999 primarily due to the
amortization of intangible assets received in connection with the Rite Aid and
General Nutrition Companies, Inc. (GNC) transaction.
Amortization of Stock-based Compensation. Amortization of stock-based
compensation increased from $2.3 million in the second quarter of 1999 to $9.3
million in the third quarter of 1999. The increase was primarily due to the
grant of stock options to new employees prior to the Company's initial public
offering and additional expense primarily associated with a separation
agreement with the Company's founder.
Interest Income, net. Interest income represents earnings on our cash and
cash equivalents net of interest expense associated with capital lease
obligations. Interest income was $0.7 million in the second quarter of fiscal
1999 and $1.9 million in the third quarter of fiscal 1999. The increase is due
to a higher average outstanding balance of cash and cash equivalents earning
interest in the third quarter. Such increase is due to cash obtained in July
1999 from our initial public offering, the Rite Aid and GNC transaction and the
Amazon.com, Inc. private placement.
Liquidity and Capital Resources
Prior to our initial public offering, we financed our operations primarily
through private sales of preferred stock which yielded net cash proceeds of
$106.8 million. In July 1999, we completed our initial public offering
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and issued 5,750,000 shares of common stock at an initial public offering price
of $18.00 per share. In connection with our initial public offering, we
received approximately $94.6 million in net cash proceeds. Concurrently, we
received $10 million in cash in exchange for 555,555 shares of our common stock
through a private placement with Amazon.com, Inc.
We have incurred net losses of $80.4 million from inception to October 3,
1999. We believe that we will continue to incur net losses for the forseeable
future and that the rate at which we will incur such losses will increase
significantly from current levels.
Net cash used in operating activities was $35.4 million for the first nine
months of fiscal 1999. Net cash used in operating activities for this period
primarily consisted of net losses offset by a net source of funds from working
capital.
Net cash used in investing activities was $8.0 million for the first nine
months of fiscal 1999. Net cash used in investing activities primarily
consisted of leasehold improvements and purchases of equipment and systems,
including computer equipment, warehouse handling equipment and fixtures and
furniture.
Net cash provided by financing activities was $189.3 million for the first
nine months of fiscal 1999 and consisted primarily of $104.6 million in net
proceeds from the issuance of common stock and $84.6 million in net proceeds
from the issuance of convertible preferred stock.
As of October 3, 1999 we had $160.3 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, MSNBC and Discovery Channel, aggregating
approximately $30.1 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. In the first quarter of
2000, we intend to begin operating our own distribution center to improve the
customer experience by locating closer to a greater percentage of our
customers, exerting greater control over the distribution process and ensuring
the supply of products for our customers. The distribution center is currently
under construction and will require significant capital investments in
facilities and equipment. For the remainder of 1999 and in 2000, we also expect
to devote substantial expenditures toward technology and systems upgrades to
support the new distribution center and our ability to provide in-store
prescription pick up at Rite Aid stores, inventory purchases for the new
distribution center and advertising and promotional activities.
We believe that our existing cash and cash equivalents, together with our
available funds, will be sufficient to meet our anticipated needs for working
capital and capital expenditures into the second half of 2000. 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. 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 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.
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We have substantially completed our review of 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. 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, we believe that our internally developed proprietary
software is year 2000 compliant.
We continue to assess 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. This assessment process has been substantially completed.
Based upon the results of this assessment, we plan to implement some minor
corrective measures with respect to third-party software, computer technology
and services during the fourth quarter of fiscal 1999. We have expensed amounts
incurred in connection with year 2000 assessment since our inception through
October 3, 1999. To date, such amounts have not been material and although any
future
expenses cannot be readily determined, these costs are not expected to be
material. If such third-party supplied software, computer technology and other
services fail to be year 2000 compliant, it 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.
We rely to a large extent on rapid distribution by third parties. We
currently purchase all of our pharmaceutical products from one vendor,
RxAmerica L.L.C., and Walsh Distribution, Inc. accounted for 72% of our
nonpharmaceutical costs of sales from launch of our Web store to October 3,
1999. We will also depend on Rite Aid, PCS Health Systems, Inc. and GNC
whereby, among other things, certain of our systems will be integrated with
Rite Aid's, certain transactions will rely on PCS's transaction processing
systems, and we are the exclusive online provider of GNC-branded products. The
year 2000 readiness of these third parties has not been thoroughly assessed. We
have inquired at a general level as to the year 2000 readiness of these third
parties and, based on these inquiries, we have been informed that assessment of
critical systems has been substantially completed. However, we have not yet
used any independent verification or validation processes to analyze these
parties' year 2000 risk, cost estimates or readiness. We plan to conduct some
integrated assessments between our internally developed systems and the systems
of RxAmerica L.L.C. and Walsh Distribution, Inc. We expect to complete these
assessments during the fourth quarter of 1999. The failure of these third
parties to be year 2000 compliant could significantly disrupt our business.
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. The need for such a contingency plan is currently expected to be
assessed during the fourth quarter of fiscal 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
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have been implemented, (3) the status of our new distribution facility, and (4)
the cost of developing and implementing a contingency plan. Based on this
evaluation, we will determine if the development and implementation of a
contingency plan is a cost-effective strategy. 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We have assessed our vulnerability to certain market risks, including
interest rate risk associated with financial instruments included in cash and
cash equivalents. Due to the short-term nature of these investments and our
investment policies and procedures, we have determined that the risk associated
with interest rate fluctuations related to these financial instruments does not
pose a material risk to the Company.
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PART II--OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(c) Sales of Unregistered Securities During the Quarter
During the quarter ended October 3, 1999, we issued and sold 3,750
unregistered shares of our common stock to employees pursuant to the exercise
of stock options under our 1998 stock plan. We granted these options as
consideration for the recipients' services to drugstore.com. In issuing these
securities, we relied on an exemption from registration pursuant to Rule 701
under Section 3(b) of the Securities Act.
On July 7, 1999, we issued 12,282,599 shares of our Series E Preferred Stock
to Rite Aid Corporation and General Nutrition Companies, Inc. in exchange for
$10 million in cash and other consideration, including access to insurance
coverage, advertising commitments and a vendor agreement with an estimated fair
value of $233.9 million. On August 2, 1999, we issued 555,555 shares of common
stock to Amazon.com, Inc. for $10 million in cash. In issuing these securities,
we relied on an exemption from registration pursuant to Rule 506 under Section
4(2) of the Securities Act, on the basis that the transactions did not involve
any public offering.
On July 29, 1999, we issued 10,000 shares of common stock to Dial 800, LLC
upon the exercise of warrants that had previously been issued in exchange for
the right to use the 1-800-DRUGSTORE and related iterations of telephone
numbers. The aggregate exercise price for the warrants was $78,000. In issuing
these securities, we relied on an exemption from registration pursuant to Rule
506 under Section 4(2) of the Securities Act, on the basis that the
transactions did not involve any public offering.
(d) Use of Proceeds
On July 27, 1999, our registration statement on Form S-1, file number 333-
78813, became effective. The offering date was July 27, 1999. The offering has
terminated as a result of all of the shares offered being sold. The managing
underwriters were Morgan Stanley Dean Witter, Donaldson, Lufkin & Jenrette and
Thomas Weisel Partners LLC. The offering consisted of 5,750,000 shares of our
common stock, including 750,000 shares of common stock pursuant to the exercise
of the underwriter's over-allotment option. The aggregate price of the shares
offered and sold was $103.5 million. After accounting for approximately $7.2
million in underwriting discounts and commissions and $1.7 million in other
expenses, we received proceeds of $94.6 million. We generated interest income
of approximately $1.9 million for the three months ended October 3, 1999. The
proceeds and generated interest income remain in temporary investments
consisting of money market accounts available on a daily basis and short-term
commercial paper.
Item 5. Other Information
On August 20, 1999, we announced the appointment of Melinda French Gates and
Martin L. Grass to our board of directors.
Mrs. Gates worked at Microsoft Corporation from 1987 to May 1996 in a
variety of positions, including serving both as product manager and general
manager of the development of several multi-media products and other software
programs. Since leaving Microsoft in 1996, Mrs. Gates has focused on
philanthropic work in the areas of global health and learning. Mrs. Gates holds
a Bachelor of Arts and a Masters of Business Administration from Duke
University.
Mr. Grass, who had been nominated to the board of directors by Rite Aid
Corporation pursuant to a voting agreement, resigned from the board of
directors on October 18, 1999. Under the terms of the voting agreement, Rite
Aid Corporation has the right to nominate Mr. Grass's replacement.
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On August 20, 1999, we announced that Jed A. Smith, the founder of
drugstore.com is leaving the Company to pursue a new entrepreneurial venture.
Mr. Smith was our initial president, served as a director and as our vice
president of strategic partnerships. Mr. Smith continues to be an investor in
drugstore.com.
On October 20, 1999, we announced that Kal Raman was promoted to the
position of Chief Operating Officer. Mr. Raman was previously drugstore.com's
Senior Vice President, Operations.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter covered by this Form
10-Q.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DRUGSTORE.COM, INC.
(Registrant)
By /s/ David E. Rostov
---------------------------------------
David E. Rostov
Chief Financial Officer
(principal financial and chief
accounting officer)
Date: November 1, 1999
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INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
3.1 Amended and Restated Certificate of Incorporation of drugstore.com
(Incorporated by reference to exhibit number 3.2 to
drugstore.com's registration statement on Form S-1 (file number
333-78813),
filed July 20, 1999).
3.2 Bylaws of drugstore.com, as amended (Incorporated by reference to
exhibit number 3.3 to drugstore.com's registration statement on
Form S-1 (file number 333-78813), filed May 19, 1999).
10.1 Lease Agreement dated August 30, 1999 between DS Distribution,
Inc. and the Northwestern Mutual Life Insurance Company.
27.1 Financial Data Schedule.
</TABLE>
<PAGE>
EXHIBIT 10.1
LEASE AGREEMENT
IRE No.: 334090
LANDLORD: THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
TENANT: DS DISTRIBUTION, INC.
Date: August 30, 1999
Property: 407 Heron Drive
Building A, The Gateway Buildings
Pureland Industrial Complex
Logan Township, Gloucester County
Bridgeport, New Jersey 08014
<PAGE>
TABLE OF CONTENTS
1. Basic Lease Provisions....................... 1
2. Premises..................................... 3
3. Term and Commencement of Lease............... 3
4. Rent Payments................................ 5
5. Repairs and Maintenance...................... 11
6. Utilities.................................... 15
7. Signs........................................ 15
8. Usage........................................ 15
9. Compliance with Laws, Rules and Regulations.. 16
10. [Intentionally Omitted]...................... 16
11. Indemnification, Waiver and Release.......... 16
12. Insurance.................................... 16
13. Waiver of Subrogation........................ 18
14. Tenant Improvements.......................... 18
15. Alteration and Improvements.................. 23
16. Mechanics Liens.............................. 23
17. Condemnation................................. 23
18. Hazardous Substances......................... 24
19. Fire and Casualty............................ 30
20. Hold Harmless................................ 31
21. Quiet Enjoyment.............................. 32
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22. Landlord's Right of Entry.................... 32
23. Assignment or Sublease....................... 32
24. Landlord's Lien.............................. 33
25. Uniform Commercial Code...................... 34
26. Default by Tenant............................ 34
27. Remedies for Tenant's Default................ 34
28. Waiver of Default or Remedy.................. 35
29. Acts of God; Force Majeure................... 35
30. Attorney's Fees.............................. 35
31. Holding Over................................. 36
32. Rights of First Mortgage..................... 36
33. Estoppel Certificates........................ 36
34. Successors................................... 36
35. Guaranty of Lease............................ 37
36. Definitions.................................. 37
37. Construction of Language..................... 37
38. Notice....................................... 37
39. Agreement and Limitation of Warranties....... 38
40. Brokerage Commission......................... 38
41. Waiver by Jury Trial......................... 39
42. Choice of Law................................ 39
43. Forum Selection Clause....................... 39
44. Authority.................................... 39
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45. Right of First Offer.......................... 40
46. Antenna, Auxiliary Power Supply and Parking
Spaces........................................ 42
47. [RESERVED].................................... 43
Exhibits
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Exhibit A--Floor Plan(s)
Exhibit B--Rules and Regulations
Exhibit C--Insurance Questionnaire
Exhibit D--Guaranty of Lease
Exhibit E--Tenant Acceptance of Premises
Exhibit F--License Agreement
Schedules
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Schedule 9--Title Documents
Schedule 14.1--Shell Work
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LEASE AGREEMENT
THIS LEASE is made as of the 30/th/ day of August, 1999, by and between THE
NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY, a Wisconsin corporation (hereinafter
referred to as "Landlord"), and DS DISTRIBUTION, INC., a Delaware corporation
(hereinafter referred to as "Tenant").
In consideration of the mutual covenants contained in this Lease and for
other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged by each party hereto, Landlord and Tenant agree as follows:
1. Basic Lease Provisions. As used in this Lease, the terms set forth
----------------------
below shall have the corresponding meanings set forth below.
<TABLE>
<S> <C>
1.1 Premises The Building set forth on the Floor
Plan attached hereto as Exhibit "A"
and made a part hereof constituting
270,378 rentable square feet,
including a mezzanine area with an
additional 5,800 square feet, together
with the Lot and all easements
appurtenant to such Lot.
1.2 Lot The parcel of ground known as Block
44, Lot 7.07, consisting of
approximately 819,208 square feet
located at the intersection of Heron
Drive and Center Square Road in the
Pureland Industrial Complex with
approximately 626 feet of frontage
along Heron Drive and 400 feet of
frontage along Center Square Road.
1.3 Project The three parcels of land located on
Heron Drive in the Pureland Industrial
Complex and owned by Landlord,
together with the three buildings
erected on such parcels, and which
together contain approximately 496,145
square feet of rentable space.
</TABLE>
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<TABLE>
<S> <C>
1.4 Building The building located on the Lot at the
Building Address.
1.5 Building Address 407 Heron Drive Building A, The
Gateway Building Pureland Industrial
Complex Logan Township, Gloucester
County Bridgeport, New Jersey 08014
1.6 Term Sixty (60) months, with two (2)
options to renew for an additional
period of five (5) years each, subject
to Section 45.1 of the Lease.
1.7 Lease Commencement Date Date of signing of Lease
1.8 Rent Commencement Date As set forth in Section 3 of Lease
Tenant Improvements
1.9 Base Rent $1,226,623.90 per year (representing
$4.54 PSF)
1.10 Security Deposit $102,218.66
1.11 Tenant's Address 13920 SE Eastgate Way
Suite 300
Bellevue, Washington 98005
1.12 Landlord's Address 720 E. Wisconsin Avenue
Milwaukee, Wisconsin 53202
1.13 Manager Lanard & Axilbund
399 Market Street
Philadelphia, PA 19106
1.14 Landlord's Broker GMH Realty, Inc.
510 Pedricktown Road
Bridgeport, New Jersey 08014
1.15 Tenant's Broker Staubach Company of Pennsylvania 225
City Line Avenue, Suite 103
Bala Cynwyd, Pennsylvania 19004
</TABLE>
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<TABLE>
<S> <C>
1.16 Tenant's Proportionate Share With respect to a particular expense
or amount attributable solely to the
Premises for which Tenant is
responsible, 100% of such expense or
amount, or with respect to a
particular expense or amount
attributable to the Project, the
percentage of all rentable space
receiving benefit of the expense which
is represented by the Premises
</TABLE>
2. Premises. Landlord hereby leases to Tenant and Tenant hereby rents
from Landlord the Premises.
3. Term and Commencement of Lease. This Lease shall be effective on the
Lease Commencement Date. The Term of the Lease shall begin upon the Rent
Commencement Date as defined herein. The "Rent Commencement Date" shall be that
date which is the earlier of (1) January 1, 2000, or (2) the date of issuance of
a temporary certificate of occupancy for the Premises. Notwithstanding the
foregoing, in the event that the Premises is divided into Warehouse, Pharmacy
and Office Phases as described in Section 14(D) below, with respect to the
Pharmacy and Office Phases, the Rent Commencement Date for each such Phase shall
be deemed to have occurred upon issuance of a temporary certificate of occupancy
for such Phase (whether or not such certificate of occupancy is issued before or
after January 1, 2000), provided that in all events the Rent Commencement Date
shall be deemed to have occurred with respect to the Warehouse Phase by January
1, 2000. The Term shall expire on that date which is the 5th anniversary of the
first date on which the entire Premises (and no lesser portion thereof) is
covered by a certificate or certificates of occupancy permitting use and
occupancy by Tenant as described in Section 14. All rental charges hereunder
shall commence on the Rent Commencement Date.
3.1 Renewal of Term. Tenant shall have two (2) successive options to renew
the Term of the Lease upon its expiration for an additional period of five (5)
years each, subject to potential extension pursuant to Section 45.1 below (each
a "Renewal Term," which if exercised shall be deemed part of the Term), and
subject to the following provisions:
(a) In order to exercise either option to renew the Lease, Tenant must
give Landlord written notice of its election to renew not later than 365 days
before the expiration of the then-current Term. All terms of the Lease shall
remain in full force
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and effect for the Renewal Term, except that the Base Rent applicable during the
period of renewal shall be at ninety-five percent (95%) of the then-prevailing
market rate of rent and all other charges for comparable space, which market
rate shall be calculated as the market rental rate for a new tenant not yet in
occupancy which receives no allowances for improvements above a base building
shell (e.g., as in the case of this Lease, including the Landlord's Work as
defined herein, but not including the remainder of the Tenant Improvements as
defined herein beyond the Landlord's Work), with such market rate to reflect
such factors as the Tenant's use of the Premises, location of the Building, size
of rental area, condition of the Premises, and the time the particular rate
under consideration becomes effective. However, in no event shall the Base Rent
for the Renewal Term be less than that in effect at the expiration of the
immediately preceding Term of the Lease. If Tenant exercises either option in
accordance with the foregoing, then Landlord shall notify Tenant in writing of
the market rate of rent to apply during the applicable Renewal Term, as
determined by real estate brokers or other professionals selected by Landlord.
Landlord shall provide such statement within 15 days after receiving the notice
of exercise of the applicable option.
(b) If Tenant does not accept Landlord's determination of the market
rate of rent contained in its notice to Tenant under subsection (A) above, then
Tenant shall within 15 days after receiving Landlord's statement notify Landlord
in writing that it elects to have such value determined by a panel of 3 licensed
real estate brokers or appraisers, one of whom shall be selected by Landlord
within 5 days after the end of such 15 day period, one of whom shall be selected
by Tenant within 5 days after the end of such 15 day period, and the third of
whom shall be selected by the first two within 10 days after the first two are
selected. Each broker or appraiser, within 10 days after the third such party
is so selected, shall submit a determination of such market rent, and the mean
of the two closest determinations shall be binding on the parties for purposes
of calculating rent during the applicable Renewal Term. Landlord and Tenant
shall each pay the fee of the broker or appraiser selected by it and they shall
share equally the payment of the fee of the third such party. If Tenant does
not notify Landlord within 15 days after receiving the Landlord's statement of
value of its election to have the market rate determined by the independent
panel, the rate set forth in Landlord's notice given under subsection (A) above
shall be binding on the parties.
(c) Notwithstanding the appraisal procedure set forth above, Tenant
shall have the right to cancel and rescind its exercise of the renewal option
herein, provided that Tenant notifies Landlord in writing of such election on or
before the date which is 270 days prior to the expiration of the then-current
Term, and further provided that the Tenant pays all of the costs of the
appraisers described in the immediately preceding paragraph (b) of this section.
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(d) If Tenant fails to give notice exercising either of the foregoing
options by the date required herein, or if at the time Tenant exercises either
such option or at commencement of the applicable Renewal Term there exists an
uncured Event of Default hereunder past applicable notice and grace periods,
then Tenant's right and option to renew shall be automatically terminated and of
no further force or effect.
4. Rent Payments.
4.1 Base Rent. During the Term of this Lease following the Rent
Commencement Date, Tenant shall pay to Landlord the Base Rent, payable in equal
monthly installments, in advance, on the first day of each and every calendar
month during the Term, delivered to the Manager's Address or at any other
address as designated from time to time. One monthly installment of Base Rent
shall be payable by Tenant on the date of execution of this Lease for the first
month's rent. If the Rent Commencement Date occurs on a day other than the first
day of the calendar month, the rent for such partial month shall be prorated for
each day at the rate of one-thirtieth (1/30) of the full monthly installment of
rent. Tenant shall pay, as additional rent, all other sums due under this
Lease.
Notwithstanding the foregoing, in the event that the Premises is
divided into Warehouse, Pharmacy and Office Phases as described in Section 14(D)
below, and pursuant to Section 3 above the Rent Commencement Date shall have
occurred with respect to any of such Phases without the others, then upon such
partial Rent Commencement Date, the Tenant shall begin making payments of Base
Rent and Additional Rent as provided above in amounts which are allocable, pro
rata on a square foot basis, to the applicable Phase, provided that such rental
obligations shall begin with respect to the Warehouse Phase by January 1, 2000
notwithstanding the fact that a certificate of occupancy may not have been
issued for the Warehouse Phase by such date (except if such non-issuance is due
to the Landlord's negligence or intentional misconduct as provided elsewhere
herein).
4.2 Security Deposit. On the date of execution of this Lease by Tenant,
Tenant shall pay to Landlord the Security Deposit to be held for the performance
by Tenant of Tenant's covenants and obligations under this Lease, it being
expressly understood that the Security Deposit shall not be considered an
advance payment of rent or a measure of Landlord's damage in case of default by
Tenant. Upon the occurrence of any Event of Default by Tenant or breach by
Tenant of Tenant's covenants under this Lease, Landlord may, from time to time,
without prejudice to any other remedy, use the Security Deposit to the extent
necessary to make good any arrears of rent and/or any damage, injury, expense or
liability caused to Landlord by
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the Event of Default or breach of covenant, with any remaining balance of the
Security Deposit to be returned by Landlord to Tenant thirty (30) days after
termination of this Lease.
4.3 Additional Rent. In addition to the foregoing, Tenant shall pay as
additional rent (the "Additional Rent") the following:
(a) Impositions. During the Term of this Lease following the Rent
Commencement Date, Tenant shall pay to Landlord an amount equal to one-hundred
percent (100%) of the Impositions (as defined below) which are attributable
solely to the Premises ("Tenant's Proportionate Share of Impositions"). For any
year during the Term or any renewal thereof which is not a full calendar year,
Impositions shall be prorated between Landlord and Tenant on a 365 day calendar
year basis. The term "Impositions" shall mean all taxes, assessments, ad
valorem real estate taxes, excises, personal property taxes, any kind (including
without limitation fees "in-lieu" of any such tax or assessment) of fee service
payments, levies, any tax imposed in substitution, partially or totally, of any
tax previously included within the definition of Impositions, any additional tax
the nature of which was previously included within the definition of
Impositions, and any other charges, general and special, ordinary and
extraordinary, foreseen and unforeseen, of any kind and nature whatsoever which
shall or may during the Term of this Lease be assessed, levied, charged,
confirmed or imposed upon or become payable out of or become a lien upon the
Premises or Landlord's estate therein or any part thereof or the appurtenances
thereto or the sidewalks or streets adjacent thereto.
The term "Impositions" shall not include any of the following: (i)
any special tax district taxes or similar taxes or assessments (other than those
in the nature of ad valorem taxes or assessments or usage fees) which are
extraordinary and which are imposed for the recovery of the costs of
constructing infrastructure improvements or for the repayment of financing of
such costs, (ii) any future taxes or assessments or charges under local
improvement districts, community facilities districts or similar arrangements
undertaken by or with the consent of Landlord for the purpose of financing
improvements to or for the benefit of the Premises or other properties owned by
the Landlord, (iii) any correction of or supplement to any tax or assessment
applicable to any period prior to the Rent Commencement Date or the portion of
any tax or assessment applicable to any period prior to the Rent Commencement
Date, regardless of when imposed, (iv) any municipal, state or federal income
taxes assessed against Landlord, or any municipal state or federal capital stock
or levy, estate, succession, inheritance or transfer taxes payable by Landlord,
or any franchise taxes, or (v) any tax or assessment similar to a capital stock
or franchise tax imposed upon any non-corporate owner (the taxes enumerated in
this sentence are
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collectively referred to as "Landlord's Taxes.). In addition, the term
Impositions shall not include any taxes or other amounts imposed in connection
with any tax parcel other than the tax parcel or parcels on which the Premises
is located. If any assessment, whether general, special, ordinary or
extraordinary, for which Tenant is liable under this Lease as an "Imposition" is
assessed in whole or in part against the Premises which may be payable over a
term of years, Landlord will exercise its right to make payment over such term
of years, and only such portion of any such tax or assessment which falls due
within each year of this Lease and is reasonably attributable to such year shall
be used in the determination of Tenant's payment obligation hereunder. Landlord
further agrees to pay any real property taxes sufficiently in advance to achieve
any available discounts or other savings.
Tenant shall also pay to Landlord during the Term of this Lease or any
renewals thereof any rental, sales, and use taxes or other similar taxes (but
not income taxes), if any, levied or imposed by any city, state, county or other
governmental body having authority in the amount levied by such governmental
body with respect to the Base Rent and/or Additional Rent due hereunder
(collectively, "Additional Impositions").
Additional Impositions and Tenant's Proportionate Share of Impositions
shall be paid by Tenant in equal monthly installments in an amount equal to one-
twelfth (l/12th) of the amount of Additional Impositions and Tenant's
Proportionate Share of Impositions as reasonably estimated by Landlord from time
to time in written notice to Tenant given at least 30 days prior to the date on
which such amounts are to become effective. Within a reasonable amount of time
after the actual amount of Additional Impositions and Impositions can be
determined for each year, Landlord shall deliver to Tenant a written statement,
which shall be conclusive between the parties hereto, setting forth Landlord's
calculation of the Additional Impositions and Impositions and Tenant's
Proportionate Share of Impositions for such year. If the aggregate amount of
estimated monthly payments made by Tenant in any year for Additional Impositions
and Tenant's Proportionate Share of Impositions is less than the actual amount
set forth on Landlord's statement, then within 30 days Tenant shall pay to
Landlord as Additional Rent upon demand the amount of such deficiency; if the
aggregate amount of monthly estimated payments made by Tenant to Landlord
exceeds the actual amount as set forth on Landlord's statement, and if Tenant is
not otherwise in default hereunder, the amount of such excess will be applied by
Landlord to reduce the installments of such Additional Rent due hereunder for
the next year (unless the refund amount is greater than $5,000, in which event
Landlord shall pay the amount to Tenant upon making the calculation); and if
there is any such excess for the last year of the term and if Tenant is not
otherwise in default hereunder, the amount thereof will be refunded by Landlord
to Tenant.
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Tenant shall have the right to file an appeal and contest the real
estate taxes and assessments applicable to the Premises in the event that the
Landlord refuses to conduct such an appeal upon demand of Tenant. In the event
of any such appeal by Tenant, Tenant shall indemnify Landlord against all
expenses incurred in connection with such appeal, against any claims arising out
of the result of such appeal or any dismissal thereof, and against any increase
in real estate taxes assessed against the Premises resulting from such appeal.
(b) Utilities and Other Operating Costs: Electric and gas service shall be
separately metered. Tenant shall pay 50% of the costs of all utilities consumed
at the Premises between the Lease Commencement Date and the Rent Commencement
Date. Beginning upon the Rent Commencement Date, Tenant shall pay when due all
charges for electricity and gas consumed in connection with the Premises. Upon
request, Landlord shall furnish Tenant with copies of the applicable bills for
utilities. Tenant shall pay to Landlord an amount equal to one-hundred percent
(100%) of the Operating Costs (as defined below) which are attributable solely
to the Premises ("Tenant's Proportionate Share of Operating Costs"). As used
herein, "Operating Costs" means the amount of all costs to Landlord of operating
and maintaining the Premises, including (1) cost of wages and salaries of all
employees engaged in the operation and maintenance of the Premises, including
but not limited to payroll taxes, insurance and benefits (provided that such
wages and salaries shall be prorated to the extent any such employees are also
engaged with respect to other projects); (2) cost of supplies used in the
maintenance and repair of the Premises; (3) all costs of maintaining and
repairing any utility lines and systems on the Premises; (4) costs incurred
under all maintenance and service agreements for the Premises, including trash
removal, snow and ice removal and landscaping; (5) cost of general maintenance,
replacements and repairs to the Building, parking areas, sidewalks and
surrounding landscaping at the Premises; (6) all property management fees and
expenses; (7) the costs of any minor repairs and alterations to portions of the
Premises other than the roof, walls and other structural portions of the
Building which are required or made necessary by law or changes in law; (8) cost
of any capital improvements made to the Building that, in Landlord's reasonable
judgment, will reduce other operating expenses or increase energy efficiency,
provided such costs are amortized over the useful life of the improvement in
accordance with generally accepted accounting principles ("GAAP") at such rates
as may have been paid by Landlord on funds borrowed for the purpose of
constructing such capital improvements or, if no such funds were borrowed, at
such reasonable rates as are not in conflict with GAAP; (9) cost of any licenses
or permits required by any public authority; and (10) any owner's association or
similar fees or assessments (if any) applicable to the Premises which are
imposed under covenants recorded in the land
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records with respect to the Premises. Notwithstanding the foregoing, "Operating
Costs" shall not include (a) any costs of initial construction of the Building
or of additions of space to the Building, or of constructing and dedicating
Heron Drive, including but not limited to paving, striping or replacement of
1999 drought damaged vegetation or other landscaping; (b) principal, interest,
ground lease or other debt service payments; (c) any fees or costs for property
management services which are in excess of the prevailing market rate, taking
into account any special factors related to the operation of the Building (i.e.,
which are in excess of that reached through arms-length bargaining); (d)
marketing costs, advertising costs or leasing or brokerage commissions; (e) any
costs which are recovered through insurance or condemnation proceeds; (f)
executive salaries and compensation; (g) costs and expenses incurred in
connection with collections or other enforcement of other tenants leases; (h)
costs of initial build-out or improvements to other tenants' spaces; (i)
expenses for any special services or utilities provided solely to, or otherwise
recovered entirely from, any other individual tenant in the Project; (j) rent or
other bad debt losses or reserves therefor; (k) transfer taxes, deed recordation
taxes or other costs directly attributable to the sale of the Building or any
ownership interest therein, (l) depreciation, (m) costs incurred in connection
with the sale, financing, refinancing, mortgaging, selling or change of
ownership of the Building, (n) any increases in insurance premiums caused by the
hazardous acts of the Landlord, (o) any expenditures which are capitalized under
GAAP or for federal income tax purposes, except as expressly provided in Section
4.3(b)(8), (p) general overhead, or (q) fees of architects, engineers, attorneys
or other professionals.
Tenant's Proportionate Share of Operating Costs shall be paid by
Tenant in equal monthly installments in an amount equal to one-twelfth (1/12th)
of the amount of Tenant's Proportionate Share of Operating Costs as estimated by
Landlord from time to time in written notice to Tenant prior to or during each
year of the term of the Lease. Within a reasonable amount of time after the
actual amount of Operating Costs can be determined for each year, Landlord shall
deliver to Tenant a written statement setting forth the calculation of the
Operating Costs and Tenant's Proportionate Share of Operating Costs for such
year (the "Expense Statement"). If the aggregate amount of estimated monthly
payments made by Tenant in any year for Tenant's Proportionate Share of
Operating Costs is less than the actual amount set forth on Landlord's
statement, then Tenant shall pay to Landlord as Additional Rent upon demand the
amount of such deficiency; if the aggregate amount of monthly estimated payments
made by Tenant to Landlord exceeds the actual amount as set forth on Landlord's
statement, and if Tenant is not otherwise in default hereunder, the amount of
such excess will be applied by Landlord to reduce the installments of such
Additional Rent due hereunder for the next year (unless the refund amount is
greater
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than $5,000, in which event Landlord shall pay the amount to Tenant upon making
the calculation); and if there is any such excess for the last year of the Term
and if Tenant is not otherwise in default hereunder, the amount thereof will be
promptly refunded by Landlord to Tenant.
4.4 Tenant's Audit of Operating Costs. Tenant shall have the right, at
its own expense and after reasonable advance notice to Landlord, to review
Landlord's records relating to the calculation of Tenant's Proportionate Share
of Operating Costs for the then-current and immediately preceding calendar years
at the offices of Landlord's property manager. In the event that such review
determines that Tenant's Proportionate Share of Operating Costs have been
miscalculated, Landlord shall pay Tenant (by crediting the next payment of Base
Rent due under the Lease) or Tenant shall pay Landlord (at the time of the next
installment of Base Rent), as the case may be, the amount of the overpayment or
underpayment by Tenant with respect to its share of such expenses. Landlord
agrees that in the event that such a review by Tenant reveals an overpayment by
Tenant of its share of Operating Costs by an amount of greater than 10% with
respect to the year reviewed, then Landlord shall reimburse to Tenant the out-
of-pocket costs of such review up to (but not exceeding) an amount of $5,000.00.
Tenant agrees that any party performing such review shall be compensated on the
basis of hourly fees and not on a contingency or percentage basis.
4.5 Late Charge. Any item of Base Rent or Additional Rent which is not
made when due hereunder shall bear interest at the rate of 12% per annum until
paid in full. If the monthly payment of Base Rent and Additional Rent is not
received by Landlord on or before the fifth day of the month for which rent is
due, or if any other payment due Landlord by Tenant is not received by Landlord
on or before the fifth day of the month following the month in which Tenant was
invoiced, a service charge (the "Late Charge") in the amount of the greater of
five percent (5%) of such past due amount or FIVE HUNDRED AND 00/100 DOLLARS
($500.00) shall become due and payable in addition to such amounts owned under
this Lease. The Late Charge shall also apply to any payment made by check draft
where the check is returned for any reason through no fault of the Tenant. Time
is of the essence with respect to the payment of Basic Rent and Additional Rent
as set forth in this Lease.
4.6 No Waiver. No payment by Tenant or receipt by Landlord of a lesser
amount of monthly Base Rent and Additional Rent or any other sum due hereunder,
shall be deemed to be other than on account of the earliest due rent or payment,
nor shall any endorsement or statement on any check or any letter accompanying
any such check or payment be deemed an accord and satisfaction, and Landlord may
accept such check or payment without prejudice to Landlord's right to recover
the balance of such rent or payment or pursue any other remedy available in this
Leave, at law or in
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equity. Landlord may accept any partial payment from Tenant without invalidation
of any contractual notice required to be given herein (to the extent such
contractual notice is required) and without invalidation of any notice required
by any law pertaining to eviction or summary remedy for regaining possession of
real property in the event of tenant default.
4.7 Tenant's Remedies. This Lease shall be construed as though the
covenants herein between Landlord and Tenant are independent, and not dependent,
and Tenant shall not be entitled to any set-off of the Base Rent, Additional
Rent or other amounts owing hereunder against Landlord if Landlord, acting in
good faith, fails to perform its obligations set forth herein; provided,
however, the foregoing shall in no way impair the right of Tenant to commence a
separate action against Landlord for any violation by Landlord of the provisions
hereof so long as notice is first given to Landlord and any holder of a mortgage
or a deed of trust then covering the Premises, or any portion thereof provided
Tenant has received written notice of such mortgage), and a reasonable
opportunity is granted to Landlord and such holder to correct such violation.
Notwithstanding the foregoing, in the event that the Landlord breaches any
express obligation in this Lease to maintain or repair any portion of the
Premises, and such breach continues for a period of 30 days after written notice
from Tenant (or, in the event of an emergency or a situation in which the
default of Landlord materially and adversely impairs the Tenant's business
operations at the Premises, then such lesser period as is reasonable under the
circumstances), then Tenant shall have the right to perform the obligation so
breached by Landlord, provided that (i) Tenant notifies Landlord of its intent
to take such action, (ii) any work to be performed by Tenant shall be subject to
Section 15 of this Lease, and (iii) Tenant shall cede the work to Landlord upon
demand of Landlord for its completion. In the event of such action by Tenant
taken in accordance with the foregoing provisions, Tenant shall be entitled to
reimbursement of its out-of-pocket costs of performing the work within 30 days
after Landlord's receipt of a statement and supporting documentation verifying
such costs. Such right of action of Tenant shall not diminish the Tenant's
rights and remedies available under law upon a default of Landlord, all of which
may be exercised by the Tenant cumulatively or successively for full redress.
5. Repairs and Maintenance:
5.1 Landlord's Obligations. Unless otherwise expressly provided,
Landlord shall not be required to make any improvements, replacements or repairs
of any kind or character to the Premises during the term of this Lease except
those repairs set forth in this Paragraph 5.1. Landlord shall maintain in good
repair and condition, except for reasonable wear and tear, only the following:
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(a) utility service lines and equipment between the Lot boundary and
the Building;
(b) underground storm and sanitary sewers and drain lines, pipes,
conducts and other underground facilities between the Lot boundary and the
Building;
(c) all paved areas on the Premises including the driveways,
sidewalks, parking lots and truck aprons;
(d) the roof, foundation, and the structural soundness of the exterior
walls (excluding all doors) of the Building; and
(e) all windows at the Premises with respect to manufacturers'
warranties and installation (and not with respect to cleaning or repairs after
damage);
(f) all landscaping surrounding the building (including the
replacement of any trees stricken by drought conditions prior to the Lease
Commencement Date).
(g) if the Building's exterior is painted, Landlord shall be
responsible for repainting the Building's exterior (except for exterior doors).
Payment of the cost of the foregoing repairs and maintenance shall be
determined in accordance with Section 4 and the other express provisions of this
Lease, and, without limiting the generality of the foregoing, the payment of the
costs incurred in connection with items (d) and (e) above, except for the costs
of routine maintenance of the roof (which are not to be capitalized under GAAP
or federal income tax law or regulations), shall not be deemed Operating
Expenses or otherwise chargeable the Tenant.
Tenant shall repair and pay for any damage including those repairs
which are the responsibility of Landlord, as stated above, caused by any
negligent or intentional act or omission of Tenant or Tenant's agents, employees
and invitees. Landlord shall not be liable to Tenant for any damage or
inconvenience caused by making of repairs, and Tenant shall not be entitled to
any abatement or reduction of rent by reason of any repairs, alterations or
additions made by Landlord under this Lease.
5.2 Right of Entry. Landlord shall have the right, but shall not be
obligated, to enter the Premises at all reasonable hours, upon reasonable
advance notice, except in an emergency, for the purpose of making any repairs
which are
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required by this Lease or which Landlord shall deem necessary for the
preservation of the Premises or the Building, and Landlord shall be allowed to
take all materials into and upon the Premises that may be required to make such
repairs, improvements, and additions, or any alterations for the benefit of
Tenant without Landlord in any way being deemed or held guilty of an eviction of
Tenant. Any such entry to the Building shall be subject to Tenant's reasonable
sign-in and security procedures. In addition, Landlord shall use commercially
reasonable efforts to not interfere with the Tenant's business in exercising any
right of entry into the Premises for repairs and maintenance. All such repairs,
decorations, additions and improvements shall be done during ordinary business
hours, or, if any such work is at the request of Tenant to be done during any
other hours, Tenant shall pay for all overtime costs.
5.3 Tenant's Obligations. Tenant shall, at its own expense, maintain
all parts of the Premises not required to be maintained by Landlord in good
clean repair and condition (including all necessary replacements) under
Paragraph 5.1, including, but not limited to, any downspouts, fire sprinkler
system, HVAC equipment, dock bumpers, pest control and extermination, regular
removal of debris. Tenant shall take good care of the Premises and the Building
and its fixtures. If Tenant neglects to keep and maintain the Premises in
accordance with its obligations under this Lease, then Landlord shall have the
right, but not the obligation, upon providing Tenant with notice and ten (10)
business days to cure, to have the work done, and the costs of performing such
work shall be charged to Tenant as Additional Rent and shall become payable by
Tenant with the payment of rent next due under this Lease.
5.4 HVAC Equipment. In connection with Tenant's maintenance and repair
of the heating, ventilating, and air conditioning (HVAC) system, Tenant shall
provide Landlord during the term of this Lease and any renewal hereof with a
duplicate original of a maintenance contract in form and substance reasonably
acceptable to Landlord, with a reputable HVAC maintenance firm. If Tenant fails
to provide Landlord with a duplicate original of a maintenance contract within
45 days after the Rent Commencement Date, Landlord shall have the right (but not
the obligation), upon not less than 10 days advance notice, to obtain on behalf
of Tenant, a maintenance contract at reasonable market cost. The cost for such
contract shall be charged to Tenant as Additional Rent and shall become payable
by Tenant with the payment of rent next due hereunder. Tenant shall at all times
conduct maintenance on the HVAC equipment at the Premises in accordance with all
federal, state or local laws. Landlord agrees that during the Term, Tenant shall
receive benefit, through assignment or otherwise as appropriate, of all
manufacturer's warranties with respect to the HVAC systems. In the event that a
leak occurs in any portion of the HVAC equipment at the Premises, Tenant shall
promptly repair such leak in accordance with
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such federal, state or local laws and shall, in any event repair such leaks
within the deadline imposed by such federal, state or local laws. Tenant hereby
agrees to indemnify, defend and hold Landlord harmless against any and all
damages, liabilities, losses, costs and expenses, including reasonable
attorneys' fees, incurred by Landlord as a result of Tenant's failure to conduct
maintenance on the HVAC equipment at the Premises in accordance with all
federal, state or local laws or as a result of Tenant's failure to repair any
leak in any portion of the HVAC equipment at the Premises in accordance with
federal, state or local laws. In the event of a replacement of a part or portion
of the HVAC equipment which is warranted by the manufacturer and/or guaranteed
by the installer, Tenant shall provide Landlord with a duplicate original of the
warranty and/or guarantee. The parties agree that the foregoing provisions are
not in diminution of the Landlord's obligations pursuant to Section 5.6 below.
5.5 Requirements to Restore. Tenant shall be responsible for any damage
to be committed on any portion of the Premises. Tenant shall deliver the
Premises to Landlord in as good condition as existed at the Lease Commencement
Date, ordinary wear and tear, damage caused by Landlord, and casualty covered by
Section 19 being excepted. The cost of any repairs necessary to restore the
condition of the Premises, for which Tenant is responsible hereunder, shall be
borne by Tenant, and if Landlord notifies Tenant and undertakes to restore the
Premises it shall have a right of reimbursement against Tenant which right shall
survive the termination of this Lease (provided that any claims in connection
therewith are brought to the attention of the Tenant within one year after
expiration of the Term). Upon request of Tenant given within the last 6 months
of the Term, Landlord and Tenant shall perform a joint walkthrough of the
Premises and develop a written punchlist of restoration and repair work required
of the Tenant hereunder. Tenant shall only be responsible for repairs, which
are required by the terms of this Lease but not listed on such punchlist agreed
to by Landlord, if the need for such repairs arises after the time of the walk-
through by the parties.
5.6 Warranty. Landlord hereby warrants to Tenant that for a period of one
(1) year from the Lease Commencement Date (the "Warranty Period"), the Tenant
Improvements described in Section 14 below shall be in good working order. In
addition, Landlord warrants that the Tenant Improvements and, as of the Rent
Commencement Date, the Premises shall be in compliance with all applicable laws,
ordinances and regulations (including, as applicable, the Americans With
Disabilities Act) and the declarations and covenants of title set forth in
Schedule 9 hereto. Landlord shall be responsible for any repairs to the Tenant
Improvements during the Warranty Period in addition to the obligations set forth
in Paragraph 5.1 above (but not including any maintenance or repairs which are
the Tenant's responsibility under Section 4.3 above).
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6. Utilities. Landlord shall provide the normal utility service
connections into the Building, the specifications for which are included in
Schedule 14.1 hereof. Payment for utilities shall be as provided in Paragraph 4
hereof. Tenant shall pay all costs caused by Tenant introducing excessive
pollutants or solids other than ordinary human waste into the sanitary sewer
system, including permits, fees and charges levied by any governmental
subdivision for any such pollutants or solids. Tenant shall be responsible for
the installation and maintenance of any dilution tanks, holding tanks, settling
tanks, sewer sampling devices, sand traps or similar devices as may be required
by any governmental subdivision due to the nature of Tenant's use of the
sanitary sewer system beyond customary employee restroom use. Tenant shall pay
all surcharges levied due to Tenant's use of sanitary sewer or waste removal
services insofar as such surcharges affect Landlord. Landlord shall in no way
or event be liable for loss or interruption of utility service on or to the
Premises; however, Landlord shall, to the extent within its control, but without
the expenditure of money (unless related to an express obligation of Landlord
hereunder), take commercially reasonable steps to provide for the resumption of
such utility service.
7. Signs. Tenant shall not place on the Project, any exterior signs or
advertisements, nor any interior signs or advertisements that are visible from
the exterior of the Premises, without the Landlord's prior written consent,
which consent shall not be unreasonably withheld or delayed. The cost of
installation and regular maintenance of any such signs approved by the Landlord
shall be at the sole expense of the Tenant. Any and all signs must meet the
standards imposed by the ordinances, statutes, laws and regulations of any
applicable state or local governmental authority, as well as any declarations or
other covenants of title applicable to the Premises true and correct copies of
which are provided by Landlord to Tenant as described in Section 9 below.
Tenant shall maintain its sign or signs in a good state of repair. In the event
that Tenant's sign or signs are not maintained to the satisfaction of Landlord,
then Landlord may, at its option, repair such sign or signs and Tenant shall
pay, as Additional Rent, the full cost of such repair. At the termination of
this Lease, or any extension thereof, the Tenant shall remove all of Tenant's
signs. Any damage caused by the installation or removal of Tenant's signs shall
be repaired at Tenant's expense.
8. Usage. The Premises may be used and occupied only for the purposes of
a warehouse, storage and distribution center and a pharmacy fulfillment center
with accessory offices, and for no other purpose or purposes without Landlord's
prior written consent, which consent shall not be unreasonably withheld or
delayed. Tenant shall occupy the Premises, conduct its business and control its
agents, employees, invites and visitors in such a way as is lawful, reputable
and will not create any nuisance or otherwise interfere with, annoy or disturb
any other tenant or Landlord in its management of the Building.
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9. Compliance with Laws; Rules and Regulations. Tenant shall, at its
sole cost and expense (except as may be expressly provided otherwise by this
Lease), use and occupy the Premises in compliance with all applicable federal,
state, county and municipal laws, rules and regulations now or hereafter in
force, including the Americans with Disabilities Act of 1990, and in compliance
with any declarations and other covenants of title applicable to the Premises,
true and correct copies of which have been provided by Landlord to Tenant and
which are listed and referenced in Schedule 9 to this Lease. Tenant will comply
with the Rules and Regulations of the Premises adopted by Landlord which are set
forth in Exhibit "B" to this Lease. Landlord represents and warrants to Tenant
that Landlord has delivered to Tenant true and correct copies of all
declarations and other covenants of title which are recorded among the public
land records as of the date hereof and which are applicable to the Premises and
affect the use thereof, and Landlord shall not enter into any declarations or
covenants which shall affect the Tenant's use of the Premises without the
Tenant's prior consent, which consent shall not be unreasonably withheld or
delayed. To Landlord's knowledge, no declarations, covenants or easements, or
other contracts or agreements, exist which affect the use of the Premises but
which are not listed in Schedule 9 hereto (other than public laws and
regulations).
10. [Intentionally omitted.]
11. Indemnification, Waiver And Release.
11.1 Tenant's Indemnification. Except to the extent attributable to
the negligence (whether through act or omission) or deliberate act of Landlord,
its employees or agents, and subject to the provisions of Section 13 herein,
Tenant shall indemnify and hold Landlord and the employees and agents of
Landlord (hereinafter collectively referred to as the "Indemnified Parties" and
individually as an "Indemnified Party") harmless from and against, any and all
demands, claims, causes of action, fines, penalties, damages, liabilities,
judgments, and related expenses (including, without limitation, reasonable
attorney's fees) incurred in connection with or arising from the use or
occupancy or manner of use or occupancy of the Premises by Tenant or any
employee, agent, invitee or licensee of Tenant. If any action or proceeding for
which Tenant is responsible to indemnify the Landlord under this Section 11 is
brought against an Indemnified Party, Tenant, upon written notice from such
Indemnified Party, shall defend the same at Tenant's expense, with counsel
reasonably satisfactory to Landlord.
12. Insurance.
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12.1 Landlord's Insurance. At all times during the Term, Landlord
shall procure and keep in full force and effect the following insurance:
(a) All-Risk property insurance insuring (i) the Building, (ii) all
improvements located therein, and (iii) Landlord's equipment located in the
Building;
(b) Commercial general liability insurance insuring its interest
in the Project;
(c) Rent loss insurance; and
(d) Such other insurance as Landlord reasonably determines from time
to time are in accord with prudent business standards.
12.2 Tenant's Insurance. Tenant shall, at its sole cost and expense,
keep in full force and effect the following insurance:
(a) Commercial general liability insurance insuring Tenant against
liability arising out of its use, occupancy or maintenance of the Premises or
the business operated by Tenant pursuant to the Lease. Such insurance shall be
in the amount of at least $2,000,000 per occurrence. Such policy shall name
Landlord and agents and any mortgagees of Landlord as additional insureds; and
(b) Workers' Compensation insurance as required by state law.
All such policies shall be written in a form and with an insurance
company reasonably satisfactory to Landlord and any mortgagees of Landlord, and
shall provide that Landlord, and any mortgagees of Landlord, receive not less
than thirty (30) days' prior written notice of any cancellation. Prior to or at
the time that Tenant takes possession of the Premises, Tenant shall deliver to
Landlord copies of policies or certificates evidencing the existence of the
amounts and forms of coverage required hereunder. Tenant shall, within thirty
(30) days prior to the expiration of such policies, furnish Landlord with
renewals or "binders" thereof, or upon 10 days' prior written notice to Tenant,
Landlord may order such insurance and charge the reasonable cost thereof to
Tenant as Additional Rent.
12.3 Forms of Policies. All policies maintained by Tenant will
provide that they may not be terminated except after thirty (30) days' prior
written notice to Landlord. All commercial general liability and all-risk
property policies
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maintained by Tenant shall be written as primary policies, not contributing with
and not supplemental to the coverage that Landlord may carry.
12.4 Certain Insurance Risks. Tenant shall not knowingly do any act
or thing upon the Premises or the Project which would (a) jeopardize or be in
conflict with fire insurance policies covering the Project or fixtures and
property in the Project; or (b) increase the rate of fire insurance applicable
to the Project to an amount higher than it otherwise would be for the Tenant's
permitted uses of the Project. Tenant warrants to Landlord that the insurance
questionnaire attached hereto as Exhibit "C" and incorporated herein by
reference (filled-out by Tenant, signed and delivered to Landlord prior to the
execution of this Lease) accurately reflects Tenant's intended use of the
Premises.
13. Waiver of Subrogation: Notwithstanding that any loss or damage may be
due to or result from the negligence of either of the parties hereto, Landlord
and Tenant, for themselves and their respective insurers, each waive any and all
rights to recover against the other, against any subsidiary or joint venture
partner of such other party, or against the officers, directors, shareholders,
partners, employees, agents, customers, invitees, or business visitors of such
other party, for any loss or damage to the property of such waiving party
arising from any cause to the extent coverable by property insurance required to
be maintained by such party hereunder without reference to any deductible. With
respect to any insurance required herein that is provided through a plan of
self-insurance shall be deemed the actual insurance so required for purposes of
this provision.
14. Tenant Improvements:
(A) Certain improvements shall be constructed in the Premises for the
purpose of initially preparing the Premises for occupancy by Tenant (the "Tenant
Improvements"), and as paid for, in accordance with the following procedures:
(1) Landlord shall construct and complete the building shell
improvements defined and described in Schedule 14.1 hereto (the "Landlord's
Work").
(2) The remaining Tenant Improvements shall be constructed as
follows:
(a) Tenant has engaged an architect to prepare plans and
specifications of the Tenant Improvements for Landlord's review and approval.
Such plans and specifications shall be submitted to Landlord within 21 days
after the date hereof, and Landlord shall review and either approve or notify
Tenant of proposed changes thereto within 10 days after receiving same. Tenant
shall make any
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changes to such plans reasonably requested by Landlord and resubmit the revised
plans to Landlord, and Landlord shall review and either approve or notify Tenant
of proposed changes thereto, in each case within 5 days (with such procedure to
repeat as necessary to completion of the plans). The parties agree that Tenant
may generate plans for the Tenant Improvements in phases as described in Section
14(D) below, and the foregoing review and approval procedures shall apply to
each phase individually. If Tenant shall fail to deliver plans within the
specified time period, Landlord shall have no recourse against Tenant other than
to extend, by the number of days Landlord was actually delayed by Tenant,
Landlord's completion of the Tenant Improvements, except as expressly provided
in paragraph (C) of this section below with respect to any such failure which
causes a delay in the Rent Commencement Date.
(b) Landlord's general contractor will act as general contractor (the
"GC") for the Tenant Improvements. Promptly after the plans and specifications
have been finalized, the GC shall solicit competitive bids for all labor and
materials used to complete the Tenant Improvements on an "open book" basis
(i.e., Tenant shall have the right to include one subcontractor per trade on the
bidding list and shall have the right to examine all bids as they are opened).
After the final bids have been selected, Landlord and Tenant shall determine a
budget of all costs of the work. In addition, Landlord will cause the GC to
furnish a guaranteed maximum cost contract (the "Guaranteed Contract"), and the
GC shall be entitled to, as part of such contract, a fee of six percent (6%) of
the total cost of Tenant Improvements. Tenant shall not be responsible for any
costs of the Tenant Improvements which are in excess of the Guaranteed Contract,
plus the costs of any change orders described below, minus the Allowance
(defined herein). Landlord shall apply for building permits and contract for
the construction of the Tenant Improvements covered by the plans and
specifications. Prior to proceeding with the work, Landlord shall provide
Tenant with a copy of each executed subcontract.
(c) Within 3 business days after completion of the bidding process
described above, which bidding process shall not exceed 15 business days from
completion of the plans and specifications, Landlord shall develop a work
schedule of construction to completion. Such schedule may include times for
obtaining materials and times for proper performance of the work after delivery
of such materials. Tenant shall have the right to revise the plans and
specifications in order to adjust (e.g., accelerate) such work schedule, if
possible, and such revisions shall be reviewed and resubmitted in accordance
with paragraph (a) of this section above. Landlord shall adjust the work
schedule accordingly.
(d) Landlord shall provide Tenant with weekly progress reports during
construction, and a representative specified by Tenant (the
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"Tenant Representative") will have the right to participate in any meetings to
evaluate progress. The Tenant Improvements shall be constructed with quality
materials (subject to such selections as are made by Tenant) and in a good and
workmanlike manner and in compliance with all laws. Likewise, the applicable
architect for the Tenant Improvements shall have the right to reject or request
replacement of any work which does not meet such standards.
(e) Landlord will notify Tenant of the need for any change orders or
develop appropriate change orders which are requested by Tenant. With respect
to any change orders, Landlord shall identify for Tenant the increased costs and
delay, if any, which will result from such change orders. With respect to any
change orders which are not requested by Tenant, Landlord shall obtain the
Tenant's prior written approval, as issued through the Tenant's Representative,
which approval shall not be unreasonably withheld or delayed. Landlord shall
not proceed with the work underlying any such change order unless and until so
approved by Tenant. All change orders, and any other modifications, additions,
substitutions and deletions with respect to the Tenant Improvements, shall be in
writing signed by the parties.
(f) Tenant and its agents and contractors shall have the right to
enter the Premises for purposes of installing fixtures, provided that in doing
so such parties shall not interfere with Landlord or its contractors
constructing the Tenant Improvements, and further provided that prior to any
such entry Tenant shall have obtained the insurance required under the terms of
this Lease, and its contractors shall have obtained such liability, workmen's
compensation and other insurance as is reasonably acceptable to Landlord. In
addition, Tenant shall obtain all permits required for such work, Landlord and
Tenant agree to cooperate during periods of simultaneous work and to take
reasonable steps to not interfere with each other and each other's contractors
during such periods.
(g) Upon substantial completion of the Tenant Improvements, Landlord
and Tenant shall perform a joint walk-through of the Premises and develop a
punchlist of items for final completion. Landlord shall complete all items on
the punchlist within 60 days. In addition, Landlord shall obtain an as-built
survey of the Premises (which shall be deemed part of the Tenant Improvements).
(3) Upon request of either party hereto, the other party shall
designate an individual to act as representative with the authority to bind such
party for certain specified purposes.
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(B) All costs and expenses of designing and constructing the Tenant
Improvements described in subsection (A) above shall be paid as follows:
(1) The costs of constructing the Landlord's Work, including but not
limited to all fees of contractors, the costs of materials and permits and other
items shall be paid by Landlord.
(2) Landlord shall provide and pay an allowance (the "Allowance") of
$1,145,000.00 towards all costs of the remaining Tenant Improvements, including
(i) the costs of design and all of the plans and specifications for the Tenant
Improvements, and (ii) the costs of constructing the Tenant Improvements,
including but not limited to all fees, costs and expenses paid under
construction contracts and subcontracts, costs and expenses, the costs of
materials, supplies, permits and other items, and any other out-of-pocket
expenditures incurred in any connection with such construction. Such Allowance
shall not be paid for any other costs or purposes. Except as may be provided by
approved or requested (by Tenant) change order described above, Landlord is
responsible for any cost overruns (i.e., excess costs of work beyond the
originally bid and contracted amount). Tenant shall pay any and all costs of
designing and constructing the Tenant Improvements which equal the difference
between the Allowance and the Guaranteed Contract Amount plus approved or
requested (by Tenant) change orders.
(3) Landlord and Tenant shall each disburse its portion of the costs
of the Tenant Improvements, proportionately and in installments, as work
progresses. The Landlord's share of each payment shall be that fraction of the
total cost of the work as originally estimated which is represented by the
Allowance, and the Tenant's share of each payment shall be the remainder. Each
payment shall be made for completed work, and directly to the professionals,
contractors and other parties performing the work, upon presentation for each
disbursement of (i) a requisition substantially in the form of AIA Requisition
Forms G702 and G703, including a description of all completed work for which
payment is requested, the amount requested with a breakdown by each trade
comprising the work, and the percentage of the entire project completed after
taking into account all such work, (ii) conditional lien waivers from all
parties for whom such payment is requested releasing all liens which may arise
on account of the work performed by such parties to the date of the request for
payment, and (iii) unconditional lien waivers covering all work up to and
including the immediately preceding payment. Withheld from each disbursement
shall be the applicable retainage, not to be less than 10% as provided
hereinabove, which retainage shall be paid and disbursed upon (i) completion of
the Space Improvements as required by the applicable contract(s), (ii) delivery
of unconditional lien waivers as described above for all work comprising the
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improvements, and (iii) issuance of a certificate of occupancy or other
applicable approval by the local authorities permitting occupancy by Tenant.
(C) Landlord shall use commercially reasonable efforts to complete the
Tenant Improvements as soon as is practicable after execution of this Lease by
the parties. However, Landlord shall have no liability to the Tenant hereunder
if delayed due to strike or other labor troubles, governmental restrictions,
failure or shortage of utility service, national or local emergency, accident,
flood, fire or other casualty, adverse weather condition, other act of God,
delays in obtaining a building permit or a certificate of occupancy, or any
other cause beyond the Landlord's and the GC's reasonable control (any of the
foregoing, "force majeure"), or if any delay in completion of the Tenant
Improvements or in delivering possession of the Premises to Tenant are caused by
Tenant, including but not limited to failure of Tenant to timely respond to
submissions by Landlord as required in this section above or Tenant's requesting
changes in the Tenant Improvements which delay completion thereof. If Landlord
delays in the completion of the construction of the Tenant Improvements beyond
the scheduled date of completion as set forth in the Landlord's work schedule
developed in accordance with subsection (A)(2)(b) of this section above, not due
to causes of force majeure, defects in design by Tenant's architect or delays
caused by the Tenant as described above (including but not limited to delays
arising from change orders requested by the Tenant), but due to fault or cause
of Landlord or the GC, then Landlord shall be obligated to pay to Tenant an
amount of $1,000.00 for each business day of the delay caused by fault of
Landlord or the GC. If completion of the Tenant Improvements are delayed beyond
January 1, 2000, not due to the failure of any certificate of occupancy to be
issued for reasons other than fault of Tenant, and not due to causes of force
majeure or fault or cause of Landlord or the GC, but rather are due to fault or
cause of Tenant, including but not limited to Tenant's failure to respond to
deadlines set forth hereinabove, then the Rent Commencement Date shall be deemed
to have occurred on the day on which such Date after January 1, 2000 would have
occurred if not for such delay.
(D) The parties acknowledge that the Tenant shall design the Tenant
Improvements beyond the Landlord's Work for three phases of construction: a
warehouse phase of not less than 85% of the Premises (the "Warehouse Phase"), a
pharmacy phase (the "Pharmacy Phase") and an office phase (the "Office Phase"),
all of which are shown together with their respective rentable square footages
in Exhibit A hereto. Landlord agrees that upon request of Tenant, the Landlord
shall apply for a certificate of occupancy with respect to any Phase which is
less than all of the Premises.
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15. Alteration and Improvements: Subject to Paragraph 46 of this Lease,
Tenant shall not make or allow to be made any alterations or physical additions
in or to or outside the Premises without first obtaining the written consent of
Landlord, which consent shall not be unreasonably withheld or delayed. Any
alterations, physical additions or improvements to the Premises made by Tenant
(other than Tenant's material handling systems, shelving and other trade
fixtures) and which are permanent in nature shall at once become property of
Landlord and shall be surrendered to Landlord upon the termination of this
Lease. Landlord, at its option (and provided notice is given to Tenant at the
time of approval), to be exercised using reasonable discretion, may require
Tenant to remove any physical additions and/or to repair any alterations in
order to restore the Premises to the condition existing at the time Tenant took
possession (reasonable wear and tear excepted), all costs of removal and/or
alterations to be borne by Tenant. This clause shall not apply to moveable
equipment or furniture and other trade fixtures owned by Tenant which may be
removed by Tenant without material damage to the Premises. Notwithstanding the
foregoing, Landlord hereby consents to the erection by Tenant of a security
fence surrounding the truck court and rear portions of the Premises, subject to
Landlord's reasonable review of plans therefor and any applicable restrictions
set forth in the title covenants affecting the property.
16. Mechanics' Liens: No mechanic's or other lien shall attach to or be
allowed to stand against the estate of Landlord by reason of any improvements
made by Tenant. Tenant shall pay promptly all persons furnishing labor or
materials with respect to any work performed by Tenant or its contractor(s) in,
on or about the Premises. In the event any mechanic's or other lien shall at
any time be filed against the Premises by reason of work, labor, services or
materials performed or furnished, or alleged to have been performed or
furnished, for Tenant or for anyone holding the Premises through or under
Tenant, Tenant shall cause the same to be discharged of record, or bonded to the
reasonable satisfaction of Landlord within 15 days after the imposition thereof.
If Tenant shall fail to cause such lien to be so discharged or bonded after
being notified of the filing thereof, then, in addition to any other right or
remedy of Landlord, Landlord may discharge the same by paying the amount claimed
to be due, and the amount so paid by Landlord (including actual attorney's fees
and expenses incurred by Landlord either defending against such lien or in
procuring the discharge of such lien), together with interest thereon, shall be
due and payable by Tenant to Landlord as Additional Rent. Nothing herein
contained shall be construed as a consent by Landlord to make any alteration,
improvement, installation or addition so as to give rise to any right to any
laborer or materialman to file any mechanic's lien or any notice thereof, or any
other lien purporting to affect the Premises.
17. Condemnation:
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(a) If, during the Term (or any extension or renewal thereof), all or
at least 10% of the Premises, or at least 50 spaces for automobiles in the
parking area (without being replaced), or at least 25% of the loading dock area,
is taken for any public or quasi-public use under any governmental law,
ordinance or regulation, or by right of eminent domain or by purchase in lieu
thereof, and the taking would prevent or materially interfere with the use of
the Premises for the purpose for which they are then being used, Tenant shall
have the right to terminate this Lease through written notice to the Landlord
effective on the date physical possession is taken by the condemning authority.
All compensation and damages awarded for the partial or total taking of the
Premises shall belong to and be the sole property of Landlord, except that
Tenant shall be entitled to make its own claims for and receive any award that
may be made for the Tenant's Improvements (except for Landlord's Work), moving
expenses, and the removal of Tenant's trade fixtures, equipment and furnishings.
(b) If a portion of the Premises shall be taken for any public or
quasi-public use under any governmental law, ordinance or regulation, or by
right of eminent domain or by purchase in lieu thereof, and this Lease is not
terminated as provided in Paragraph 17(a) above, Landlord shall, at Landlord's
sole risk and expense, restore and reconstruct the Building and other
improvements on the Premises to the extent necessary to make it reasonably
tenantable. The rent payable under this Lease during the unexpired portion of
the term shall be prorated based on the portion of Premises which is reasonably
usable by Tenant. All compensation and damages awarded for the partial taking
of the Premises shall belong to and be the sole property of Landlord. Tenant
shall be entitled to make its own claims for and receive any award that may be
made for Tenant's improvements, moving expenses, and the removal of Tenant's
trade fixtures, equipment and furnishing.
18. Hazardous Substances:
(a) The term "Hazardous Substance(s)" as used in the lease is defined
as follows: Any element, compound, mixture, solution, particle or substance,
which presents danger or potential danger for damage or injury to health,
welfare or to the environment including, but not limited to: (i) those
substances which are inherently or potentially radioactive, explosive,
ignitable, corrosive, reactive, carcinogenic or toxic and (ii) those substances
which have been recognized as dangerous or potentially dangerous to health,
welfare or to the environment by any federal, municipal, state, county or other
governmental or quasi-governmental authority and/or any department or agency
thereof.
(b) Tenant agrees that at all times during the Term and any extensions
or renewals thereof, Tenant shall:
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(i) obtain Landlord's prior written consent, which consent shall be
granted or withheld in Landlord's sole discretion, but which determination as to
consent shall not be unreasonably delayed, to the manufacturing, processing,
distributing, using, producing, treating, storing (above or below ground level),
disposing of, or allowing to be present (the "Presence") of any Hazardous
Substance in or about the Premises. In connection with each such consent
requested by Tenant, Tenant shall submit to Landlord a description, including
the composition, quantity and all other information requested by Landlord
concerning the proposed Presence of any Hazardous Substance. Landlord's consent
to the Presence of any Hazardous Substance may be deemed given only by inclusion
of a description of the composition and quantity of the proposed Hazardous
Substance on a schedule attached to this Lease. The term "Allowed Substance" as
used in this lease is defined as any Hazardous Substance which Landlord has
agreed to the presence thereof. Landlord's consent to the Presence of any
Hazardous Substance at any time during the lease term or renewal thereof shall
not waive the requirement obtaining Landlord's consent to the subsequent
Presence of any other, or increased quantities of, Hazardous Substance in or
about the Premises. If Landlord subsequently consents to the Presence of any
other Hazardous Substance, or to increased quantities of any Hazardous
Substance, such consent shall be deemed given only by amendment of the schedule
attached to this Lease. Notwithstanding the foregoing, Landlord acknowledges
and agrees that an inventory of prescription drug products, including
pharmaceuticals for compounded medications, will be maintained by Tenant in
quantities appropriate for mail-service pharmacies for dispensing and delivery
in consumer quantities, and no explicit scheduling or further notice to Landlord
is necessary for these items and such goods shall be considered "Allowed
Substances" for purposes hereof. Landlord further acknowledges that Tenant may
also store on the Premises "over-the-counter" products of the nature generally
sold in drugstores and general merchandise stores such as Target, K-Mart and
Rite Aid, or in supermarkets, including, without limitation, non-prescription
drug products and pharmaceuticals, and no explicit scheduling or further notice
to Landlord is necessary for these items only, and said goods shall be
considered "Allowed Substances," provided such packaged goods are not opened,
mixed or transferred to different containers at the Property (except for de
minimis quantities of non-prescription drug products or pharmaceuticals that may
be used in the compounding or mixing of prescription medications). Tenant shall
also be permitted to store and use building cleaning supplies on the Property in
quantities which would be considered reasonable and appropriate in the ordinary
course of business. Notwithstanding any provisions hereof to the contrary,
Tenant acknowledges that chlorinated solvents including, but not limited to,
Trichloroethene (TCE), 1,1,1 Trichloroethene (TCE), 1,1 Dichloroethane (DCA),
1,2, Dichloroethane (DCA), and 1,1, Dichlorethene (DCE), ("Chlorinated
Solvents") shall be deemed not
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to be Allowed Substances, and the Presence of Chlorinated Solvents on the
Premises is strictly prohibited, except for those in consumer quantities which
are temporarily at the Premises and remain packaged during such time.
(ii) refrain from (and prohibit others from) allowing the Presence of
any Hazardous Substance in or at the Premises which is not an Allowed Substance,
except as explicitly authorized in Paragraph 18.b(i).
(iii) promptly comply at Tenant's own cost and expense, with all
laws, orders, rules, regulations, certificates of occupancy, or other
requirements, as the same now exist or may hereafter be enacted, amended or
promulgated, of any federal, municipal, state, county or other governmental or
quasi-governmental authorities and/or any department or agency thereof relating
to the Presence of Hazardous Substances in or at the Premises, whether or not
such substances are Allowed Substances. Notwithstanding anything to the
contrary contained in this Paragraph 18, Tenant's obligation under this
Paragraph is limited to any Hazardous Substance or condition which came to exist
on or at the Premises during the Tenant's occupancy thereof which was not
attributable to any act or omission of Landlord or Landlord's agents or, with
respect to areas beyond the Premises, acts or omissions of other third parties.
Moreover, Landlord agrees to remain responsible for any Hazardous Substance or
condition which existed on, at or outside the Premises prior to Tenant's
occupancy of the Premises.
Without limiting the generality of the foregoing provisions, Tenant
shall, at Tenant's own expense and if applicable to Tenant's operation, comply
with the Industrial Site Recovery Act, N.J.S.A. 13: 1 K-6 et seq. and the
regulations promulgated thereunder ("ISRA"). Tenant shall, at Tenant's own
expense, make all submissions to, provide all information to, and comply with
all requirements of, the Bureau of Industrial Site Evaluation (the "Bureau") of
the New Jersey Department of Environmental Protection ("NJDEP"). Tenant's
obligations under this paragraph shall arise only if there is any closing,
terminating, or transferring of operations of an industrial establishment at the
Premises pursuant to ISRA which is triggered by Tenant. If a closing,
terminating or transfer of ownership or operations occurs which is triggered by
Landlord, then Landlord shall have the sole obligation to satisfy ISRA as
defined herein, other than such actions as may be required under ISRA to address
any Hazardous Substances release or condition created during Tenant's occupancy
of the Premises and not attributable to any act or omission of Landlord or
Landlord's agent or, with respect to areas outside the Premises, acts or
omissions of other third parties. In the event Landlord has the obligation to
satisfy ISRA, Tenant agrees to reasonably cooperate with and assist Landlord in
its submissions under ISRA (without cost to Tenant). Provided this Lease is not
previously canceled or terminated by either
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party or by operation of law, Tenant shall commence its submission under ISRA in
anticipation of the end of the Lease term no later than one year prior to the
termination of the Lease. The party responsible for complying with ISRA shall
notify the other in advance of all meetings which pertain to the Premises
scheduled between the responsible party or the responsible party's
representatives and NJDEP or any other environmental authority and the other
party or that party's representatives shall have the right, without obligation,
to attend and participate in all such meetings. If for any reason Tenant has not
complied with all of its obligations under this paragraph by the expiration of
the Term when it is Tenant's responsibility do so, Tenant's responsibility shall
continue. If, when it is Tenant's responsibility to comply with ISRA, Tenant
fails to obtain either: (i) a non-applicability letter; (ii) a de minimis
exemption; (iii) a negative declaration; or (iv) approval of a remedial action
workplan; (collectively referred to as ISRA clearance) from NJDEP prior to the
expiration or earlier termination of the term of this Lease, then upon the
expiration or earlier termination of the Lease term Landlord shall, based on the
criteria set forth below, consider the Lease as having ended or shall treat
Tenant as a holdover tenant in possession of the Premises:
(1) If Tenant has obtained a remedial action workplan approval or a
Classification Exception Area approval from NJDEP prior to termination of the
Lease term, and groundwater monitoring is the only remedial activity being
required by N1DEP, then Tenant shall not be considered a holdover tenant.
Tenant shall nevertheless be obligated to promptly obtain ISRA clearance and to
fulfill the obligations set forth herein.
(2) If remedial activities (other than groundwater monitoring)
affecting the Premises are required of Tenant by NJDEP and these activities will
continue post-closing, Landlord shall treat Tenant as a holdover tenant in
possession of the Premises and Tenant shall continue to pay to Landlord the
regular and additional monthly rent which Tenant would otherwise have paid under
the Lease until such time as Tenant obtains ISRA clearance and fulfills its
obligations hereunder.
At no expense to the other party, the party with the responsibility of
complying with ISRA shall promptly provide all information in it's possession or
within it's knowledge pertinent to ISRA compliance at the Premises requested by
the other party and all information required for preparation of a non-
applicability affidavit, de minimis quantity exemption application, limited
conveyance application or other submission and shall promptly sign such
affidavits and submissions when requested by the other party or NJDEP. The
responsible party shall likewise promptly furnish to the other party true and
complete copies of all
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documents, submissions, correspondence and written communications provided by
the responsible party to and from the NJDEP pertinent to ISRA compliance at the
Premises, including all sampling and test results and reports obtained and
prepared from samples and tests taken at or about the Premises.
Should Tenant's operations at the Premises be outside of those
industrial operations covered by ISRA, Tenant shall, at Tenant's own expense,
obtain a letter of non-applicability or de minimis quantity exemption prior to
the expiration of the Term and shall provide Tenant's submission and the
exemption letter to Landlord.
Should the Bureau or any other division of NJDEP determine that a
remediation plan be prepared and that a remediation be undertaken because of the
Presence of Hazardous Substances at the Premises, then the party responsible for
remediating the Hazardous Substances, as defined hereinbelow, and as subject to
the limitation hereinbelow, shall at that party's own expense, prepare and
submit the required plans and financial assurances, and carry out the approved
plans. The responsible party shall indemnify, defend and save harmless the
other party from all fines, suits, procedures, claims and actions of any kind
arising out of the responsible party's failure to provide all information of
NJDEP. The responsible party's failure to abide by the terms of this paragraph
shall be restrainable by injunction.
Notwithstanding anything to the contrary contained herein and for the
purposes of determining Tenant's responsibilities for remediating any Hazardous
Substances or environmental condition, in the event that any release or other
condition on or about the Premises arising during Tenant's occupancy of the
Premises results in the Presence of Hazardous Substances at the Premises, Tenant
shall be responsible for satisfying the remediation requirements of the New
Jersey Department of Environmental Protection (NJDEP) as set forth in the
applicable statutes and regulations, including N.J.A.C. 7:26(E), and for
achieving groundwater cleanup criteria set forth in N.J.A.C. 7:9-6. In the
event that a Hazardous Substance release or condition on or at the Premises is
attributable to Tenant, Landlord shall arrange for testing and analysis of soil
samples from areas of the Premises which are unimpacted by the release or
condition (the costs of which shall be divided evenly between the parties), and
Tenant shall be responsible for achieving soil cleanup criteria in the impacted
area which is equivalent to the average testing results of the soil samples
taken from the unimpacted areas. Tenant shall not be responsible for
remediating any Hazardous Substances, releases or conditions which existed on or
at the Premises prior to Tenant's occupancy or which exist outside the Premises
but not
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due to act or omission of Tenant or any other parties for whom Tenant is
responsible hereunder.
(iv) indemnify and hold Landlord, its agents and employees, harmless
from any and all demands, claims, causes of action, penalties, liabilities,
judgments, damages (including consequential damages) and expenses including,
without limitation, court costs and reasonable attorneys' fees including but not
limited to all costs of investigation and response to meet appropriate remedial
cleanup standards incurred by Landlord as a result of (a) Tenant's failure or
delay in complying, with the provisions of sections (b)(i) or (ii) above; (b)
Tenant's failure or delay in properly complying with such law, order, rule,
regulation, or other requirement referred to in section (b)(iii), above or (c)
any adverse effect which results from the Presence of any Hazardous Substance in
or about the Premises for which Tenant is responsible, whether or not such
Hazardous Substance is an Allowed Substance. If any action or proceeding is
brought against Landlord, its agents or employees by reason of any such claim,
Tenant, upon notice from Landlord, will defend such claim at Tenant's expense
with counsel reasonably satisfactory to Landlord. This indemnification by
Tenant of Landlord shall survive the termination of the Lease.
(v) promptly disclose to Landlord by delivering, in the manner
prescribed for delivery of notice in the Lease, a copy of any forms,
submissions, notices, reports, or other written documentation (communications)
relating to the Presence of any Hazardous Substance in or about the Premises,
whether or not such Hazardous Substance is an Allowed Substance, and whether
such Communications are delivered to Tenant or are requested of Tenant by any
federal, municipal, state, county or other government or quasi-governmental
authority and/or any department or agency thereof
(vi) notwithstanding any other provisions of this Lease, allow
Landlord, and any authorized representative of Landlord, access and the right to
enter and inspect the Premises, during business hours (except in case of
emergency), for the Presence of any Hazardous Substance, whether or not such
Hazardous Substance is an Allowed Substance, at any time deemed reasonable by
the parties (but not later than 72 hours of the written notice), upon reasonable
prior written notice to Tenant. In the event of any such entry, Landlord shall
comply with the Tenant's reasonable security, safety and sign-in procedures.
Landlord shall not unreasonably interfere with the Tenant's use of the Premises
and shall, at Landlord's cost (unless the need for sampling or testing was
caused by Tenant), repair and restore any areas of the Premises which are
damaged (if any) by Landlord's sampling or testing.
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(c) Compliance by Landlord or Tenant with any provision of this
Paragraph 18 shall not be deemed a waiver of any other provision. Without
limiting the foregoing, Landlord's consent to the Presence of any Allowed
Substance shall not relieve Tenant of its indemnity obligations under the terms
of this Paragraph 18.
(d) Landlord represents and warrants that, as of July 15, 1999 and as
of the date hereof, to the best of the Landlord's knowledge (with knowledge of
the Landlord being deemed the knowledge of the persons with day-to-day
management and supervision of the Premises): (i) there are no
outstanding/unresolved notice(s) of violation(s) of any Environmental Laws
pertaining to the Premises, and; (ii) there is not any Hazardous Substance or
condition on the Premises which, if disclosed to NJDEP or other regulatory
agency, would require investigation or remedial action.
(e) Landlord shall indemnify, protect and hold harmless Tenant from
and against any and all claims, demands, liabilities, actions, suits,
proceedings, judgments, losses, damages (including punitive damages), fines,
penalties, costs and expenses (including reasonable attorneys', consultants' and
experts' fees) arising from (i) any Hazardous Substance or condition on, at or
outside the Premises which existed prior to Tenant's occupancy of the Premises,
(ii) any Hazardous Substance or condition which comes to exist on or at the
Premises from the date of Tenant's occupancy forward, and which is attributable
to any act or omission of Landlord or Landlord's agents or, with respect to
areas outside the Premises, act or omission of other third parties, and (iii)
any inaccuracy in the Landlord's warranty and representation set forth in
paragraph (d) of this section above. The foregoing indemnification obligation
shall survive the expiration or earlier termination of this Lease.
19. Fire and Casualty:
(a) If, the Building is totally destroyed by fire or other casualty,
or if the Building is damaged so that rebuilding cannot reasonably be completed
within one hundred twenty (120) working days after the date of written
notification by Tenant to Landlord of the destruction, Landlord and Tenant shall
have the right to terminate this Lease by written notice from one party to the
other effective as of the date Landlord received Tenant's written notification
of such casualty. If neither Landlord or Tenant provides written notice of its
election to terminate this Lease within sixty (60) days of the date Landlord
received Tenant's written notification of such casualty, this Lease shall not
terminate and Landlord shall at its sole cost and expense proceed with
reasonable diligence to rebuild or repair the Premises to substantially the same
condition they existed prior to the damage, provided, however, Landlord shall
have no
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obligation to restore or repair any alterations or improvements made by either
Landlord or Tenant to the Premises at Tenant's cost beyond the Tenant
Improvements.
(b) If the Premises are partially damaged by fire or other casualty,
and rebuilding or repairs can reasonably be completed within one hundred twenty
(120) working days from the date of written notification by Tenant to Landlord
of the destruction, this Lease shall not terminate and Landlord will at its sole
cost and expense proceed with reasonable diligence to rebuild or repair the
Premises to substantially the same condition they existed prior to the damage,
provided, however, Landlord shall have no obligation to restore or repair any
alterations or improvements made by either Landlord or Tenant to the Premises at
Tenant's cost. If the Premises are to be rebuilt or repaired and are
untenantable in whole or in part following the damage, the rent payable under
this Lease during the period for which the Premises are untenantable shall be
prorated. In the event Landlord fails to substantially complete the necessary
repairs or rebuilding within one hundred twenty (120) working days from the date
of written notification by Tenant to Landlord of the destruction, Tenant may
terminate this Lease by delivering written notice of termination to the
Landlord.
(c) Whenever Landlord shall be required by the terms of this Lease or
otherwise to make any improvements or repairs, to furnish any services, to
repair or reconstruct the Premises or to fulfill any other obligation hereunder,
and Landlord shall be delayed in or prevented from so doing for reasons beyond
Landlord's reasonable control, Landlord shall not be deemed thereby to be in
default and this Lease and the obligation of Tenant to pay rent hereunder and to
perform all of the other covenants and agreements hereunder on the part of
Tenant to be performed shall in no way be affected, impaired, or excused, and
any time limit herein fixed for Landlord's performance thereof shall be extended
by length of delay, if and so long as Landlord's nonperformance, delay or
default shall be caused by reason of governmental controls, war, riots or civil
disturbances, strikes, labor disputes, power shortages, acts of God, or any
other cause beyond Landlord's reasonable control.
(d) To the extent that any portion of the Premises is rendered
untenantable due to fire or other casualty, all rent provided hereunder shall
abate, proportionately, from the portion of the Premises so rendered
untenantable, until restored as provided above.
20. Hold Harmless: Landlord shall not be liable to Tenant's employees,
agents, invitees, licensees or visitors, or to any other persons, for any injury
to person or damage to property on or about the Premises.
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21. Quiet Enjoyment: Landlord covenants and agrees that, upon payment of
the required rents and performing the terms, conditions, covenants and
agreements contained in this Lease, Tenant shall peaceably and quietly have,
hold and enjoy the Premises during the full term of this Lease as well as any
extension or renewal thereof. Landlord shall not be responsible for the acts or
omissions of any third party that may interfere with Tenant's use and enjoyment
of the Premises.
22. Landlord's Right of Entry:
(a) Landlord shall have the right, during business hours after
reasonable advance notice (except in case of emergency), to enter the Premises
for the following reasons: inspection; cleaning or making repairs required of
Landlord under the Lease; determining Tenant's use of the Premises; or
determining if an act of default under this Lease has occurred. In the event of
any such entry, Landlord shall comply with the Tenant's reasonable security,
safety and sign-in procedures.
(b) Landlord shall have the right, during business hours after
reasonable advance notice (except in case of emergency), to enter the Premises
during the last six (6) months of this Lease for the purpose of showing the
Premises to prospective tenants, and the Landlord shall also have the right at
such time to post on the exterior of the Premises the usual notice and/or signs
advertising the Premises "For Rent" or other such similar advertising as
Landlord deems necessary. In the event of any such entry, Landlord shall comply
with the Tenant's reasonable security, safety and sign-in procedures.
23. Assignment or Sublease:
(a) Landlord shall have the right to transfer and assign this Lease
along with any transfer or assignment, in whole or in part, of Landlord's rights
and obligations in the Premises. In the event that Landlord transfers and
assigns this Lease, provided that the transferee assumes all of Landlord's
obligations under this Lease thereafter accruing, Landlord shall be released
from all liability under this Lease arising after the effective date of the
assignment. Tenant shall not assign this Lease or sublet all or any part of the
Premises without the prior written consent of Landlord, which consent shall be
unreasonably withheld or delayed. Any request by Tenant for Landlord's consent
to an assignment or sublease must be accompanied by: (1) a copy of the proposed
assignment or sublease; (2) a written statement as to the proposed assignee or
sublessee's intended use of the Premises; (3) a Dunn and Bradstreet report or an
equivalent report of the proposed assignee or sublessee in a form reasonably
acceptable to Landlord; (4) financial statements including the most current
annual income statement and balance sheet (as defined by generally accepted
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accounting practices) for the proposed assignee or sublessee (and Landlord shall
observe the confidentiality of any such statements which are not public); (5) at
the Landlord's discretion, banking and business references for the proposed
assignee or sublessee; and (6) a description of the intended use of the Premises
by the proposed assignee or sublessee and a satisfactory report from an
environmental engineer, satisfactory to Landlord, concerning said use and the
risks of environmental contamination resulting from the proposed use of the
Premises by the assignee or subtenant. Landlord reserves the right to request
such other information as reasonably necessary to qualify the proposed assignee
or sublessee. Landlord agrees to respond to any request by Tenant for approval
of an assignment or subletting within 15 days after receiving the request and
the information described above. Notwithstanding the foregoing, Tenant shall
have the right to assign or sublet to any wholly owned subsidiary or parent
entity without the consent of Landlord, provided that Tenant notifies Landlord
in advance and delivers to Landlord the information regarding the transaction
described above.
(b) In the event Landlord consents to an assignment or subletting, and
in the case of any assignment or subletting with respect to which Landlord's
consent is not required hereunder, Tenant shall nevertheless at all times remain
fully responsible and liable for the payment of rent and for compliance with all
other obligations under the terms, conditions and covenants of this Lease.
Landlord reserves the right to receive all rental money obtained from the
assignment or sublease as the case may be. In the event that Tenant receives
payments from an approved assignee or sublessee in excess of the Basic Rent and
Additional Rent due under this Lease, Landlord shall be entitled to 50% of such
excess over the Tenant's out-of-pocket costs of such assignment or subletting
(e.g., space improvement costs and broker's commissions) in addition to the
Basic Rent and Additional Rent due under this Lease. Upon the occurrence of an
Event of Default (as defined hereinafter), if all or any part of the Premises
are then assigned or sublet, Landlord, in addition to any other remedies
provided for by this Lease or provided for by law, may, at its option, collect
directly from the assignee or subtenant all rents becoming due to Tenant by
reason of the assignment or sublease. Any collection directly by Landlord from
the assignee or subtenant shall not be construed to constitute a novation or a
release of Tenant from the further performance of its obligations under this
Lease.
24. Statutory Liens. Landlord agrees that it shall, upon request of any
one or more lenders to whom Tenant grants a security interest in personal
property located at the Premises, execute an agreement waiving any statutory
lien (including NJSA 2A:42-1), existing by law and benefitting Landlord with
respect to such property, in favor of (and only in favor of) such lenders.
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25. [Intentionally deleted.]
26. Default by Tenant: Any of the following shall constitute an Event of
Default by Tenant under this Lease:
(a) Tenant fails to pay when due any installment of rent or any other
payment required pursuant to this Lease after ten (10) days notice of such
default and failure to cure during such notice period;
(b) Tenant fails to comply with any term, provision, or covenant of
this Lease, other than the payment of rent, and such failure is not cured within
thirty (30) days after written notice to Tenant or, if such failure is not
capable of being cured within 30 days, then within 60 days (except for those
obligations set forth in Section 5.3 which are not capable of being cured within
60 days, with respect to which the 60 day period shall not apply) provided that
Tenant begins efforts to cure promptly after receiving notice from Landlord and
diligently pursues such cure to completion;
(c) Any proceeding against Tenant seeking any reorganization,
arrangement, composition, readjustment, liquidation, dissolution or similar
relief is not dismissed within 60 days after the commencement thereof, or any
trustee, receiver or liquidator is appointed for Tenant, or of any material part
of its properties, and appointment is not vacated within 60 days after such
appointment; or
(d) Tenant does or permits to be done any act which results in a lien
being filed against the Premises or the Project which is not bonded off within
15 days after Tenant is first notified of such lien.
27. Remedies for Tenant's Default: Upon the occurrence of any Event of
Default set forth in this Lease, Landlord shall have the option to pursue any
one or more of the following remedies without any notice or demand:
(a) Terminate this Lease, in which event Tenant shall immediately
surrender the Premises to Landlord. If Tenant fails to surrender the Premises,
Landlord may, without prejudice to any other remedy it has for possession or
arrearages in rent, enter upon and take possession of the Premises, by picking
or changing locks if necessary, and lock out, expel, or remove Tenant and any
other person who may be occupying all or any part of the Premises without being
liable for prosecution of any claim for damages. Tenant agrees to pay on demand
the amount of all loss and damage which Landlord suffers by reason of the
termination of the Lease including inability to relet the Premises on
satisfactory terms.
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(b) Enter upon and take possession of the Premises, by picking or
changing locks if necessary, and lock out, expel or remove Tenant and any other
person who may be occupying all or any part of the Premises without being liable
for any claim for damages, and relet the Premises on behalf of Tenant and
receive directly the rent by reason of the reletting. Tenant agrees to pay
Landlord on demand any deficiency that arises by reason of any reletting of the
Premises; further, Tenant agrees to reimburse Landlord for any expenditures made
by it for remodeling or repairing the Premises (except, in order to avoid
duplication, that which is recovered directly through such reletting).
(c) Enter upon the Premises, by picking or changing locks if
necessary, without being liable for prosecution of any claim for damages, and do
whatever Tenant is obligated to do under the terms of this Lease. Tenant agrees
to reimburse Landlord on demand for any expenses which Landlord incurs in
effecting compliance with Tenant's obligations under this Lease; further, Tenant
agrees that Landlord shall not be liable for any damages resulting to Tenant
from effecting compliance with Tenant's obligations under this subparagraph
caused by the negligence of Landlord or otherwise.
(d) All rights and remedies of the Landlord herein enumerated in the
event of a default shall be cumulative and nothing herein shall exclude any
other right or remedy allowed by law.
28. Waiver of Default or Remedy: Failure of Landlord to declare a default
or an Event of Default immediately upon its occurrence, or delay in taking any
action in connection with an Event of Default, shall not constitute a waiver of
the default or Event of Default, but Landlord shall have the right to declare
the default or Event of Default at any time and take such action as is lawful or
authorized under this Lease. Failure by Landlord to enforce one or more of the
remedies provided upon an Event of Default shall not be deemed or construed to
constitute a waiver of the default or of any other violation or breach of any of
the terms, provisions and covenants contained in this Lease.
29. [Intentionally deleted.]
30. Attorney's Fees: In the event either party defaults in the
performance of any of the terms, covenants, agreements or conditions contained
in this Lease and the other party retains an attorney to enforce all or any part
of this Lease, and such party incurs attorneys' fees and costs in court or other
formal legal proceedings, then the non-prevailing party in such proceedings
shall pay the reasonable attorney's fees and costs of the prevailing party.
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31. Holding Over: In the event of holding over by Tenant after the
expiration or termination of this Lease, the holdover shall be as a tenant at
will and all of the terms and provisions of this Lease shall be applicable
during that period, except that Tenant shall pay Landlord as rent for the period
of such holdover an amount equal to one and one-half times the rent. Tenant
agrees to vacate and deliver the Premises to Landlord upon Tenant's receipt of
notice from Landlord to vacate upon termination of this Lease. The rental
payable during the holdover period shall be payable to Landlord on demand. No
holding over by Tenant, whether with or without consent of Landlord, shall
operate to extend this Lease.
32. Rights of First Mortgagee: Tenant accepts this Lease subject and
subordinate to any recorded first mortgage or deed of trust lien presently
existing or hereafter created upon the Premises, provided that the applicable
mortgagee or beneficiary shall agree to honor this Lease and not disturb Tenant
in its possession of the Premises except upon an event of default past any
applicable notice and grace period. Tenant agrees upon demand to execute
additional instruments so subordinating this Lease as Landlord may require. If
the interests of Landlord under this Lease are transferred by reason of
foreclosure or other proceedings for enforcement of any first mortgage or deed
of trust on the Premises, Tenant shall be bound to the transferee (sometimes
called the "Purchasers"), at the option of the Purchaser, under the terms,
covenants and conditions of this Lease for the balance of the term remaining,
and any extensions or renewals, with the same force and effect as if the
Purchaser were Landlord under this Lease.
33. Estoppel Certificates: Within ten (10) days after request by Landlord
or Landlord's mortgagee, Tenant agrees to furnish a statement certifying that
Tenant is in possession of the Premises; the Premises are acceptable; the Lease
is in full force and effect; the Lease is unmodified; Tenant claims no present
charge, lien, or claim of offset against rent, the rent is paid for the current
month, but is not prepaid for more than one month and will not be prepaid for
more than one month in advance; there is no existing default by reason of some
act or omission by Landlord; and such other matters as may be reasonably
required by Landlord or Landlord's mortgagee. If Tenant believes any of the
statements requested of Landlord in such Estoppel Certificate not to be true or
correct, Tenant shall state the circumstances relative thereto with specificity
in the statement. Tenant's failure to deliver such statement- within the time
specified herein shall cause Landlord to be automatically appointed as Tenant's
attorney-in-fact for the purpose of issuing such statement. Landlord agrees to
provide such an estoppel statement to Tenant within 10 days after request
therefor.
34. Successors: This lease shall be binding upon and inure to the benefit
of Landlord and Tenant and their respective permitted heirs, personal
representatives,
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successors and assignees. It is hereby covenanted and agreed that should
Landlord's interest in the Premises cease to exist for any reason during the
term of this Lease, then notwithstanding the happening of such event this Lease
nevertheless shall remain unimpaired and in full force and effect and Tenant
hereunder agrees to attorn to the then owner of the Premises.
35. Guaranty Lease: Under appropriate circumstances, at Landlord's option,
Tenant may be required to provide a Guaranty of Lease in the form attached
hereto as "Exhibit "D" executed by a guarantor satisfactory to Landlord.
36. [Intentionally deleted.]
37. Construction of Language: The captions appearing in this Lease are
inserted for convenience and in no way define, limit, construe or describe the
scope or intent of such paragraph. If any provision of this Lease shall ever be
held to be invalid or unenforceable, such invalidity or unenforceability shall
not affect any other provision of this tease, and such other provisions shall
continue in full force and effect.
38. Notice:
(a) All rent and other payments required to be made by Tenant shall be
payable to Landlord at the address set forth below, or at any other address as
Landlord may specify from time to time by written notice.
(b) All payments required to be made by Landlord to Tenant shall be
payable to Tenant at the address set forth below, or at any other address within
the United States as Tenant may specify from time to time by written notice.
(c) Any notice or document required or permitted to be delivered by
this Lease shall be deemed to be delivered (whether or not actually received)
when: (i) deposited in the United States Mail, postage prepaid, certified mail,
return receipt requested; (ii) deposited with a recognized overnight courier
such as Federal Express or United Parcel Service; (iii) sent by facsimile
transmission (with a confirmation copy to follow by either of the methods of
delivery set forth above); or (iv) delivered by hand, addressed to the Landlord
or Tenant at the respective addresses set out below with copies to the parties
set forth below:
LANDLORD: TENANT:
- --------- -------
The Creaney & Smith Group ds distribution, inc.
925 Fell Street c/o drugstore.com, inc.
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Baltimore, Maryland 21231 13920 SE Eastgate Way, Suite 300
Bellevue, Washington 98005
and: copy to:
- --- -------
The Northwestern Mutual General Counsel
Life Insurance Company drugstore.com, inc.
1133 29th Street, N.W., Suite 700 13920 SE Eastgate Way, Suite 300
Washington, D C. 20036 Bellevue, Washington 98005
Attn: William H. Norton
and to:
------
Marvin Garfinkel, Esq.
Mesirov Gelman Jaffe
Cramer & Jamieson
1735 Market Street, Suite 3800
Philadelphia, Pennsylvania 19103
39. Agreement and Limitation of Warranties: It is expressly agreed by the
parties, as a material consideration for the execution of this Lease, that the
Lease, with the specific references to written extrinsic documents, is the
entire agreement of the parties and supersedes all prior agreements or
negotiations between the parties; and that there are, and were, no oral
representations, warranties, understandings, stipulations, agreements or
promises pertaining to this lease or the expressly mentioned written extrinsic
documents not incorporated in writing in this Lease. Landlord and Tenant
expressly agree that there are and shall be no implied warranties of
merchantability, habitability, fitness, for a particular purpose or of any other
kind arising out of this Lease and there are no warranties which extend beyond
those expressly set forth in this Lease. It is likewise agreed that this Lease
may not be altered, waived, amended or extended except by an instrument in
writing signed by both Landlord and Tenant. Notwithstanding anything to the
contrary contained in this Lease, provided that there is no mortgage or deed of
trust recorded among the land records with respect to the Premises, in no event
shall Landlord have any obligation or incur any liability beyond the interest of
Landlord in the Premises, including the rents, issues and profits therefrom, and
Tenant shall look exclusively to such interest of Landlord in the Premises for
the payment and discharge of any obligations imposed upon Landlord hereunder.
40. Brokerage Commission: Landlord recognizes GMH Realty, Inc., Landlord's
Broker, and Staubach Company of Pennsylvania, Tenant's Broker
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(collectively, the "Brokers"), as the sole Brokers procuring this Lease and
shall pay Brokers a commission therefor pursuant to a separate agreement between
Brokers and Landlord. Landlord and Tenant each represent and warrant one to
another that except as set forth herein, neither of them has employed any
broker, agent, or finder in connection with this Lease. Landlord agrees to
indemnify and hold Tenant harmless from any claim, or claim of or right to a
lien under the Statutes of Pennsylvania or New Jersey relating to real estate
broker liens, resulting from Landlord's acts or omissions for brokerage or other
similar fees in connection with the Lease or the leasing of the Premises by
Tenant and from and against all liabilities, costs, damages, and expenses that
would result from any such claim in connection with the Lease or the leasing of
the Premises by Tenant. Tenant agrees to indemnify and hold Landlord harmless
from any claim, or claim of or right to a lien under the Statutes of
Pennsylvania or New Jersey relating to real estate broker liens, resulting from
Tenant's acts or omissions for brokerage or other similar fees, except for
Tenant's employment of Tenant's Broker, in connection with the Lease or the
leasing of the Premises by Tenant and from and against all liabilities, costs,
damages, and expenses that would result from any such claim in connection with
the Lease or the leasing of the Premises by Tenant.
41. Waiver by Jury Trial: LANDLORD AND TENANT EXPRESSLY WAIVE ANY RIGHT TO
TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION ARISING UNDER, IN
CONNECTION WITH OR INCIDENT TO, THIS LEASE AND ANY AND ALL AMENDMENTS AND
SUPPLEMENTS HERETO, IN ANY WAY RELATED TO THE PREMISES OR THE MANAGEMENT OR
OPERATION OF THE PREMISES, WHETHER IN CONTRACT, TORT OR OTHERWISE, AND AGREE AND
CONSENT THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED
BY COURT TRIAL WITHOUT A JURY.
42. Choice of Law: This Lease shall be governed by and construed in all
respects in accordance with the laws of the State of New Jersey without regard
to any conflict of laws principles.
43. Forum Selection Clause. Landlord and Tenant agree that all disputes and
matters whatsoever arising under, in connection with or incident to this Lease
or the Premises shall be litigated, if at all, in and before a federal or state
court located in the State of New Jersey to the exclusion of the courts of any
other state or country.
44. Authority. The individuals executing this Lease on behalf of Tenant
each represent to Landlord that they are duly authorized to execute and deliver
this
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Lease on behalf of Tenant and to bind Tenant to the terms and provisions set
forth herein.
45. Right of First Offer. Tenant shall have a right of first offer to
lease certain portions of the properties owned by Landlord and located within
the Pureland Industrial Complex which are available for lease during the Term of
this Lease, subject to any similar rights or options of other tenants existing
on the date of this Lease, and subject to the following additional terms:
(A) If either (i) Landlord receives a bona-fide request for a site
visit or a written proposal for a lease with respect to any space which is in
excess of 50,000 square feet and not occupied by a tenant on the Lease
Commencement Date (defined herein), or (ii) the date upon which any space, which
is occupied by a tenant as of the Lease Commencement Date, is to become vacant
is known to Landlord with reasonable certainty (either of such respective
spaces, the "Expansion Space"), Landlord shall deliver to Tenant a notice
offering such space to Tenant (the "Expansion Availability Notice"). Such
Expansion Availability Notice shall include (1) the date on which the Tenant may
occupy such Expansion Space, (2) the Base Rent to apply to the Expansion Space,
which Base Rent shall be at a per square foot rate which is equal to the greater
of (i) the market rate in effect for comparable space in the area of the
Premises at the time, or (ii) the rate of Base Rent for the remainder of the
Term under the Lease, and (3) any other important terms upon which the Landlord
is offering the Expansion Space to the Tenant.
(B) In order to exercise its rights under this section, Tenant must
give Landlord written notice of its election to accept the offer (the "Expansion
Acceptance Notice") within 10 days after receiving the Expansion Availability
Notice. In addition, if Tenant does not accept landlord's determination of the
market rate of Base Rent contained in the Expansion Availability Notice, and
only if Tenant states this fact in the Expansion Acceptance Notice, then Tenant
shall have the right to have the market rate of Base Rent to apply to Tenant's
leasing of the Expansion Space determined by a panel of 3 licensed real estate
brokers or appraisers, one of whom shall be selected by Landlord within 5 days
after delivery of the Expansion Acceptance Notice, one of whom shall be selected
by Tenant within 5 days after delivery of the Expansion Acceptance Notice, and
the third of whom shall be selected by the first two within 10 days after the
first two are selected. Each broker or appraiser, within 10 days after the
third such party is so selected, shall submit a determination of such market
rate, and the average of the two closest determinations (or, if higher, the rate
in effect with respect to the Premises) shall be binding on the parties for
purposes of calculating rate applicable to the Expansion Space. Landlord and
Tenant shall each pay the fee of the broker or appraiser selected by it and they
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shall share equally the payment of the fee of the third such party. If Tenant
does not notify Landlord in the Expansion Acceptance Notice of its election to
have the market rate determined by the independent panel, the rate set forth in
the Expansion Availability Notice given under subsection (A) above shall be
binding on the parties.
(C) If Tenant timely accepts the Landlord's offer in accordance with
subsection (B) above, then Tenant's leasing of the Expansion Space shall be
under all terms of this Lease for the remainder of the Term, except that (i) the
Base Rent shall be as determined in accordance with the provisions above, and
(ii) appropriate adjustments shall be made in the Tenant's Proportionate Share
of Impositions and Operating Costs to reflect the addition of the Expansion
Space to the Premises. Furthermore, within 15 days after the later of the
Expansion Acceptance Notice or determination of the Base Rent to apply as
described in subsection (A) or (B) above, the parties shall execute a written
amendment to this Lease describing the addition of the Expansion Space to the
Premises and setting forth the foregoing changes to this Lease.
(D) Tenant shall lease the Expansion Space in accordance with all
terms of this Lease, "as-is, where-is" and without warranty as to physical
condition, environmental condition or any other matter whatsoever, for the
period from the date the Tenant may occupy the Expansion Space as set forth in
the Expansion Availability Notice to the expiration of the Term of the Lease.
(E) If Tenant fails to give notice accepting the Landlord's offer by
the time required above, or if at the time Tenant accepts such offer or at the
time Tenant's lease of the Expansion Space becomes effective the Tenant is in
default of any term of this Lease, then Tenant's right of first offer provided
in this section with respect to the Expansion Space described in the Landlord's
Expansion Availability Notice shall be automatically terminated and of no
further force or effect, and Landlord shall have the right to lease such
Expansion Space to any parties and upon any terms it sees fit.
45.1 Expansion. Tenant shall have a right to require that the Landlord
expand the Building at the Premises by an amount of approximately 75,000 square
feet, subject to the availability of permits, zoning, building, fire and
sprinkler codes, and all other legal requirements, in accordance with the
following terms:
(A) In order to exercise its rights under this section, Tenant must
give Landlord written notice of its election to expand, which notice shall
include a statement as to the proposed size, location and description of the
expansion (the "Building Expansion"), on or before the 8th anniversary of the
Rent Commencement Date. Upon such election by Tenant, the following shall
apply:
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<PAGE>
(1) Such election shall be deemed an election to exercise the then-
applicable renewal option set forth in Section 3.1 hereof, except that the term
of such renewal together with the remainder of the then-existing Term (and with
respect to both the then-existing Premises and the Building Expansion) shall not
be less than 7 years (with the understanding that the then-applicable renewal
option set forth in Section 3.1 above shall be deemed exercised and the term of
such renewal option extended to achieve such 7 year term), and except that the
rent applicable to the existing Premises for any period in such term beyond the
then-current Term shall be determined in accordance with the procedures set
forth in Section 3.1.
(2) The improvements to be constructed in connection with such
expansion of the Premises shall be constructed in accordance with the terms and
procedures set forth in Section 14 hereof with respect to the Tenant
Improvements, except that relating to the Allowance.
(3) The monthly Base Rent applicable to the Building Expansion shall
be equal to that reflecting (i) amortization of the total cost of all building
standard shell improvements (i.e., consistent with the Landlord's Work) which
are part of the Building Expansion (including design, permitting, utility
extensions, construction and the like) over a period of 20 years with interest
at a rate which is 200 basis points in excess of the rate of interest then being
paid on 10-year U.S. Treasury Bonds, and (ii) amortization of the total cost of
all improvements beyond the building standard shell which are part of the
Building Expansion (including design, permitting, utility extensions,
construction and the like) over a period which is equal to the term of the Lease
with interest at a rate of 10% per annum. In addition, appropriate adjustments
shall be made in the Tenant's Proportionate Share of Impositions and Operating
Costs to reflect the addition of the Building Expansion.
(B) Within 30 days after the Tenant's notice exercising its right to
the Building Expansion, the parties shall enter into a written amendment to this
Lease setting forth the foregoing changes to this Lease.
46. Antenna, Auxiliary Power Supply and Parking Spaces.
46.1 Antenna. Subject to Subparagraph 46.5, Landlord hereby grants
to Tenant the right to install, replace, maintain and operate, at Tenant's sole
cost and expense, one or more satellite antennas and the associated equipment
required to operate such antennas (collectively, the "Antenna") at a location on
the roof of the Building, as reasonably determined by Tenant and approved by
Landlord, which approval shall not be unreasonably withheld or delayed. The
Antenna is and shall remain the property of Tenant or Tenant's assignee, and may
be removed by Tenant at
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<PAGE>
any time or times. Tenant hereby warrants that the Antenna, and any equipment or
construction related to its installation, maintenance or operation, shall in no
way affect the structural integrity of the roof or cause the roof to leak.
46.2 Auxiliary Power Supply. Subject to Subparagraph 46.5, Landlord
hereby grants to Tenant the right to install, replace, maintain and upgrade, at
Tenant's sole cost and expense, one or more auxiliary electric generators
together with one or more above ground fuel storage tanks for the same
(collectively, the "Auxiliary Power Supply") at a location or locations on the
Premises (excluding the roof) as reasonably designated by Tenant and approved by
Landlord, which approval shall not be unreasonably withheld or delayed. The
Auxiliary Power Supply is and shall remain the property of Tenant or Tenant's
assignee, and may be removed by Tenant at any time or times.
46.3 Parking Spaces. The Premises shall have, as of the Rent
Commencement Date, three-hundred twenty (320) parking spaces.
46.4 Procedures. Plans and specifications for the installation and
construction of each of the Antenna, Auxiliary Power Supply and Parking Spaces
shall be prepared by Tenant and its architects and other contractors, and
approved and signed by both Landlord and Tenant prior to the commencement of
installation and construction. Installation and construction of each of the
Antenna, Auxiliary Power Supply and Parking Spaces shall be subject to the
general procedures set forth in Subsection 14.2 of this Lease.
46.5 License Agreement. Each of the Antenna shall be subject to and
governed by a separate license agreement in the form attached hereto as Exhibit
F.
47. Perpetuities. If the rule against perpetuities would invalidate this
Lease or any portion hereof, or would limit the time during which this Lease
shall be effective, due to the potential failure of an interest in property
created herein to vest within a particular time, then notwithstanding anything
to the contrary herein, each such interest in property must vests, if at all,
before the passing of 21 years from the date of this Lease, or this Lease shall
become null and void upon the expiration of such 21 year period and the parties
shall have no further liability hereunder.
[SIGNATURES APPEAR ON FOLLOWING PAGE]
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease under
seal, with the intention that it be a sealed instrument, as of the date first
set forth above.
LESSOR:
------
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<PAGE>
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY, a
Wisconsin corporation
By: Northwestern Investment Management Company, a
Wisconsin corporation, its wholly owned
subsidiary and authorized representative
By: \s\ Donald L. O'Dell (SEAL)
--------------------
Donald L. O'Dell
Managing Director
LESSEE:
------
DS DISTRIBUTING, INC.,
a Delaware corporation
By: \s\ Peter M. Neupert (SEAL)
--------------------
Peter M. Neupert
President and Chief Executive Officer
Attest: \s\ Naomi J. Skudler (SEAL)
--------------------
Naomi J. Skudler
Its Assistant Secretary
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<PAGE>
Exhibit "D"
GUARANTY OF LEASE
-----------------
THIS GUARANTY OF LEASE ("Guaranty") is made as of the 30th day of August,
1999 by DRUGSTORE.COM, INC. ("Guarantor"), a Delaware corporation, having an
address at 13920 SE East Gate Way, Suite 300, Bellevue, Washington 98005, for
benefit of the NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY ("Landlord").
WHEREAS, Guarantor has a direct financial interest or relationship with DS
Distribution, Inc., the party named as Tenant under that Lease Agreement (the
"Lease") between such Tenant and Landlord to which this Guaranty is attached.
AND, WHEREAS, Guarantor has agreed to guarantee the duties, obligations and
liabilities of the Tenant under the Lease as material inducement and
consideration for Landlord to enter into the Lease with Tenant.
NOW, THEREFORE, for good and valuable consideration, the Guarantor hereby
agrees as follows:
1. Guarantor directly and primarily guarantees the timely payment of any
and all monetary obligations of the Tenant under the Lease, including but not
limited to all base or minimum rent, percentage rent (if any), reimbursements or
pass-through charges for taxes, insurance, maintenance, repairs and the like,
any other additional rent, all costs and expenses (including reasonable
attorneys' fees and other costs of collection), and any other charges. In
addition, Guarantor hereby guarantees full and timely performance of all other
terms, covenants or conditions to be performed under the Lease by Tenant.
Furthermore, the Guarantor shall pay, reimburse and indemnify the Landlord for
any and all damages, costs, out-of-pocket expenses (including reasonable
attorneys' fees), losses and other liabilities arising or resulting from the
failure of the Tenant to perform, satisfy or observe any of the terms or
conditions of the Lease.
2. The liability of the Guarantor hereunder is direct, immediate,
absolute, continuing, unconditional and unlimited. In the event that two or more
persons or entities shall be parties to this Guaranty, the liability of each
such party shall be joint and several with the liability of the others.
3. The Guarantor hereby consents and agrees, in advance, to any amendments
or modifications to the Lease of any kind which may be agreed to by the Tenant,
including but not limited to renewals or extensions of the term of the lease,
increases or decreases of the rent payable under the lease, additions or removal
of parties named in the lease, or any other changes. Moreover, this Guaranty,
and Guarantor's obligations and liability hereunder, shall extend and apply to
the Lease as so amended or modified.
-45-
<PAGE>
4. Any assignment, waiver, release, compromise, settlement, extension or
other action of any kind by the Landlord with respect to the Tenant or the Lease
shall not serve to affect or limit the obligations of the Guarantor with respect
to the obligations of the Tenant under the Lease as the same may be modified or
amended from time to time. This Guaranty shall remain in full force and effect,
and the Guarantor shall remain fully liable hereunder, without regard to any
receipt, disposition, application or release of any other security for the Lease
by the Landlord.
5. The Landlord shall not be required to pursue any remedies against the
Tenant or any security deposit or other collateral as a condition to enforcement
of this Guaranty. Guarantor shall not be discharged or released by reason of the
discharge or release of the Tenant for any reason, including a discharge in
bankruptcy, receivership or other proceedings.
6. The Guarantor assumes all responsibility for keeping informed of the
Tenant's financial condition and all other circumstances relating to the risk of
nonperformance by Tenant under the Lease. The Guarantor agrees that Landlord
shall have no duty to advise the Guarantor of information known to it regarding
such risks or circumstances.
7. The Guarantor subordinates to the Landlord's interest under the Lease
any and all claims which the Guarantor has or may have against the Tenant by
reason of subrogation for payments or performances under this Guaranty or claims
for any other reason or cause. The Guarantor agrees not to assert any claim
which it has or may have against the Tenant, including claims by reason of
subrogation under this Guaranty, until such time as all payments and other
obligations of the Tenant to the Landlord are fully satisfied and discharged.
8. Guarantor hereby knowingly and intelligently waives any and all rights
which it may have to request a jury trial in any action or proceeding, at law or
in equity, on any matter arising with respect to this Guaranty or the Lease.
9. This Guaranty is binding upon the Guarantor and all heirs, legal
representatives, successors and assigns of the Guarantor, and this Guaranty
shall inure to the benefit of the Landlord and its successors and assigns. No
assignment or delegation by the Guarantor shall release the Guarantor of any
obligations under this Guaranty.
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<PAGE>
IN WITNESS WHEREOF, the Guarantor has duly signed this Guaranty on the date
stated above.
GUARANTOR: DRUGSTORE.COM, INC.
[signature illegible] By: /s/ Peter M. Neupert
- ------------------------------------------- Name: Peter M. Neupert
Witness Title: Chairman of the Board
President and CEO
STATE OF WASHINGTON,
COUNTY OF KING :
I HEREBY CERTIFY, that on this 1st day of September, 1999, before me, the
subscriber, a Notary Public of the State of Washington, personally appeared
Peter M. Neupert, known to me (or satisfactorily proven) to be Chairman of the
Board, President and CEO of DRUGSTORE.COM, INC., party to the foregoing Guaranty
of Lease, and acknowledged that he, being authorized to do so, executed the same
for the purposes therein contained.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
\S\ Nancy J. Thygesen
---------------------------------------
Notary Public
My commission expires:
March 30, 2001
---------------------------------------
-47-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE NINE MONTHS ENDED OCTOBER 3, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-02-2000
<PERIOD-END> OCT-03-1999
<CASH> 160,302
<SECURITIES> 0
<RECEIVABLES> 2,266
<ALLOWANCES> 0
<INVENTORY> 2,311
<CURRENT-ASSETS> 175,414
<PP&E> 12,265
<DEPRECIATION> 1,912
<TOTAL-ASSETS> 413,405
<CURRENT-LIABILITIES> 20,709
<BONDS> 1,008
0
0
<COMMON> 4
<OTHER-SE> 391,684
<TOTAL-LIABILITY-AND-EQUITY> 413,405
<SALES> 16,360
<TOTAL-REVENUES> 16,360
<CGS> 19,617
<TOTAL-COSTS> 19,617
<OTHER-EXPENSES> 71,987
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (72,326)
<INCOME-TAX> 0
<INCOME-CONTINUING> (72,326)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (72,326)
<EPS-BASIC> (6.54)
<EPS-DILUTED> (6.54)
</TABLE>
