<PAGE>
As filed with the Securities and Exchange Commission on May 19, 1999
Registration 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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DRUGSTORE.COM, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
Delaware 5912 04-3416255
<S> <C> <C>
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification Number)
incorporation
or organization)
</TABLE>
13920 Southeast Eastgate Way, Suite 300
Bellevue, Washington 98005
(425) 372-3200
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
----------------
Peter M. Neupert
President and Chief Executive Officer
drugstore.com, inc.
13920 Southeast Eastgate Way, Suite 300
Bellevue, Washington 98005
(425) 372-3200
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
Joshua L. Green Neil J. Wolff
John H. Sellers Yoichiro Taku
Adam J. Rosenberg Shelly Dolev
Kevin G. Montler WILSON SONSINI GOODRICH & ROSATI
VENTURE LAW GROUP Professional Corporation
A Professional Corporation 650 Page Mill Road
2800 Sand Hill Road Palo Alto, California
Menlo Park, CA 94025 (650) 493-9300
(650) 854-4488
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this registration statement.
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If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]__________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]__________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]__________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
Title Of Each Class Of Securities Proposed Maximum Aggregate Amount Of
To Be Registered Offering Price (1) Registration Fee
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<S> <C> <C>
Common Stock, par value
$0.001.................. $67,500,000 $18,765
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</TABLE>
(1) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(o) under the Securities Act.
----------------
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until this registration
statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
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<PAGE>
EXPLANATORY NOTE
This Registration Statement covers the registration of (1) shares of
our common stock pursuant to an underwritten public offering, including
shares issuable upon exercise of the underwriters' over-allotment option, and
(2) a number of shares of our common stock equal to $10,000,000 divided by the
initial public offering price offered to Amazon.com in a concurrent offering
that is not underwritten. Therefore, this Registration Statement contains two
forms of prospectus: one to be used in connection with the public offering and
the other to be used in connection with the concurrent Amazon.com offering.
The public offering prospectus and the Amazon.com prospectus are identical in
all respects except for the front cover pages, the tables of contents, the
descriptions of the plan of distribution and the descriptions of legal
matters. These pages of the Amazon.com prospectus are included herein after
the final page of the public offering prospectus and are each labeled
"Alternate Page for Amazon.com Prospectus." Final forms of each prospectus
will be filed with the Securities and Exchange Commission under Rule 424(b).
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and we are not soliciting offers to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Subject to Completion)
Issued May , 1999
Shares
[LOGO OF DRUGSTORE.COM]
COMMON STOCK
-----------
drugstore.com, inc. is offering shares of its common stock. This is our
initial public offering and no public market currently exists for our shares.
We anticipate that the initial public offering price will be between $ and
$ per share.
-----------
We have applied to list our common stock on the Nasdaq National Market under
the symbol "DSCM."
-----------
Investing in the common stock involves risks. See "Risk Factors" beginning on
page 7.
-----------
PRICE $ A SHARE
-----------
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions drugstore.com
-------- ------------- -------------
<S> <C> <C> <C>
Per Share................... $ $ $
Total....................... $ $ $
</TABLE>
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
drugstore.com, inc. has granted the underwriters the right to purchase up to an
additional shares to cover over-allotments. Morgan Stanley & Co.
Incorporated expects to deliver the shares to purchasers on , 1999.
-----------
MORGAN STANLEY DEAN WITTER
DONALDSON, LUFKIN & JENRETTE
THOMAS WEISEL PARTNERS LLC
, 1999
<PAGE>
[INSIDE FRONT COVER OF PROSPECTUS]
TITLE: drugstore.com, What Every Body Needs
SCREEN SHOT OF drugstore.com HOME PAGE
BOX CONTAINING TEXT TO LEFT OF SCREEN SHOT:
Complete Comfort and Privacy
Five Stores in One
[INSIDE GATEFOLD]
TITLE: drugstore.com, Five Stores in One
CAPTION 1: A Familiar, Comfortable Way to Shop
SCREEN SHOTS OF drugstore.com PRODUCT CATEGORIES: Health, Beauty, Boutique,
Wellness, Personal Care, Pharmacy and the Pharmacy Drug Index
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page Page
---- ----
<S> <C> <C> <C>
Prospectus Summary.................. 4 Business......................................... 34
Risk Factors........................ 7 Management....................................... 48
Special Note Regarding Forward- Certain Relationships and Related Transactions... 55
Looking Statements................. 23 Principal Stockholders........................... 57
Sale of Shares to Amazon.com........ 24 Description of Capital Stock..................... 59
Use of Proceeds..................... 24 Shares Eligible for Future Sale.................. 61
Dividend Policy..................... 24 Underwriters..................................... 63
Capitalization...................... 25 Legal Matters.................................... 65
Dilution............................ 26 Experts.......................................... 65
Selected Consolidated Financial Where You Can Find More Information.............. 65
Data............................... 27 Index to Consolidated Financial Statements....... F-1
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 28
</TABLE>
We were incorporated in Delaware in April 1998. Our principal executive
offices are located at 13920 Southeast Eastgate Way, Suite 300, Bellevue,
Washington 98005, and our telephone number is (425) 372-3200. Our World Wide
Web site is www.drugstore.com. The information contained on our Web site is not
part of this prospectus.
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of the
prospectus or of any sale of the common stock.
Except as otherwise noted, all information in this prospectus (1) gives
effect to the conversion of all outstanding shares of preferred stock into
shares of common stock effective upon the closing of the offering, (2) assumes
no exercise of the underwriters' overallotment option, (3) assumes the sale of
a number of shares of common stock equal to $10,000,000 divided by the initial
public offering price to Amazon.com in a concurrent offering that will not be
underwritten, (4) assumes the conversion of a convertible promissory note that
is convertible into 2,266,289 shares of Series D preferred stock and (5) assumes
no exercise of an outstanding warrant to purchase 10,000 shares of our common
stock.
Until , 1999, 25 days after commencement of the offering, all dealers
effecting transactions in our common stock, whether or not participating in
this offering, may be required to deliver a prospectus. This delivery
requirement is in addition to the dealers' obligation to deliver a prospectus
when acting as underwriters and with respect to their unsold allotments or
subscriptions.
drugstore.com(TM), the drugstore.com logo, the boutique(TM), What Every Body
Needs(TM), Where Every Body Shops(TM), What Your Body Needs(TM), and HEALTH .
BEAUTY . WELLNESS(TM) are our trademarks. This prospectus also includes trade
dress, trade names, trademarks and service marks of other companies. Use or
display by drugstore.com of other parties' trademarks, trade dress or products
is not intended to and does not imply a relationship with, or endorsement or
sponsorship of drugstore.com by, the trademark or trade dress owners.
3
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and the common stock being sold in this
offering and our Consolidated Financial Statements and Notes to Consolidated
Financial Statements appearing elsewhere in this prospectus.
Our Business
drugstore.com is a leading online drugstore: a retail store and information
site for health, beauty, wellness, personal care and pharmacy products. We
designed our store to provide a convenient, private and informative shopping
experience that encourages consumers to purchase products essential to healthy,
everyday living. Our Web site can be accessed 24 hours a day, 7 days a week
from anywhere that a consumer has Internet access. We offer a larger selection
of products than typical store-based retailers, along with a wealth of health-
related information, buying guides and other tools designed to help consumers
make more educated purchasing decisions. Our shopping lists and e-mail
reminders are designed to make it easier for our customers to regularly
purchase their preferred products. We believe that our online store delivers a
superior customer experience, making buying What Every Body Needs(TM) less of a
chore.
Our Market Opportunity
International Data Corporation estimates that worldwide business-to-consumer
sales over the Internet will increase from approximately $11 billion in 1998 to
approximately $93 billion by 2002. The Internet has also become an important
personal tool for accessing health and medical information. According to a
recent Forrester Research report, 31.6% of Internet users surveyed had shopped
for healthcare products online in the previous six months.
The market for health, beauty, wellness, personal care and pharmacy products
has grown despite the lack of convenience, selection, information, and privacy
associated with a trip to a traditional store based retailer. Consequently, we
believe there is a significant market opportunity for an online store that can
offer consumers an enhanced shopping experience. We seek to attract and retain
consumers by emphasizing the following key attributes of our store:
. Convenience. We feature 24 hour a day access to our user-friendly Web
store, direct home or office delivery, advanced search technology, a
personalized shopping list, and confidential access to a personal
medication profile.
. Selection. With over 17,000 SKUs, we believe we offer a significantly
greater number of products than are available in a typical traditional
chain drugstore.
. Information. We have assembled a broad array of information on key
aspects of our market segments. We offer full product packaging
information, extensive drug information, and a Resource Center, which
includes buying guides, reference information, shopping advisors, and
beauty information.
. Communication. We can communicate with customers on a regular basis
through the convenience of e-mail. In addition, we offer our popular
"Ask Your Pharmacist" and "Ask Your Beauty Expert" features.
. Privacy. Consumers can shop in the privacy of their own homes or offices
and can obtain answers to questions that they would otherwise be
uncomfortable asking in public.
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<PAGE>
Our Strategy
Our objective is to become one of the world's leading retailers of health,
beauty, wellness, personal care and pharmacy products. Key elements of our
strategy include:
. Strengthen the drugstore.com Brand. We intend to establish drugstore.com
as the leading consumer brand for buying health, beauty, wellness,
personal care, and pharmacy products. We will continue to pursue an
aggressive marketing strategy, both through the Internet and traditional
media.
. Continuously Improve Our Web Store and Service. We seek to combine wide
product selection and helpful information with the unique aspects of the
Internet to deliver a convenient and personalized shopping experience
and to develop long-term relationships with our customers.
. Take Advantage of Repeat Purchasing Patterns. We will continue to
develop personalized tools and features that allow consumers to satisfy
their replenishment purchasing needs easily.
. Maintain Our Technology Focus and Expertise. We intend to use technology
to enhance our product and service offerings and take advantage of the
benefits of the Internet.
. Ensure Quick and Efficient Distribution. We intend to continuously
increase the automation and efficiency of our fulfillment and
distribution activities.
. Enhance and Form Key Relationships. We intend to enhance our existing
strategic relationships with leading product manufacturers, content
providers and insurance and pharmacy benefit management companies, as
well as develop new strategic relationships.
The Offering
<TABLE>
<C> <S>
Common stock offered....................... shares
Common stock to be outstanding after the
offering.................................. shares
Use of proceeds............................ We intend to use the proceeds for general
corporate purposes, including working
capital and capital expenditures. See "Use
of Proceeds."
Nasdaq National Market symbol.............. DSCM
</TABLE>
The number of shares of our common stock to be outstanding immediately after
the offering is based on the number of shares outstanding at April 4, 1999,
including the sale of shares of common stock offered by us to Amazon.com and
assuming the conversion of a convertible promissory note that is convertible
into 2,266,289 shares of Series D preferred stock. This number does not include
2,762,184 shares of our common stock subject to options and warrants
outstanding or reserved for issuance under our stock plans at April 4, 1999.
5
<PAGE>
Summary Consolidated Financial Data
The balance sheet data displayed in the "pro forma" column reflects the
issuance of 2,266,289 shares of Series D preferred stock upon the expected
conversion of a convertible promissory note issued in May 1999 and receipt of
related consideration. The "pro forma as adjusted" column reflects our
capitalization as of April 4, 1999 with adjustments to give effect to:
. the conversion of all shares of outstanding preferred stock into
22,185,401 shares of common stock upon the closing of this offering; and
. the receipt of the estimated proceeds from the sale of shares of our
common stock at an assumed initial public offering price of $ per
share, after deducting the underwriting discount and estimated offering
expenses, including the sale of $10 million of our common stock to
Amazon.com. See "Use of Proceeds" for a description of how we intend to
use the net proceeds of this offering.
<TABLE>
<CAPTION>
Period from
April 2, 1998
(Inception) through Quarter
December 31, Ended April 4,
1998 1999
------------------- --------------
(in thousands, except share
and per share data)
<S> <C> <C>
Consolidated Statement of Operations Data:
Net sales................................... $ -- $ 652
Gross profit (loss)......................... -- (20)
Total operating expenses.................... 7,664 10,517
Operating loss.............................. (7,664) (10,537)
Net loss.................................... (7,490) (10,219)
Pro forma basic and diluted net loss per
share (1).................................. $ (.92) $ (.53)
Weighted average shares outstanding used to
compute pro forma basic and diluted net
loss per share (1)......................... 8,126,703 19,429,853
</TABLE>
<TABLE>
<CAPTION>
At April 4, 1999
---------------------------
Pro Pro Forma
Actual Forma as Adjusted
------- ------- -----------
(in thousands)
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents.......................... $38,007 $78,007
Working capital.................................... 39,804 79,804
Total assets....................................... 49,983 94,983
Capital lease obligations, less current portion.... 923 923
Total stockholders' equity......................... 45,017 90,017
</TABLE>
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(1) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the determination of the number of weighted average shares used to
compute pro forma net loss per share amounts.
6
<PAGE>
RISK FACTORS
You should carefully consider the risks described below, together with all
of the other information included in this prospectus, before making an
investment decision. If any of the following risks actually occurs, our
business, financial condition or operating results could be materially
adversely affected. In such case, the trading price of our common stock could
decline, and you may lose all or part of your investment.
Risks Related to Our Business
We Are an Early Stage Company and We Expect to Encounter Risks and
Difficulties Frequently Faced by Early Stage Companies in New and Rapidly
Evolving Markets
Because drugstore.com was founded in April 1998 and we only began selling
products in February 1999, we have a limited operating history on which to
base an evaluation of our business strategy. An investor in our common stock
must consider the risks and difficulties frequently encountered by early stage
companies in new and rapidly evolving markets. These challenges include our:
. Need to increase our brand name awareness;
. Need to attract and retain customers at a reasonable cost;
. Dependence on Web site and transaction processing performance and
reliability;
. Need to manage changing and expanding operations;
. Dependence on a limited number of fulfillment partners;
. Need to compete effectively;
. Need to establish ourselves as an important participant in the evolving
market for healthcare products and services on the Internet;
. Need to establish and develop relationships in the healthcare industry,
particularly in the areas of reimbursement and managed care; and
. Dependence on experienced personnel.
In addition, because of our limited operating history and the early stage
of development of our market, we have limited insight into trends that may
emerge and affect our business. We cannot be certain that our business
strategy will be successful or that we will successfully address these risks.
Any failure to do so would seriously harm our business and operating results.
Consumers of Health, Beauty, Wellness, Personal Care and Pharmacy Products
May Not Accept Our Solution
If we do not attract and retain a high volume of online customers to our
store at a reasonable cost, our business and operating results will be
negatively affected. We may not be able to convert a large number of customers
from traditional shopping methods to online shopping for health, beauty,
wellness, personal care and pharmacy products. Specific factors that could
prevent widespread customer acceptance of our solution, and our ability to
grow revenues, include:
. Shipping charges, which do not apply to shopping at traditional
drugstores;
. Delivery time associated with Internet orders, as compared to the
immediate receipt of products at a physical store;
. Pricing that does not meet customer expectations of "finding the lowest
price on the Internet;"
7
<PAGE>
. Inefficiencies (such as additional steps and delays) in ensuring
insurance coverage for prescription products;
. Lack of coverage of customer prescriptions by some insurance carriers;
. Lack of consumer awareness of our online pharmacy;
. Customer concerns about the security of online transactions and the
privacy of their personal health information;
. Product damage from shipping or shipments of wrong or expired products
from our fulfillment partners or other vendors, resulting in a failure
to establish customers' trust in buying drugstore items online;
. Delays in responses to customer inquiries or in deliveries to customers;
. Inability to serve the acute care needs of customers, including
emergency prescription drugs and other urgently needed products; and
. Difficulties in returning or exchanging orders.
We Have a History of Losses and Expect Future Losses
We incurred net losses of $17.7 million for the period from inception
through April 4, 1999. We have not achieved profitability. We believe that we
will continue to incur operating and net losses for the foreseeable future and
that the rate at which we will incur such losses will increase significantly
from current levels. Because we expect our sales and marketing, product
development and general and administrative expenses to continue to increase
for the foreseeable future, we must attract a high volume of customers to our
Web site to become profitable. In addition, we will incur expenses related to
product shipping that we may decide not to fully pass on to customers. We only
began selling products in February 1999 and cannot be certain that we will
obtain enough customer traffic or a high enough volume of purchases to
generate sufficient revenues and achieve profitability. We expect that it will
take several years to build a critical mass of customers. Because of our
limited operating history and the early stage of the online market for
drugstore products, historical trends and expected performance are difficult
to analyze.
We May Not Succeed in Establishing the drugstore.com Brand
We believe that continuing to strengthen our brand is critical to achieving
widespread acceptance of drugstore.com, particularly because of the early
stage and competitive nature of the online market for drugstore products. In
particular, if we do not establish our brand quickly, we may lose the
opportunity to build a critical mass of customers. Promoting and positioning
our brand will depend largely on the success of our marketing efforts and our
ability to provide consistent, high quality customer experiences. To promote
our brand, we will need to commit substantial financial resources to creating
and maintaining brand loyalty among customers. This includes continuing our
advertising efforts on major Internet destinations such as Amazon.com, America
Online, Excite and Yahoo! and other Web sites our customers are likely to
visit, as well as other forms of media such as television and magazines. We
will also need to commit significant additional financial resources to attract
and train customer service personnel in order to provide our customers with
high quality customer service. We cannot be certain that these brand promotion
activities will yield increased revenues, that any promotional activities on
other Web sites will be continued, including Amazon.com's promotion of our
site, or that any such revenues will be sufficient to offset the expenses
incurred in building our brand.
We Expect Our Quarterly Financial Results to Fluctuate
Our revenues and operating results are expected to vary significantly from
quarter to quarter due to a number of factors, including:
. Demand for our products;
. Our ability to attract visitors to our Web store and convert those
visitors into customers;
8
<PAGE>
. The frequency of repeat purchases by customers;
. Shifts in the nature and amount of publicity for us or our competitors;
. Changes in the growth rate of Internet usage;
. Average order size;
. The mix of products sold;
. Our ability to scale technology and upgrade order processing
capabilities;
. Our ability, and that of our fulfillment partners, to ensure sufficient
product supply;
. Changes in our pricing policies or the pricing policies of our
competitors;
. Changes in government regulation;
. The availability of reimbursement for pharmacy products; and
. Costs related to potential acquisitions of technology or businesses.
We currently expect that substantially all of our revenues for the
foreseeable future will come from orders of health, beauty, wellness, personal
care and pharmacy products on our Web store. The volume and timing of such
orders are difficult to predict because the online market for such products is
in its infancy. Our operating expenses are largely based on anticipated
revenue trends and a high percentage of our expenses are fixed in the short
term. As a result, a delay in generating or recognizing revenue for any reason
could cause significant variations in our operating results from quarter to
quarter and could result in substantial additional operating losses. In
addition, due to the limited operating history of our Web store, we do not
have a material amount of repeat business from regular customers. Because our
Web site is designed to encourage repeat business and we do not yet have
sufficient historical data on how successful this strategy will be, we cannot
currently forecast revenue from regular customers or overall anticipated
revenue trends.
A portion of our revenues may also be seasonal in nature, especially with
respect to the sale of certain beauty products, which depend to some extent on
seasonal product changes and seasonal purchasing patterns. Our limited
operating history, however, makes it difficult to fully assess the impact of
these seasonal factors. In addition, our business will be subject to cyclical
fluctuations in the U.S. economy. Moreover, consumer "fads" and other changes
in consumer trends may cause shifts in purchasing patterns, resulting in
significant fluctuations in our operating results from one quarter to the
next.
Because of our limited operating history and the early stage of the online
market for drugstore products, historical trends and expected performance are
difficult to analyze. Due to the foregoing factors, we believe that quarter-
to-quarter comparisons of our operating results are not a good indication of
our future performance. It is likely that in some future quarter, our
operating results may be below the expectations of public market analysts and
investors. In this event, the price of our common stock may fall.
Limited Insurance Reimbursement Coverage Increases Our Dependence on Cash
Purchases
To obtain reimbursement on behalf of our customers for the prescription
products that they purchase on our Web site, we need to obtain contracts with
numerous insurance companies and pharmacy benefit management companies (PBMs).
Although we currently have contracts with a number of insurance companies and
PBMs, most of these contracts are short-term and may be terminated with less
than 30 days' prior notice. Our ability to obtain additional contracts with
other insurance companies and PBMs, or retain our existing contracts for an
extended period of time, is uncertain. Many of these companies are in the
early stages of evaluating the impact of the Internet and online pharmacies on
their businesses. Many of these companies may delay their decisions to
9
<PAGE>
contract with online pharmacies or may decide to develop their own Internet
capabilities that may compete with us. In addition, many insurance companies
have existing contracts with chain drugstores and PBMs that have announced
their intentions to establish online pharmacies. It is likely that some
insurance companies and PBMs will contract with only one or a limited number
of online pharmacies. If our online competitors obtain these contracts and we
do not, we would be at a competitive disadvantage.
In addition, we must process each insurance application individually, which
may raise the costs of processing prescription orders and delay our order
processing time. Customers may not initially embrace our online insurance
coverage procedure. As a result, we may remain dependent on customers who are
willing to pay cash for their prescriptions. In addition, the cash market as a
percentage of the overall market for prescriptions has declined. Further, the
inclusion of prescription drugs in certain aspects of Medicare coverage as is
being considered in legislation before the U.S. Congress may decrease the
amount of customer cash payments for prescription products. A disproportionate
dependence on cash purchases may limit the amount of the prescription drug
market that we can service, and may thus have an adverse impact on our
business.
We Depend on a Limited Number of Fulfillment Partners; If They Do Not
Perform, We Will Not Be Able to Effectively Ship Orders
To generate the significant customer traffic, volume of purchases and
repeat purchases that we believe are crucial to obtaining sufficient revenues,
we must develop and maintain customer trust in the timing and accuracy of our
product deliveries. We purchase all of our pharmaceutical products from one
vendor, RxAmerica L.L.C. We also purchase a substantial majority of our
nonpharmaceutical products from one vendor, Walsh Distribution, Inc., which
accounted for 82% of our nonpharmaceutical cost of sales from launch of our
Web store to April 4, 1999. We carry minimal inventory and rely to a large
extent on rapid fulfillment from RxAmerica, Walsh Distribution and other
vendors. A breach by RxAmerica or Walsh Distribution of our contracts with
them could result in a major disruption of our business. Our business could
also be significantly disrupted if RxAmerica or Walsh Distribution were to
suffer adverse developments that affect their ability to supply products to
us. In addition, RxAmerica is a joint venture owned by American Stores Company
(which was recently acquired by Albertsons) and Longs Drugs, both of which are
potential competitors of drugstore.com. Finally, our agreement with RxAmerica
only has a one-year term (ending in February 2000), and we cannot be certain
that it will be renewed. If for any reason RxAmerica or Walsh Distribution is
unable or unwilling to supply products to us in sufficient quantities and in a
timely manner, we may not be able to secure alternative fulfillment partners
on acceptable terms in a timely manner, or at all.
Our current vendors or fulfillment partners may not continue to sell
merchandise to us on current terms and we may not be able to establish new or
extend current vendor or fulfillment terms on a timely basis or at all.
Negotiating and implementing relationships with additional vendors or
distributors would take substantial time and resources. If we cannot develop
and maintain relationships with vendors that allow us to obtain sufficient
quantities of merchandise on acceptable commercial terms, our business may be
materially adversely affected.
Because we rely on third parties to fulfill orders, we depend on their
systems for tracking inventory and financial data. In addition, our order
fulfillment and distribution process requires us to cooperate extensively with
our fulfillment partners with respect to the coordination of separate
information technology systems. To the extent there are any problems, we
cannot ensure that such problems will be resolved on a timely basis or at all.
In addition, if we establish new fulfillment partner relationships, we cannot
be sure that we will be able to integrate our respective information systems
on a timely basis. If our fulfillment partners' systems fail or are unable to
scale or adapt to changing needs, we may not have adequate, accurate or timely
inventory or financial information. Our failure to have adequate, accurate or
timely inventory and financial information would harm our ability to manage
our business effectively.
In addition, we depend on our fulfillment partners to comply with federal,
state and local regulations that apply to their performance of services for
us. Their failure to comply may have an adverse impact on our business.
10
<PAGE>
We also rely on third-party carriers for product shipments, including
shipments to and from distribution facilities. We are therefore subject to the
risks, including employee strikes and inclement weather, associated with our
fulfillment partners and of our carriers' ability to provide product
fulfillment and delivery services to meet our fulfillment and shipping needs.
Failure to deliver products to our customers in a timely and accurate manner
would harm our reputation, the drugstore.com brand and our business and
results of operations.
Pharmacy or Prescription Processing Errors Could Produce Liability and
Significant Adverse Publicity
Pharmacies occasionally make mistakes relating to prescriptions, dosage and
other aspects of the medication dispensing process. For example, a study of
community pharmacies appearing in the December 1995 issue of American Pharmacy
found that 24% of prescriptions contained dispensing errors and 4% of
prescriptions contained errors that were clinically significant. We expect
that sales of pharmaceutical products will account for a significant
percentage of our revenues. Because we distribute these products directly to
the consumer, we are the most visible participant in the medication
distribution chain. Further, our pharmacists are required by law to offer
counseling, without additional charge, to our customers about medication,
dosage, delivery systems, common side effects and other information deemed
significant by the pharmacists. Our pharmacists may have a duty to warn
customers regarding any potential adverse effects of a prescription drug if
the warning could reduce or negate such effects. This counseling is in part
accomplished through e-mail and inserts included with the prescription, which
may increase the risk of miscommunication because the customer is not
personally present or may not have provided all relevant information. We also
post product information on our Web store. This creates the potential for
claims to be made against us for negligence, personal injury, wrongful death,
product liability, malpractice, invasion of privacy or other legal theories
based on our product or service offerings. Although we carry general
liability, product liability and professional liability insurance, our
insurance may not cover potential claims of this type or may not be adequate
to protect us from all liability that may be imposed. In addition, there could
be severe negative publicity if we are sued on these or other grounds, which
could hurt the drugstore.com brand and prevent us from attracting and
retaining customers. We cannot be certain that we will be able to maintain
general liability, products liability and professional liability insurance in
the future on acceptable terms or with adequate coverage against potential
liabilities.
In addition, because we and other online pharmacies offer a novel shopping
experience, pharmacy errors either by drugstore.com or our competitors may
produce significant adverse publicity either for us or the entire online
pharmacy industry. Because of the significant amount of recent press coverage
on Internet retailing, we believe that we will be subject to a higher level of
media scrutiny than other pharmacy product channels. The amount of negative
publicity that we or the online pharmacy industry receive as a result of
pharmacy or prescription processing errors could be disproportionate in
relation to the negative publicity received by other pharmacies making similar
mistakes. We have no control over the pharmacy practices of our competitors,
and we cannot ensure that our pharmacists or our prescription processing
department will be able to operate without error. We believe customer
acceptance of our online shopping experience is based in large part on
consumer trust, and negative publicity could erode such trust, or prevent it
from growing. This could result in an immediate reduction in the amount of
orders we receive and adversely affect our revenue growth.
We Expect Significant Increases in Our Operating Expenses
We intend to increase our operating expenses substantially as we:
. Increase our sales and marketing activities, particularly advertising
efforts;
. Increase our general and administrative functions to support our growing
operations;
. Expand our customer and pharmacist support organizations to better serve
customer needs;
. Develop enhanced technologies and features to improve our Web site;
. Enhance our distribution fulfillment processes; and
. Possibly buy or build our own distribution facilities.
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With these additional expenses, we must significantly increase our revenues
to become profitable. We anticipate that these expenses will significantly
precede any revenues generated by our increased spending. If we do not
significantly increase revenues after investing in these efforts, our
operating results would be seriously harmed. Our efforts to enhance our
products, increase our sales and marketing activities and expand our customer
and pharmacist support organizations may be more expensive that we currently
anticipate.
We Face the Risk of Systems Interruptions and Capacity Constraints on Our
Web Site
The satisfactory performance, reliability and availability of our recently-
opened Web site, transaction processing systems and network infrastructure are
critical to our reputation and our ability to attract and retain customers and
to maintain adequate customer service levels. From time to time, we have
experienced temporary system interruptions for a variety of reasons, including
power failures, software bugs and an overwhelming number of visitors trying to
reach our Web site. We may not be able to correct any problem in a timely
manner. Because we outsource certain aspects of our system and because some of
the reasons for a systems interruption may be outside of our control, we also
may not be able to exercise sufficient control to remedy the problem quickly
or at all. Any future system interruption that results in the unavailability
of our Web site or reduced order fulfillment performance could result in
negative publicity and reduce the volume of goods sold and the attractiveness
of our Web store, which would negatively affect our business.
We opened our site for customers in February 1999 and to the extent that
customer traffic grows substantially, we will need to expand the capacity of
our systems to accommodate a larger number of visitors. We will be required to
add additional software and hardware and further develop and upgrade our
existing technology, transaction-processing systems, network infrastructure
and distribution facilities to accommodate increased traffic on our Web site
and increased sales volume through our transaction-processing systems. Any
inability to scale our systems may cause unanticipated system disruptions,
slower response times, degradation in levels of customer service, impaired
quality and speed of order fulfillment, or delays in reporting accurate
financial information. We are not certain that we will be able to accurately
project the rate or timing of increases, if any, in the use of our Web site or
in a timely manner to effectively upgrade and expand our transaction-
processing systems or to integrate smoothly any newly developed or purchased
modules with our existing systems.
We Need to Manage Changing and Expanding Operations
We have rapidly and significantly expanded our operations, and anticipate
that we will continue to expand. From July 1998 to April 1999 we grew from 3
to over 170 employees. This growth has placed, and our anticipated future
operations will continue to place, a significant strain on our management
systems and resources. Our ability to successfully offer products and services
and implement our business strategy in a rapidly evolving market requires an
effective planning and management process. We expect that we will need to
continue to improve our transaction-processing, operational, financial and
managerial controls and reporting systems and procedures, and will need to
continue to expand, train and manage our work force. Furthermore, we expect
that we will be required to manage multiple relationships with various
customers and other third parties. Many of our senior management have no prior
senior management experience at public companies, and none of our executive
officers have prior management experience in the healthcare industry. We
cannot be certain that our current and planned personnel, systems, procedures
and controls will be adequate to support our future operations, that
management will be able to hire, train, retain, motivate and manage required
personnel or our management will be able to successfully identify, manage and
exploit existing and potential market opportunities.
Expanding the Breadth and Depth of Our Product and Service Offerings is
Expensive and Difficult, and We May Receive No Benefit from Our Expansion
We intend to expand the breadth and depth of our product and service
offerings by promoting new or complementary products or sales formats.
Expansion of our offerings in this manner could require significant additional
expenditures and could strain our management, financial and operational
resources. For example, we
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may need to incur significant marketing expenses, develop relationships with
new fulfillment partners or manufacturers, or comply with new regulations. We
cannot be certain that we will be able to expand our product and service
offerings in a cost-effective or timely manner. Furthermore, any new product
or service offering or sales format that is not favorably received by
consumers could damage the reputation of our brand. The lack of market
acceptance of such efforts or our inability to generate satisfactory revenues
from such expanded offerings to offset their cost could harm our business.
We have an agreement with Amazon.com that prohibits us from selling
advertising to, linking our Web site to or promoting on our Web site any
company that sells products or services competitive with those which
Amazon.com offers or which Amazon.com is preparing to produce or market. While
we retain the ability to sell products and services in these markets
ourselves, this prohibition would limit our ability to work with other
companies in the markets for books, music products, video products, software,
magazines, consumer electronics, gift centers or registries, and auctions. If
Amazon.com expands into other areas, this expansion may further limit the
number of companies we can promote on our Web site.
We May Need to Establish Our Own Distribution Centers
We are in the process of evaluating our long-term distribution strategy. At
some point, it is possible that we may need to establish our own distribution
centers either to achieve greater control over the distribution process or to
ensure adequate supplies of products to our customers. Opening one or more
distribution centers would require significant capital investments in
facilities and equipment, would require us to hire and train a significant
number of new employees, would require us to establish a significant number of
direct relationships with manufacturers and could divert management attention
from other issues. In addition, we may be unable to obtain products on terms
as favorable as our fulfillment partners. We would need to develop or license
distribution software to ensure timely and accurate shipments. If we opened
our own pharmacy operation we would become subject to additional regulatory
requirements and related costs.
To obtain funds for this expansion, we may need to raise additional funds
through the issuance of equity, equity-related or debt securities or through
obtaining credit from financial institutions. We cannot be certain that such
additional financing will be available to us on favorable terms when required,
or at all. In addition, if we issue equity or equity-related securities, such
issuance would dilute the ownership interest of existing stockholders and
could adversely affect our stock price.
Our Limited Relationship with Amazon.com May Restrict Our Activities and is
Subject to Change
Our limited relationship with Amazon.com may restrict our activities and is
subject to change. We entered into a Technology License and Advertising
Agreement in August 1998 with Amazon.com, our largest stockholder. Jeffrey P.
Bezos, Amazon.com's President, Chief Executive Officer and Chairman of the
Board, is a member of our Board of Directors. Our relationship with Amazon.com
has received significant media attention, but the parties' obligations to
provide support to each other are limited. Under the agreement, each party has
committed to providing the other with promotional placements through the term
of the agreement. We have also agreed not to sell advertising on our Web site
to, link our Web site to or promote on our Web site any company that sells
products or services competitive with those which Amazon.com offers or which
Amazon.com is preparing to produce or market. We are currently restricted with
respect to books, music products, video products, gift centers, and auctions.
If Amazon.com expands into other areas, this expansion may further limit the
number of companies we can promote on our Web site. If we were acquired by a
competitor of Amazon.com and Amazon.com did not vote in favor of the
transaction, we would lose our rights to promotional placements on
Amazon.com's Web site and to use Amazon.com's technology (if we are then using
any). In addition, due to Amazon.com's significant ownership of our common
stock, it will be able to significantly influence all matters requiring
approval by our stockholders, including the election of directors and the
approval of mergers or other business combination transactions. For more
information about our relationship with Amazon.com, see "Business--
Relationship with Amazon.com." See also "Executive Officers and Directors" for
background on
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Jeffrey P. Bezos, "Certain Relationships and Related Transactions" for a
description of our agreements with Amazon.com and "Principal Stockholders" for
a description of Amazon.com's stock ownership relative to other stockholders.
We Depend on Strategic Relationships
We believe that our ability to attract customers, facilitate broad market
acceptance of our products and the drugstore.com brand and enhance our sales
and marketing capabilities depends on our ability to develop and maintain
strategic relationships with portals, distributors and Amazon.com. If we are
unable to develop or maintain key relationships, we may have difficulty
attracting customers.
We Face Uncertainty Related to Pharmaceutical Costs and Pricing
We expect that pharmacy sales will account for a significant percentage of
our total sales. Sales of our products will depend in part on the availability
of reimbursement from third-party payors such as government health
administration authorities, private health insurers, health maintenance
organizations (HMOs), pharmacy benefit management companies (PBMs) and other
organizations. Because these organizations are traditionally focused on reduced
cost to employer groups, whereas we are focused more on direct customer
service, we must devote time and resources to develop third-party payor
confidence in our approach.
In addition, third-party payors are increasingly challenging the price and
cost-effectiveness of medical products and services. The efforts of third-party
payors to contain costs will place downward pressures on gross margins from
sales of prescription drugs. Our revenues from prescription drug sales may also
be affected by health care reform initiatives of federal and state governments,
including proposals designed to significantly reduce spending on Medicare,
Medicaid and other government programs, changes in programs providing for
reimbursement for the cost of prescription drugs by third-party payors and
regulatory changes related to the approval process for prescription drugs. Such
initiatives could lead to the enactment of federal and state regulations that
may adversely impact our prescription drug sales and, accordingly, our results
of operations.
We cannot be certain that our products or services will be considered cost
effective or that adequate third-party reimbursement will be available to
enable us to maintain price levels sufficient to realize adequate profit
margins. Any such event would harm our business.
Our Market is Highly Competitive
We compete in a market that is highly competitive and expect competition to
intensify in the future. We currently or potentially compete with a variety of
companies, many of which have significantly greater financial, technical,
marketing and other resources. These competitors include (1) various online
stores that sell pharmaceutical as well as over-the-counter drug and health,
wellness, beauty and personal care items; (2) PBMs that sell pharmaceuticals
directly; and (3) existing physical drugstores. Most of these physical
drugstores, which include national, regional and local drugstore chains,
discount drugstores, supermarkets, combination food and drugstores, discount
general merchandise stores, mass market retailers, independent drugstores and
local merchants, have existed for a longer period, have greater financial
resources, have established marketing relationships with leading manufacturers
and advertisers, and have secured greater presence in distribution channels.
Some of these companies may also commence or expand their presence on the
Internet. We also compete with hospitals, HMOs and mail order prescription drug
providers, all of whom are or may begin offering products and services over the
Internet. Finally, we are aware of numerous other smaller entrepreneurial
companies that are focusing significant resources on developing and marketing
products and services that will compete directly with those offered at
drugstore.com.
We believe that there may be a significant advantage in establishing a large
customer base before our competitors do so. If we fail to attract and retain a
large customer base and our competitors establish a more prominent market
position relative to ours, this could inhibit our ability to grow.
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We also believe we may face a significant competitive challenge from our
competitors forming alliances with each other. For instance, one of our direct
online competitors may form a partnership with a major PBM, major HMO or chain
drugstore. The combined resources of these partnerships could pose a
significant competitive challenge to drugstore.com. In addition, certain PBMs
and HMOs could form alliances with our competitors that would prevent them
from also entering into relationships with drugstore.com. Our inability to
partner with a major PBM or HMO could be a major competitive disadvantage to
us.
We believe the principal factors that will draw end users to an online
shopping application include brand availability, selection, personalized
services, convenience, price, accessibility, customer services, quality of
search tools, quality of content, and reliability and speed of fulfillment for
products ordered. We will have little or no control over how successful our
competitors are in addressing these factors. In addition, with little
difficulty, our online competitors can duplicate many of the products,
services and content offered on our site.
Increased competition could result in price reductions, fewer customer
orders, fewer search queries served, reduced gross margins and loss of market
share.
Our Systems and Operations, and Those of Our Distributors, Are Vulnerable
to Natural Disasters and Other Unexpected Problems
Substantially all of our computer and communications hardware is located at
our leased facility in Bellevue, Washington and our systems infrastructure is
hosted at an Exodus Communications facility in Tukwila, Washington. Our
systems and operations are vulnerable to damage or interruption from fire,
flood, power loss, telecommunications failure, earthquakes and similar events.
In addition, our servers are vulnerable to computer viruses, physical or
electronic break-ins and similar disruptions, which could lead to
interruptions, delays, loss of data or the inability to accept and fulfill
customer orders. We do not currently have redundant systems or a formal
disaster recovery plan and do not carry sufficient business interruption
insurance to compensate for losses that may occur. Our current fulfillment
partners, Walsh Distribution and RxAmerica, are both located in Texas and also
face these risks. In particular, RxAmerica only has a single location and no
back-up facility.
We depend on the efficient operation of Internet connections from customers
to our systems. These connections, in turn, depend on the efficient operation
of Web browsers, Internet service providers and Internet backbone service
providers, all of which have had periodic operational problems or experienced
outages. Any system delays, failures or loss of data, whatever the cause,
could reduce customer satisfaction with our applications and services and harm
our business.
We retain confidential customer and patient information in our processing
centers. Therefore, it is critical that our facilities and infrastructure
remain secure and that our facilities and infrastructure are perceived by the
marketplace to be secure. A material security breach could damage our
reputation or result in liability to us.
Government Regulation of the Health Care and Pharmacy Industries Could
Affect Our Business
Our business is subject to extensive federal, state and local regulations,
many of which are specific to pharmacies and the sale of over-the-counter
drugs. For example, pursuant to the Omnibus Budget Reconciliation Act of 1990
and related state and local regulations, our pharmacists are required to offer
counseling, without additional charge, to our customers about medication,
dosage, delivery systems, common side effects, adverse effects or interactions
and therapeutic contraindications, proper storage, prescription refill and
other information deemed significant by the pharmacists. We may face lawsuits
or claims asserting that we have a duty to warn customers regarding any
potential adverse effects of a prescription drug if the warning would have
reduced or negated such effects, and seeking compensatory and punitive damages
for violation of such a duty. We are also subject to federal, state and local
licensing and registration regulations with respect to, among other things,
our pharmacy operations. Regulations in this area often require subjective
interpretation, and we cannot be certain that our attempts to comply with
these regulations will be deemed sufficient by the appropriate regulatory
agencies. Violations of any regulations could result in various civil and
criminal penalties, including
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suspension or revocation of our licenses or registrations, seizure of our
inventory, or monetary fines, which could adversely effect our operations.
We are subject to requirements under the Controlled Substances Act and
federal Drug Enforcement Agency regulations, as well as related state and
local laws and regulations, relating to our pharmacy operations, including
registration, security, recordkeeping, and reporting requirements related to
the purchase, storage and dispensing of controlled substances, prescription
drugs, and certain over-the-counter drugs. Failure to comply with these
regulations could result in civil liability and criminal penalties, including
suspension or revocation of our licenses or registrations, seizure of our
inventory, or monetary fines, which could adversely affect our operations. We
are also subject to laws and regulations regarding homeopathic drugs. Under
the Food, Drug & Cosmetic Act of 1938 (the FDCA), a drug recognized in
Homeopathic Pharmacopeia of the United States must meet all compendial
standards, or it will be considered misbranded or adulterated. Because we sell
homeopathic remedies, we may face enforcement actions, lawsuits or claims
asserting that we have not complied with the FDCA.
The U.S. House of Representatives Committee on Commerce and the General
Accounting Office are currently investigating online pharmacies and online
prescribing, especially focused on those who prescribe drugs online and on
pharmacies that fill invalid prescriptions, including those that are written
online. The committee requested that the General Accounting Office undertake a
formal review of a number of issues pertaining to online pharmacies, including
an assessment of mechanisms to ensure that online pharmacies are obeying the
various state and federal regulations for the industry. However, we believe
that any regulations resulting from the investigations will likely result in
increased reporting and monitoring requirements.
The National Association of Boards of Pharmacy (NABP), a coalition of state
pharmacy boards, is in the process of developing a program, the Verified
Internet Pharmacy Practice Sites (VIPPS), as a model for self-regulation for
online pharmacies. We are assisting the NABP with the development of the VIPPS
program and intend to comply with its criteria for certification, although we
cannot be certain that compliance with VIPPS requirements will not require
substantial expenses, which could affect our business.
Legislation and regulations currently being considered at the federal and
state level could affect our business, including legislation or regulations
relating to confidentiality of patient records, electronic access and storage.
In addition, various state legislatures are considering new legislation
related to the regulation of nonresident pharmacies. The Health Insurance
Portability and Accountability Act of 1996 mandates the use of standard
transactions, standard identifiers, security and other provisions by the year
2000. Regulations have been proposed to implement these requirements, and we
are designing our applications to comply with the proposed regulations.
However, until these regulations become final, they could change, which could
cause us to use additional resources and lead to delays in order to revise our
Web site and operations. In addition, our success depends on other healthcare
industry participants complying with these regulations.
Although the FDA does not regulate the practice of pharmacy, other than
pharmacy compounding, which we currently do not engage in, FDA regulations
impact some of our product and service offerings. The FDA regulates drug
advertising and promotion, including direct-to-consumer advertising, done by
or on behalf of drug manufacturers and marketers. As we expand our product and
service offerings, more of our products and services will likely be subject to
FDA regulation. We have no experience in complying with FDA regulations as
they pertain to the regulation of medical products and services. Complying
with FDA regulations is time consuming, burdensome and expensive, and could
delay our introduction of new products or services.
The inclusion of prescription drugs as a Medicare benefit has been the
subject of numerous bills in the U.S. Congress. Should legislation on
prescription drug coverage for Medicare recipients be enacted into law, we
would be subject to compliance with any corresponding rules and regulations.
Until recently, Health Care Financing Administration guidelines prohibited
transmission of Medicare eligibility information over the Internet. We are
also subject to extensive regulation relating to the confidentiality and
release of patient records. Additional legislation governing the distribution
of medical records exists or has
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been proposed at both the state and federal level. It may be expensive to
implement security or other measures designed to comply with any new
legislation. Moreover, we may be restricted or prevented from delivering
patient records electronically.
We Must Attract and Retain Experienced Personnel and We Rely on Senior
Management
We intend to continue to hire a significant number of additional sales,
support and marketing personnel, as well as pharmacists and software
developers. Competition for these individuals is intense, and we may not be
able to attract, assimilate or retain additional highly qualified personnel in
the future. Our future success also depends upon the continued service of our
executive officers and senior management. None of our employees is bound by an
employment agreement for any specific term. We do not have "key person" life
insurance policies covering any of our employees.
Protection of Our Intellectual Property Is Limited and Uncertain
We rely or may in the future rely on a combination of patent, trademark,
trade secret and copyright law and contractual restrictions to protect the
proprietary aspects of our technology. These legal protections afford only
limited protection for our intellectual property and trade secrets. Despite
our efforts to protect our proprietary rights, unauthorized parties may
attempt to copy aspects of our sales formats or to obtain and use information
that we regard as proprietary.
In February 1999, we filed an application for a United States trademark
registration for "drugstore.com." We may be unable to secure this
registration. It is also possible that our competitors or others will adopt
service names similar to ours, thereby impeding our ability to build brand
identity and possibly leading to customer confusion. In addition, there could
be potential trade name or trademark infringement claims brought by owners of
other registered trademarks or trademarks that incorporate variations of the
term drugstore.com. Any claims or customer confusion related to our trademark,
or our failure to obtain trademark registration, would negatively affect our
business.
Litigation may be necessary in the future to enforce our intellectual
property rights, to protect our trade secrets and domain name and determine
the validity and scope of the proprietary rights of others. If third parties
prepare and file applications in the United States that claim trademarks used
or registered by us, we may oppose those applications and be required to
participate in proceedings before the United States Patent and Trademark
Office to determine priority of rights to the trademark, which could result in
substantial costs to us. Any litigation or adverse priority proceeding could
result in substantial costs and diversion of resources and could seriously
harm our business and operating results. Finally, we may in the future sell
our products internationally, and the laws of many countries do not protect
our proprietary rights to as great an extent as do the laws of the United
States. Many countries have a "first-to-file" trademark registration system.
As a result, we may be prevented from registering or using our trademarks in
certain countries if third parties have previously filed applications to
register or have registered the same or similar trademark. Our means of
protecting our proprietary rights may not be adequate, and our competitors
could independently develop similar technology.
We Face Risks Associated with Domain Names
We currently hold the Internet domain name "drugstore.com," as well as
various other related names. Domain names generally are regulated by Internet
regulatory bodies. The regulation of domain names in the U.S. and in foreign
countries is subject to change. Regulatory bodies could establish additional
top-level domains, appoint additional domain name registrars or modify the
requirements for holding domain names. As a result, we may not acquire or
maintain the "drugstore.com" domain name in all of the countries in which we
conduct business.
The relationship between regulations governing domain names and laws
protecting trademarks and similar proprietary rights is unclear. Therefore, we
could be unable to prevent third parties from acquiring domain names that
infringe or otherwise decrease the value of our trademarks and other
proprietary rights.
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We May Face Liability For Content on Our Web Site
Because we post product information and other content on our Web site, we
face potential liability for negligence, copyright, patent, trademark,
defamation, indecency and other claims based on the nature and content of the
materials that we post. Such claims have been brought, and sometimes
successfully pressed, against Internet content distributors. In addition, we
could be exposed to liability with respect to the unauthorized duplication of
content or unauthorized use of other parties' proprietary technology. Although
we maintain general liability insurance, our insurance may not cover potential
claims of this type or may not be adequate to indemnify us for all liability
that may be imposed. Any imposition of liability that is not covered by
insurance or is in excess of insurance coverage could harm our business.
We May Be Found to Infringe Proprietary Rights of Others
Third parties may claim infringement by us with respect to past, current or
future technologies. We expect that participants in our markets will be
increasingly subject to infringement claims as the number of services and
competitors in our industry segment grows. Any such claim, whether meritorious
or not, could be time-consuming, result in costly litigation, cause service
upgrade delays or require us to enter into royalty or licensing agreements.
Such royalty or licensing agreements might not be available on terms
acceptable to us or at all.
We Face Additional Potential Stock-based Compensation Related to Our
Relationship with TriNet
In August 1998, we began a co-employment arrangement involving all of our
personnel with TriNet VCO, an independent company. Under the co-employment
arrangement, we pay a percentage of compensation per co-employee (in addition
to compensation costs) to TriNet to cover payroll processing and related taxes
and insurance. On March 31, 1999, the Financial Accounting Standards Board
(FASB) issued an Exposure Draft of a FASB Interpretation, Accounting for
Certain Transactions involving Stock Compensation-- an interpretation of APB
Opinion No. 25. Such FASB Exposure Draft, if adopted in its current form,
could be interpreted to indicate that employees subject to co-employment
arrangements, would not be considered our employees for purposes of applying
APB No. 25. On May 14, 1999, we gave notice of termination of this co-
employment arrangement. If additional clarification regarding the definition
of an employee is not provided in the final pronouncement, we may be required
to establish a new measurement date for stock options granted after December
15, 1998 to these employees for the purpose of accounting for stock options
under APB No. 25. If a new measurement date is required to be established, we
would recognize the deferred stock-based compensation which would be amortized
as stock-based compensation over the remaining vesting periods of the options.
We estimate that this charge would aggregate approximately $4.2 million, which
would be recognized beginning with the fourth quarter of fiscal 1999, the
estimated date the final pronouncement will be effective, and ending in 2004.
Such amortization could have a material adverse effect on our operating
results.
We Face Risks Associated with Acquisitions
If appropriate opportunities present themselves, we may attempt to acquire
businesses, technologies, services or products that we believe are a strategic
fit with our business. We currently have no commitments or agreements with
respect to any material acquisitions and no material acquisition is currently
being pursued. If we do undertake any transaction of this sort, the process of
integrating an acquired business, technology, service or product may result in
unforeseen operating difficulties and expenditures and may absorb significant
management attention that would otherwise be available for ongoing development
of our business. Moreover, there can be no assurance that the anticipated
benefits of any acquisition will be realized. Future acquisitions could result
in potentially dilutive issuances of equity securities, the incurrence of
debt, contingent liabilities and/or amortization expenses related to goodwill
and other intangible assets, which could adversely affect our business,
results of operations and financial condition.
In addition, recent proposed changes in the FASB rules for merger
accounting may affect our ability to make acquisitions or be acquired. For
example, elimination of the "pooling" method of accounting for mergers could
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increase the amount of goodwill that we would be required to account for if we
merge with another company, which would have an adverse financial impact on
our future operating results. Further, accounting rule changes that reduce the
availability of write-offs for in-process research and development costs in
connection with an acquisition could result in the capitalization and
amortization of such costs and negatively impact results of operations in
future periods.
Year 2000 Issues Could Affect Our Business
Any failure of our material systems, our vendors' material systems or the
Internet to be year 2000 compliant would have material adverse consequences
for us. Such consequences would include difficulties in operating our Web site
effectively, taking product orders, making product deliveries or conducting
other fundamental parts of our business. We are currently assessing the year
2000 readiness of the software, computer technology and other services that we
use which may not be year 2000 compliant. At this time, we have not yet
developed a contingency plan to address situations that may result if our
vendors or we are unable to achieve year 2000 compliance. The cost of
developing and implementing such a plan, if necessary, could be significant.
We also understand that at least one of our distributors, RxAmerica, has not
yet completed its assessment of the year 2000 readiness of its software,
computer technology and other services or finalized any contingency plan to
address year 2000 problems that may arise.
We also depend on the year 2000 compliance of the computer systems and
financial services used by consumers. A significant disruption in the ability
of consumers to reliably access the Internet or portions of it or to use their
credit cards would have an adverse effect on demand for our products and
services. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Year 2000" for a further description of the issues we
face with regard to the year 2000.
We Are Controlled by Officers, Directors and Existing Stockholders
Executive officers, directors and entities affiliated with them will, in
the aggregate, beneficially own approximately % of our outstanding common
stock following the completion of this offering. These stockholders, if acting
together, would be able to significantly influence all matters requiring
approval by our stockholders, including the election of directors and the
approval of mergers or other business combination transactions. In addition,
after this offering, Amazon.com will beneficially own approximately % of our
outstanding common stock. Therefore, Amazon.com will be able to significantly
influence all matters requiring approval by our stockholders, including the
election of directors and the approval of mergers or other business
combination transactions. Further, there is a significant possibility that a
sufficient number of stockholders will not vote when matters are submitted to
stockholders for approval, thereby resulting in Amazon.com holding close to
(or even over) a majority of the shares represented and voting at a meeting.
In such event, Amazon.com alone would effectively decide whether each matter
should be approved. Amazon.com's substantial equity stake in drugstore.com
could also make drugstore.com a much less attractive acquisition candidate to
potential acquirors, because Amazon.com alone could have sufficient votes to
prevent the approval or the tax-free treatment of an acquisition. See
"Principal Stockholders" for a description of Amazon.com's stock ownership
relative to other stockholders.
Our Net Sales Would be Harmed if We Experience Significant Credit Card
Fraud
A failure to adequately control fraudulent credit card transactions would
harm our net sales and results of operations because we do not carry insurance
against this risk. Under current credit card practices, we are liable for
fraudulent credit card transactions because we do not obtain a cardholder's
signature.
Certain Antitakeover Provisions and Amazon.com's Significant Equity
Ownership Could Preclude an Acquisition
Provisions of our certificate of incorporation, bylaws, and Delaware law
could make it more difficult for a third party to acquire us, even if doing so
would be beneficial to our stockholders. Further, because Amazon.com
19
<PAGE>
owns a significant percentage of our capital stock, a competitor of Amazon.com
as well as other potential acquirors could determine not to merge with or
acquire us. If we were acquired by an Amazon.com competitor and Amazon.com did
not vote in favor of the transaction, we would lose our rights to promotional
placements on Amazon.com's website, and to use Amazon.com's technology (if we
are then using any). The potential loss of these rights could inhibit offers
to acquire us.
We Have No Intention to Pay Dividends
We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain any future earnings for funding growth and,
therefore, do not expect to pay any dividends in the foreseeable future.
Risks Related to Internet Commerce
We Depend on Continued Use of the Internet and Growth of the Online
Drugstore Market
Our future revenues and profits, if any, substantially depend upon the
widespread acceptance and use of the Internet as an effective medium of
business and communication by our target customers. Rapid growth in the use of
and interest in the Internet has occurred only recently. As a result,
acceptance and use may not continue to develop at historical rates, and a
sufficiently broad base of consumers may not adopt, and continue to use, the
Internet and other online services as a medium of commerce. Demand and market
acceptance for recently introduced services and products over the Internet are
subject to a high level of uncertainty, and there exist few proven services
and products.
In addition, the Internet may not be accepted as a viable long-term
commercial marketplace for a number of reasons, including potentially
inadequate development of the necessary network infrastructure or delayed
development of enabling technologies and performance improvements. Our success
will depend, in large part, upon third parties maintaining the Internet
infrastructure to provide a reliable network backbone with the speed, data
capacity, security and hardware necessary for reliable Internet access and
services.
Further, the online market for drugstore products is in its infancy. The
market is significantly less developed than the online market for books,
auctions, music, software and numerous other consumer products. Even if use of
the Internet and electronic commerce continues to increase, the rate of
growth, if any, of the online drugstore market could be significantly less
than the online market for other products. Our rate of revenue growth could
therefore be significantly less than other online merchants.
Our Sales Could be Negatively Affected if We are Required to Charge Taxes
on Purchases
We do not collect sales or other similar taxes in respect of goods sold by
drugstore.com, except from purchasers located in Washington and Texas.
However, one or more states or the federal government may seek to impose sales
tax collection obligations on out-of-state companies (such as drugstore.com)
which engage in or facilitate online commerce, and a number of proposals have
been made at the state and local level that would impose additional taxes on
the sale of goods and services through the Internet. Such proposals, if
adopted, could substantially impair the growth of electronic commerce, and
could adversely affect our opportunity to derive financial benefit from such
activities. Moreover, a successful assertion by one or more states or the
federal government that we should collect further sales or other taxes on the
sales of products through drugstore.com could negatively affect our revenues
and business.
If We Do Not Respond to Rapid Technological Changes, Our Services Could
Become Obsolete and Our Business Would Be Seriously Harmed
The Internet and the online commerce industry are characterized by rapid
technological change, changes in user and customer requirements and
preferences, frequent new product and service introductions embodying new
technologies and the emergence of new industry standards and practices that
could render our existing Web site
20
<PAGE>
and proprietary technology and systems obsolete. To remain competitive, we
must continue to enhance and improve the responsiveness, functionality and
features of our online store. Our success will depend, in part, on our ability
to license leading technologies useful in our business, enhance our existing
services, develop new services and technology that address the increasingly
sophisticated and varied needs of our prospective customers and respond to
technological advances and emerging industry standards and practices on a
cost-effective and timely basis. The development of a Web site and other
proprietary technology entails significant technical, financial and business
risks. We may not be able to successfully implement new technologies or adapt
our Web store, proprietary technology and transaction-processing systems to
customer requirements or emerging industry standards. If we are unable, for
technical, legal, financial or other reasons, to adapt in a timely manner in
response to changing market conditions or customer requirements, such
inability could adversely impact our ability to build the drugstore.com brand
and attract and retain customers.
Government Regulation of the Internet and Data Transmission over the
Internet Could Affect Our Business
Laws and regulations directly applicable to communications or commerce over
the Internet are becoming more prevalent. The most recent session of the
United States Congress resulted in Internet laws regarding children's privacy,
copyrights, taxation and the transmission of sexually explicit material. The
European Union recently enacted its own privacy regulations. The law of the
Internet, however, remains largely unsettled, even in areas where there has
been some legislative action. It may take years to determine whether and how
existing laws such as those governing intellectual property, privacy, libel
and taxation apply to the Internet. In addition, the growth and development of
the market for online commerce may prompt calls for more stringent consumer
protection laws, both in the United States and abroad, that may impose
additional burdens on companies conducting business online. The adoption or
modification of laws or regulations relating to the Internet could adversely
affect our business.
Risks Related to this Offering
Our Stock Price Will Fluctuate After this Offering, Which Could Result in
Substantial Losses for Investors
Although the initial public offering price will be determined based on
several factors, the market price for our common stock will vary from the
initial offering price after this offering. The market price of our common
stock may fluctuate significantly in response to a number of factors, some of
which are beyond our control. These factors include:
. Quarterly variations in operating results;
. Changes in financial estimates by securities analysts;
. Announcements by us or our competitors, of new products, significant
contracts, acquisitions or strategic relationships;
. Publicity about our company, our products and services, our competitors,
or e-commerce in general;
. Additions or departures of key personnel;
. Any future sales of our common stock or other securities; and
. Stock market price and volume fluctuations of publicly-traded companies
in general and Internet-related companies in particular.
The trading prices of Internet-related companies have been especially
volatile and many are at or near historical highs. Investors may be unable to
resell their shares of our common stock at or above the offering price. In the
past, securities class action litigation has often been brought against a
company following periods of volatility in the market price of its securities.
We may be the target of similar litigation in the future. Securities
21
<PAGE>
litigation could result in substantial costs and divert management's attention
and resources, which could seriously harm our business and operating results.
Future Sales of Shares Could Affect Our Stock Price
If our stockholders sell substantial amounts of our common stock in the
public market following this offering, the market price of our common stock
could fall. Such sales also might make it more difficult for us to sell equity
or equity-related securities in the future at a time and price that we deem
appropriate. Based on shares outstanding as of April 4, 1999, upon completion
of this offering, we will have outstanding shares of common stock,
assuming no exercise of the underwriters' over-allotment option. Other than
the shares of common stock sold in this offering, no shares will be eligible
for sale in the public market immediately. Our stockholders will be subject to
agreements with the underwriters or us that restrict their ability to transfer
their stock for 180 days from the date of this prospectus. After these
agreements expire, an additional 17,769,268 shares will be eligible for sale
in the public market assuming no exercise of options. See "Shares Eligible for
Future Sale" for a further description regarding shares that will become
eligible for sale at future dates after this offering.
New Stockholders Will Incur Substantial Dilution as a Result of this
Offering
The initial public offering price is expected to be substantially higher
than the book value per share of our outstanding common stock. As a result,
investors purchasing common stock in this offering will incur immediate
substantial dilution. In addition, we have issued options to acquire common
stock at prices significantly below the initial public offering price. To the
extent such outstanding options are ultimately exercised, there will be
further dilution to investors in this offering. See "Dilution" for a more
detailed description of how new stockholders will incur dilution.
We Have Broad Discretion to Use the Proceeds from this Offering
Our management can spend most of the proceeds from this offering in ways
with which the stockholders may not agree. We cannot predict that the proceeds
will be invested to yield a favorable return. See "Use of Proceeds" for how we
generally intend to use the proceeds from this offering.
22
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. These statements
relate to future events or our future financial performance. In some cases,
you can identify forward-looking statements by terminology such as may, will,
should, expect, plan, intend, anticipate, believe, estimate, predict,
potential or continue, the negative of such terms or other comparable
terminology. These statements are only predictions. Actual events or results
may differ materially. In evaluating these statements, you should specifically
consider various factors, including the risks outlined in the Risk Factors
section above. These factors may cause our actual results to differ materially
from any forward-looking statement.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of the
forward-looking statements. We are under no duty to update any of the forward-
looking statements after the date of this prospectus to conform such
statements to actual results or to changes in our expectations.
23
<PAGE>
SALE OF SHARES TO AMAZON.COM
We are offering a number of shares of our common stock equal to $10,000,000
divided by the initial public offering price to Amazon.com concurrent with
this offering at a price per share equal to the initial public offering price.
Such offering is made in connection with a letter agreement we entered into
with Amazon.com in May 1999, under which we agreed to use reasonable efforts
to request the underwriters to allow us to offer shares to Amazon.com
concurrent with this offering. As of May 19, 1999, Amazon.com owned 10,733,523
shares of our capital stock. Jeffrey P. Bezos, President, Chief Executive
Officer and director of Amazon.com, is a director of drugstore.com. See
"Management," "Certain Relationships and Related Transactions" and "Principal
Stockholders" for further discussion of our relationship with Amazon.com.
USE OF PROCEEDS
Our net proceeds from the sale of the shares of common stock we are
offering hereby are estimated to be $ million, assuming an initial public
offering price of $ per share and after deducting the estimated underwriting
discounts and commissions and estimated offering expenses and the sale of
shares of common stock to Amazon.com at the initial public offering price. If
the underwriters' over-allotment option is exercised in full, we estimate that
our net proceeds will be approximately $ million.
The principal purposes of this offering are to increase our working
capital, to create a public market for our common stock, to facilitate our
future access to the public capital markets, and to increase our visibility in
the retail marketplace. We may also use a portion of the net proceeds to
acquire complementary technologies or businesses; however, we currently have
no commitments or agreements and are not involved in any negotiations with
respect to any such transactions. Pending use of the net proceeds of this
offering, we intend to invest the net proceeds in interest-bearing, investment
grade securities.
DIVIDEND POLICY
We have never declared or paid cash dividends on our capital stock. We
currently intend to retain all available funds and any future earnings for use
in the operation and expansion of our business and do not anticipate paying
any cash dividends in the foreseeable future.
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<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of April 4, 1999 on an
actual, pro forma and pro forma as adjusted basis:
. The "actual" column reflects our capitalization as of April 4, 1999,
without any adjustments to reflect subsequent events or anticipated
events;
. The "pro forma" column reflects the issuance of 2,266,289 shares of
Series D preferred stock upon the expected conversion of a convertible
promissory note issued in May 1999 and receipt of consideration
therefore; and
. The "pro forma as adjusted" column reflects our capitalization as of
April 4, 1999 with adjustments to give effect to (1) the conversion of
all shares of outstanding preferred stock into 22,185,401 shares of
common stock upon the closing of this offering; and (2) the receipt of
the estimated proceeds from the sale of our common stock offered hereby
(after deducting the estimated offering expenses and underwriting
discounts and commissions), including the sale of shares of our common
stock to Amazon.com.
This table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the
consolidated financial statements and related notes thereto included elsewhere
in this prospectus.
<TABLE>
<CAPTION>
At April 4, 1999
---------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- ----------- -----------
(unaudited) (unaudited)
(in thousands)
<S> <C> <C> <C>
Capital lease obligations, less current
portion..................................... $ 923 $ 923 $ 923
Stockholders' equity:
Convertible preferred stock, $.001 par
value; authorized: 20,500,000 shares
actual, 22,800,000 shares pro forma and
10,000,000 shares pro forma as adjusted
Series A--issued and outstanding: 10,000,000
shares actual and pro forma and none pro
forma as adjusted.......................... 7,986 7,986 --
Series B--issued and outstanding: 5,446,268
shares actual and pro forma and none pro
forma as adjusted.......................... 18,237 18,237 --
Series C--issued and outstanding: 4,472,844
shares actual and pro forma and none pro
forma as adjusted.......................... 34,981 34,981 --
Series D--issued and outstanding: none
actual, 2,266,289 shares pro forma and none
pro forma as adjusted...................... -- 45,000 --
Common stock, $.001 par value; authorized
30,200,000 shares actual and pro forma and
250,000,000 pro forma as adjusted; issued
and outstanding 2,323,000 shares actual and
pro forma and pro forma as adjusted
(1)........................................ 2 2
Additional paid-in capital.................. 8,175 8,175
Deferred stock-based compensation........... (6,655) (6,655) (6,655)
Accumulated deficit......................... (17,709) (17,709) (17,709)
-------- -------- --------
Total stockholders' equity............... 45,017 90,017
-------- -------- --------
Total capitalization................... $ 45,940 $ 90,940 $
======== ======== ========
</TABLE>
- --------
(1) Excludes 8,327,000 shares of common stock reserved for issuance under
drugstore.com's stock option and stock purchase plans, of which 2,752,184
shares were subject to outstanding options as of April 4, 1999, and 10,000
shares of common stock issuable upon exercise of an outstanding warrant.
See "Management--Incentive Stock Plans," "Description of Capital Stock"
and Note 5 and 7 of Notes to Consolidated Financial Statements.
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<PAGE>
DILUTION
The pro forma net tangible book value of drugstore.com as of April 4, 1999
was $44.8 million or approximately $2.01 per share. Pro forma net tangible
book value per share represents the amount of drugstore.com's total tangible
assets less total liabilities, divided by the number of shares of common stock
outstanding, after giving effect to the conversion of all shares of
outstanding preferred stock into 19,919,112 shares of common stock upon the
closing of this offering. Dilution in pro forma net tangible book value per
share represents the difference between the amount per share paid by
purchasers of shares of common stock in the offering made hereby and the net
tangible book value per share of common stock immediately after the completion
of this offering. After giving effect to (1) the sale of the shares of common
stock offered by us hereby at an assumed initial public offering price of
$ per share and after deducting the underwriting discount and estimated
offering expenses payable by us, (2) the sale of 2,266,289 shares of Series D
preferred stock to Vulcan Ventures on May 19, 1999 (assuming conversion of a
promissory note issued to Vulcan Ventures) and (3) the sale of shares of
common stock to Amazon.com at the initial public offering price, the net
tangible book value of drugstore.com at April 4, 1999 would have been $
million or approximately $ per share. This represents an immediate
increase in net tangible book value of $ per share to existing
stockholders and an immediate dilution of $ per share to new investors of
common stock in this offering. The following table illustrates this dilution
on a per share basis:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................... $
Pro forma net tangible book value per share as of April 4, 1999.. $2.01
Increase per share attributable to Vulcan Ventures...............
Increase per share attributable to Amazon.com....................
Increase per share attributable to new investors(1)..............
-----
Net tangible book value per share after the offering and the sale
of shares to Vulcan Ventures and Amazon.com(1)....................
----
Dilution per share to new investors(1)............................. $
====
</TABLE>
- --------
(1) This table excludes 8,327,000 shares of common stock reserved for issuance
under drugstore.com's stock option and stock purchase plans, of which
2,752,184 shares were subject to outstanding options as of April 4, 1999,
and 10,000 shares of common stock were issuable upon exercise of
outstanding warrants. See "Capitalization," "Management--Incentive Stock
Plans," "Description of Capital Stock" and Note 5 and 7 of Notes to
Consolidated Financial Statements.
The following table sets forth, as of April 4, 1999, the differences
between the number of shares of common stock purchased from drugstore.com, the
total consideration paid and the average price per share paid by existing
holders of common stock, by Vulcan Ventures, by Amazon.com and by the new
investors, before deducting the underwriting discount and estimated offering
expenses payable by drugstore.com, at the initial public offering price of
$ per share.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
----------------- ---------------------- Price
Number Percentage Amount Percentage Per Share
------ ---------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockhold-
ers(1)................. % $ % $
Vulcan Ventures.........
Amazon.com..............
New investors(1)........
---- ---- --------- ---------
Total................. % $ 100.0%
==== ==== ========= =========
</TABLE>
- --------
(1) The number of shares held by new public investors will be or
approximately % ( shares, or approximately %, if the Underwriters'
over-allotment option is exercised in full) of the total number of shares
of Common Stock outstanding after this offering. See "Principal
Stockholders".
26
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements of
drugstore.com, inc. and the Notes thereto included elsewhere in this
prospectus. The consolidated statement of operations data set forth below for
the period from April 2, 1998 (inception) to December 31, 1998 and the
selected consolidated balance sheet data as of December 31, 1998 have been
derived from the audited financial statements of drugstore.com, inc. included
elsewhere in this prospectus, which have been audited by Ernst & Young LLP,
Independent Auditors. The unaudited financial data as of April 4, 1999 and for
the quarter then ended are derived from unaudited consolidated financial
statements. The unaudited financial statements include all adjustments,
consisting of normal recurring accruals, which we consider necessary for a
fair presentation of the results of operations for this period. The historical
results are not necessarily indicative of results to be expected for any
future period. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
<TABLE>
<CAPTION>
Period from
April 2, 1998
(Inception) to Quarter
December 31, Ended April 4,
1998 1999
-------------- --------------
(in thousands, except share
and per share data)
<S> <C> <C>
Consolidated Statement of Operations Data:
Net sales........................................ $ -- $ 652
Cost of sales.................................... -- 672
---------- -----------
Gross profit (loss).............................. -- (20)
Operating expenses:
Marketing and sales............................ 3,092 5,189
Product development............................ 2,178 2,713
General and administrative..................... 1,894 1,731
Amortization of stock-based compensation....... 500 884
---------- -----------
Total operating expenses..................... 7,664 10,517
---------- -----------
Operating loss................................... (7,664) (10,537)
Other income (expense):
Interest income................................ 177 332
Interest expense............................... (3) (14)
---------- -----------
Net loss......................................... $ (7,490) $ (10,219)
========== ===========
Basic and diluted net loss per share............. $ (14.82) $ (11.47)
========== ===========
Pro forma basic and diluted net loss per
share(1)........................................ $ (0.92) $ (0.53)
========== ===========
Weighted average shares outstanding used to
compute basic and diluted net loss per share.... 505,282 890,661
========== ===========
Weighted average shares outstanding used to
compute pro forma basic and diluted net loss per
share(1)........................................ 8,126,703 19,429,853
========== ===========
</TABLE>
<TABLE>
<CAPTION>
December 31, April 4,
1998 1999
------------ ----------
(in thousands)
<S> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents.............................. $ 14,408 $ 38,007
Working capital........................................ 17,050 39,804
Total assets........................................... 22,517 49,983
Capital lease obligations, less current portion........ 975 923
Total stockholders' equity............................. 19,347 45,017
</TABLE>
- --------
(1) See Note 1 of Notes to Consolidated Financial Statements for an
explanation of the determination of the number of weighted average shares
used to compute pro forma net loss per share amounts.
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and the related Notes contained elsewhere in
this prospectus. The following discussion contains forward-looking statements
that involve risks and uncertainties. Our actual results could differ
materially from the results contemplated by these forward-looking statements
as a result of certain factors, including those discussed below and elsewhere
in this prospectus.
Overview
drugstore.com is a leading online drugstore: a retail store and information
site for health, beauty, wellness, personal care and pharmacy products and
information. We designed our store to provide a convenient, private and
informative shopping experience that encourages consumers to purchase products
essential to healthy, everyday living. Our Web site can be accessed 24 hours a
day, 7 days a week from anywhere that a consumer has Internet access. We offer
a larger selection of products than typical store-based retailers, along with
a wealth of health-related information, buying guides and other tools designed
to help consumers make more educated purchasing decisions. Our shopping lists
and e-mail reminders are designed to make it easier for our customers to
regularly purchase their preferred products. We believe that our online store
delivers a superior customer experience, making buying What Every Body
Needs(TM) less of a chore.
We were incorporated in April 1998 and commercially launched our Web site
on February 24, 1999. From the period from inception through the commercial
launch of our site, our primary activities consisted of:
. Developing our business model;
. Raising funds and developing strategic alliances;
. Designing and developing our Web site;
. Recruiting and training employees;
. Selecting our fulfillment partners and integrating their systems and
processes with ours;
. Negotiating advertising contracts with several of the major Web portals;
and
. Developing the drugstore.com brand.
Since the commercial launch of our site, we have continued these operating
activities and have also focused on building sales momentum, expanding our
product offerings, building vendor relationships, promoting our brand name,
improving the efficiency of our order fulfillment processes and establishing
customer service operations.
We have incurred net losses of $17.7 million from inception to April 4,
1999. We believe that we will continue to incur net losses for the foreseeable
future and that the rate at which we will incur such losses will increase
significantly from current levels.
We have a limited operating history on which to base an evaluation of our
business and prospects. Our prospects must be considered in light of the
risks, expenses, and difficulties encountered by companies in their early
stage of development, particularly companies in new and rapidly-evolving
markets, such as e-commerce. See "Risk Factors" for a more complete
description of the many risks we face.
In view of our limited operating history and the rapidly evolving nature of
our business, we believe that period-to-period comparisons of our operating
results are not meaningful and should not be relied upon as an indication of
future performance. It is likely that in some future quarter our operating
results may fall below the expectations of securities analysts and investors.
In this event, the trading price of our common stock may fall significantly.
Net Sales. Net sales consist of product sales and charges to customers for
outbound shipping and handling and are net of allowances for product returns,
promotional discounts and coupons. We recognize product and
28
<PAGE>
shipping revenues when the related product is shipped. In the future, the
level of our sales will depend on a number of factors including, but not
limited to, the following:
. The number of customers we are able to obtain;
. The frequency of our customers' purchases;
. The quantity and mix of products our customers purchase;
. The price we charge for our products;
. The amount we charge for shipping;
. The extent of sales promotions and discounts we offer;
. The extent of reimbursement available from third-party payors;
. The level of customer returns we experience; and
. The seasonality that we may experience in our business.
Cost of Sales and Gross Margins. Cost of sales consists primarily of the
costs of products sold to customers and outbound and inbound shipping costs.
We expect cost of sales to increase in absolute dollars to the extent that our
sales volume increases. We may in the future expand or increase the coupons
and discounts we offer to our customers and may otherwise alter our pricing
structures and policies. Such changes may negatively affect gross margins. Our
gross margin will fluctuate based on a number of factors, including, but not
limited to, the following:
. The cost of our products, including the extent of purchase volume
discounts that we are able to obtain from suppliers;
. Our pricing strategy relative to the cost of our products;
. The mix of products our customers purchase;
. The mix of cash payments vs. insurance reimbursement for our pharmacy
products;
. Our shipping pricing strategy relative to the cost of shipping;
. Our distribution and fulfillment strategy if we decide to open our own
distribution centers; and
. The extent to which we are able to control product damage, shrinkage and
expiration though inventory management practices.
Marketing and Sales Expenses. Marketing and sales expenses consist
primarily of advertising and promotional expenditures, distribution expenses,
including order processing and fulfillment charges, equipment and supplies,
and payroll and related expenses for personnel engaged in marketing,
merchandising, customer service and distribution and fulfillment activities.
We intend to continue to pursue an aggressive branding and marketing campaign
and, therefore, expect marketing and sales expenses to increase significantly
in absolute dollars. Marketing and sales expenses may also vary considerably
from quarter to quarter, depending on the timing of our advertising campaigns.
In addition, 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 may include the
development of our own distribution centers to accommodate such increases in
sales volume.
Product Development Expenses. Product development expenses consist
primarily of payroll and related expenses for Web site development and
information technology personnel, Internet access and hosting charges and Web
site content and design expenses. 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.
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<PAGE>
General and Administrative Expenses. General and administrative expenses
consist of payroll and related expenses for executive and administrative
personnel, corporate facility expenses, professional services expenses, travel
and other general corporate expenses. We expect general and administrative
expenses to increase in absolute dollars as we expand our staff and incur
additional costs related to the anticipated growth of our business and being a
public company.
Amortization of Stock-based Compensation. We recorded total deferred stock-
based compensation of $2,746,000 for the period from April 2, 1998 (inception)
to December 31, 1998 and $5,293,000 for the quarter ended April 4, 1999 in
connection with stock options granted and restricted stock issued during such
periods. The deferred stock-based compensation amounts represent the
difference between the exercise price of stock option grants and the deemed
fair value of our common stock at the time of such grants. In the case of
restricted stock, the deferred stock-based compensation represents the
difference between the purchase price of the restricted stock and the deemed
fair value of our common stock on the date of purchase. Such amounts are
amortized to expense over the vesting periods of the applicable agreements,
resulting in amortization of stock-based compensation totaling $500,000 for
the period from April 2, 1998 (inception) to December 31, 1998 and $884,000
for the quarter ended April 4, 1999. The amortization expense relates to
options awarded to employees in all operating expense categories. Deferred
stock-based compensation for stock options and restricted stock issued through
April 4, 1999 that will be subsequently recognized as expense for each of the
next six fiscal years is estimated to be as follows:
<TABLE>
<CAPTION>
Fiscal Year Amount
------------ --------------
(in thousands)
<S> <C>
1999 $2,892
2000 2,104
2001 1,127
2002 489
2003 39
2004 4
</TABLE>
We have outsourced our payroll processing and other aspects related to our
employee benefits programs under a co-employment arrangement with TriNet VCO,
an independent company. On March 31, 1999, the Financial Accounting Standards
Board (FASB) issued an Exposure Draft of a FASB Interpretation, Accounting for
Certain Transactions involving Stock Compensation-- an interpretation of APB
Opinion No. 25. Such FASB Exposure Draft, if adopted in its current form,
could be interpreted to indicate that employees subject to co-employment
arrangements, would not be considered employees for purposes of applying APB
No. 25. On May 14, 1999, we gave notice of termination of this co-employment
arrangement. If additional clarification regarding the definition of an
employee is not provided in the final pronouncement, we may be required to
establish a new measurement date for stock options granted after December 15,
1998 to these employees for the purpose of accounting for stock options under
APB No. 25. If a new measurement date is required to be established, we would
recognize the deferred stock-based compensation which would be amortized as
stock-based compensation over the remaining vesting periods of the options. We
estimate that this charge would aggregate approximately $4.2 million, which
would be recognized beginning with the fourth quarter of fiscal 1999, the
estimated date the final pronouncement will be effective, and ending in 2004.
Such amortization could have a material adverse effect on our operating
results.
Interest Income and Expense. Interest income consists of earnings on our
cash and cash equivalents and interest expense consists of interest associated
with capital lease obligations.
Income Taxes. There was no provision or benefit for income taxes for any
period since inception due to our operating losses. As of December 31, 1998,
we had $6,737,000 of net operating loss carryforwards for
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federal income tax purposes, which expire beginning in 2018. Utilization of
these carryforwards may also be subject to further limitation upon a change in
control under Section 382 of the Internal Revenue Code of 1986, as amended. We
have provided a full valuation allowance on the deferred tax asset, consisting
primarily of such net operating loss carryforwards, because of uncertainty
regarding its realizability. See Note 4 of Notes to Consolidated Financial
Statements.
Quarterly Results of Operations
Because we were a development stage company during 1998 and have a short
operating history, we believe that period-to-period comparisons prior to 1999
are less meaningful than an analysis of recent quarterly operating results.
Accordingly, we are providing a discussion and analysis of our results of
operations that is focused on the four quarters ended April 4, 1999.
The following table sets forth unaudited quarterly statement of operations
data for the four quarters ended April 4, 1999. This unaudited quarterly
information has been derived from our unaudited financial statements and, in
the opinion of management, include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of such information
in accordance with generally accepted accounting principles. The operating
results for any quarter are not necessarily indicative of the operating
results for any future period.
<TABLE>
<CAPTION>
Quarter Ended
-------------------------------------
June 30, Sept. 30, Dec. 31, Apr. 4,
1998 1998 1998 1999
-------- --------- -------- --------
(in thousands)
<S> <C> <C> <C> <C>
Net sales................................ $ -- $ -- $ -- $ 652
Cost of sales............................ -- -- -- 672
----- ------- ------- --------
Gross profit (loss).................... -- -- -- (20)
Operating expenses:
Marketing and sales.................... -- 313 2,779 5,189
Product development.................... 104 522 1,552 2,713
General and administrative............. 79 521 1,294 1,731
Amortization of stock-based
compensation.......................... 39 171 290 884
----- ------- ------- --------
Total operating expenses............. 222 1,527 5,915 10,517
----- ------- ------- --------
Operating loss........................... (222) (1,527) (5,915) (10,537)
Other income (expense):
Interest income........................ -- 36 141 332
Interest expense....................... -- -- (3) (14)
----- ------- ------- --------
Net loss................................. $(222) $(1,491) $(5,777) $(10,219)
===== ======= ======= ========
</TABLE>
Net Sales and Cost of Sales. We commercially launched our Web site on
February 24, 1999. There were no net sales or cost of sales prior to the
quarter ended April 4, 1999. The negative gross margin experienced in the
quarter ended April 4, 1999 was primarily the result of promotional sales
discounts associated with the commercial launch of the Web site.
Marketing and Sales. Marketing and sales expenses increased in each of the
three quarters ended April 4, 1999, primarily due to expenses associated with
the addition of marketing and sales personnel. Additionally, we recognized
$1.0 million of marketing expenses related to advertising costs under our
technology license and marketing agreement with Amazon.com in the quarter
ended April 4, 1999. We also increased our advertising on the major Web
portals, including AOL, Excite and Yahoo!, in the quarter ended April 4, 1999
in connection with the commercial launch of our Web site.
Product Development. Product development expenses increased in each of the
three quarters ended April 4, 1999, primarily due to increased expenses
associated with the addition of product development personnel and additional
use of consultants and contract labor.
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General and Administrative. General and administrative expenses increased
in each of the three quarters ended April 4, 1999 primarily due to increased
expenses associated with the addition of general and administrative personnel,
additional professional fees and the cost of corporate facilities.
Amortization of Stock-based Compensation. Amortization of stock-based
compensation increased in each of the three quarters ended April 4, 1999,
primarily due to the grant of stock options to new employees in the three
quarters ended April 4, 1999 as well as an increase in the difference between
the grant price and the deemed fair value of our common stock, particularly in
the quarter ended April 4, 1999. In the period from April 2, 1998 (inception)
to December 31, 1998, employees in the marketing and sales, product
development and general and administrative expense categories accounted for
approximately 24%, 24% and 52% of amortization of stock-based compensation,
respectively. In the quarter ended April 4, 1999, employees in the marketing
and sales, product development and general and administrative expense
categories accounted for approximately 32%, 38% and 30% of amortization of
stock-based compensation, respectively.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through private
sales of preferred stock which, through April 4, 1999, yielded net cash
proceeds of $57.2 million.
In May 1999, we issued a convertible promissory note to Vulcan Ventures
Incorporated for aggregate cash consideration of $40.0 million. This note will
convert into 2,266,289 shares of Series D Preferred Stock upon receipt of
necessary clearance under the Hart-Scott-Rodino Antitrust Improvements Act. If
such clearance is not obtained, the note will be due and payable, along with
accrued interest, on November 18, 1999.
Net cash used in operating activities was $9.8 million in the quarter ended
April 4, 1999, and $6.3 million in the period from April 2, 1998 (inception)
to December 31, 1998. Net cash used in operating activities for each of these
periods primarily consisted of net losses and during the quarter ended April
4, 1999, increases in inventories.
Net cash used in investing activities was $1.5 million in the quarter ended
April 4, 1999, and $1.5 million in the period from April 2, 1998 (inception)
to December 31, 1998. Net cash used in investing activities for each of these
periods primarily consisted of leasehold improvements and purchases of
equipment and systems, including computer equipment and fixtures and
furniture.
Net cash provided by financing activities was $34.9 million in the quarter
ended April 4, 1999, and $22.3 million in the period from April 2, 1998
(inception) to December 31, 1998. Net cash provided by financing activities
during each of those periods primarily consisted of proceeds from the issuance
of preferred stock.
As of April 4, 1999 we had $38.0 million of cash and cash equivalents. As
of that date, our principal commitments consisted of obligations outstanding
under operating leases and marketing agreements with certain Web portals,
aggregating approximately $25 million through 2005. Although we have no
material commitments for capital expenditures, we anticipate a substantial
increase in our capital expenditures and lease commitments consistent with
anticipated growth in operations, infrastructure and personnel. In addition,
at some point it is possible that we may need to establish our own
distribution centers either to ensure greater control over the distribution
process or to ensure adequate supplies of products to our customers. This
would require significant capital investments in facilities and equipment.
We currently anticipate that the net proceeds of this offering, together
with our available funds, will be sufficient to meet our anticipated needs for
working capital and capital expenditures through at least the next 12 months.
We may need to raise additional funds prior to the expiration of such period
if, for example, we pursue business or technology acquisitions or experience
operating losses that exceed our current expectations. If we raise additional
funds through the issuance of equity, equity-related or debt securities, such
securities may have rights, preferences or privileges senior to those of the
rights of our common stock and our stockholders may experience additional
dilution. We cannot be certain that additional financing will be available to
us on acceptable terms when required, or at all.
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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.
We are in the process of reviewing the year 2000 compliance of our
internally developed proprietary software. This review has included testing to
determine how our systems will function at and beyond the year 2000. We expect
to complete these tests during the summer of 1999. Since inception, we have
internally developed substantially all of the systems for the operation of our
Web site. These systems include the software used to provide our Web site's
search, customer interaction, and transaction-processing and distribution
functions, as well as monitoring and back-up capabilities. Based upon our
assessment to date, we believe that our internally developed proprietary
software is year 2000 compliant.
We are currently assessing the year 2000 readiness of our third-party
supplied software, computer technology and other services, which include
software for use in our accounting, database and security systems. As part of
the assessment of the year 2000 compliance of these systems, we have sought
assurances from these vendors that their software, computer technology and
other services are year 2000 compliant. We have expensed amounts incurred in
connection with year 2000 assessment since our inception through April 4,
1999. Such amounts have not been material. We expect this assessment process
to be completed during the summer of 1999. Based upon the results of this
assessment, we will develop and implement, if necessary, a corrective action
plan with respect to third-party software, third-party vendors and computer
technology and services that may fail to be year 2000 compliant. We expect to
complete any required actions during the summer of 1999. At this time, the
expenses associated with this assessment and potential corrective action plan
that may be incurred in the future cannot be determined. The failure of our
software and computer systems or those of our third-party suppliers to be year
2000 compliant could have a material adverse effect on us.
The year 2000 readiness of the general infrastructure necessary to support
our operations is difficult to assess. For example, we depend on the integrity
and stability of the Internet to provide our services. We also depend on the
year 2000 compliance of the computer systems and financial services used by
consumers. Thus, the infrastructure necessary to support our operations
consists of a network of computers and telecommunications systems located
throughout the world and operated by numerous unrelated entities and
individuals, none of which has the ability to control or manage the potential
year 2000 issues that may impact the entire infrastructure. Our ability to
assess the reliability of this infrastructure is limited and relies solely on
generally available news reports, surveys and comparable industry data. Based
on these sources, we believe most entities and individuals that rely
significantly on the Internet are reviewing and attempting to remediate issues
relating to year 2000 compliance, but it is not possible to predict whether
these efforts will be successful in reducing or eliminating the potential
negative impact of year 2000 issues. A significant disruption in the ability
of consumers to reliably access the Internet or portions of it or to use their
credit cards would have an adverse effect on demand for our products and
services.
At this time, we have not yet developed a contingency plan to address
situations that may result if we or our vendors are unable to achieve year
2000 compliance. The cost of developing and implementing such a plan, if
necessary, could be significant. Any failure of our material systems, our
vendors' material systems, our customers' computers, or the Internet to be
year 2000 compliant could have negative consequences for us. Such consequences
could include difficulties in operating our Web site effectively, taking
customer orders, making product deliveries or conducting other fundamental
parts of our business.
33
<PAGE>
BUSINESS
Overview
drugstore.com is a leading online drugstore: a retail store and information
site for health, beauty, wellness, personal care and pharmacy products. We
designed our store to provide a convenient, private and informative shopping
experience that encourages consumers to purchase products essential to
healthy, everyday living. Our Web site can be accessed 24 hours a day, 7 days
a week from anywhere that a consumer has Internet access. We offer a larger
selection of products than typical store-based retailers, along with a wealth
of health-related information, buying guides and other tools designed to help
consumers make more educated purchasing decisions. Our shopping lists and e-
mail reminders are designed to make it easier for our customers to regularly
purchase their preferred products. We believe that our online store provides a
customer with a superior shopping experience, making buying What Every Body
Needs(TM) less of a chore.
Industry Background
The Growth of the Internet and Electronic Commerce
The Internet has become an important medium for communicating, finding
information and purchasing products and services. International Data
Corporation estimates that there were approximately 51 million Web users in
the United States at the end of 1998 and anticipates this number will grow to
approximately 135 million users by the end of 2002. We believe this increased
usage is due to a number of factors including:
. The large installed base of personal computers in the workplace and
home;
. Advances in the performance and reductions in the cost of personal
computers and modems;
. Improvements in the ease of use and security of the Internet;
. The availability of a broader range of online products, information and
services; and
. Growing awareness among consumers and businesses of the benefits of
online shopping.
The Internet has unique and powerful characteristics that differentiate it
from traditional distribution channels and have facilitated its use as a
purchasing medium. International Data Corporation estimates that worldwide
business-to-consumer sales over the Internet will increase from approximately
$11 billion in 1998 to approximately $93 billion by 2002. We believe consumers
using the Internet to purchase goods expect a more information-intensive
experience than when they shop at a traditional retail store. We believe the
ability to obtain relevant, up-to-date information makes the consumer better
prepared to make a purchase. Accessing the Internet from a computer in the
home or office allows a consumer to easily scroll through and search articles,
pages of product data and related topics. This allows consumers to research
and then purchase products at their convenience.
Healthcare Trends on the Internet
Healthcare is one of the largest segments of the U.S. economy, representing
an annual expenditure of roughly $1 trillion, and health and medical
information is one of the fastest growing areas of interest on the Internet.
According to a recent Forrester Research report, 31.6% of Internet users
surveyed had shopped for healthcare products online in the previous six
months. Cyber Dialogue estimates that the number of adults in the United
States searching online for health and medical information will grow from
approximately 17.1 million during the 12 month period ended July 1998 to
approximately 30.0 million during the twelve month period ending July 2000.
The drugstore.com Market
The market we address can be divided into five primary segments: health,
beauty, wellness, personal care and pharmacy. Many products in this market are
personal (being used on a person's skin or in a person's body)
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<PAGE>
and essential, and often are purchased repeatedly. In this market, vendors
frequently introduce new products, and consumers seek comprehensive product
information. Consumers currently shop for these products primarily in chain
drugstores (such as Walgreen's, CVS, RiteAid and Eckerd), mass market
retailers (such as Wal-mart, Kmart and Target), supermarkets, warehouse clubs
and independent drugstores. However, category-specific retailers and catalogs
also serve each of these segments. Overall, distribution of products in our
primary market segments is fragmented.
Key aspects of the primary segments of the drugstore.com market are as
follows:
Health. The health segment includes over-the-counter remedies (such as
cough, cold, allergy and pain relief medications), first aid, medical devices
for home healthcare, contraceptives and other products related to the body's
health needs. Based on estimates from Information Resources, Inc. and Frost &
Sullivan, we believe that sales of health products in the U.S. we currently
offer grew from approximately $15.0 billion in 1996 to approximately $16.3
billion in 1998. We believe that the aging U.S. population, along with a
greater portion of prescription drugs becoming available as over-the-counter
medications, will contribute to growth in this market segment. Consumers in
the health segment often seek significant amounts of product information to
determine which products will meet their health needs. Consumers generally buy
health products from chain drugstores, mass market retailers, supermarkets,
and warehouse clubs as well as from locally-owned, independent drugstores and
convenience stores. Representative brands in our health market segment include
Advil, Tylenol, Pepcid, Bausch & Lomb and Metamucil.
Beauty. The beauty segment includes cosmetics, fragrances and a variety of
skin care products. Based on estimates from Information Resources, Inc. and
Frost & Sullivan, we believe that sales of beauty products in the U.S. we
currently offer grew from approximately $10.7 billion in 1996 to approximately
$12.8 billion in 1998. Some of the factors driving consumer demand for beauty
products include regular and seasonal new product introductions, as well as
changing fashion trends. Consumers often seek advice regarding these trends or
the functionality of new products. The beauty segment can be broadly
classified into two categories: mass market and prestige products. Consumers
for mass market beauty products typically purchase such products in mass
market retailers, drugstores and supermarkets. Consumers for prestige products
generally shop in department stores (such as Nordstrom, Macys, May and
Dillard's), beauty specialty stores (such as Aveda or Sally's), or spas and
salons (such as Elizabeth Grady or Elizabeth Arden). Representative brands in
our beauty market segment include Estee Lauder, Revlon, L'Oreal, Cover Girl,
Neutrogena and Peter Thomas Roth.
Wellness. The wellness segment includes vitamins, nutritional supplements,
herbs, homeopathy, and other natural products. Based on estimates from
Information Resources, Inc. and Frost & Sullivan, we believe that sales of
wellness products in the U.S. we currently offer grew from approximately $9.4
billion in 1996 to approximately $11.0 billion in 1998. We believe that
increasing consumer interest in nutritional and wellness products to improve
physical and mental well-being has contributed to growth in this segment. We
believe supplemental product information is important to these consumers
because they are interested in the intended physiological effects of these
products. Consumers can obtain these products at chain drugstores, mass market
retailers, supermarkets, warehouse clubs, and specialty stores as well as
through catalogs or online vitamin and nutrition stores. Representative brands
in our wellness market segment include Centrum, One-A-Day, Nature Made,
Twinlab, Natrol and Nature's Way.
Personal Care. The personal care market segment includes products related
to hair, body and eye care, shaving, oral hygiene and feminine needs. Based on
estimates from Information Resources, Inc. and Frost & Sullivan, we believe
that sales of personal care products in the U.S. we currently offer grew from
approximately $20.7 billion in 1996 to approximately $23.5 billion in 1998.
New product introductions drive most of the growth in this market segment. The
personal care segment is comprised of a number of different product groups
that consumers typically shop for at mass market retailers, chain drugstores,
supermarkets, warehouse clubs and specialty stores. Representative brands in
our personal care market segment include Gillette, Colgate, Johnson & Johnson,
Rogaine and Pampers.
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Pharmacy. Based on estimates from Information Resources, Inc. and Frost &
Sullivan, we believe that the pharmacy segment in the U.S. we address grew
from approximately $89.2 billion in 1996 to approximately $101.2 billion in
1998. This segment consists of prescription medication for chronic illnesses,
such as high blood pressure, osteoporosis and depression, which represents
approximately 73% of the U.S. prescription drug market according to Advanstar
Communications. AC Nielsen and IMS Health estimate that out of the $101.7
billion of prescription sales, over 75%, or $76.4 billion are distributed
through retail channels. The number of prescriptions written for chronic
illnesses is expected to continue to grow due to an aging population and the
increasing utilization of pharmaceuticals in medical management. The principal
source of pharmaceuticals for chronic illnesses has been retail pharmacies.
However, over the past ten years, mail order pharmacies have become an
increasingly important source of pharmaceuticals for chronic illnesses.
Forrester Research estimates that as of February 1999, 13% of HMO
prescriptions will be filled by a mail-order pharmacy by the end of 1999.
Limitations on Traditional Channels of Distribution
Traditional channels of retail distribution for health, beauty, wellness,
personal care and pharmacy products have many limitations, including:
Inconvenience. Consumers often view shopping for many of these products as
a chore. Shopping at a physical store can be highly inconvenient. It generally
involves time-consuming activities such as making a trip to the store, finding
a parking space, searching for the desired products, and waiting in line to
fill a prescription or make a purchase. This process can be especially
difficult for customers with disabilities or parents with young children.
To increase convenience for consumers, traditional store-based retailers
often need to open new stores, which is time-consuming and expensive. Each new
store results in significant investments in inventory, real estate, building
improvements and the hiring and training of store personnel. The required
investment may limit the ability of traditional store-based retailers to serve
geographic areas that are not densely populated. Also, an existing store may
face substantial added costs if it attempts to build more parking spaces or
hire more clerks in order to reduce parking and waiting inconveniences.
Narrow Selection. Consumers value the opportunity to select items from a
broad range of products that best fit their needs. However, consumers must
often choose from a narrow product selection at traditional store-based
retailers. Stores may not carry a full range of products, especially prestige,
specialty or regional products, or carry a full assortment of sizes.
Overcoming these difficulties can be prohibitively expensive for traditional
retail stores, usually due to shelf space limitations, the cost of carrying
inventory and the resulting need to allocate inventory dollars to popular
products. To the extent that mass market retailers allocate physical store
space to items such as alcohol, lawn furniture, motor oil and snack foods,
they may have to reduce the number of health, wellness and beauty products
that they offer. Product selection in traditional store-based retailers cannot
be tailored to individual needs because it is driven by aggregate demand.
Limited Information and Communication. Consumers buying health, beauty,
wellness, personal care and pharmacy products often seek information and
knowledgeable advice to assist them in making purchasing decisions. Many
traditional store-based retailers do not provide consumers with access to
useful product information or readily-available on-site experts who can
provide helpful advice. Employees at traditional store-based retailers,
especially supermarkets and mass market retailers, may have limited if any
interaction with their customers. Often there is no direct contact, except at
the check-out line. Customers may also face difficulties following up with
questions after a purchase. While traditional store-based retailers could take
steps to increase the availability of customized information and on-site
experts, such steps would involve substantial investments in printing and
training. In addition, it is difficult for a traditional retail store to use
information about a particular consumer to personalize that consumer's
shopping experience.
Lack of Privacy. Because many health, beauty, wellness, personal care and
pharmacy products are inherently personal, consumers often desire ways to
preserve the anonymity of their purchases and the confidentiality of the
information transferred in the buying process. Many consumers may feel
uncomfortable
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purchasing certain drugstore products, such as birth control devices, feminine
care products, and incontinence products, in a traditional retail store. Many
consumers have encountered the unpleasant experience of placing such a product
on a checkout stand's conveyor belt in front of store clerks and other waiting
customers. Consumers may hesitate to ask store personnel questions about which
product best meets a need, or how to use a product, especially if either the
question or the answer is embarrassing or may be overheard by others.
Overcoming this limitation is very difficult for traditional retail stores
because the consumer must visit a physical store frequented by other customers
and must interact in person with store employees.
The markets for health, beauty, wellness, personal care and pharmacy
products have grown despite the lack of convenience, selection, information
and privacy associated with a trip to a traditional store-based retailer.
Consequently, we believe there is a significant market opportunity for an
online store that can offer consumers an enhanced shopping experience through
convenient and private access to detailed information about a broad range of
products, and an easy way to buy them.
The drugstore.com Solution
We are a leading online drugstore: a retail store and information site for
health, beauty, wellness, personal care and pharmacy products. We designed our
store to provide a convenient, private and informative shopping experience
that encourages consumers to purchase products essential to healthy, everyday
living. We believe our online store provides customers with a superior
shopping experience, making buying What Every Body NeedsTM less of a chore.
We draw and retain consumers by emphasizing key attributes of our store:
Convenience. Our user-friendly Web store may be reached from wherever the
shopper has Internet access, such as the shopper's home or office. Further
convenience advantages at our store include:
. Shopping 24 hours a day, seven days a week;
. Direct delivery to the shopper's home or office, avoiding the need for a
trip to a physical store;
. A personal shopping list for every customer, allowing for quick and easy
reordering in future visits;
. Simplified searching for products and information using advanced search
technology;
. Confidential access by a customer to his or her individual medication
profiles at any time; and
. Ability to purchase and send products easily to others.
Selection. Because we do not have inventory or shelf-space limitations, we
believe we offer a significantly greater number of products than are available
in a typical traditional chain drugstore. Not only do we offer traditional
drugstore items (prescription drugs and medicine), we offer a broad selection
of health, beauty and wellness products. Many traditional chain drugstores do
not carry a wide range of these products. We believe that we offer the largest
selection of drugstore products available on the Internet, offering over
17,000 SKU's (excluding pharmacy items).
Information. Because the Web has become an increasingly important tool for
researching health care topics, we believe that providing useful information
is a critical aspect of enabling consumers to make informed purchasing
decisions. We have assembled a broad array of information on our Web site that
can enable our consumers to make informed purchasing decisions. This
information is produced both in-house and by third-party expert sources and is
focused on key aspects of our market segments. Consumers can either access our
information directly, though a number of content features on our site, or can
get free help directly from our advisors and experts by contacting them
through e-mail. Our information services include:
. Full Product Packaging Information. Almost every product available on
our site can be viewed in an expanded format where all package
information, including ingredients, directions and warnings, can be read
next to an enlarged photograph of the product. We believe we are the
only online retailer to provide all the information that is normally
found on the products' packaging.
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. Resource Center. Our resource center provides an easy way for customers
to find the information they need to make an informed purchasing
decision. It includes buying guides, reference information, shopping
advisors and beauty information.
. Easy Access to Drug Information and Personalized Pharmacy
Advice. Consumers can access our extensive drug information library
directly at our Web site, anytime at their own convenience. Patient
information and drugstore.com drug prices can be accessed via our drug
index. We provide information to help consumers understand generic drug
alternatives. We also provide health- and pharmacy-related editorial
content in our online resource center. Our pharmacists can provide
personal guidance by phone or e-mail to ensure that each customer
understands the correct usage, possible side effects and expected
beneficial outcomes of a prescription or an over-the-counter medication.
Communication. We can communicate with customers on a regular basis through
the convenience of e-mail. In addition to our Ask Your Pharmacist and Ask Your
Beauty Expert features, we offer the following means of communication with our
store:
. Reminders. We have the ability to e-mail a customer when a prescription
or non-prescription product is about to run out, reminding him or her to
order a replacement product or a prescription refill. Customers simply
tell us how often they need a product and we can send them a notice
before it is scheduled to run out.
. Specialized Customer Care. To ensure timely and high-quality customer
service, we have established specialty teams within the drugstore.com
customer care department. Our Web site, product and insurance
specialists respond to customer e-mails and calls that are related to
shopping orders, insurance, prices, and shipping. Once an order is made,
customers can view order-tracking information on our Web site.
. Personalized Communications. As customers use our Web site, they can
provide us with information about their buying preferences and habits.
We can use this information to develop personalized communications and
deliver useful newsletters, special offers and new product announcements
to our customers via e-mail and other means. In addition, we use e-mail
to alert customers to important developments and merchandising
initiatives.
Privacy. Consumers can shop in the privacy of their own homes or offices.
When shopping at a physical store, many shoppers feel embarrassed or
uncomfortable buying items that may reveal personally-sensitive aspects of
their health or lifestyle to store personnel or other shoppers. Shoppers at
drugstore.com avoid these problems. Through features such as Ask Your
Pharmacist and Ask Your Beauty Expert, consumers can obtain answers to
questions that they would otherwise be uncomfortable asking in public.
Business Strategy
Our objective is to become one of the world's leading retailers of health,
beauty, wellness, personal care and pharmacy products. To achieve our
objective, we intend to attract a growing base of customers and provide them a
superior shopping experience. Key elements of our strategy include:
Strengthen the drugstore.com brand. We intend to establish drugstore.com as
the leading consumer brand for buying health, beauty, wellness, personal care
and pharmacy products. To date, we have promoted our site on major Internet
destinations such as Amazon.com, America Online, Excite and Yahoo!, as well as
on other sites our customers are likely to visit, including ThirdAge,
InteliHealth, OnHealth, Medscape and Women.com. To further strengthen our
brand, we intend to cultivate a reputation for excellent quality of service
and continue to pursue an aggressive marketing strategy, both through the
Internet and traditional media.
Continuously Improve Our Web Store and Service. We seek to combine wide
product selection and helpful information with the unique aspects of the
Internet to deliver a convenient and personalized shopping experience. We
strive to develop long-term relationships with our customers to build loyalty
and encourage repeat purchases. To improve our site, we intend to continue to
expand our product selection and enhance our existing offerings
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such as shopping lists, individual medication profiles, e-mail reminders and
targeted special offers, as well as develop new personalization features as we
learn more about our customers and their needs.
Take Advantage of Repeat Purchasing Patterns. We intend to maximize repeat
purchases by our customers. To achieve this objective, we have developed
personalized tools and features that are designed to allow consumers to
satisfy their replenishment purchasing needs easily. We believe that our focus
on prescriptions for chronic conditions and products that must be regularly
replenished will allow us to benefit from repeat purchase patterns. We also
plan to continue to expand the functionality of our Web site to further
facilitate repeat purchases.
Maintain our Technology Focus and Expertise. We intend to use technology to
enhance our product and service offerings and take advantage of the benefits
of the Internet. We have developed a proprietary, scalable architecture
designed to support secure and reliable online shopping in an intuitive easy-
to-navigate format. We intend to seek ways to increase the efficiency of
pharmacy transaction processing and order fulfillment activities. We also
intend to develop features to further personalize the consumer's shopping
experience and enhance the customer's ability to find products and useful
information.
Ensure Quick and Efficient Distribution. We intend to continuously increase
the automation and efficiency of our fulfillment and distribution activities.
For example, we will seek ways to improve the efficiency of the prescription
fulfillment process in areas such as receiving prescriptions from doctors and
billing the customer or his or her insurance company. In addition, because we
currently outsource our distribution operations, we intend to work with our
distributors and vendors to find more ways to ensure prompt deliveries to our
customers. As part of this effort, we are currently reviewing and formulating
our long-term distribution strategy, which may include continuing to work with
our existing distribution partners, finding additional distribution partners,
or developing our own distribution centers. Our goals in this area include
reducing shipping costs, ensuring adequate future capacity, and ensuring
reliable and prompt deliveries to our customers.
Enhance and Form Key Relationships. We intend to enhance our existing
strategic relationships with leading product manufacturers, content providers
and insurance and pharmacy benefit management companies, as well as develop
new strategic relationships. We also believe relationships with leading
insurance and pharmacy benefit management companies will enhance customer
awareness of our site and enable an even greater number of our customers to
obtain reimbursement for their prescriptions filled through our store. We also
believe having strong relationships with product manufacturers will enable us
to provide more and better product information to our customers. In addition,
as part of our long-term distribution strategy, we may need to develop direct
manufacturer relationships to ensure the availability of adequate volumes of
products ordered by our customers. We also intend to continue to pursue key
relationships with leading providers of health, beauty and wellness
information. We believe this strategy will enhance our product offerings and
allow us to serve more customers.
Shopping at drugstore.com
Shoppers at drugstore.com see a home page that highlights our five product
departments, as well as editorial content and promotions. A shopper can browse
through the store by clicking on the permanently displayed department names,
move directly to a department's home page and view promotions and featured
products. All product lists allow a shopper to select products based on brand
or unique attributes of the category, such as tartar control or whitening for
toothpaste, or color for lipstick or eye shadow. Shoppers can also search the
site by entering text in the search box at the top of any page.
A customer can select products to purchase by clicking on the "buy" button
in the product list. The products are then added to the customer's shopping
bag. If a customer needs more information to make a purchase, we supply
interactive tools and content to aid in the decision, such as:
. Resource Center. Our resource center provides an easy way for customers
to find the information they need to make an informed purchasing
decision. Some of the components of the Resource Center include:
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Shopping Advisors. Our shopping advisors consist of interactive
tools to help consumers find the right products for their needs. We
currently feature a cold and cough advisor, a skin care advisor and
a vitamin and supplement advisor. Through an easy-to-use interactive
format, a customer provides information about what he or she needs,
and the advisor provides information that enables the customer to
choose the appropriate product.
Buying Guides. Our buying guides help consumers make informed buying
decisions. We currently feature buying guides on condoms, birth
control pills, cold and cough medicine, toothpaste, shampoo and
sunscreen. The buying guides provide helpful information about the
key benefits and characteristics of each of these products.
. Shopping List. Returning customers can easily view their previous
purchases by consulting their personalized shopping lists. The shopping
lists make buying regularly-replenished items even easier to purchase
because the customer can move products into their shopping bag directly
from their personalized shopping list, without browsing the site. If
requested by the customer, we also send e-mail reminders to consumers
when items on their lists are scheduled to run out and need to be
replenished.
. Ask Your Pharmacist. Our Ask Your Pharmacist feature allows customers to
ask our pharmacists questions about over-the-counter and wellness
products as well as prescription drugs.
. Ask Your Beauty Expert. Our Ask Your Beauty Expert feature allows
customers to ask our beauty experts questions about beauty needs. Our
beauty experts respond to questions via e-mail and seek to answer
questions within one business day.
. Getting Help. From every page of our Web site, a customer can click on a
"help" button to go to our customer service area. In this area, we
assist customers in searching for, shopping for, ordering and returning
our products. In addition, we provide customers with answers to the most
frequently asked questions and encourage our visitors to send us
feedback and suggestions via e-mail.
When the customer finishes selecting the desired products, he or she goes
to checkout. The only information required to checkout is an e-mail
identification, password (to protect account privacy), shipping address and a
valid credit card number. All of this information is maintained in a secure
format and remains available for the customer's future access.
Pharmacy Services
The pharmacy services at drugstore.com are provided by experienced clinical
professionals using advanced information technologies. We employ licensed
pharmacists who ensure private, personal customer service. Through our
prescription drug dispensing partner, RxAmerica, L.L.C., we are able to ship
prescription products to all 50 U.S. states. See "--Distribution and Order
Fulfillment" for a further description of our relationship with RxAmerica. In
addition, we are an active participant in the development of the National
Association of Boards of Pharmacy's Verified Internet Pharmacy Practice Sites
program. This new program will set standards for Internet pharmacies and
inform the public of those Web sites that have agreed to comply with these
standards.
Services
We seek to provide a high level of responsiveness and customer support. In
addition to our extensive drug information, specialized customer care features
and refill reminders, our pharmacy services include:
. Ask Your Pharmacist. Our Ask Your Pharmacist feature allows customers to
ask our pharmacists questions about medication, dosage, delivery
systems, common side effects and other information about prescription
drugs and health-related products. Our pharmacists seek to provide an
initial answer via e-mail within one business day.
. Private Access to drugstore.com Prescription History. Customers who fill
their prescriptions at drugstore.com can access their secure, individual
medication profiles at any time. A written patient
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information document accompanies all medications dispensed to
drugstore.com customers. This service enables customers to maintain a
record of their prescription purchases for clinical, insurance and tax
reporting purposes.
Filling Prescriptions
We only accept prescriptions from licensed health care providers. We do not
prescribe medications or otherwise practice medicine. We focus on dispensing
medications used by consumers on a chronic basis. Advanstar Communications,
Inc. estimates that such medications comprised approximately 73% of all
prescription drugs taken in the United States in 1998. For acute care needs, we
recommend that consumers go to a local pharmacy. We also do not dispense
certain controlled substances known as Schedule II pharmaceuticals at this time
because there are increased risks associated with their dispensation. We
accept, verify and cross-check prescriptions much like traditional retail and
mail service pharmacies:
. Accepting Prescriptions. For new prescriptions, customers can direct
their physicians to call or fax their prescriptions to us at 1-800-
DRUGSTORE, or request that we contact their physician directly to obtain
prescription information. For transfers, customers can direct their
pharmacy to transfer their prescriptions or request us to contact their
pharmacy to transfer the prescription to drugstore.com. For refills,
customers may order directly from our Web site or respond to one of our
e-mail refill reminders.
. Verifying Prescriptions. Our pharmacists verify the validity and
completeness of prescription drug orders utilizing the same methodology
as community-based pharmacists, which may include contacting the
physician, pharmacist or consumer.
. Drug Utilization Review. To use our prescription drug services, all
customers are asked to provide our pharmacists with information
regarding drug allergies, current medical conditions and current
medications. Our pharmacists use advanced technologies to cross-check
every prescription against the information we receive from the customer
for drug-, disease- and allergy-drug interactions.
Payment
Customers may pay for their prescriptions with cash or by entering insurance
information that shows that they are covered by a managed care organization,
insurance plan or pharmacy benefit management company with whom we have a
contract. To date, a substantial majority of our prescriptions have been
submitted by cash paying customers.
Marketing and Promotion
Our marketing and promotion strategy is designed to build brand recognition,
increase customer traffic to our store, add new customers, build strong
customer loyalty, maximize repeat purchases and develop incremental revenue
opportunities.
Our advertising campaigns target both online and traditional audiences and
are designed to promote an enhanced customer experience. Our online advertising
efforts have been focused on highly-visited Internet portals, health-related
Web sites and other highly-visited Web sites. We also have a strategic
relationship with Amazon.com whereby Amazon.com promotes our Web site. We
believe that the marketing benefits of our relationship with Amazon.com include
their promotion of our site and the beneficial aspects of our being associated
with one of the premier e-commerce companies. In addition, we advertise on
America Online, Excite and Yahoo!, as well on other sites where our customers
are likely to visit, including ThirdAge, InteliHealth, OnHealth, Medscape, and
Women.com. We have also created inbound links that connect directly to our Web
site from other sites. We intend to continue to use the unique resources of the
Internet as a means of marketing in an effort to drive traffic and repeat
purchases. We have also used traditional marketing and promotion efforts,
including special product promotions, print advertising in USA Today,
promotional press releases, and public appearances by our executives. We intend
to further intensify our advertising efforts through traditional media channels
to continue building our brand recognition.
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Merchandising
We believe that the breadth and depth of our product selection, together
with the flexibility of our online store and our range of helpful and useful
shopping services, enables us to pursue a strong merchandising strategy.
Aspects of this strategy include:
Easy Access to a Wide Selection of Products. Our easy-to-use Web site and
robust search capabilities enable customers to browse our product selection by
brand, age, product and price, as well as combinations of these categories.
For example, a customer can easily search for all aspirin products or for
Tylenol for children without consulting store personnel or searching
traditional store shelves. Combination searching allows customers to find
desired items easily among our large selection of products.
Dynamic Product Offering. Our online store gives us flexibility to change
featured products or promotions without having to alter the physical layout of
a store. We are also able to dynamically adjust our product mix in response to
changing customer demand, new seasons or upcoming holidays and introduce
special promotions.
Extensive Product Information. A key component of our merchandising
strategy is the ability to use information as a tool for consumers. We combine
manufacturer information with editorial information or buying guides to allow
customers to make more informed buying decisions and to more easily comparison
shop for products. In addition, our Web site allows us to market products to
customers in many different ways, such as by product category or by product
characteristics, such as price or ingredients.
Targeted Promotions. We have the ability to offer products to individual
customers based on their affinities or conditions. In addition, we can present
merchandise to a customer tailored to personal interests and shopping
histories. We also cross-sell a brand across our departments to promote
impulse buying by customers. For example, we might promote mothers' products
in our Pregnancy and Infant Center.
Sampling. We have programs that allow us to provide samples of products to
customers as trials. We may also use sampling to work with manufactures to
introduce new products.
Editorial
Our editorial strategy is to present helpful, value-added information to
consumers in a readable, user-friendly format. Our editors create, source and
maintain health, beauty, wellness, personal care and pharmacy related content
for our Web site. Our editors assemble content to provide both reference and
product-related information. To date, we have established relationships with
several leading information providers who provide content for our site. We
will continue to direct our editorial efforts toward enhancing existing
features as well as sourcing new content to help our customers. For example,
we expect to expand our health and affinity centers beyond our first center,
the Pregnancy and Infant Center, to new centers focused on specific interest
areas such as allergy, fitness or diabetes. We also plan to expand the health
and affinity centers to provide consumers a forum to provide feedback or
recommendations on products.
Distribution and Order Fulfillment
We currently outsource our distribution and order fulfillment operations
through Walsh Distribution, RxAmerica and other vendors. We carry minimal
inventory relative to our total sales and rely to a large extent on rapid
distribution from these vendors.
Walsh Distribution accounted for 82% of our cost of sales for health,
beauty, wellness and personal care products from inception to April 4, 1999.
Walsh packages for shipment all customer orders, including drugstore.com
inventory purchased directly from other vendors that Walsh holds for us at
their facility. We staff our own customer care specialists at the Walsh
facility to monitor quality control and order fulfillment. Walsh provides
inventory and services under a supply and services agreement that has a three
year term (through January 2002). This agreement may be terminated earlier by
us upon accelerated payment of minimum fees that would not exceed
approximately $2,500,000.
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We purchase all of our pharmaceutical products from one vendor, RxAmerica,
in accordance with a pharmacy services agreement. Our pharmacists perform all
aspects of the prescription fulfillment process and all aspects of customer
service, except for the physical filling and packaging of prescription drugs,
which is performed by RxAmerica pharmacists. We staff our own pharmacists,
pharmacy technicians and customer care specialists at the RxAmerica facility.
As of April 30, 1999, RxAmerica employed approximately 25 pharmacists to fill
and package prescriptions and help manage quality assurance. RxAmerica is
licensed and in good standing in the State of Texas and in every other state
as a nonresident pharmacy, as required by law. The pharmacy services agreement
with RxAmerica has a one-year term (to February 2000) and will automatically
renew for additional one-year terms unless either party notifies the other
that it wishes to terminate the agreement at the end of the initial term or a
successive term.
Our warehouse management system, which is integrated with RxAmerica's and
Walsh's information systems, provides us real-time data on inventory
receiving, shipping, inventory quantities and inventory location. This enables
us to notify customers on a real-time basis if the product is in stock. In
addition, we offer an order tracking system for our customers on our Web site.
We offer a variety of shipping options, including next-day delivery for
orders received during the business week. We ship to anywhere in the United
States served by the United Parcel Service or the U.S. Postal Service.
Priority orders are flagged and expedited through our fulfillment processes.
For non-prescription product orders received before 9:00 p.m. Central time
Monday through Friday or before 5:00 p.m. Central time on Saturday, our goal
is to ship the product the same day. For prescription products, our goal is to
ship the product as soon as the prescription has been verified and our
pharmacists have completed drug utilization review.
Customer Service
We believe that a high level of customer service and support is critical to
retaining and expanding our customer base. Our customer service
representatives are currently available from 6:00 a.m. to 10:00 p.m. Pacific
time, Monday to Friday, on Saturdays from 9:00 a.m. to 6:00 p.m. Pacific time,
and on Sundays from 9:00 a.m. to 4:00 p.m. Pacific time to provide assistance
via e-mail or phone. We strive to answer all customer inquiries within 24
hours. Our customer service representatives handle questions about orders and
how to use our Web site, assist customers in finding desired products and
register customers' credit card information over the telephone. Our customer
service representatives are a valuable source of feedback regarding user
satisfaction. Our Web site also contains a customer service page that outlines
store policies and provides answers to frequently asked questions. In
addition, our pharmacists can provide advice to our customers about
medication, dosage, delivery systems, common side effects and other
information about prescription drugs.
Operations and Technology
We have implemented a broad array of scalable services and systems for site
management, searching, customer interaction, transaction processing and
fulfillment. We use a set of software applications for:
. Accepting and validating customer orders;
. Organizing, placing and managing orders with vendors and fulfillment
partners;
. Receiving product and assigning it to customer orders; and
. Managing shipment of products to customers based on various ordering
criteria.
These services and systems use a combination of our own proprietary
technologies and commercially available, licensed technologies. We focus our
internal development efforts on creating and enhancing the specialized,
proprietary software that is unique to our business. We also have a technology
license agreement with Amazon.com under which we mutually agreed to license
certain existing and future technology used in the operation of our Web sites
as long as we do not use the technology to compete with each other. We
currently are
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not using any Amazon.com technology but could do so in the future if it would
benefit us. See "--Relationship with Amazon.com" for a further description of
our agreements with Amazon.com.
Our core merchandise catalog, customer interaction, order collection,
fulfillment and back-end systems are proprietary to drugstore.com, but are
available to Amazon.com under our agreement with them. Our software platform
and architecture are integrated with an Oracle database system. The system was
designed to include an open application protocol interface that provides real-
time connectivity to the distribution center systems for pharmacy and the non-
pharmacy products. These include a perpetual inventory system, real-time order
tracking system, executive information system and replenishment system. Our
Internet servers use Verisign digital certificates to help conduct secure
communications and transactions. Our systems infrastructure is hosted at
Exodus Communications in Tukwila, Washington, which provides communication
lines from multiple providers including UUNet and AT&T, as well as 24 hour
monitoring and engineering support. Exodus has its own generators and multiple
back up systems in Tukwila.
We maintain customer care centers in our Bellevue, Washington office and in
our prescription distribution facility in Fort Worth, Texas and use a real
time interactive voice response system with transfer capabilities between our
customer care centers in Bellevue, Washington and Fort Worth, Texas. We also
operate a toll-free number, 1-800-DRUGSTORE, through which customers can place
orders and receive information. In addition, customers who choose not to
transmit their credit card information via the Internet have the option of
submitting their credit card information by telephone.
We incurred $2.2 million in product development expenses in the period from
inception to December 31, 1998 and $2.7 million during the quarter ended April
4, 1999. We anticipate that we will continue to devote significant resources
to product development in the future as we add new features and functionality
to our Web site.
Competition
The online commerce market is new, rapidly evolving and intensely
competitive. In particular, the health, beauty, wellness, personal care and
pharmacy categories are intensely competitive and are also highly fragmented,
with no clear dominant leader in any of our market segments. Our competitors
can be divided into several groups: chain drugstores, such as Walgreen's,
RiteAid, CVS and Eckerd; mass market retailers such as Wal-mart, Kmart and
Target; supermarkets, such as Safeway, Albertson's and Kroger; warehouse
clubs; online retailers of health, beauty, wellness, personal care and/or
pharmaceutical products; mail order pharmacies; prescription benefits
managers, such as Express Scripts and Merck-Medco; Internet-portals and online
service providers that feature shopping services such as America Online,
Yahoo!, Excite and Lycos; cosmetics departments at major department stores,
such as Nordstrom, Macy's and Bloomingdale's; and hair salons. Each of these
competitors operate within one or more of the health, beauty, wellness,
personal care and pharmacy segments.
We believe that the following are principal competitive factors in our
market:
. Brand recognition;
. Selection;
. Convenience;
. Price;
. Web site performance and accessibility;
. Customer service;
. Quality of information services; and
. Reliability and speed of order shipment.
Many of our current and potential traditional store-based and online
competitors have longer operating histories, larger customer or user bases,
greater brand recognition and significantly greater financial, marketing
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and other resources than we do. Many of these current and potential
competitors can devote substantially more resources to their Web site and
systems development than we can. In addition, larger, well-established and
well-financed entities may acquire, invest in or form joint ventures with
online competitors or drugstore retailers as the use of the Internet and other
online services increases.
Some of our competitors may be able to secure products from vendors on more
favorable terms, fulfill customer orders more efficiently and adopt more
aggressive pricing or inventory availability policies than we can. Traditional
store-based retailers also enable customers to see and feel products in a
manner that is not possible over the Internet. Traditional store-based
retailers can also sell products to address immediate, acute care needs, which
we and other online sites cannot do. Some of our competitors such as
Walgreen's and Wal-mart have significantly greater experience in selling
drugstore products.
Relationship with Amazon.com
We have a strategic relationship with Amazon.com whereby Amazon.com
promotes our Web site. We believe that the benefits of our relationship with
Amazon.com include their promotion of our site and the beneficial aspects of
our being associated with one of the premier e-commerce companies. Amazon.com
is our largest shareholder, and Jeff Bezos, Amazon.com's President, Chief
Executive Officer and Chairman of the Board, is a member of our Board of
Directors. As part of our relationship with Amazon.com, we entered into a
Technology License and Marketing Agreement on August 10, 1998. This agreement
extends for ten years and can be terminated for breach or in the event that we
are acquired by a competitor of Amazon.com. This agreement contains provisions
generally relating to the sharing of technology, technical support and co-
marketing rights; however, we have decided to develop our own technology and
there has been no exchange of technology by either party to date.
Specifically, this agreement provides for the license of substantially all of
each company's technology to the other for use within their respective
businesses that may be developed through August 10, 2008. Neither company may
use the other's technology to compete against the other. In addition, each
party has committed to providing the other with promotional placements through
the term of the agreement as mutually agreed upon. In addition, we agreed not
to place advertisements competitive to Amazon.com's business on our site. We
have also agreed not to sell advertising on our Web site to, link our Web site
to, or promote on our Web site any company that sells products or services
competitive with those which Amazon.com offers or which Amazon.com is
preparing to produce or market. We are currently restricted with respect to
books, music products, video products, gift centers, and auctions. If
Amazon.com expands into other areas this may further limit the companies we
can promote on our Web site. If we were acquired by an Amazon.com competitor
and Amazon.com did not vote in favor of the transaction, we would lose our
rights to promotional placements on Amazon.com's website, to restrict
Amazon.com's ability to compete in the online drugstore business, and to use
Amazon.com's technology (if we are then using any). See "Executive Officers
and Directors," "Certain Relationships and Related Transactions" and
"Principal Stockholders" for further background on Amazon's relationship with
us.
Government Regulation
Our business is subject to extensive federal, state and local regulations,
many of which are specific to pharmacies and the sale of over-the-counter
drugs. For example, pursuant to the Omnibus Budget Reconciliation Act of 1990
and related state and local regulations, our pharmacists are required to offer
counseling, without additional charge, to our customers about medication,
dosage, delivery systems, common side effects, adverse effects or interactions
and therapeutic contraindications, proper storage, prescription refill, and
other information deemed significant by the pharmacists. We are also subject
to federal, state and local licensing and registration regulations with
respect to, among other things, our pharmacy operations.
We are subject to requirements under the Controlled Substances Act and
federal Drug Enforcement Agency regulations, as well as related state and
local laws and regulations, relating to our pharmacy operations, including
registration, security, recordkeeping, and reporting requirements related to
the purchase, storage and dispensing
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of controlled substances, prescription drugs, and certain over-the-counter
drugs. Under the Food, Drug & Cosmetic Act of 1938 (the FDCA), a drug
recognized in Homeopathic Pharmacopeia of the United States must meet all
compendial standards, or it will be considered misbranded or adulterated.
Because we sell homeopathic remedies, we are required to comply with the FDCA.
The U.S. House of Representatives Committee on Commerce and the General
Accounting Office are currently investigating online pharmacies and online
prescribing, especially focused on those who prescribe drugs online and on
pharmacies that fill invalid prescriptions, including those that are written
online. The committee requested that the General Accounting Office undertake a
formal review of a number of issues pertaining to online pharmacies, including
an assessment of mechanisms to ensure that online pharmacies are obeying the
various state and federal regulations for the industry. Because we make every
effort only to fulfill valid prescriptions and we do not prescribe drugs, we
believe that our business will not be negatively affected by any regulations
that result from the investigations. However, we believe that any regulations
resulting from the investigations will likely result in increased reporting
and monitoring requirements.
The National Association of Boards of Pharmacy (NABP), a coalition of state
pharmacy boards, is in the process of developing a program, the Verified
Internet Pharmacy Practice Sites (VIPPS), as a model for self-regulation for
online pharmacies. We are assisting the NABP with the development of the VIPPS
program and intend to comply with its criteria for certification.
Legislation and regulations currently being considered at the federal and
state level could affect our business, including legislation or regulations
relating to confidentiality of patient records, electronic access and storage.
In addition, various state legislatures are considering new legislation
related to the regulation of nonresident pharmacies. The Health Insurance
Portability and Accountability Act of 1996 mandates the use of standard
transactions, standard identifiers, security and other provisions by the year
2000. Regulations have been proposed to implement these requirements, and we
are designing our applications to comply with the proposed regulations.
Although the FDA does not regulate the practice of pharmacy, other than
pharmacy compounding, which we do not currently engage in, FDA regulations
impact some of our product and service offerings because the FDA regulates
drug advertising and promotion, including direct-to-consumer advertising, done
by or on behalf of drug manufacturers and marketers. As we expand our product
and service offerings, more of our products and services will likely be
subject to FDA regulation.
The inclusion of prescription drugs as a Medicare benefit has been the
subject of numerous bills in the U.S. Congress. Should legislation on
prescription drug coverage for Medicare recipients be enacted into law, we
would be subject to compliance with any corresponding rules and regulations.
Until recently, Health Care Financing Administration guidelines prohibited
transmission of Medicare eligibility information over the Internet. We are
also subject to extensive regulation relating to the confidentiality
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and release of patient records. Additional legislation governing the
distribution of medical records exists or has been proposed at both the state
and federal level.
For a description of the risks we face with regard to these government
regulations, please see "Risk Factors--Government Regulation of the Health
Care and Pharmacy Industries Could Affect Our Business."
Intellectual Property
We regard the protection of our copyrights, service marks, trademarks,
trade dress and trade secrets as critical to our future success and rely on a
combination of copyright, trademark, service mark and trade secret laws and
contractual restrictions to establish and protect our proprietary rights in
products and services. We have entered into confidentiality and invention
assignment agreements with our employees and contractors, and nondisclosure
agreements with our vendors, fulfillment partners and strategic partners to
limit access to and disclosure of our proprietary information. We cannot be
certain that these contractual arrangements or the other steps taken by us to
protect our intellectual property will prevent misappropriation of our
technology. We have licensed in the past, and expect that we may license in
the future, certain of our proprietary rights, such as trademarks or
copyrighted material, to third parties. While we attempt to ensure that the
quality of the drugstore.com products brand is maintained by such licensees,
we cannot assure that such licensees will not take actions that might hurt the
value of our proprietary rights or reputation. We also rely on technologies
that we license from third parties, such as Oracle and Microsoft, the
suppliers of key database technology, the operating system and specific
hardware components for our service. We cannot be certain that these third-
party technology licenses will continue to be available to us on commercially
reasonable terms. The loss of such technology could require us to obtain
substitute technology of lower quality or performance standards or at greater
cost, which could harm our business.
We have filed applications for the registration of some of our trademarks
and service marks in the U.S. and in some other countries, including for
drugstore.com(TM), although we have not secured registration of any of our
marks to date. We may be unable to secure such registered marks. It is also
possible that our competitors or others will use marks similar to ours, which
could impede our ability to build brand identity and lead to customer
confusion. In addition, there could be potential trade name or trademark
infringement claims brought by owners of other registered trademarks or
trademarks that incorporate variations of the term drugstore.com(TM). Any
claims or customer confusion related to our trademark, or our failure to
obtain trademark registration, would negatively affect our business. In
addition, the laws of some foreign countries do not protect our proprietary
rights to the same extent as do the laws of the U.S., and effective copyright,
trademark and trade secret protection may not be available in such
jurisdictions. Our efforts to protect our intellectual property rights may not
prevent misappropriation of our content. Our failure or inability to protect
our proprietary rights could substantially harm our business.
Charitable Contributions
Prior to completion of this offering, we may donate approximately 200,000
shares of our common stock to a foundation to be established by us. The
foundation will make grants to charitable organizations. We intend to involve
our employees in determining the charitable purposes to which proceeds from
the sale of these shares will be devoted.
Employees
As of April 30, 1999, we had 171 full-time employees. None of our employees
is represented by a labor union. We have not experienced any work stoppages
and consider our employee relations to be good.
Facilities
Our principal executive offices are located in Bellevue, Washington, where
we lease approximately 55,649 square feet under a lease that expires in July
2005. We also lease an approximately 18,750 square feet facility in Redmond,
Washington, which we vacated after moving to our new Bellevue facility, under
a lease that expires in September 2003. We intend to sublease the Redmond
facility, if possible.
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MANAGEMENT
Executive Officers and Directors
The following table sets forth information with respect to our executive
officers and directors as of May 19, 1999:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Peter M. Neupert(1)..... 43 President, Chief Executive Officer and Director
Suzan K. DelBene........ 37 Vice President, Marketing and Store Development
Kal Raman............... 30 Senior Vice President, Technology and Operations
David E. Rostov......... 33 Vice President and Chief Financial Officer
Mark L. Silverman....... 34 Vice President, Health Services, General Counsel and Secretary
Jed A. Smith............ 33 Vice President, Strategic Partnerships and Director
Jeffrey P. Bezos........ 35 Director
Brook H. Byers(2)....... 50 Director
L. John Doerr........... 48 Director
Howard Schultz(1)....... 46 Director
</TABLE>
- --------
(1) Member of compensation committee
(2) Member of audit committee
Peter M. Neupert has served as a director and the President and Chief
Executive Officer of drugstore.com since July 1998. From March 1987 to July
1998, he worked for Microsoft Corporation in several positions, most recently
as Vice President of News and Publishing for Microsoft's interactive media
group. Mr. Neupert holds an M.B.A. from the Amos Tuck School of Business at
Dartmouth College and a B.A. from Colorado College.
Suzan K. DelBene has served as Vice President, Marketing and Store
Development of drugstore.com since September 1998. From June 1989 to August
1998, she worked at Microsoft Corporation in several positions, most recently
as Director of Marketing and Business Development in Microsoft's interactive
media group. Ms. DelBene holds an M.B.A. from the University of Washington and
a B.A. from Reed College.
Kal Raman (formerly known as Kalyanaraman Srinivasan) served as Chief
Information Officer and Vice President, Technology of drugstore.com from
August 1998 to May 1999 and as Vice President, Technology and Operations from
March 1999 to May 1999. Since May 1999, Mr. Raman has served as Senior Vice
President, Operations and Technology of drugstore.com. From March 1998 to
August 1998, Mr. Raman served as the Chief Information Officer and Vice
President of Nations Rent and from February 1997 to March 1998, he served as
Senior Director, Information Systems of Blockbuster Inc. From May 1992 to
February 1997, Mr. Raman served as Director, International Division of Wal-
mart Stores Inc.
David E. Rostov has served as Vice President and Chief Financial Officer of
drugstore.com since January 1999. From 1996 to January 1999, he worked for
Nextel International, Inc. as Chief Financial Officer. From 1992 to 1995, he
served in various capacities at McCaw Cellular Communications, Inc. Mr. Rostov
holds an M.B.A. and a Master's in Public Policy from the University of Chicago
Graduate School of Business and a B.A. from Oberlin College.
Mark L. Silverman has served as Secretary of drugstore.com since our
inception in April 1998, and as Vice President, Health Services and General
Counsel of drugstore.com since January 1999. From December 1995 to January
1999, he was a lawyer with the Venture Law Group, A Professional Corporation,
becoming a director in January 1998. Mr. Silverman was an attorney with
Heller, Ehrman, White & McAuliffe from December 1992 to November 1995. Mr.
Silverman holds a J.D. from the University of California, Los Angeles and a
B.A. from the University of California, Berkeley.
Jed A. Smith, a founder of drugstore.com, has served as a director and Vice
President of Strategic Partnerships since our inception in April 1998. In
1994, he founded Cybersmith and served as Vice President of Sales and
Marketing through 1998. Mr. Smith holds an M.B.A. from Harvard University
Graduate School of Business and a B.A. from Middlebury College.
48
<PAGE>
Jeffrey P. Bezos has served as a director of drugstore.com since August
1998. Mr. Bezos, a founder of Amazon.com, has served as President and Chairman
of the Board of Directors of Amazon.com since its inception in 1994, Chief
Executive Officer of Amazon.com since May 1996 and Treasurer and Secretary of
Amazon.com from May 1996 to March 1997. From December 1990 to June 1994, Mr.
Bezos was employed by D.E. Shaw & Co., a Wall Street investment firm, becoming
Senior Vice President in 1992. From April 1988 to December 1990, Mr. Bezos was
employed by Bankers Trust Company, becoming Vice President in February 1990.
Mr. Bezos received his B.S. in Electrical Engineering and Computer Science
from Princeton University.
Brook H. Byers has served as a director of drugstore.com since May 1998.
Mr. Byers is a partner of Kleiner Perkins Caufield & Byers, a private venture
capital firm, and has been a technology venture capital investor since 1972.
He has served on the Board of Directors of over twenty companies, and he is
currently a director of Axys Pharmaceuticals, Nanogen, Chemdex.com and several
private companies. He also served as the founding President and Chairman of
Idec Pharmaceuticals, Ligand Pharmaceuticals, Athena Neurosciences and Insite
Vision Opthalmics. Mr. Byers serves on the boards of the California Healthcare
Institute and the Foundation of the University of California at San Francisco
Medical Center. Mr. Byers received a degree in Electrical Engineering from
Georgia Institute of Technology and an M.B.A. from the Stanford Graduate
School of Business.
L. John Doerr has served as a director of drugstore.com since November
1998. Mr. Doerr has been a general partner of Kleiner Perkins Caufield &
Byers, a private venture capital firm, since September 1980. In 1974, he
joined Intel Corporation and held various engineering, marketing and
management assignments. Mr. Doerr is also a director of Amazon.com, @Home
Networks, Healtheon Corporation, Intuit, Inc., Platinum Software, Inc., and
SunMicrosystems, as well as several private companies. Mr. Doerr received his
M.E.E. and B.S.E.E. from Rice University and his M.B.A. from Harvard
University Graduate School of Business.
Howard Schultz has served as a director of drugstore.com since November
1998. Mr. Schultz, the founder of Starbucks Corporation, has served as
Chairman of the Board and Chief Executive Officer of Starbucks since its
inception in 1985. From 1985 to June 1994, Mr. Schultz also served as
President of Starbucks. Mr. Schultz is one of two founding members of Maveron
LLC, a company providing advisory services to consumer-based businesses, and
is one of two members of a limited liability company that serves as a general
partner of its affiliated venture capital fund, Maveron Equity Partners, L.P.
Mr. Schultz is a governor on the National Association of Securities Dealers,
Inc. Board of Governors, and he is a director of Ebay, Inc. Mr. Schultz
received his B.S. degree from Northern Michigan University.
Our board of directors currently consists of eight members, including two
vacancies. Until the closing of this offering, Amazon.com has the right to
appoint another director to our board. In addition, under the terms of the
voting agreement dated May 19, 1999, upon the conversion of Vulcan Ventures'
convertible promissory note into shares of our Series D preferred stock,
Vulcan Ventures will have the right to nominate one member to our board of
directors.
Each director is elected for a period of one year at our annual meeting of
stockholders and serves until the next annual meeting or until his successor
is duly elected and qualified. The board of directors elects executive
officers on an annual basis. Executive officers serve until their successor
has been duly elected and qualified. There are no family relationships among
any of the directors, officers or key employees of drugstore.com.
Board Committees
The board of directors has a compensation committee and an audit committee.
Compensation Committee. The compensation committee of the board of
directors reviews and makes recommendations to the board regarding all forms
of compensation and benefits provided to our officers. In addition, the
compensation committee establishes and reviews general policies relating to
the compensation and benefits of all of our employees. The current members of
the compensation committee are Peter M. Neupert and
49
<PAGE>
Howard Schultz. Since the current members of the compensation committee do not
meet the definition of "non-employee directors" for purposes of SEC Rule
16(b)(3), the full board of directors will continue to approve stock option
grants for our officers in order to qualify the option grants for an exemption
from short-swing trading rules.
Audit Committee. The audit committee of the board of directors reviews and
monitors our internal accounting procedures, corporate financial reporting,
external and internal audits, the results and scope of the annual audit and
other services provided by our independent auditors, and our compliance with
legal matters that have a significant impact on our financial reports. Brook
H. Byers is the only current member of the audit committee.
Compensation Committee Interlocks and Insider Participation
The board of directors established its compensation committee in May 1999.
Prior to establishing the compensation committee, the board of directors as a
whole performed the functions delegated to the compensation committee. No
interlocking relationship exists between our board of directors or our
compensation committee and the board of directors or compensation committee of
any other company, and no interlocking relationship existed in the past.
Director Compensation
We currently do not provide any cash compensation to our directors for
their service as members of the board of directors, although we do reimburse
the directors for certain expenses in connection with attendance at board and
committee meetings. Under our 1998 stock plan, nonemployee directors are
eligible to receive stock option grants at the discretion of the board or any
other administrator of the plan. See "--Stock Plans" for a description of
option grants under the 1998 stock plan.
Executive Compensation
The following table sets forth the compensation received for services
rendered to drugstore.com for the fiscal year ended December 31, 1998 by our
Chief Executive Officer and our only other executive officer who earned more
than $100,000 in salary and bonus during the fiscal year ended December 31,
1998.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
------------------------------------- Securities
Other Annual Underlying All Other
Name and Principal Position Salary ($) Bonus ($) Compensation ($) Options (#) Compensation($)
- --------------------------- ---------- --------- ---------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Peter M. Neupert........ $107,692 -- -- -- $ 170(1)
President and Chief
Executive Officer
Kal Raman............... $ 60,577 $120,000 -- 150,000 $5,895(2)
Senior Vice President,
Technology and
Operations, Operations
</TABLE>
- --------
(1) Represents premium paid for term life insurance for the benefit of Peter
M. Neupert.
(2) Represents reimbursement for relocation expenses and premium paid for term
life insurance for the benefit of Kal Raman.
Option Grants
The following table provides summary information regarding stock options
granted to our Chief Executive Officer and our only other officer earning more
than $100,000 in salary and bonus during the fiscal year ended December 31,
1998.
50
<PAGE>
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Individual Grants
---------------------
Potential Realizable
% of Total Value at Assumed
Number of Options Annual Rates of
Securities Granted to Stock Appreciation
Underlying Employees Exercise For Option Term ($)
Options During Price Expiration ---------------------
Name Granted(#) Period(1) ($/share) Date 5% 10%
---- ---------- ---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Peter M. Neupert........ -- -- -- -- -- --
Kal Raman............... 150,000 10.1% $0.04 9/01/2008 3,773 9,562
</TABLE>
- --------
(1) Based on an aggregate of 1,480,584 shares underlying options granted by
drugstore.com during the fiscal year ended December 31, 1998 to our
employees and consultants.
Option Exercises and Holdings
The following table provides summary information with respect to our Chief
Executive Officer and our only other officer earning more than $100,000 in
salary and bonus during the 1998 fiscal year concerning option exercises for
the fiscal year ended December 31, 1998 and exercisable and unexercisable
options held as of December 31, 1998:
Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options at
Shares December 31, 1998 (#) December 31, 1998 ($)(1)
Acquired on Value ------------------------- -------------------------
Name Exercise (#) Realized ($)(1) Exercisable Unexercisable Exercisable Unexercisable
---- ------------ --------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Peter M. Neupert........ -- -- -- -- -- --
Kal Raman............... -- -- -- 150,000 -- $61,500
</TABLE>
- --------
(1) Based on a value of $0.45 per share, the fair market value of our common
stock as of December 31, 1998 as determined by the board of directors,
minus the per share exercise price, multiplied by the number of shares
issued upon exercise of the option.
Stock Plans
1998 Stock Plan. Our 1998 stock plan provides for the grant of incentive
stock options to employees and nonstatutory stock options and stock purchase
rights to employees, directors and consultants to acquire shares of common
stock. The purposes of the 1998 stock plan are to attract and retain the best
available personnel, to provide additional incentives to our employees and
consultants and to promote the success of our business. Our board of directors
originally adopted the 1998 stock plan in July 1998 and our stockholders
approved the plan in July 1998. The plan was amended in January 1999 to
increase the total number of shares of common stock reserved for issuance. The
1998 stock plan was amended by the board a second time in April 1999 to
increase the total number of shares of common stock reserved for issuance to
7,827,000 shares and to incorporate certain other changes. We will submit the
amendment to the 1998 stock plan for approval by our stockholders prior to the
completion of this offering. Unless terminated earlier by the board of
directors, the 1998 stock plan will terminate in July 2008. As of May 19,
1999, options to purchase 3,068,684 shares of common stock were outstanding at
a weighted average exercise price of $1.76 per share, 8,000 shares had been
issued pursuant to restricted stock purchase agreements, no shares had been
issued upon exercise of outstanding options, and 4,758,316 shares remained
available for future grant.
The 1998 stock plan may be administered by the board of directors, a
committee appointed by the board of directors or a combination of the board of
directors and a committee, as determined by the board of directors.
51
<PAGE>
The administrator determines the terms of options granted under the 1998 stock
plan, including the number of shares subject to the option, exercise price,
term and exercisability. In no event, however, may an individual receive
option grants for more than 2,500,000 shares of common stock under the 1998
stock plan in any fiscal year. Incentive stock options granted under the 1998
stock plan must have an exercise price of at least 100% of the fair market
value of the common stock on the date of grant and at least 110% of such fair
market value in the case of an optionee who holds more than 10% of the total
voting power of all classes of our stock. Nonstatutory stock options granted
under the 1998 stock plan will have an exercise price as determined by the
administrator. Payment of the exercise price may be made in cash or such other
consideration as determined by the administrator.
The administrator determines the term of options, which may not exceed 10
years or 5 years in the case of an incentive stock option granted to a holder
of more than 10% of the total voting power of all classes of our stock. No
option may be transferred by the optionee other than by will or the laws of
descent or distribution, provided, however, that the administrator may in its
discretion provide for the transferability of nonstatutory stock options
granted under the 1998 stock plan if the common stock is listed or approved
for listing on a national securities exchange or designated as a national
market system security by the National Association of Securities Dealers, Inc.
Each option may be exercised during the lifetime of the optionee only by such
optionee or permitted transferee. The administrator determines when options
become exercisable. Options granted under the 1998 stock plan generally must
be exercised within 3 months after the termination of the optionee's status as
an employee, director or consultant of drugstore.com, or within 6 months if
such termination is due to the death or disability of the optionee, but in no
event later than the expiration of the option's term. Options granted under
the 1998 stock plan generally vest over a four-year or five-year period at a
rate of 1/4 of the total number of shares subject to the option twelve months
after the date of grant, with the remaining shares vesting in equal
installments at the end of each six month period thereafter.
In the event of our merger with or into another corporation, the successor
corporation may assume each option and outstanding stock purchase right or may
substitute an equivalent option or stock purchase right. However, if the
successor corporation does not agree to this assumption or substitution, the
option or stock purchase right will terminate. The board of directors has the
authority to amend or terminate the 1998 stock plan provided that no action
that impairs the rights of any holder of an outstanding option may be taken
without the holder's consent. In addition, we will obtain requisite
stockholder approval for any action requiring stockholder approval under the
applicable law.
In addition to stock options, the administrator may issue stock purchase
rights under the 1998 stock plan to employees, directors and consultants. The
administrator determines the number of shares, price, terms, conditions and
restrictions related to a grant of stock purchase rights and the purchase
price of a stock purchase right granted under the 1998 stock plan. The
administrator also determines the period during which the stock purchase right
is held open, but in no case shall such period exceed 30 days. Unless the
administrator determines otherwise, the recipient of a stock purchase right
must execute a restricted stock purchase agreement granting an option to
repurchase the unvested shares at cost upon termination of such recipient's
relationship with us.
1999 Employee Stock Purchase Plan. Our board of directors adopted the 1999
employee stock purchase plan in April 1999; we will submit the plan to our
stockholders for approval prior to the completion of this offering. A total of
500,000 shares of common stock has been reserved for issuance under the
purchase plan plus an annual increase on the first day of each of our fiscal
years beginning in 2000, 2001, 2002, 2003 and 2004 equal to the lesser of the
following:
. 500,000 shares;
. three percent (3%) of our shares outstanding on the last day of the
immediate preceding fiscal year; or
. such lesser number of shares as is determined by the board.
The purchase plan, which is intended to qualify under Section 423 of the
Internal Revenue Code, will be implemented by an offering period commencing on
the date of the closing of this offering and ending on January 31, 2000. Each
subsequent offering period will have a duration of six months. Each offering
period after the first
52
<PAGE>
offering period will commence on February 1 and August 1 of each year. The
board of directors or a committee appointed by the board will administer the
purchase plan. Employees, including officers and employee directors, of
drugstore.com or of any majority-owned subsidiary designated by the board, are
eligible to participate in the purchase plan if they are employed by
drugstore.com or any such subsidiary for at least 20 hours per week and more
than 5 months per year. The purchase plan permits eligible employees to
purchase common stock through payroll deductions, which may not exceed 20% of
an employee's compensation, at a price equal to the lower of 85% of the fair
market value of our common stock at the beginning or end of the offering
period. Employees may end their participation in the offering at any time
during the offering period, and participation ends automatically on
termination of employment. If not terminated earlier, the purchase plan will
have a term of 10 years.
The purchase plan provides that in the event of our merger with or into
another corporation or a sale of all or substantially all of our assets, the
successor corporation will assume each right to purchase stock under the
purchase plan or will substitute an equivalent right. If the successor
corporation does not agree to an assumption or substitution, the offering
period then in progress will be shortened so that employees' rights to
purchase stock under the purchase plan are exercised prior to the merger or
sale of assets. The board of directors has the power to amend or terminate the
purchase plan as long as that action does not adversely affect any outstanding
rights to purchase stock under the plan. We may, however, terminate the
purchase plan or an offering period if continuation of the purchase plan or
the offering period would cause us to incur adverse accounting charges.
401(k) Plan
Effective April 1999, we adopted the drugstore.com, inc. 401(k) plan
covering our full-time employees. The 401(k) plan is intended to qualify under
Section 401(k) of the Internal Revenue Code of 1986, as amended, so that
contributions to the 401(k) plan by employees or by drugstore.com, and the
investment earnings thereon, are not taxable to employees until withdrawn from
the 401(k) plan, and so that contributions by drugstore.com, if any, will be
deductible by drugstore.com when made. Under the 401(k) plan, employees may
elect to reduce their current compensation by up to the statutorily prescribed
annual limit ($10,000 in 1999) and to have the amount of such reduction
contributed to the 401(k) plan. The 401(k) plan permits, but does not require,
additional matching contributions to the 401(k) plan by drugstore.com on
behalf of all participants in the 401(k) plan. To date, we have not made any
matching contributions to the 401(k) plan.
Employment Offer Letters
Peter M. Neupert's employment offer letter provides for an initial annual
salary of $250,000 and an initial annual bonus of $125,000. We also granted
Mr. Neupert a one-time right to purchase 1,260,000 shares of our common stock
at a purchase price of $0.04 per share. We have a lapsing right to repurchase
Mr. Neupert's unvested shares. As of May 19, 1999, our right to repurchase has
lapsed with respect to 315,000 shares of stock and will lapse with respect to
19,688 shares at the close of each month after the one-year anniversary of his
start date while he remains employed, with all of these shares becoming fully
vested on the close of the month following his fifth anniversary of
employment. If drugstore.com experiences a change in control and Mr. Neupert
is not offered a position with the surviving corporation with responsibilities
similar to those held at drugstore.com, our right of repurchase will lapse
with respect to all of these shares. Mr. Neupert's employment is for no
specified length of time, and either party has the right to terminate Mr.
Neupert's employment at any time with or without cause. If we terminate Mr.
Neupert's employment other than for cause, our right of repurchase will lapse
on an additional 236,250 shares of the then-unvested portion. The offer letter
also provides that in the event Mr. Neupert's employment is terminated for any
reason, he will continue to receive his then-current base salary and benefits
for a period of nine months.
Kal Raman's employment offer letter provides for an initial annual salary
of $175,000, a $100,000 signing bonus (which was grossed up to $125,000 to
negate the effect of applicable taxes), reimbursement of $5,000 for lost
earnest money and an annual bonus of up to 15% of his salary. We also offered
Mr. Raman an option to purchase shares of common stock under our 1998 stock
plan. In the offer letter, we agreed to guarantee a loan
53
<PAGE>
from a bank in the amount of $250,000. However, instead of guaranteeing a bank
loan, we and Mr. Raman agreed that we would loan $250,000 directly to Mr.
Raman. See "Certain Relationship and Related Transactions" for a description
of our loan arrangement with Mr. Raman. Mr. Raman's employment is for no
specified length of time, and either party has the right to terminate the
agreement at any time with or without cause.
Jed A. Smith's employment offer letter provides for an initial annual base
salary of $125,000 and an initial bonus of $25,000 contingent on drugstore.com
reaching agreed milestones. Mr. Smith's employment is for no specified length
of time, and either party has the right to terminate Mr. Smith's employment at
any time with or without cause. The offer letter also provides that, in the
event Mr. Smith's employment is terminated for other than cause, he will
continue to receive his then-current base salary and benefits for a period of
six months.
Mark L. Silverman's employment offer letter provides for an initial annual
base salary of $175,000, a $35,000 signing bonus and a bonus at the discretion
of the Chief Executive Officer commensurate with other officers of
drugstore.com. We also offered Mr. Silverman an option to purchase shares of
our common stock under our 1998 stock plan. If drugstore.com experiences a
change in control and Mr. Silverman is not offered a position with the
surviving corporation with responsibilities similar to those held at
drugstore.com or if his employment is terminated for other than cause, the
option with respect to all then-unvested shares shall vest. Mr. Silverman's
employment is for no specified length of time, and either party has the right
to terminate Mr. Silverman's employment at any time with or without cause. The
offer letter also provides that, in the event Mr. Silverman's employment is
terminated without cause, he will continue to receive his then-current base
salary and benefits for a period of twelve months.
Limitations on Directors' Liability and Indemnification
Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for:
. any breach of their duty of loyalty to the corporation or its
stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
. any transaction from which the director derived an improper personal
benefit.
This limitation of liability does not apply to liabilities arising under
the federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
Our certificate of incorporation and bylaws provide that drugstore.com
shall indemnify our directors and executive officers and may indemnify our
other officers and employees and other agents to the fullest extent permitted
by law. We believe that indemnification under our bylaws covers at least
negligence and gross negligence on the part of indemnified parties. Our bylaws
also permit us to secure insurance on behalf of any officer, director,
employee or other agent for any liability arising out of his or her actions in
such capacity, regardless of whether the bylaws would permit indemnification.
We have entered into agreements to indemnify our directors and officers, in
addition to indemnification provided for in our bylaws. These agreements,
among other things, provide for indemnification of our directors and officers
for expenses specified in the agreements, including attorneys' fees,
judgments, fines and settlement amounts incurred by any such person in any
action or proceeding arising out of such person's services as a director or
officer of drugstore.com, any subsidiary of drugstore.com or any other company
or enterprise to which the person provides services at the request of
drugstore.com. We believe that these provisions and agreements are necessary
to attract and retain qualified persons as directors and officers.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since our inception in April 1998, we have issued and sold shares of our
capital stock as follows: a total of 2,265,000 shares of common stock at a
price of $0.04 per share in June, July and August 1998, a total of 10,000,000
shares of Series A preferred stock at a price of $0.80 per share in June and
August 1998, a total of 5,446,268 shares of Series B preferred stock at a
price of $3.35 per share in October, November and December 1998, a total of
4,472,844 shares of Series C preferred stock at a price of $7.825 per share in
January and March 1999, and a convertible promissory note that is convertible
into a total of 2,266,289 shares of Series D Preferred Stock at a price of
$17.65 per share in May 1999. All shares of our preferred stock will convert
into common stock on a 1-for-1 basis upon the closing of this offering. The
following table summarizes the shares of capital stock purchased by executive
officers, directors and five-percent stockholders and their affiliates in
these transactions:
<TABLE>
<CAPTION>
Series A Series B Series C Series D
Common Preferred Preferred Preferred Preferred
Investor(1) Stock Stock Stock Stock Stock
- ----------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Kleiner Perkins Caufield &
Byers(2)(3)................ -- 4,937,500 1,582,089 511,182 --
Amazon.com, Inc.(2)(4)...... -- 5,000,000 3,177,612 2,555,911 --
Maveron Equity Partners,
L.P.(2)(5)................. -- -- 417,910 766,773 --
Peter M. Neupert(2)(6)...... 1,260,000 -- 268,657 319,489 --
Vulcan Ventures Incorporat-
ed(2)(7)................... -- -- -- -- 2,266,289
</TABLE>
- --------
(1) Shares held by affiliated persons and entities have been added together
for the purposes of this chart. See "Principal Stockholders" for a chart
of beneficial owners.
(2) Holder of 5% or more of a class of our capital stock.
(3) Includes shares held by Kleiner Perkins Caufield & Byers VIII, L.P. ("KPCB
VIII"), KPCB VIII Founders Fund, L.P., and KPCB Life Sciences Zaibatsu
Fund II, L.P. KPCB VIII and KPCB VIII Founders Fund, L.P. are wholly
controlled by KPCV VIII Associates, L.P. KPCB Life Sciences Zaibatsu Fund
II, L.P. is wholly controlled by KPCB VII Associates, L.P., Brook H. Byers
and L. John Doerr, each a general partner of KPCB VIII Associates and KPCB
VII Associates, L.P., are both directors of drugstore.com. Mr. Byers and
Mr. Doerr each disclaim beneficial ownership of shares held by these
entities except to the extent of their pecuniary interest therein. In
November 1998, drugstore.com and Kleiner Perkins Caufield & Byers agreed
to rescind the purchase of 89,552 of such shares and refund the
$299,999.20 purchase price. As a result, after November 1998, Kleiner
Perkins Caufield & Byers held 1,582,089 shares of Series B preferred
stock.
(4) In consideration of Amazon.com's obligations under a technology license
and marketing agreement, we issued Amazon.com 5,000,000 shares of our
Series A preferred stock. We issued these shares primarily in exchange for
Amazon.com's early marketing and support efforts in connection with and
after our launch. Jeffrey P. Bezos, President, Chief Executive Officer and
a director of Amazon.com, became a director of drugstore.com upon
completion of the issuance.
(5) Howard Schultz, a director of drugstore.com, is one of the two founding
members of Maveron LLC, and is one of two members of a limited liability
company that serves as a general partner of its affiliated venture capital
fund, Maveron Equity Partners, L.P.
(6) Mr. Neupert's shares of preferred stock are held jointly by Mr. Neupert
and Sheryl Neupert.
(7) Represents shares that are convertible under a promissory note issued to
Vulcan Ventures Incorporated in May 1999.
A provision of the investors' rights agreement dated May 19, 1999 between
drugstore.com and some of our stockholders precludes Kleiner, Perkins,
Caufield & Byers, Amazon.com and Maveron Equity Partners from purchasing
additional shares of our common stock without our prior approval if the
purchase would cause any of them to hold individually more than 40% of our
outstanding common stock (calculated on a fully-diluted basis to include
outstanding options and shares reserved under our stock plans). This
restriction lasts until August 2002.
55
<PAGE>
The convertible promissory note we issued to Vulcan Ventures in May 1999
will convert into 2,266,289 shares of Series D preferred stock upon clearance
of the transaction under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended. If we do not obtain Hart-Scott-Rodino clearance by November
19, 1999, the convertible promissory note will mature and all principal and
accrued interest will be due and payable on November 19, 1999.
In addition, under the terms of the voting agreement dated May 19, 1999,
upon the conversion of Vulcan Ventures' convertible promissory note into
shares of our Series D preferred stock, Vulcan Ventures will have the right to
nominate one member to our board of directors.
We are offering a number of shares of our common stock equal to $10,000,000
divided by the initial public offering price to Amazon.com concurrent with
this offering at a price per share equal to the initial public offering price.
Such offering is made in connection with a letter agreement we entered into
with Amazon.com in May 1999, under which we agreed to use reasonable efforts
to cause the underwriters to permit us to sell shares to Amazon.com concurrent
with this offering.
We have entered into offer letters with several of our executive officers.
See "Management--Employment Offer Letters" for a description of the offer
letters.
On December 3, 1998, we loaned $250,000 to Kal Raman, our Senior Vice
President, Technology and Operations. In our offer letter to Mr. Raman, we
agreed to guarantee a loan for $250,000, and, in connection with this
obligation, chose to provide the loan directly to Mr. Raman. The loan bears
interest at 7% and is secured by the shares issuable upon exercise of Mr.
Raman's stock option. All principal and accrued interest under the loan
remains outstanding and is due and payable on the earlier of December 3, 1999,
or within 15 days after ceasing to provide substantial services to
drugstore.com. As of May 17, 1999, the outstanding balance of Mr. Raman's loan
was $257,911. See "Management--Employment Offer Letters" for a description of
our loan arrangement with Mr. Raman.
All future transactions, including any loans from us to our officers,
directors, principal stockholders or affiliates, will be approved by a
majority of our board of directors, including a majority of the independent
and disinterested members of the board, and if required by law, a majority of
disinterested stockholders.
In the event that drugstore.com merges or is acquired by another company
and Peter M. Neupert or
Jed A. Smith is not offered a similar position with similar responsibilities,
respectively, by the surviving entity, or if the surviving entity's principal
office is located more than 50 miles from their respective residences, all of
Mr. Neupert's and Mr. Smith's unvested shares will be released from our option
to repurchase these shares.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of May 19, 1999, assuming conversion of a
convertible promissory note we issued to Vulcan Ventures and conversion of all
outstanding shares of preferred stock into common stock, and as adjusted to
reflect the sale of common stock offered hereby and to Amazon.com concurrently
with this offering by:
. each stockholder known by us to own beneficially more than 5% of our
common stock;
. each director;
. our Chief Executive Officer and our only other officer earning more
than $100,000 in salary and bonus during the 1998 fiscal year; and
. all directors and executive officers as a group.
As of May 19, 1999, there were 24,508,401 shares of common stock
outstanding and 29 shareholders of drugstore.com.
<TABLE>
<CAPTION>
Shares Beneficially Shares Beneficially Owned
Owned Prior to this Offering After this Offering(1)(2)
-----------------------------------------------------------------
Name and Address of Beneficial Owner Number Percentage Number Percentage
- ------------------------------------ ----------------- -------------------------------- --------------
<S> <C> <C> <C> <C>
Kleiner Perkins Caufield &
Byers(3)................. 7,030,771 28.7% 7,030,771
2750 Sand Hill Road
Menlo Park, CA 94025
Amazon.com, Inc.(4)....... 10,733,523 43.8%
1516 2nd Avenue
Seattle, WA 98101
Maveron Equity Partners,
L.P.(5).................. 1,184,683 4.8% 1,184,683
Vulcan Ventures
Incorporated(6).......... 2,266,289 9.2% 2,266,289
110 110th Avenue NE,
Suite 550
Bellevue, WA 98004
Peter M. Neupert(7)....... 1,848,146 7.5% 1,848,146
13920 Southeast Eastgate
Way Suite 300
Bellevue, WA 98005
Jed A. Smith(8)........... 975,000 4.0% 975,000
Kal Raman(9).............. -- -- --
13920 Southeast Eastgate
Way Suite 300
Bellevue, WA 98005
Jeffrey P. Bezos(4)....... 10,733,523 43.8% 10,733,523
1516 2nd Avenue
Seattle, WA 98101
Brook H. Byers(3)......... 7,030,771 28.7% 7,030,771
2750 Sand Hill Road
Menlo Park, CA 94025
L. John Doerr(3).......... 7,030,771 28.7% 7,030,771
2750 Sand Hill Road
Menlo Park, CA 94025
Howard Schultz(5)......... 1,184,683 4.8% 1,184,683
All directors and officers
as a group (10
persons)(10)........... 24,038,412 98.1%
</TABLE>
- --------
(1) Assumes no exercise of the underwriters' over-allotment option and
includes the number of shares of our common stock equal to $10,000,000
divided by the initial public offering price per share to be offered to
Amazon.com concurrently with this offering.
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that
person, shares of common stock subject to options or warrants held by that
person that are currently exercisable or will become exercisable within 60
days after May 19, 1999 are deemed outstanding, while such shares are not
deemed outstanding for purposes of computing percentage ownership
57
<PAGE>
of any other person. Unless otherwise indicated in the footnotes below, the
persons and entities named in the table have sole voting and investment
power with respect to all shares beneficially owned, subject to community
property laws where applicable.
(3) Consists of 6,313,633 shares held by Kleiner Perkins Caufield & Byers
VIII, L.P. ("KPCB VIII"), 365,600 shares held by KPCB VIII Founders Fund,
L.P., and 351,538 shares held by KPCB Life Sciences Zaibatsu Fund II, L.P.
KPCB VIII and KPCB VIII Founders Fund, L.P. are wholly controlled by KPCB
VIII Associates, L.P. KPCB Life Sciences Zaibatsu Fund II, L.P. is wholly
controlled by KPCB VII Associates, L.P. Brook H. Byers and L. John Doerr,
each a general partner of KPCB VIII Associates and KPCB VII Associates,
L.P., are both directors of drugstore.com. Mr. Byers and Mr. Doerr each
disclaim beneficial ownership of shares held by these entities except to
the extent of his pecuniary interest in those shares.
(4) Jeffrey P. Bezos is a director of drugstore.com and is the President,
Chief Executive Officer and a director of Amazon.com, Inc.
(5) Howard Schultz is a director of drugstore.com and one of two founding
members of Maveron LLC and is one of two members of a limited liability
company that serves as a general partner of its affiliated venture capital
fund, Maveron Equity Partners, L.P.
(6) Assumes conversion of the convertible promissory note we issued to Vulcan
Ventures Incorporated in May 1999. The convertible promissory note will
convert upon clearance of the transaction under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended. If we do not obtain Hart-
Scott-Rodino clearance by November 19, 1999, the convertible promissory
note will mature and all principal and accrued interest will be due and
payable on November 19, 1999. In addition, under the terms of the Second
Amended and Restated Voting Agreement dated May 19, 1999, upon the
conversion of Vulcan Ventures' convertible promissory note into shares of
our Series D preferred stock, Vulcan Ventures will have the right to
nominate one member to our board of directors.
(7) As of May 19, 1999, 945,000 of such shares are subject to a right of
repurchase at cost in the event Mr. Neupert ceases to be an employee of
drugstore.com. Mr. Neupert's shares of preferred stock are held jointly by
Mr. Neupert and Sheryl Neupert.
(8) As of May 19, 1999, 441,797 of such shares are subject to a right of
repurchase at cost in the event Mr. Smith ceases to be an employee of
drugstore.com. Includes 40,000 shares held by The Jed Smith 1998
Irrevocable Trust and 15,000 shares held by family members of Mr. Smith.
(9) Kal Raman was granted an option to purchase 150,000 shares of our common
stock. As of 60 days after May 19, 1999, none of these shares was vested.
(10) No shares subject to options held by the directors and officers are
exercisable within 60 days of May 19, 1999. Includes 2,266,289 shares of
Series D preferred stock issuable to Vulcan Ventures upon conversion of
the convertible promissory note.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
As of May 19, 1999, there were 24,508,401 shares of common stock
outstanding, assuming conversion of a convertible promissory note we issued to
Vulcan Ventures and conversion of all outstanding shares of preferred stock
into shares of common stock. Upon completion of this offering, drugstore.com
will be authorized to issue 250,000,000 shares of common stock, $0.001 par
value, and 10,000,000 shares of undesignated preferred stock, $0.001 par
value.
The following description of drugstore.com's capital stock is not complete
and is qualified in its entirety by drugstore.com's certificate of
incorporation and bylaws, which are included as exhibits to the registration
statement of which this prospectus forms a part, and by the provisions of
applicable Delaware law.
Common Stock
The holders of common stock are entitled to one vote per share on all
matters to be voted on by the stockholders. Subject to preferences that may be
applicable to any outstanding preferred stock, the holders of common stock are
entitled to receive ratably such dividends, if any, as may be declared from
time to time by the board of directors out of funds legally available for that
purpose. See "Dividend Policy" for a description of drugstore.com's policy of
distribution of dividends. In the event of a liquidation, dissolution or
winding up of drugstore.com, the holders of common stock are entitled to share
ratably in all assets remaining after payment of liabilities, subject to prior
distribution rights of preferred stock, if any, then outstanding. The common
stock has no preemptive or conversion rights or other subscription rights.
There are no redemption or sinking fund provisions applicable to the common
stock. All outstanding shares of common stock are fully paid and
nonassessable, and the shares of common stock to be issued upon the closing of
this offering will be fully paid and nonassessable.
Preferred Stock
Upon the closing of this offering, the board of directors will have the
authority, without action by the stockholders, to designate and issue
preferred stock in one or more series and to designate the rights, preferences
and privileges of each series, any or all of which may be greater than the
rights of the common stock. It is not possible to state the actual effect of
the issuance of any shares of preferred stock upon the rights of holders of
the common stock until the board of directors determines the specific rights
of the holders of such preferred stock. However, the effects might include,
among other things, restricting dividends on the common stock, diluting the
voting power of the common stock, impairing the liquidation rights of the
common stock and delaying or preventing a change in control of drugstore.com
without further action by the stockholders. drugstore.com has no present plans
to issue any shares of preferred stock.
Warrants
At May 19, 1999, we had one warrant outstanding to purchase a total of
10,000 shares of common stock at $7.825 per share. The warrant expires on
February 1, 2002.
Registration Rights
The holders of 22,185,401 shares of common stock (the "registrable
securities") or their permitted transferees are entitled to certain rights
with respect to registration of such shares under the Securities Act. These
rights are provided under the terms of an agreement between drugstore.com and
the holders of registrable securities. Under these registration rights,
beginning on the earlier of June 22, 2003, or six months after the effective
date of the offering contemplated by this prospectus, holders of at least 33%
of the then-outstanding registrable securities may require on two occasions
that drugstore.com register their shares for public resale. We are obligated
to register these shares only if the shares to be registered would have an
anticipated public offering price of at least $5,000,000. In addition, holders
of then-outstanding registrable securities with an aggregate offering price of
at least $40 million may require that we register their shares for public
resale on Form S-3 or similar short-form registration, provided we are
eligible to use Form S-3 or similar short-form registration
59
<PAGE>
statement and provided further that the value of the securities to be
registered is at least $500,000. Furthermore, in the event we elect to
register any of our shares of common stock for purposes of effecting any
public offering, the holders of registrable securities are entitled to include
their shares of common stock in the registration, subject however to our right
to reduce the number of shares proposed to be registered in view of market
conditions. All expenses in connection with any registration (other than
underwriting discounts and commissions) will be borne by us. All registration
rights will terminate five years after the date of this public offering or,
with respect to each holder of registrable securities, at such time as the
holder is entitled to sell all of its shares in any three month period under
Rule 144 of the Securities Act.
A provision of the investors' rights agreement dated May 19, 1999 between
drugstore.com and some of our stockholders precludes Kleiner, Perkins,
Caufield & Byers, Amazon.com and Maveron Equity Partners from purchasing
additional shares of our common stock without our prior approval if the
purchase would cause them to hold more than 40% of our outstanding common
stock (calculated on a fully-diluted basis to include outstanding options and
shares reserved under our stock plans). This restriction lasts until August
2002.
Delaware Anti-Takeover Law and Certain Charter and Bylaw Provisions
Provisions of Delaware law and our certificate of incorporation and bylaws
could make more difficult the acquisition of drugstore.com by a third party
and the removal of incumbent officers and directors. These provisions,
summarized below, are expected to discourage certain types of coercive
takeover practices and inadequate takeover bids and to encourage persons
seeking to acquire control of drugstore.com to first negotiate with us. We
believe that the benefits of increased protection of our ability to negotiate
with the proponent of an unfriendly or unsolicited proposal to acquire or
restructure drugstore.com outweigh the disadvantages of discouraging such
proposals because, among other things, negotiation of such proposals could
result in an improvement of their terms.
We are subject to Section 203 of the Delaware General Corporation Law,
which regulates corporate acquisitions. In general, Section 203 prohibits a
publicly held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years following the
date the person became an interested stockholder, unless:
. the board of directors approved the transaction in which such
stockholder became an interested stockholder prior to the date the
interested stockholder attained such status;
. upon consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, he or she owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding shares owned by persons who are directors and also
officers and shares in employee stock plans in which the participants
have no right to determine confidentially whether shares held subject to
the plan will be tendered in a tender or exchange offer; or
. on or subsequent to such date the business combination is approved by
the board of directors and authorized by 66 2/3% vote at an annual or
special meeting of stockholders.
A business combination generally includes a merger, asset or stock sale, or
other transaction resulting in a financial benefit to the interested
stockholder. In general, an "interested stockholder" is a person who, together
with affiliates and associates, owns, or within three years prior to the
determination of interested stockholder status, did own, 15% or more of a
corporation's voting stock.
Our certificate of incorporation and bylaws do not provide for the right of
stockholders to act by written consent without a meeting or for cumulative
voting in the election of directors. In addition, our certificate of
incorporation permits the board of directors to issue preferred stock with
voting or other rights without any stockholder action. The authorization of
undesignated preferred stock makes it possible for the board of directors to
issue preferred stock with voting or other rights or preferences that could
impede the success of any attempt to change control of drugstore.com. These
and other provisions may have the effect of deterring hostile takeovers or
delaying changes in control or management of drugstore.com.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is ChaseMellon
Shareholder Services.
60
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock.
Future sales of substantial amounts of common stock in the public market could
adversely affect prevailing market prices. Furthermore, since only a limited
number of shares will be available for sale shortly after this offering
because of certain contractual and legal restrictions on resale, as described
below, sales of substantial amounts of our common stock in the public market
after the restrictions lapse could adversely affect the prevailing market
price and impair our ability to raise equity capital in the future.
Upon completion of the offering, we will have outstanding shares of
common stock. Of these shares, the shares sold in the offering, plus any
shares issued upon exercise of the underwriters' over-allotment option, will
be freely tradable without restriction under the Securities Act, unless
purchased by our "affiliates" as that term is defined in Rule 144 under the
Securities Act (generally, officers, directors or 10% stockholders).
The remaining 24,508,401 shares outstanding are "restricted securities"
within the meaning of Rule 144 under the Securities Act. Restricted shares may
be sold in the public market only if registered or if they qualify for an
exemption from registration under Rules 144, 144(k) or 701 promulgated under
the Securities Act, which are summarized below. Sales of the restricted shares
in the public market, or the availability of such shares for sale, could
adversely affect the market price of the common stock.
Our directors, officers and securityholders have entered into lock-up
agreements in connection with this offering generally providing that they will
not offer, sell, contract to sell or grant any option to purchase or otherwise
dispose of our common stock or any securities exercisable for or convertible
into our common stock owned by them for a period of 180 days after the date of
this prospectus without the prior written consent of Morgan Stanley & Co.
Incorporated, the representative of the underwriters. As a result of these
contractual restrictions, notwithstanding possible earlier eligibility for
sale under the provisions of Rules 144, 144(k) and 701, shares subject to
lock-up agreements will not be salable until such agreements expire or are
waived by the designated underwriters' representative. Taking into account the
lock-up agreements, and assuming Morgan Stanley & Co. Incorporated does not
release stockholders from these agreements, the following shares will be
eligible for sale in the public market at the following times:
. Beginning on the effective date of this prospectus, only the shares sold
in the offering will be immediately available for sale in the public
market.
. Beginning 180 days after the effective date, approximately 17,769,268
shares will be eligible for sale pursuant to Rule 701 and Rule 144,
assuming no exercise of options, of which all but 146,000 shares are
held by affiliates.
. An additional 4,472,844 shares will be eligible for sale pursuant to
Rule 144 after January 29, 2000. Further, an additional 2,266,289 shares
will be eligible for sale pursuant to Rule 144 after May 19, 2000.
Shares eligible to be sold by affiliates pursuant to Rule 144 are
subject to volume restrictions as described below. In addition, Jed A.
Smith and Peter M. Neupert each granted drugstore.com a right to
repurchase up to 2,235,000 shares of common stock held by them at the
original purchase price of $0.04 per share if their employment
terminates under certain circumstances. Our right of repurchase lapses
(a) 25% immediately and (b) the remaining 75% lapses beginning one year
after the vesting commencement date at a rate of 1/48th per month. At
May 19, 1999, 1,386,797 shares held by Mr. Smith and Mr. Neupert were
subject to repurchase under this agreement.
In general, under Rule 144, and beginning after the expiration of the lock-
up agreements 180 days after the date of this prospectus, a person, or persons
whose shares are combined, who has beneficially owned restricted securities
for at least one year would be entitled to sell within any three-month period
a number of shares that does not exceed the greater of the following:
. one percent of the number of shares of common stock then outstanding
(which will equal approximately shares immediately after the
offering); or
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<PAGE>
. the average weekly trading volume of the common stock during the four
calendar weeks preceding the sale.
Sales under Rule 144 are also subject to certain manner of sale provisions and
notice requirements and to the availability of current public information
about us. Under Rule 144(k), a person who is not deemed to have been our
affiliate at any time during the three months preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years, is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
Rule 701, as currently in effect, permits resales of shares in reliance
upon Rule 144 but without compliance with certain restrictions, including the
holding period requirement, of Rule 144. Any of our employees, officers,
directors or consultants who purchased shares pursuant to a written
compensatory plan or contract may be entitled to rely on the resale provisions
of Rule 144. Rule 701 permits affiliates to sell their Rule 701 shares under
Rule 144 without complying with the holding period requirement of Rule 144.
Rule 701 further provides that non-affiliates may sell such shares in reliance
on Rule 144 without having to comply with the holding period, public
information, volume limitation or notice provisions of Rule 144. In addition,
we intend to file registration statements under the Securities Act as promptly
as possible after the effective date to register shares to be issued pursuant
to our employee benefit plans. As a result, any options exercised under the
1998 stock plan, the 1999 employee stock purchase plan or any other benefit
plan after the effectiveness of such registration statement will also be
freely tradable in the public market, except that shares held by affiliates
will still be subject to the volume limitation, manner of sale, notice and
public information requirements of Rule 144 unless otherwise resalable under
Rule 701. As of May 19, 1999, there were outstanding options for the purchase
of 3,068,684 shares of our common stock under the 1998 stock plan and
4,758,316 shares were available for future grant.
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<PAGE>
UNDERWRITERS
Under the terms and subject to conditions contained in the underwriting
agreement dated the date of this prospectus, the underwriters named below, for
whom Morgan Stanley & Co. Incorporated, Donaldson, Lufkin & Jenrette
Securities Corporation and Thomas Weisel Partners LLC are acting as
representatives, have severally agreed to purchase, and drugstore.com has
agreed to sell to them, severally, the respective number of shares of common
stock set forth opposite the names of such underwriters below:
<TABLE>
<CAPTION>
Number
Name of Shares
---- ---------
<S> <C>
Morgan Stanley & Co. Incorporated..................................
Donaldson, Lufkin & Jenrette Securities Corporation................
Thomas Weisel Partners LLC.........................................
----
Total............................................................
====
</TABLE>
The underwriters are offering the shares subject to their acceptance of the
shares from drugstore.com and subject to prior sale. The underwriting
agreement provides that the obligations of the several underwriters to pay for
and accept delivery of the shares of common stock offered hereby are subject
to the approval of legal matters by their counsel and to certain other
conditions. The underwriters are obligated to take and pay for all of the
shares of common stock offered by this prospectus, other than those covered by
the over-allotment option described below, if any such shares are taken.
The underwriters initially propose to offer part of the shares of common
stock directly to the public at the public offering price set forth on the
cover page of the prospectus and part to certain dealers at a price that
represents a concession not in excess of $ a share under the public offering
price. Any underwriter may allow, and the dealers may reallow, a concession
not in excess of $ a share to other underwriters or to certain other
dealers. After the initial offering of the shares of common stock, the
offering price and other selling terms may from time to time be varied by the
representatives of the underwriters.
drugstore.com has granted to the underwriters an option, exercisable for 30
days from the date of this prospectus, to purchase up to an aggregate of
additional shares of common stock at the public offering price set forth on
the cover page hereof, less underwriting discounts and commissions. The
underwriters may exercise this option solely for the purpose of covering over-
allotments, if any, made in connection with this offering of common stock. To
the extent this over-allotment option is exercised, each underwriter will
become obligated, subject to certain conditions, to purchase approximately the
same percentage of additional shares of common stock as the number set forth
next to each underwriter's name in the preceding table bears to the total
number of shares of common stock set forth next to the names of all
underwriters in the preceding table.
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<PAGE>
At the request of drugstore.com, the underwriters have reserved up to ten
percent of the shares of common stock to be issued by drugstore.com and
offered hereby for sale, at the initial public offering price, to directors,
officers, employees, business associates and related persons of drugstore.com.
The number of shares of common stock available for sale to the general public
will be reduced to the extent these individuals purchase such reserved shares.
Any reserved shares which are not so purchased will be offered by the
underwriters to the general public on the same basis as the other shares
offered by this prospectus.
Each of drugstore.com and the officers, directors, and stockholders has
agreed that, without the prior written consent of Morgan Stanley & Co.
Incorporated on behalf of the underwriters, or otherwise during the period
ending 180 days after the date of this prospectus it will not: (1)offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase, lend or otherwise transfer or dispose of, directly or indirectly,
any shares of common stock; or any securities convertible into or exercisable
or exchangeable for common stock; or (2) enter into any swap or similar
arrangement that transfers to another, in whole or in part, any of the
economic consequences of ownership of the common stocks; whether any such
transaction described above is to be settled by delivery of common stock or
such other securities after the date of this prospectus.
The underwriters have informed drugstore.com that they do not intend sales
to discretionary accounts to exceed five percent of the total number of shares
of common stock offered by them.
Approval of the common stock has been sought for quotation on the Nasdaq
National Market under the symbol "DSCM."
In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock. Specifically, the underwriters may over-allot in
connection with the offering, creating a short position in the common stock
for their own account. In addition, to cover any over-allotments or to
stabilize the price of the common stock, the underwriters may bid for, and
purchase, shares of common stock in the open market. Finally, the underwriting
syndicate may reclaim selling concessions allowed to an underwriter or a
dealer for distributing the common stock in the offering if the syndicate
repurchases previously distributed common stock in transactions to cover
syndicate short positions, in stabilization transactions or otherwise. Any of
these activities may stabilize or maintain the market price of the common
stock above independent market levels. The underwriters are not required to
engage in these activities, and may end any of these activities at any time.
drugstore.com and the underwriters have agreed to indemnify each other
against certain liabilities, including liabilities under the Securities Act.
Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since
December 1998, Thomas Weisel Partners LLC has been named as a lead or co-
manager on 24 filed public offerings of equity securities, of which 9 have
been completed, and has acted as a syndicate member in an additional 10 public
offerings of equity securities. Thomas Weisel Partners LLC does not have any
material relationship with us or any of our officers, directors or controlling
persons, except with respect to its contractual relationship with us under the
underwriting agreement entered into in connection with this offering.
Pricing of the Offering
Prior to this offering, there has been no public market for the shares of
common stock. The initial public offering price will be determined by
negotiations between drugstore.com and the representatives. Among the factors
to be considered in determining the initial public offering price will be:
. the future prospects of drugstore.com and our industry in general;
. sales, earnings and certain other financial operating information of
drugstore.com in recent periods; and
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<PAGE>
. the price-earnings ratios, price-sales ratios, market prices of
securities and financial and operating information of companies engaged
in activities similar to those of drugstore.com.
The estimated public offering price range set forth on the cover page of
this prospectus is subject to change as a result of market conditions and
other factors.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
drugstore.com by Venture Law Group, A Professional Corporation, Menlo Park,
California. John Sellers, a senior attorney at Venture Law Group, is an
Assistant Secretary of drugstore.com. Certain legal matters will be passed
upon for the underwriters by Wilson Sonsini Goodrich & Rosati, Professional
Corporation, Palo Alto, California. As of the date of this prospectus, an
investment partnership associated with Venture Law Group owns an aggregate of
21,000 shares of our common stock, and one director of Venture Law Group
beneficially owns 4,500 shares of our common stock.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements as of December 31, 1998 and for the period from April 2,
1998 (inception) to December 31, 1998, as set forth in their report. We have
included our financial statements in the prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's report, given on
their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission, a registration
statement on Form S-1 under the Securities Act with respect to the shares of
common stock offered hereby. This prospectus does not contain all the
information set forth in the registration statement and the exhibits and
schedules thereto. For further information with respect to drugstore.com and
such common stock, we refer you to the registration statement and to the
exhibits and schedules filed therewith. Statements contained in this
prospectus as to the contents of any contract or other document referred to
are not necessarily complete, and in each instance reference is made to the
copy of such contract or other document filed as an exhibit to the
registration statement, each such statement being qualified in all respects by
such reference. A copy of the registration statement may be inspected by
anyone without charge at the Public Reference Section of the SEC at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of all
or any portion of the registration statement may be obtained from the Public
Reference Section of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549,
upon payment of prescribed fees. The SEC maintains a web site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the SEC.
65
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........................... F-2
Consolidated Balance Sheets................................................. F-3
Consolidated Statements of Operations....................................... F-4
Consolidated Statements of Stockholders' Equity............................. F-5
Consolidated Statements of Cash Flows....................................... F-6
Notes to Consolidated Financial Statements.................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
drugstore.com, inc.
We have audited the accompanying consolidated balance sheet of drugstore.com,
inc. as of December 31, 1998, and the related consolidated statements of
operations, stockholders' equity, and cash flows for the period from April 2,
1998 (inception) to December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
from material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of drugstore.com,
inc. at December 31, 1998, and the consolidated results of its operations and
its cash flows for the period from April 2, 1998 (inception) to December 31,
1998, in conformity with generally accepted accounting principles.
Seattle, Washington
January 29, 1999, except for Note 7
as to which the date is
May , 1999
- -------------------------------------------------------------------------------
The foregoing report is in the form that will be signed upon the completion
of the increase in the number of authorized shares described in Note 7 to the
financial statements.
Ernst & Young LLP
Seattle, Washington
May 19, 1999
F-2
<PAGE>
DRUGSTORE.COM, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
Pro Forma
Stockholders'
Equity
December 31, April 4, April 4,
1998 1999 1999
------------ ----------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents............. $14,408 $ 38,007
Accounts receivable................... -- 112
Inventories........................... -- 1,323
Prepaid marketing expenses............ 4,317 3,801
Other prepaid expenses and current
assets............................... 520 604
------- --------
Total current assets.................... 19,245 43,847
Fixed assets, net of accumulated
depreciation of $66 and $377........... 2,616 4,157
Intangible assets, net of accumulated
amortization of $33 and $51............ 230 246
Note receivable from officer............ 250 256
Deposits and other assets............... 176 1,477
------- --------
Total assets............................ $22,517 $ 49,983
======= ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued
expenses............................. $ 1,396 $ 2,252
Accrued compensation.................. 327 965
Accrued marketing expenses............ -- 347
Current portion of capital lease
obligations.......................... 472 479
------- --------
Total current liabilities............... 2,195 4,043
Capital lease obligations, less current
portion................................ 975 923
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock, $.001 par
value:
Authorized shares--22,800,000
(10,000,000 pro forma)
Series A preferred stock, designated
10,000,000 shares
Issued and outstanding shares--
10,000,000 (none pro forma)
(aggregate liquidation preference
of $8,000)......................... 7,986 7,986
Series B preferred stock, designated
5,500,000 shares
Issued and outstanding shares--
5,446,268 (none pro forma)
(aggregate liquidation preference
of $18,245)........................ 18,237 18,237
Series C preferred stock, designated
5,000,000 shares
Issued and outstanding shares--
4,472,844 (none pro forma)
(aggregate liquidation preference
of $35,000)........................ -- 34,981
Common stock, $.001 par value:
Authorized shares--30,200,000
(250,000,000 pro forma)
Issued and outstanding shares--
2,323,000 (22,242,112 pro forma)..... 2 2 $ 22
Additional paid-in capital............. 2,858 8,175 69,359
Deferred stock-based compensation...... (2,246) (6,655) (6,655)
Accumulated deficit.................... (7,490) (17,709) (17,709)
------- -------- -------
Total stockholders' equity.............. 19,347 45,017 $45,017
------- -------- =======
Total liabilities and stockholders'
equity................................. $22,517 $ 49,983
======= ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
DRUGSTORE.COM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Period from
April 2, 1998
(Inception) to Quarter Ended
December 31, 1998 April 4, 1999
----------------- -------------
(unaudited)
<S> <C> <C>
Net sales...................................... $ -- $ 652
Cost of sales.................................. -- 672
--------- ----------
Gross profit (loss).......................... -- (20)
Operating expenses:
Marketing and sales.......................... 3,092 5,189
Product development.......................... 2,178 2,713
General and administrative................... 1,894 1,731
Amortization of stock-based compensation..... 500 884
--------- ----------
Total operating expenses....................... 7,664 10,517
--------- ----------
Operating loss................................. (7,664) (10,537)
Other income (expense):
Interest income.............................. 177 332
Interest expense............................. (3) (14)
--------- ----------
Net loss....................................... $ (7,490) $ (10,219)
========= ==========
Basic and diluted net loss per share........... $ (14.82) $ (11.47)
========= ==========
Pro forma basic and diluted net loss per
share......................................... $ (0.92) $ (0.53)
========= ==========
Weighted average shares outstanding used to
compute basic and diluted net loss per share.. 505,282 890,661
========= ==========
Weighted average shares outstanding used to
compute pro forma basic and diluted net loss
per share..................................... 8,126,703 19,429,853
========= ==========
</TABLE>
See accompanying notes.
F-4
<PAGE>
DRUGSTORE.COM, INC.
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY
(in thousands, except share data)
<TABLE>
<CAPTION>
Convertible Preferred Stock
-----------------------------------------------------
Series A Series B Series C Common Stock
----------------- ----------------- ----------------- ----------------
Shares Amount Shares Amount Shares Amount Shares Amount
---------- ------ --------- ------- --------- ------- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Initial issuance
of common shares
to founders in
exchange for
cash and
intellectual
property........ -- $ -- -- $ -- -- $ -- 2,315,000 $ 2
Issuance of
Series A
preferred stock
in June and
August, net of
offering costs
of $14.......... 5,000,000 3,986 -- -- -- -- -- --
Issuance of
Series A
preferred stock
in August in
exchange for
Technology
License and
Marketing
Agreement....... 5,000,000 4,000 -- -- -- -- -- --
Issuance of
Series B
preferred stock
in October,
November and
December net of
offering costs
of $8........... -- -- 5,446,268 18,237 -- -- -- --
Exercise of
common stock
options......... -- -- -- -- -- -- 8,000 --
Deferred stock-
based
compensation.... -- -- -- -- -- -- -- --
Amortization of
stock-based
compensation ... -- -- -- -- -- -- -- --
Net loss and
comprehensive
loss............ -- -- -- -- -- -- -- --
---------- ------ --------- ------- --------- ------- --------- ---
Balance at
December 31,
1998............ 10,000,000 7,986 5,446,268 18,237 -- -- 2,323,000 2
Issuance of
Series C
preferred stock
in January and
March, net of
offering costs
of $19
(unaudited)..... -- -- -- -- 4,472,844 34,981 -- --
Issuance of
warrants to
purchase common
stock
(unaudited)..... -- -- -- -- -- -- -- --
Deferred stock-
based
compensation
(unaudited)..... -- -- -- -- -- -- -- --
Amortization of
stock-based
compensation
(unaudited)..... -- -- -- -- -- -- -- --
Net loss and
comprehensive
loss
(unaudited)..... -- -- -- -- -- -- -- --
---------- ------ --------- ------- --------- ------- --------- ---
Balance at April
4, 1999
(unaudited)..... 10,000,000 $7,986 5,446,268 $18,237 4,472,844 $34,981 2,323,000 $ 2
========== ====== ========= ======= ========= ======= ========= ===
<CAPTION>
Additional Deferred
Paid-in Stock-based Accumulated
Capital Compensation Deficit Total
---------- ------------ ----------- --------
<S> <C> <C> <C> <C>
Initial issuance
of common shares
to founders in
exchange for
cash and
intellectual
property........ $ 111 $ -- $ -- $ 113
Issuance of
Series A
preferred stock
in June and
August, net of
offering costs
of $14.......... -- -- -- 3,986
Issuance of
Series A
preferred stock
in August in
exchange for
Technology
License and
Marketing
Agreement....... -- -- -- 4,000
Issuance of
Series B
preferred stock
in October,
November and
December net of
offering costs
of $8........... -- -- -- 18,237
Exercise of
common stock
options......... 1 -- -- 1
Deferred stock-
based
compensation.... 2,746 (2,746) -- --
Amortization of
stock-based
compensation ... -- 500 -- 500
Net loss and
comprehensive
loss............ -- -- (7,490) (7,490)
------ ------- -------- --------
Balance at
December 31,
1998............ 2,858 (2,246) (7,490) 19,347
Issuance of
Series C
preferred stock
in January and
March, net of
offering costs
of $19
(unaudited)..... -- -- -- 34,981
Issuance of
warrants to
purchase common
stock
(unaudited)..... 24 -- -- 24
Deferred stock-
based
compensation
(unaudited)..... 5,293 (5,293) -- --
Amortization of
stock-based
compensation
(unaudited)..... -- 884 -- 884
Net loss and
comprehensive
loss
(unaudited)..... -- -- (10,219) (10,219)
------ ------- -------- --------
Balance at April
4, 1999
(unaudited)..... $8,175 $(6,655) $(17,709) $45,017
====== ======= ======== ========
</TABLE>
See accompanying notes.
F-5
<PAGE>
DRUGSTORE.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Period from
April 2, 1998
(Inception) to Quarter Ended
December 31, 1998 April 4, 1999
----------------- -------------
(unaudited)
<S> <C> <C>
Operating Activities:
Net loss....................................... $(7,490) $(10,219)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................ 90 322
Amortization of stock-based compensation..... 500 884
Technology license and marketing agreement-
related expenses............................ 58 1,014
Changes in:
Accounts receivable......................... -- (112)
Inventories................................. -- (1,323)
Prepaid marketing expenses.................. (552) (462)
Other prepaid expenses and current assets... (484) (113)
Deposits and other assets................... (176) (1,301)
Accounts payable and accrued expenses....... 1,723 1,519
Other....................................... -- (6)
------- --------
Net cash used in operating activities.......... (6,331) (9,797)
Investing Activities:
Purchase of fixed assets....................... (1,202) (1,530)
Addition of intangible assets.................. (90) (10)
Issuance of note receivable to officer......... (250) --
------- --------
Net cash used in investing activities.......... (1,542) (1,540)
Financing Activities:
Proceeds from sales of common stock............ 90 --
Proceeds from exercise of stock options........ 1 --
Net proceeds from sales of Series A preferred
stock......................................... 3,986 --
Net proceeds from sales of Series B preferred
stock......................................... 18,237 --
Net proceeds from sales of Series C preferred
stock......................................... -- 34,981
Principal payments on capital lease
obligations................................... (33) (45)
------- --------
Net cash provided by financing activities...... 22,281 34,936
------- --------
Net increase in cash and cash equivalents...... 14,408 23,599
Cash and equivalents at beginning of period.... -- 14,408
------- --------
Cash and equivalents at end of period.......... $14,408 $38,007
======= ========
Supplemental Cash Flow Information:
Cash paid for interest......................... $ 48 $ 8
Equipment acquired through capital lease
agreements.................................... $ 1,480 $ --
Issuance of common stock in exchange for
intellectual property......................... $ 23 $ --
Issuance of Series A preferred stock in
exchange for technology license and marketing
agreement..................................... $ 4,000 $ --
Issuance of warrants to purchase common stock
in exchange for intangible asset.............. $ -- $ 24
</TABLE>
See accompanying notes.
F-6
<PAGE>
DRUGSTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of April 4, 1999 and for the quarter ended April 4, 1999 is
unaudited)
1. Organization and Summary of Significant Accounting Policies
General
drugstore.com, inc. and its wholly-owned subsidiary, DS Pharmacy, Inc.,
(collectively, the Company) are engaged in the development of Internet-based
retailing opportunities focused on filling needs for health, wellness, beauty,
personal care and pharmacy products and related information. The Company was
incorporated on April 2, 1998 and launched its Web site and commenced
commercial operations on February 24, 1999. The Company was previously
considered a development stage company.
The Company has incurred significant operating losses since inception of
operations and has limited working capital. The Company has financed its
operations to date through the issuance of equity securities. Further
development and establishment of the Company's business will require
additional equity financing. The Company believes that equity financing can be
obtained from existing or new investors. However, there can be no assurance
that the Company will be able to obtain such equity financing on acceptable
terms, if at all.
Interim Financial Statements
The accompanying balance sheets and statements of operations and cash flows
for the quarter ended April 4, 1999 are unaudited. In the opinion of
management, the unaudited financial statements have been prepared on the same
basis as the audited financial statements and include all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation
of the results of operations and cash flows for the interim period.
Principles of Consolidation and Basis of Presentation
The accompanying consolidated financial statements include those of
drugstore.com, inc. and its wholly-owned subsidiary, DS Pharmacy, Inc. All
material intercompany transactions and balances have been eliminated.
On January 1, 1999, the Company adopted a 52/53 week fiscal year. The
effect of the change on prior periods is insignificant.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements.
Actual results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less at the date of purchase to be cash equivalents.
Concentration of Credit Risk
The Company is subject to concentrations of credit risk from its cash
investments. The Company's credit risk is managed through monitoring the
stability of the financial institutions utilized and diversification of its
financial resources.
Financial instruments consist of cash and cash equivalents and capital
lease obligations. The fair value of all financial instruments approximates
the carrying amount based on the current rate offered for similar instruments.
F-7
<PAGE>
DRUGSTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of April 4, 1999 and for the quarter ended April 4, 1999 is
unaudited)
Inventories
Inventories are stated at the lower of cost (using the weighted average
cost method) or market. The Company purchases all of its pharmaceutical
products from RxAmerica L.L.C. and a substantial majority of its non-
pharmaceutical products from Walsh Distribution, Inc. The agreement with
RxAmerica L.L.C. is for a one year term ending February 2000 and the agreement
with Walsh Distribution, Inc. is for a three year term ending January 2002.
Fixed Assets
Fixed assets are stated at cost less accumulated depreciation and
amortization, which includes the amortization of assets recorded under capital
leases. Depreciation and amortization is provided using the straight-line
method over the estimated useful lives of the related assets, which range from
two to seven years. Fixed assets purchased under capital leases and leasehold
improvements are amortized over the shorter of the lease term or estimated
useful life.
Long-Lived Assets
Long-lived assets and intangible assets are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. Impairment is measured by comparing the carrying value
of the long-lived assets to the estimated undiscounted future cash flows
expected to result from use of the assets and their ultimate disposition. To
date, no such impairment has been indicated.
Revenue Recognition
The Company recognizes revenue from product sales, net of discounts, when
the products are shipped to customers. Outbound shipping and handling fees are
also included in net sales upon shipment. The Company provides an estimated
allowance for sales returns in the period of sale.
Product Development
Product development expenses consist primarily of payroll and related
expenses for Web site development and systems personnel and consultants,
system infrastructure and costs of Web site content. To date, expenditures
relating to product development have been expensed as incurred.
Income Taxes
The Company accounts for income taxes under the liability method. Under the
liability method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to be recovered. Valuation
allowances are established, when necessary, to reduce deferred tax assets to
the amounts expected to be realized.
Advertising
Advertising costs are expensed as incurred. Advertising expense for the
period ended December 31, 1998 and the quarter ended April 4, 1999 was
$1,638,000 and $2,589,000, respectively.
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees (APB No. 25), and related
interpretations, in accounting for employee stock options rather than the
alternative fair value accounting allowed by Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation (SFAS No. 123). APB
No. 25 provides that the compensation expense relative to the Company's
employee stock options is measured based on the intrinsic value of the stock
F-8
<PAGE>
DRUGSTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of April 4, 1999 and for the quarter ended April 4, 1999 is
unaudited)
option. SFAS No. 123 requires companies that continue to follow APB No. 25 to
provide a pro forma disclosure of the impact of applying the fair value method
of SFAS No. 123 (see Note 5).
Net Loss Per Share
Net loss per share is computed using the weighted average number of shares
of common stock outstanding less the number of shares subject to repurchase.
Shares associated with stock options, warrants and the convertible preferred
stock are not included in the calculation of diluted net loss per share
because they are antidilutive.
Pro Forma Net Loss Per Share (Unaudited)
Pro forma net loss per share is computed using the weighted average number
of common shares outstanding, including the pro forma effects of the automatic
conversion of all outstanding convertible preferred stock into shares of
common stock effective upon the closing of the Company's initial public
offering as if such conversion occurred at the date of original issuance.
The following table sets forth the computation of basic and diluted net
loss per share and pro forma basic and diluted net loss per share for the
periods indicated:
<TABLE>
<CAPTION>
Period from
April 2, 1998
(Inception) to Quarter Ended
December 31, 1998 April 4, 1999
----------------- -------------
(unaudited)
<S> <C> <C>
Numerator:
Net loss................................. $(7,490,000) $(10,219,000)
=========== ============
Denominator:
Weighted average common shares
outstanding............................. 1,462,311 2,323,000
Less weighted average common shares
issued subject to repurchase
agreements.............................. (957,029) (1,432,339)
----------- ------------
Denominator for basic and diluted
calculation............................. 505,282 890,661
Weighted average effect of pro forma
conversion of securities:
Series A convertible preferred stock... 6,124,313 10,000,000
Series B convertible preferred stock... 1,497,108 5,446,268
Series C convertible preferred stock... -- 3,092,924
----------- ------------
Denominator for pro forma basic and
diluted calculation..................... 8,126,703 19,429,853
=========== ============
Net loss per share:
Basic and diluted........................ $ (14.82) $ (11.47)
=========== ============
Pro forma basic and diluted.............. $ (0.92) $ (0.53)
=========== ============
</TABLE>
At December 31, 1998, there were 1,515,334 stock options that were excluded
from the computation of actual and pro forma diluted net loss per share as
their effect was antidilutive. If the Company had reported net income, the
calculation of these per share amounts would have included the dilutive effect
of these common stock equivalents using the treasury stock method.
F-9
<PAGE>
DRUGSTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of April 4, 1999 and for the quarter ended April 4, 1999 is
unaudited)
New Accounting Pronouncements
In March 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use. SOP 98-1 requires all costs related to
the development of internal use software other than those incurred during the
application development stage to be expensed as incurred. Costs incurred
during the application development stage are required to be capitalized and
amortized over the estimated useful life of the software. The Company adopted
SOP 98-1 in the quarter ended April 4, 1999 and there was no significant
impact upon adoption.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999. SFAS No. 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in
the fair value of derivatives are recorded each period in current earnings or
other comprehensive income, depending on whether a derivative is designed as
part of a hedge transaction and, if it is, the type of hedge transaction. The
Company does not expect that the adoption of SFAS No. 133 will have a material
impact on its financial statements because it does not currently hold any
derivative instruments.
2. Fixed Assets
Fixed assets consists of the following:
<TABLE>
<CAPTION>
December 31,
1998
--------------
(In thousands)
<S> <C>
Computers and equipment....................................... $1,862
Purchased software............................................ 711
Furniture and fixtures........................................ 20
Leasehold improvements........................................ 89
------
2,682
Less accumulated depreciation................................. (66)
------
$2,616
======
</TABLE>
Included in computers and equipment and purchased software are assets
acquired under capital leases with an original cost of approximately
$1,115,000 and $365,000, respectively, as of December 31, 1998. Accumulated
amortization on the leased assets was approximately $10,000 as of December 31,
1998. Approximately $1,370,000 of computers and equipment had not been placed
in service as of December 31, 1998.
3. Leases and Marketing Agreements
The Company leases office space under an operating lease, which calls for
fixed rental payments through 2003. In addition, the Company leases various
office equipment under operating leases. Total rent expense under operating
leases for the periods ended December 31, 1998 and April 4, 1999 approximated
$127,000 and $262,000, respectively.
Capital lease obligations bear interest at rates ranging from 4% to 7% and
mature 36 months from the date of funding. At December 31, 1998, the Company
had no additional financing available under the agreements.
The Company has also entered into certain marketing agreements, which
include fixed fees through 2002. The costs associated with these agreements
are recognized on a systematic basis over the term of the related agreements
as services are received.
F-10
<PAGE>
DRUGSTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of April 4, 1999 and for the quarter ended April 4, 1999 is
unaudited)
Future minimum commitments at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Operating
Leases and
Capital Marketing
Leases Agreements
------- ----------
(In thousands)
<S> <C> <C>
1999..................................................... $ 534 $ 5,941
2000..................................................... 620 4,771
2001..................................................... 398 4,544
2002..................................................... -- 5,310
2003..................................................... -- 1,603
Thereafter............................................... -- 2,238
------ -------
Total minimum lease payments............................. 1,552 $24,407
=======
Less amounts representing interest....................... (105)
------
Present value of minimum payments........................ 1,447
Less current portion of capital lease obligations........ (472)
------
Noncurrent portion of capital lease obligations.......... $ 975
======
</TABLE>
On January 28, 1999, the Company signed a seven-year lease for a new
corporate headquarters in Bellevue, Washington, which is expected to commence
no later than March 12, 1999. The minimum lease payments associated with this
lease are included in the commitments above. The Company has the option to
extend the lease for two additional three-year terms. The Company provided a
letter of credit totaling $640,000 as security for the lease. The letter of
credit may be reduced annually by specified amounts in the lease agreement
upon our achievement of certain economic goals. At December 31, 1998, there
were no letters of credit outstanding.
The Company has an agreement with Walsh Distribution, Inc. that provides
inventory and certain order fulfillment services for three years ending
January 2002. This agreement may be terminated earlier by the Company upon an
accelerated payment of minimum fees that would not exceed $2.5 million.
4. Income Taxes
The Company did not provide any current or deferred United States federal
income tax provision or benefit for any of the periods presented because it
has experienced operating losses since inception. The Company provided a full
valuation allowance on the net deferred tax asset, consisting primarily of net
operating loss carryforwards and research and development credit
carryforwards, because of uncertainty regarding their realizability.
At December 31, 1998, the Company had net operating loss carryforwards and
research and development credit carryforwards of approximately $6,737,000 and
$32,000, respectively. These carryforwards will expire in 2018. Utilization of
these carryforwards may also be subject to further limitation under Section
382 of the Internal Revenue Code of 1986, as amended.
F-11
<PAGE>
DRUGSTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of April 4, 1999 and for the quarter ended April 4, 1999 is
unaudited)
Deferred tax assets reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets as of December 31, 1998 are as follows
(in thousands):
<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss carryforward................................... $ 2,291
Research and development credit carryforward...................... 32
Other temporary differences....................................... 79
-------
Total gross deferred tax assets..................................... 2,402
Less valuation allowance............................................ (2,402)
-------
Net deferred tax assets............................................. $ --
=======
A reconciliation of income taxes computed at the statutory rate to the
income tax amount recorded for the period ended December 31, 1998 is as
follows (in thousands):
Income tax benefit at statutory rate................................ $ 2,547
Stock-based compensation............................................ (169)
Other permanent differences......................................... (8)
Research and development credit..................................... 32
Increase in valuation allowance..................................... (2,402)
-------
Income tax benefit.................................................. $ --
=======
</TABLE>
5. Stockholders' Equity
Convertible Preferred Stock
In June and August 1998, the Company issued 10,000,000 shares of Series A
preferred stock in a private placement offering in exchange for gross cash
proceeds of $4,000,000, and a Technology License and Marketing Agreement with
an investor that provides for the right to license certain technology and
receive certain technological and marketing support from the stockholder. The
Company valued the right to license certain technology and receive such
technological and marketing support at $4,000,000 based on the value of Series
A preferred stock issued concurrently for cash. Such value was allocated to
prepaid marketing expense, license rights and prepaid technical consulting
services in the amount of $3,765,000, $150,000 and $85,000, respectively,
based on their estimated fair value and will be amortized to expense over the
period the services are provided or the life of the license. During the period
ended December 31, 1998 and the quarter ended April 4, 1999, the Company
recognized expenses under such agreement totaling $58,000 and $1,014,000,
respectively.
In October, November and December 1998, the Company issued 5,446,268 shares
of Series B preferred stock in a private placement offering in exchange for
gross cash proceeds of $18,245,000.
In January and March 1999, the Company issued 4,472,844 shares of Series C
preferred stock in a private placement offering in exchange for gross cash
proceeds of $35,000,000. In connection with the issuance of the Series C
preferred stock, the certificate of incorporation was amended to increase the
total authorized number of preferred and common shares to 51,500,000. The
Certificate of Incorporation was amended in May 1999 to further increase
capitalization (see Note 7).
F-12
<PAGE>
DRUGSTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of April 4, 1999 and for the quarter ended April 4, 1999 is
unaudited)
Each share of Series A, Series B and Series C preferred stock is
convertible into one share of common stock at the option of the holder,
subject to certain antidilution adjustments, in accordance with the conversion
formula provided in the Company's certificate of incorporation (currently on a
1:1 ratio). Outstanding preferred shares automatically convert into common
stock, at the Company's option, upon the closing of an initial public offering
of the Company's common stock in which gross proceeds exceed $15.0 million and
a per share price of not less than $10.00 per share. Holders of each share of
preferred stock are entitled to the number of votes per share that would be
equivalent to the number of shares of common stock into which a share of
preferred stock is convertible and are entitled to dividends if and when
declared by the board of directors. No dividends have been declared. In the
event of any consolidation, merger, or liquidation, the holders of the Series
A, Series B and Series C preferred stock shall be entitled to receive $0.80,
$3.35 and $7.825 per share of preferred stock, respectively, plus cumulative
dividends, if and when declared, at the annual rate of 10%. The Company
granted the preferred stockholders certain registration rights and also agreed
not to carry out certain actions without prior approval of the holders of not
less than two-thirds of the outstanding preferred shares, voting together as a
single class.
Common Stock
The Company and its common and Series A, Series B and Series C stockholders
entered into an agreement, which, among other issues, addresses election of
directors, restrictions on transfer of equity securities by stockholders,
sales of new securities by drugstore.com, and covenants related to transfer of
shares. All provisions of the agreement, with the exception of covenants
related to transfer of shares, expire upon the closing of an initial public
offering.
In conjunction with the sale of Series A preferred stock, the Company's
founder and Chief Executive Officer each granted drugstore.com a right to
repurchase 2,235,000 shares of common stock held by them at the original
purchase price of $0.04 per share if their employment terminates under certain
circumstances. The Company's right of repurchase lapses (1) 25% immediately
and (2) the remaining 75% lapses beginning after one year from the vesting
commencement date at a rate of 1/48th per month. At December 31, 1998,
1,462,969 shares held by the founder and the CEO were subject to repurchase
under these agreements.
1998 Stock Plan
Under the terms of the 1998 stock plan, the board of directors may grant
incentive and nonqualified stock options to employees, officers, directors,
agents, consultants, and independent contractors of the Company. In connection
with the introduction of the 1998 stock plan, 2,735,000 shares of common stock
were reserved for future issuance. On January 29, 1999, the Company increased
the number of shares reserved for future issuance under such plan by 1,500,000
shares. Generally, the Company grants stock options with exercise prices equal
to the fair market value of the common stock on the date of grant, as
determined by the board of directors. Options generally vest over a four to
five year period and expire ten years from the date of grant.
F-13
<PAGE>
DRUGSTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of April 4, 1999 and for the quarter ended April 4, 1999 is
unaudited)
A summary of stock option activity follows:
<TABLE>
<CAPTION>
Outstanding Options
---------------------------
Shares Available Number of Weighted-Average
for Grant Shares Exercise Price
---------------- --------- ----------------
<S> <C> <C> <C>
1998 Plan introduction...... 2,735,000 --
Options granted............. (1,683,584) 1,683,584 $ 0.17
Options exercised........... -- (8,000) 0.12
Options canceled............ 160,250 (160,250) 0.04
---------- ---------
Outstanding at December 31,
1998......................... 1,211,666 1,515,334 0.18
Plan amendment.............. 1,500,000 -- --
Options granted ............ (1,357,100) 1,357,100 1.99
Options canceled............ 120,250 (120,250) 0.35
---------- ---------
Outstanding at April 4, 1999.. 1,474,816 2,752,184 $ 1.06
========== =========
</TABLE>
The following table summarizes information regarding stock options
outstanding and exercisable as of December 31, 1998:
<TABLE>
<CAPTION>
Outstanding Options
-----------------------------------------
Weighted-Average Exercisable
Exercise Number Remaining Number of
Price of Shares Contractual Life Shares
-------- --------- ---------------- -----------
<S> <C> <C> <C>
$0.04 505,834 9.7 years 19,167
$0.12 618,500 9.8 years --
$0.45 391,000 9.9 years --
--------- ------
1,515,334 19,167
========= ======
</TABLE>
Under APB No. 25, no compensation expense is recognized when the exercise
price of the Company's employee stock options equals the fair value of the
underlying stock on the date of grant. Deferred stock-based compensation is
recorded for those situations where the exercise price of an option or the
purchase price of restricted stock was lower than the deemed fair value for
financial reporting purposes of the underlying common stock. The Company
recorded aggregate deferred stock-based compensation of $2,746,000 during 1998
and $5,293,000 in the quarter ended April 4, 1999. The deferred stock-based
compensation is being amortized over the vesting period of the underlying
options and restricted stock. Total amortization of stock-based compensation
recognized was $500,000 during 1998 and $884,000 in the quarter ended April 4,
1999. Amortization of stock-based compensation is allocable to employees in
the following expense categories:
<TABLE>
<CAPTION>
Period from
April 2, 1998
(Inception) to Quarter ended
December 31, 1998 April 4, 1999
----------------- -------------
<S> <C> <C>
Marketing and sales........................ 24% 32%
Product development........................ 24 38
General and administrative................. 52 30
--- ---
100% 100%
=== ===
</TABLE>
F-14
<PAGE>
DRUGSTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of April 4, 1999 and for the quarter ended April 4, 1999 is
unaudited)
Had the stock-based compensation for the Company's stock option plan and
restricted stock agreements been determined based on the minimum value model
using the multiple-option approach, the Company's net loss would have been
adjusted to the following pro forma amount for the period ended December 31,
1998 (in thousands):
<TABLE>
<S> <C>
Net loss--as reported........................................... $ (7,490)
Incremental pro forma compensation expense under SFAS No. 123... (11)
--------
Net loss--pro forma............................................. $ (7,501)
========
Basic and diluted net loss per share--as reported............... $ (14.82)
========
Basic and diluted net loss per share--pro forma................. $ (14.85)
========
Pro forma basic and diluted net loss per share--as reported..... $ (0.92)
========
Pro forma basic and diluted net loss per share--pro forma....... $ (0.92)
========
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the minimum value option pricing model, assuming no expected dividends and
with the following weighted average assumptions at December 31, 1998:
<TABLE>
<S> <C>
Average risk-free interest rate.................................. 4.5%
Average expected life............................................ 3.0 years
Volatility....................................................... 50%
</TABLE>
For purposes of the pro forma disclosures, the estimated weighted average
fair value of the options granted, estimated to be $0.78 per share at December
31, 1998, is amortized to expense over the options' vesting period. This
amount has been reduced by the amount of amortization of deferred stock-based
compensation already recorded in the accompanying statements of operations
that has a weighted average value of $0.77 per share. Compensation expense
recognized in providing pro forma disclosures may not be representative of the
effects on pro forma earnings for future years because the amounts above
include only the amortization for the fair value of 1998 grants.
Common Stock Reserved for Future Issuance
The following shares of common stock were reserved at December 31, 1998:
<TABLE>
<S> <C>
Stock option plan............................................... 2,727,000
Conversion of Series A preferred stock.......................... 10,000,000
Conversion of Series B preferred stock.......................... 5,446,268
----------
18,173,268
==========
</TABLE>
The above table excludes the January 29, 1999 amendment to the stock option
plan increasing the stock option pool by 1,500,000 shares and the January 29,
1999 issuance of 4,472,844 shares of Series C preferred stock which are
convertible into common stock.
6. Note Receivable from Officer
On December 3, 1998, the Company loaned an officer $250,000 evidenced by a
note receivable bearing 7% interest, secured by the officer's stock options to
purchase an aggregate of 150,000 shares of common stock at $0.04 per share,
none of which are vested at December 31, 1998.
F-15
<PAGE>
DRUGSTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of April 4, 1999 and for the quarter ended April 4, 1999 is
unaudited)
7. Subsequent Events
Issuance of Warrant
In February 1999, the Company issued a warrant to purchase 10,000 shares of
its common stock at $7.83 per share in exchange for the right to use the 1-
800-DRUGSTORE and related iterations of telephone numbers. Such warrant is
exercisable immediately and expires in February 2002. The fair value of such
warrant was estimated at $24,000 and was recorded as an intangible asset.
Proposed Initial Public Offering of Common Stock
In April 1999, the board of directors authorized the Company to proceed
with an initial public offering of its common stock. If the offering is
consummated as presently anticipated, all of the outstanding preferred stock
will automatically convert into common stock. The unaudited pro forma
stockholders' equity at April 4, 1999 gives effect to the conversion of all
outstanding shares of convertible preferred stock at April 4, 1999 into
19,919,112 shares of common stock upon completion of the offering. The board
of directors also approved, subject to stockholder approval, a change in the
total number of authorized shares to 260,000,000 shares, of which 250,000,000
will be common stock and 10,000,000 will be undesignated preferred stock.
1998 Stock Plan
In April 1999, the board of directors increased the number of shares
reserved under the 1998 stock plan by 3,600,000 shares which will become
effective upon stockholder approval. As of April 30, 1999, the Company has
reserved a total of 7,827,000 shares of common stock for the issuance of stock
options to employees, officers, directors, or consultants under the 1998 stock
plan.
1999 Employee Stock Purchase Plan
The Company's 1999 employee stock purchase plan was adopted by the board of
directors in April 1999, subject to stockholder approval, to be effective upon
the completion of the Company's initial public offering of its common stock. A
total of 500,000 shares of common stock has been reserved for issuance under
the employee stock purchase plan plus an annual increase on the first day of
each of the fiscal years beginning in 2000, 2001, 2002, 2003 and 2004 equal to
the lesser of (1) 500,000 shares, (2) three percent (3%) of our shares
outstanding on the last day of the immediate preceding fiscal year, or (3)
such lesser number of shares as is determined by the board of directors.
Eligible employees may purchase common stock at 85% of the lesser of the fair
market value of the Company's common stock on the first or the last day of the
applicable six month purchase period.
Defined Contribution Plan
Effective April 1999, the Company adopted a defined contribution retirement
plan under Section 401(k) of the Internal Revenue Code which covers
substantially all employees. Eligible employees may contribute amounts to the
plan, via payroll withholding, subject to certain limitations. Under the
401(k) plan, employees may elect to reduce their current compensation by up to
the statutorily prescribed annual limit ($10,000 in 1999) and to have the
amount of such reduction contributed to the 401(k) plan. The 401(k) plan
permits, but does not require, additional matching contributions to the 401(k)
plan by the Company on behalf of all participants in the 401(k) plan. To date,
the Company has not made any matching contributions to the 401(k) plan.
Sale of Series D Convertible Preferred Stock
In May 1999, the Company issued to a new investor a promissory note which
is convertible into 2,266,289 shares of Series D preferred stock in exchange
for $40 million in cash and an obligation to provide cable
F-16
<PAGE>
DRUGSTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Information as of April 4, 1999 and for the quarter ended April 4, 1999 is
unaudited)
television advertising valued at $5 million. The Series D preferred stock will
carry substantially the same terms and conditions as the Series A, B and C
preferred stock and will be convertible into common stock at a one-to-one
ratio. In connection with the issuance of the convertible promissory note, the
certificate of incorporation was amended to increase the total authorized
number of preferred and common stock to 53,000,000, and the accompanying
financial statements reflect the increase in capitalization.
17
<PAGE>
[INSIDE BACK COVER OF PROSPECTUS]
TITLE: drugstore.com, Makes Shopping Easy
BOX CONTAINING TEXT BELOW TITLE: Help on a personal level
SCREEN SHOTS OF drugstore.com TOOLS AND CONTENT:
Shopping Advisor, Resource Center, Shopping List and Pregnancy and Infant Center
<PAGE>
[drugstore.com logo]
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and we are not soliciting offers to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
[ALTERNATE PAGE FOR AMAZON.COM PROSPECTUS]
PROSPECTUS (Subject to Completion)
Issued May , 1999
Shares
[LOGO OF DRUGSTORE.COM]
COMMON STOCK
-----------
This prospectus relates to the shares of common stock drugstore.com is
offering to Amazon.com. The offering price to Amazon.com will be equal to the
initial public offering price of our common stock. No public market currently
exists for our shares. We anticipate that the initial public offering price
will be between $ and $ per share.
We have applied to list our common stock on the Nasdaq National Market under
the symbol "DSCM."
-----------
Investing in the common stock involves risks. See "Risk Factors" beginning on
page 7.
-----------
PRICE $ A SHARE
-----------
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
, 1999
<PAGE>
[ALTERNATE PAGE FOR AMAZON.COM PROSPECTUS]
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page Page
---- ----
<S> <C> <C> <C>
Prospectus Summary.................. 4 Business......................................... 34
Risk Factors........................ 7 Management....................................... 48
Special Note Regarding Forward- Certain Relationships and Related Transactions... 55
Looking Statements................. 23 Principal Stockholders........................... 57
Sale of Shares to Amazon.com........ 24 Description of Capital Stock..................... 59
Use of Proceeds..................... 24 Shares Eligible for Future Sale.................. 61
Dividend Policy..................... 24 Plan of Distribution............................. 63
Capitalization...................... 25 Legal Matters.................................... 65
Dilution............................ 26 Experts.......................................... 65
Selected Consolidated Financial Where You Can Find More Information.............. 65
Data............................... 27 Index to Consolidated Financial Statements....... F-1
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 28
</TABLE>
We were incorporated in Delaware in April 1998. Our principal executive
offices are located at 13920 Southeast Eastgate Way, Suite 300, Bellevue,
Washington 98005, and our telephone number is (425) 372-3200. Our World Wide
Web site is www.drugstore.com. The information contained on our Web site is
not part of this prospectus.
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of the
prospectus or of any sale of the common stock.
Except as otherwise noted, all information in this prospectus (1) gives
effect to the conversion of all outstanding shares of preferred stock into
shares of common stock effective upon the closing of the offering, (2) assumes
no exercise of the underwriters' overallotment option, (3) assumes the sale of
a number of shares of common stock equal to $10,000,000 divided by the initial
public offering price to Amazon.com in a contemporaneous offering that will
not be underwritten, (4) assumes no conversion of a convertible promissory
note that is convertible into 2,266,289 shares of Series D preferred stock and
(5) assumes no exercise of an outstanding warrant to purchase 10,000 shares of
our common stock.
UNTIL , 1999, 25 DAYS AFTER COMMENCEMENT OF THIS OFFERING, ALL DEALERS
EFFECTING TRANSACTIONS IN OUR COMMON STOCK, WHETHER OR NOT PARTICIPATING IN
THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
drugstore.com(TM), the drugstore.com logo, the boutique(TM), What Every
Body Needs(TM), Where Every Body Shops(TM), What Your Body Needs(TM), and
HEALTH . BEAUTY . WELLNESS(TM) are our trademarks. This prospectus also
includes trade dress, trade names, trademarks and service marks of other
companies. Use or display by drugstore.com of other parties' trademarks, trade
dress or products is not intended to and does not imply a relationship with,
or endorsement or sponsorship of drugstore.com by, the trademark or trade
dress owners.
3
<PAGE>
[ALTERNATE PAGE FOR AMAZON.COM PROSPECTUS]
PLAN OF DISTRIBUTION
The shares being registered hereunder are being offered by us to
Amazon.com. This offering is not being underwritten. See "Sale of Shares to
Amazon.com" and "Certain Relationships and Related Transactions" for a
discussion of our relationship with and the concurrent offering to Amazon.com.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
drugstore.com by Venture Law Group, A Professional Corporation, Menlo Park,
California. John Sellers, a senior attorney at Venture Law Group, is an
Assistant Secretary of drugstore.com. As of the date of this prospectus, an
investment partnership associated with Venture Law Group owns an aggregate of
21,000 shares of our common stock, and one director of Venture Law Group
beneficially owns 4,500 shares of our common stock.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements as of December 31, 1998 and for the period from April 2,
1998 (inception) to December 31, 1998, as set forth in their report. We have
included our financial statements in the prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's report, given on
their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission, a registration
statement on Form S-1 under the Securities Act with respect to the shares of
common stock offered hereby. This prospectus does not contain all the
information set forth in the registration statement and the exhibits and
schedules thereto. For further information with respect to drugstore.com and
such common stock, we refer you to the registration statement and to the
exhibits and schedules filed therewith. Statements contained in this
prospectus as to the contents of any contract or other document referred to
are not necessarily complete, and in each instance reference is made to the
copy of such contract or other document filed as an exhibit to the
registration statement, each such statement being qualified in all respects by
such reference. A copy of the registration statement may be inspected by
anyone without charge at the Public Reference Section of the SEC at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of all
or any portion of the registration statement may be obtained from the Public
Reference Section of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549,
upon payment of prescribed fees. The SEC maintains a web site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the SEC.
65
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by drugstore.com in connection
with the sale of common stock being registered. All amounts are estimates
except the SEC registration fee and the NASD filing fee and the Nasdaq
National Market listing fee.
<TABLE>
<CAPTION>
Amount
to be Paid
----------
<S> <C>
SEC registration fee........................................... $ 18,765
NASD filing fee................................................ 6,250
Nasdaq National Market listing fee............................. 1,000
Printing and engraving expenses................................ 300,000
Legal fees and expenses........................................ 350,000
Accounting fees and expenses................................... 200,000
Blue Sky qualification fees and expenses....................... 5,000
Transfer Agent and Registrar fees.............................. 15,000
Miscellaneous fees and expenses................................ 20,000
--------
Total...................................................... $915,015
========
</TABLE>
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's board of directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933, as amended. Article XIII
of drugstore.com's certificate of incorporation and sections 6.1 and 6.2 of
Article VI of drugstore.com's bylaws provide for indemnification of its
directors, officers, employees and other agents to the maximum extent
permitted by the Delaware General Corporation Law. In addition, drugstore.com
has entered into indemnification agreements with its directors and officers.
The indemnification agreements may require drugstore.com, among other things,
to indemnify its directors against certain liabilities that may arise by
reason of their status or service as directors (other than liabilities arising
from willful misconduct of culpable nature), to advance their expenses
incurred as a result of any proceeding against them as to which they could be
indemnified, and to obtain directors' insurance if available on reasonable
terms. The underwriting agreement (Exhibit 1.1 hereto) also provides for cross
indemnification among drugstore.com and the underwriters with respect to
certain matters, including matters arising under the 1933 Act.
Item 15. Recent Sales of Unregistered Securities
(a) Since inception in April 1998, drugstore.com has issued and sold
(without payment of any selling commission to any person) the following
unregistered securities:
(1) In June, July and August, 1998, drugstore.com issued and sold
2,265,000 shares of common stock to a total of 5 investors for an aggregate
purchase price of $90,600.
(2) In June 1998 and August 1998, drugstore.com issued and sold shares
of Series A preferred stock convertible into an aggregate of 10,000,000
shares of common stock to a total of 5 investors for an aggregate purchase
price of $8,000,000.
(3) In October, November and December 1998, drugstore.com issued and
sold shares of Series B preferred stock convertible into an aggregate of
5,446,268 shares of common stock to a total of 6 investors for an aggregate
purchase price of $18,244,997.80.
II-1
<PAGE>
(4) In January 1999, drugstore.com issued and sold shares of Series C
preferred stock convertible into an aggregate of 1,457,891 shares of common
stock to a total of 5 investors for an aggregate purchase price of
$11,407,997.07.
(5) In January 1999, drugstore.com issued and sold two convertible
promissory notes convertible into shares of Series C preferred stock and
further convertible into an aggregate of 3,014,953 shares of common stock
to a total of 2 investors for an aggregate purchase price of
$23,592,007.22. These notes were converted into shares of Series C
preferred stock in March 1999.
(6) In February 1999, drugstore.com issued a warrant to purchase 10,000
shares of common stock in connection with a corporate partnership
agreement.
(7) In May 1999, drugstore.com issued and sold a convertible promissory
note convertible into shares of Series D preferred stock and further
convertible into 2,266,289 shares of common stock to one investor for an
aggregate purchase price of $40,000,000.85.
(8) As of May 19, 1999, 8,000 shares of fully vested common stock had
been issued pursuant to restricted stock purchase agreements and no shares
of common stock had been issued upon exercise of options; 3,068,684 shares
of common stock were issuable upon exercise of outstanding options under
drugstore.com's 1998 stock plan.
(b) There were no underwritten offerings employed in connection with any of
the transactions set forth in Item 15(a).
The issuances described in Items 15(a)(1)-(7) were deemed to be exempt from
registration under the Securities Act in reliance upon Section 4(2) thereof as
transactions by an issuer not involving any public offering. The issuances
described in Item 15(a)(8) were deemed to be exempt from registration under
the Securities Act in reliance upon Rule 701 promulgated thereunder in that
they were offered and sold either pursuant to written compensatory benefit
plans or pursuant to a written contract relating to compensation, as provided
by Rule 701. In addition, such issuances were deemed to be exempt from
registration under Section 4(2) of the Securities Act as transactions by an
issuer not involving any public offering. The recipients of securities in each
such transaction represented their intentions to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends where affixed to the securities
issued in such transactions. All recipients had adequate access, through their
relationships with us, to information about drugstore.com.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Fifth Amended and Restated Certificate of Incorporation of
drugstore.com.
3.2 Form of Amended and Restated Certificate of Incorporation of
drugstore.com, to be filed and effective upon completion of this
offering.
3.3 Bylaws of drugstore.com, as amended.
4.1* Form of drugstore.com's common stock certificate.
5.1* Opinion of Venture Law Group, A Professional Corporation.
10.1 Form of Indemnification Agreement between drugstore.com and each of its
officers and directors.
10.2 1998 Stock Plan, as amended.
10.3 1999 Employee Stock Purchase Plan.
10.4 Restricted Stock Purchase Agreement with Jed A. Smith dated June 19,
1998.
10.5 Restricted Stock Purchase Agreement with Peter M. Neupert dated July 23,
1998.
10.6 Form of Warrant To Purchase Common Stock.
10.7 Series A Preferred Stock Purchase Agreement dated June 22, 1998.
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
10.8 Series B Preferred Stock Purchase Agreement dated October 9, 1998.
10.9 Series B Preferred Stock Rescission Agreement dated November 23, 1998
between drugstore.com and entities affiliated with Kleiner Perkins
Caufield & Byers.
10.10 Series C Preferred Stock and Convertible Note Purchase Agreement dated
January 29, 1999.
10.11 Series D Preferred Stock and Convertible Note Purchase Agreement dated
May 19, 1999.
10.12 Fourth Amended and Restated Investors' Rights Agreement dated May 19,
1999.
10.13 Sublease Agreement dated January 29, 1999 between drugstore.com and
The Boeing Company for offices at 13920 Southeast Eastgate Way, Suite
300, Bellevue, Washington.
10.14*+ Amended and Restated Technology License and Advertising Agreement
dated May 19, 1999 between drugstore.com, Amazon.com and Amazon.com
Drugstore, Inc.
10.15*+ Pharmacy Service Agreement dated February 8, 1999 with RxAmerica
L.L.C.
10.16*+ Service & Supply Agreement dated January 29, 1999 with Walsh
Distribution, Inc.
10.17 Offer Letter dated June 29, 1998 with Peter M. Neupert.
10.18 Offer Letter dated July 28, 1998 with Kal Raman.
10.19 Offer Letter dated December 4, 1998 with Mark L. Silverman.
10.20 Offer Letter dated June 18, 1998 with Jed A. Smith.
10.21 Amended and Restated Voting Agreement dated May 19, 1999.
10.22 Letter Agreement dated May 19, 1999 with Amazon.com.
10.23 Cable Advertising Agreement dated May 19, 1999 with Vulcan Ventures
Incorporated.
21.1 Subsidiaries.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2* Consent of Counsel (see Exhibit 5.1).
24.1 Power of Attorney (see page II-5).
27.1 Financial Data Schedule (EDGAR-filed version only).
</TABLE>
- --------
* To be supplied by amendment.
+ Confidential treatment will be requested as to certain portions of this
Exhibit. Such confidential portions will be provided separately to the
Securities and Exchange Commission.
(b) Financial Statement Schedules
All financial statement schedules not listed are omitted because they are
inapplicable or the requested information is shown in the financial statements
of the registrant or the related notes to the financial statements.
Item 17. Undertakings
The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (Act) may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit
II-3
<PAGE>
or proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1), or (4),
or 497(h) under the Act shall be deemed to be a part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
posteffective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and this offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the undersigned
Registrant has duly caused this Registration Statement on Form S-1 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Bellevue, State of Washington, on May 19, 1999.
drugstore.com, inc.
/s/ Peter M. Neupert
By: _________________________________
Peter M. Neupert, President and
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints David E. Rostov and Mark L. Silverman,
and each one of them, his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any and all
amendments to this Registration Statement (including post-effective
amendments), and any and all registration statements filed pursuant to Rule
462 under the Securities Act of 1933, as amended, in connection with or
related to the offering contemplated by this registration statement and its
amendments, if any, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said attorneys-
in-fact, or his substitute or substitutes, may do or cause to be done by
virtue hereof. This Power of Attorney may be signed in several counterparts.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form S-1 has been signed by the following persons in
the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Peter M. Neupert President, Chief Executive May 19, 1999
______________________________________ Officer and Director
(Peter M. Neupert) (Principal Executive
Officer)
/s/ David E. Rostov Vice President and Chief May 19, 1999
______________________________________ Financial Officer
(David E. Rostov) (Principal Financial and
Accounting Officer)
/s/ Jeffrey P. Bezos Director May 19, 1999
______________________________________
(Jeffrey P. Bezos)
/s/ Brook H. Byers Director May 19, 1999
______________________________________
(Brook H. Byers)
/s/ L. John Doerr Director May 19, 1999
______________________________________
(L. John Doerr)
/s/ Howard Schultz Director May 19, 1999
______________________________________
(Howard Schultz)
/s/ Jed A. Smith Director May 19, 1999
______________________________________
(Jed A. Smith)
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Fifth Amended and Restated Certificate of Incorporation of
drugstore.com.
3.2 Form of Amended and Restated Certificate of Incorporation of
drugstore.com, to be filed and effective upon completion of this
offering.
3.3 Bylaws of drugstore.com, as amended.
4.1* Form of drugstore.com's common stock certificate.
5.1* Opinion of Venture Law Group, A Professional Corporation.
10.1 Form of Indemnification Agreement between drugstore.com and each of
its officers and directors.
10.2 1998 Stock Plan, as amended.
10.3 1999 Employee Stock Purchase Plan.
10.4 Restricted Stock Purchase Agreement with Jed A. Smith dated June 19,
1998.
10.5 Restricted Stock Purchase Agreement with Peter M. Neupert dated July
23, 1998.
10.6 Form of Warrant To Purchase Common Stock.
10.7 Series A Preferred Stock Purchase Agreement dated June 22, 1998.
10.8 Series B Preferred Stock Purchase Agreement dated October 9, 1998.
10.9 Series B Preferred Stock Rescission Agreement dated November 23, 1998
between drugstore.com and entities affiliated with Kleiner Perkins
Caufield & Byers.
10.10 Series C Preferred Stock and Convertible Note Purchase Agreement dated
January 29, 1999.
10.11 Series D Preferred Stock and Convertible Note Purchase Agreement dated
May 19, 1999.
10.12 Fourth Amended and Restated Investors' Rights Agreement dated May 19,
1999.
10.13 Sublease Agreement dated January 29, 1999 between drugstore.com and
The Boeing Company for offices at 13920 Southeast Eastgate Way, Suite
300, Bellevue, Washington.
10.14*+ Amended and Restated Technology License and Advertising Agreement
dated May 19, 1999 between drugstore.com and Amazon.com.
10.15*+ Pharmacy Service Agreement dated February 8, 1999 with RxAmerica
L.L.C.
10.16*+ Service & Supply Agreement dated January 29, 1999 with Walsh
Distribution, Inc.
10.17 Offer Letter dated June 29, 1998 with Peter M. Neupert.
10.18 Offer Letter dated July 28, 1998 with Kal Raman.
10.19 Offer Letter dated December 4, 1998 with Mark L. Silverman.
10.20 Offer Letter dated June 18, 1998 with Jed A. Smith.
10.21 Second Amended and Restated Voting Agreement dated May 19, 1999.
10.22 Letter Agreement dated May 19, 1999 with Amazon.com.
10.23 Cable Advertising Agreement dated May 19, 1999 with Vulcan Ventures
Incorporated.
21.1 Subsidiaries.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2* Consent of Counsel (see Exhibit 5.1).
24.1 Power of Attorney (see page II-5).
27.1 Financial Data Schedule (EDGAR-filed version only).
</TABLE>
- --------
* To be supplied by amendment.
+ Confidential treatment will be requested as to certain portions of this
Exhibit. Such confidential portions will be provided separately to the
Securities and Exchange Commission.
<PAGE>
EXHIBIT 1.1
____________ Shares
DRUGSTORE.COM, INC.
COMMON STOCK ($0.001 PAR VALUE PER SHARE)
UNDERWRITING AGREEMENT
July ___, 1999
<PAGE>
July ___, 1999
Morgan Stanley & Co. Incorporated
Donaldson Lufkin & Jenrette Securities Corporation
Thomas Weisel Partners LLC
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Dear Sirs and Mesdames:
drugstore.com, inc., a Delaware corporation (the "Company"), proposes to
issue and sell to the several Underwriters named in Schedule I hereto (the
"Underwriters") _______________ shares of its Common Stock, $0.001 par value
(the "Firm Shares"). The Company also proposes to issue and sell to the several
Underwriters not more than an additional ______________ shares of its Common
Stock, $0.001 par value per share (the "Additional Shares") if and to the extent
that you, as Managers of the offering, shall have determined to exercise, on
behalf of the Underwriters, the right to purchase such shares of common stock
granted to the Underwriters in Section 2 hereof. The Firm Shares and the
Additional Shares are hereinafter collectively referred to as the "Shares." The
shares of Common Stock, $0.001 par value per share of the Company to be
outstanding after giving effect to the sales contemplated hereby are hereinafter
referred to as the "Common Stock."
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement, including a prospectus, relating to the
Shares. The registration statement as amended at the time it becomes effective,
including the information (if any) deemed to be part of the registration
statement at the time of effectiveness pursuant to Rule 430A under the
Securities Act of 1933, as amended (the "Securities Act"), is hereinafter
referred to as the "Registration Statement"; the prospectus in the form first
used to confirm sales of Shares is hereinafter referred to as the "Prospectus."
If the Company has filed an abbreviated registration statement to register
additional shares of Common Stock pursuant to Rule 462(b) under the Securities
Act (the "Rule 462 Registration Statement"), then any reference herein to the
term "Registration Statement" shall be deemed to include such Rule 462
Registration Statement.
Morgan Stanley & Co. Incorporated ("Morgan Stanley") has agreed to reserve
a portion of the Shares to be purchased by it under this Agreement for sale to
the Company's directors, officers, employees and business associates and other
parties related to the Company (collectively, "Participants"), as set forth in
the Prospectus under the heading "Underwriters" (the "Directed Share Program").
The Shares to be sold by Morgan Stanley pursuant to the Directed Share Program
are referred to hereinafter as the "Directed Shares". Any Directed Shares not
orally confirmed for purchase by any Participant by the end of the business day
on which this Agreement is executed will be offered to the public by the
Underwriters as set forth in the Prospectus.
<PAGE>
1. Representations and Warranties. The Company represents and warrants
to and agrees with each of the Underwriters that:
(a) The Registration Statement has become effective; no stop order
suspending the effectiveness of the Registration Statement is in effect, and no
proceedings for such purpose are pending before or threatened by the Commission.
(b) (i) The Registration Statement, when it became effective, did not
contain and, as amended or supplemented, if applicable, will not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading,
(ii) the Registration Statement and the Prospectus comply and, as amended or
supplemented, if applicable, will comply in all material respects with the
Securities Act and the applicable rules and regulations of the Commission
thereunder and (iii) the Prospectus does not contain and, as amended or
supplemented, if applicable, will not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading,
except that the representations and warranties set forth in this paragraph do
not apply to statements or omissions in the Registration Statement or the
Prospectus based upon information relating to any Underwriter furnished to the
Company in writing by such Underwriter through you expressly for use therein.
(c) The Company has been duly incorporated, is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, has the corporate power and authority to own its property and to
conduct its business as described in the Prospectus and is duly qualified to
transact business and is in good standing in each jurisdiction in which the
conduct of its business or its ownership or leasing of property requires such
qualification, except to the extent that the failure to be so qualified or be in
good standing would not have a material adverse effect on the Company and its
subsidiaries, taken as a whole.
(d) Each subsidiary of the Company has been duly incorporated, is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has the corporate power and authority to own
its property and to conduct its business as described in the Prospectus and is
duly qualified to transact business and is in good standing in each jurisdiction
in which the conduct of its business or its ownership or leasing of property
requires such qualification, except to the extent that the failure to be so
qualified or be in good standing would not have a material adverse effect on the
Company and its subsidiaries, taken as a whole; all of the issued shares of
capital stock of each subsidiary of the Company have been duly and validly
authorized and issued, are fully paid and non-assessable and are owned directly
by the Company, free and clear of all liens, encumbrances, equities or claims.
No subsidiary is a "significant subsidiary" as defined in Rule 1-02 of
Regulation S-X under the Securities Act.
(e) This Agreement has been duly authorized, executed and delivered
by the Company.
(f) The authorized capital stock of the Company conforms as to legal
matters to the description thereof contained in the Prospectus.
-2-
<PAGE>
(g) The shares of Common Stock outstanding prior to the issuance of
the Shares have been duly authorized and are validly issued, fully paid and non
assessable.
(h) The Shares have been duly authorized and, when issued and
delivered in accordance with the terms of this Agreement, will be validly
issued, fully paid and non assessable, and the issuance of such Shares will not
be subject to any preemptive or similar rights, except for rights granted to
Amazon.com, Inc. pursuant to a letter agreement dated May 18, 1999 between the
Company and Amazon.com, Inc. (the "Letter Agreement").
(i) The execution and delivery by the Company of, and the performance
by the Company of its obligations under, this Agreement will not contravene any
provision of applicable law or the certificate of incorporation or by laws of
the Company or any agreement or other instrument binding upon the Company or any
of its subsidiaries that is material to the Company and its subsidiaries, taken
as a whole, or any judgment, order or decree of any governmental body, agency or
court having jurisdiction over the Company or any subsidiary, and no consent,
approval, authorization or order of, or qualification with, any governmental
body or agency is required for the performance by the Company of its obligations
under this Agreement, except such as may be required by the securities or Blue
Sky laws of the various states in connection with the offer and sale of the
Shares.
(j) There has not occurred any material adverse change, or any
development involving a prospective material adverse change, in the condition,
financial or otherwise, or in the earnings, business or operations of the
Company and its subsidiaries, taken as a whole, from that set forth in the
Prospectus (exclusive of any amendments or supplements thereto subsequent to the
date of this Agreement).
(k) There are no legal or governmental proceedings pending or
threatened to which the Company or any of its subsidiaries is a party or to
which any of the properties of the Company or any of its subsidiaries is subject
that are required to be described in the Registration Statement or the
Prospectus and are not so described or any statutes, regulations, contracts or
other documents that are required to be described in the Registration Statement
or the Prospectus or to be filed as exhibits to the Registration Statement that
are not described or filed as required.
(l) Each preliminary prospectus filed as part of the registration
statement as originally filed or as part of any amendment thereto, or filed
pursuant to Rule 424 under the Securities Act, complied when so filed in all
material respects with the Securities Act and the applicable rules and
regulations of the Commission thereunder.
(m) The Company is not and, after giving effect to the offering and
sale of the Shares and the application of the proceeds thereof as described in
the Prospectus, will not be an "investment company" as such term is defined in
the Investment Company Act of 1940, as amended.
(n) The Company and its subsidiaries (i) are in compliance with any
and all applicable foreign, federal, state and local laws and regulations
relating to the protection of human health and safety, the environment or
hazardous or toxic substances or wastes, pollutants or
-3-
<PAGE>
contaminants ("Environmental Laws"), (ii) have received all permits, licenses or
other approvals required of them under applicable Environmental Laws to conduct
their respective businesses and (iii) are in compliance with all terms and
conditions of any such permit, license or approval, except where such
noncompliance with Environmental Laws, failure to receive required permits,
licenses or other approvals or failure to comply with the terms and conditions
of such permits, licenses or approvals would not, singly or in the aggregate,
have a material adverse effect on the Company and its subsidiaries, taken as a
whole.
(o) There are no costs or liabilities associated with Environmental
Laws (including, without limitation, any capital or operating expenditures
required for clean up, closure of properties or compliance with Environmental
Laws or any permit, license or approval, any related constraints on operating
activities and any potential liabilities to third parties) which would, singly
or in the aggregate, have a material adverse effect on the Company and its
subsidiaries, taken as a whole.
(p) There are no contracts, agreements or understandings between the
Company and any person granting such person the right to require the Company to
file a registration statement under the Securities Act with respect to any
securities of the Company or to require the Company to include such securities
with the Shares registered pursuant to the Registration Statement.
(q) The Company has complied with all provisions of Section 517.075,
Florida Statutes relating to doing business with the Government of Cuba or with
any person or affiliate located in Cuba.
(r) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, (1) the Company and its
subsidiaries have not incurred any material liability or obligation, direct or
contingent, nor entered into any material transaction not in the ordinary course
of business; (2) the Company has not purchased any of its outstanding capital
stock, nor declared, paid or otherwise made any dividend or distribution of any
kind on its capital stock other than ordinary and customary dividends; and (3)
there has not been any material change in the capital stock, short-term debt or
long-term debt of the Company and its subsidiaries, except in each case as
described in the Prospectus.
(s) The Company and its subsidiaries have good and marketable title
in fee simple to all real property and good and marketable title to all personal
property owned by them which is material to the business of the Company and its
subsidiaries, in each case free and clear of all liens, encumbrances and defects
except such as are described in the Prospectus or such as do not materially
affect the value of such property and do not interfere with the use made and
proposed to be made of such property by the Company and its subsidiaries; and
any real property and buildings held under lease by the Company and its
subsidiaries are held by them under valid, subsisting and enforceable leases
with such exceptions as are not material and do not interfere with the use made
and proposed to be made of such property and buildings by the Company and its
subsidiaries, in each case except as described in the Prospectus.
-4-
<PAGE>
(t) The Company and its subsidiaries own or possess, or can acquire
on reasonable terms, all material patents, patent rights, licenses, inventions,
copyrights, know-how (including trade secrets and other unpatented and/or
unpatentable proprietary or confidential information, systems or procedures),
Internet domain names, trademarks, service marks and trade names ("Intellectual
Property") currently employed by them in connection with the business now
operated by them; neither the Company nor any of its subsidiaries has received
any notice of infringement of or conflict with asserted rights of others with
respect to any of the foregoing which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would have a material
adverse affect on the Company and its subsidiaries, taken as a whole; and
neither the Company nor any of its subsidiaries utilize any Intellectual
Property of Amazon.com, Inc. in connection with the business now operated by the
Company or any of its subsidiaries.
(u) No material labor dispute with the employees of the Company or
any of its subsidiaries exists, except as described in the Prospectus, or, to
the knowledge of the Company, is imminent; and the Company is not aware of any
existing, threatened or imminent labor disturbance by the employees of any of
its principal suppliers, manufacturers or contractors that could have a material
adverse effect on the Company and its subsidiaries, taken as a whole.
(v) The Company and its subsidiaries are insured by the insurers of
recognized financial responsibility against such losses and risks and in such
amounts as are prudent and customary in the businesses in which they are
engaged; neither the Company nor any of its subsidiaries has been refused any
insurance coverage sought or applied for; and neither the Company nor any of its
subsidiaries has any reason to believe that it will not be able to renew its
existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business at a cost that would not have a material adverse effect on the Company
and its subsidiaries, taken as a whole, except as described in the Prospectus.
(w) The Company and its subsidiaries are in compliance with all
applicable foreign, federal, state and local laws and regulations relating to
the Company's pharmacy operations as described in the Prospectus; the Company
and its subsidiaries possess all certificates, authorizations and permits issued
by the appropriate federal, state, local or foreign regulatory authorities
necessary to conduct their respective business, including being licensed and in
good standing as a pharmacy in the State of Washington and as a non-resident
pharmacy in each state where a license is required; to the best knowledge of the
Company, RxAmerica, L.L.C. possess all certificates, authorizations and permits
issued by the appropriate federal, state or foreign regulatory authorities
necessary to fulfill its obligations to the Company under the Pharmacy Service
Agreement (the "Pharmacy Service Agreement") dated February 8, 1999, including
being licensed resident pharmacy in each state where a license is required; and
neither the Company; any of its subsidiaries, or to the best knowledge of the
Company, RxAmerica, L.L.C., has received any notice of proceedings relating to
the revocation or modification of any such certificate, authorization or permit
which, singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, would have a material adverse effect on the Company and its
subsidiaries, taken as a whole, except as described the Prospectus.
-5-
<PAGE>
(x) The Company and its subsidiaries have not received written notice
of termination of (i) the Pharmacy Service Agreement, or (ii) the Service and
Supply Agreement dated January 29, 1999 between the Company and Walsh
Distribution, Inc.
(y) The Company and each of its subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurance that (1)
transactions are executed in accordance with management's general or specific
authorizations; (2) transactions are recorded as necessary to permit preparation
of financial statements in conformity with generally accepted accounting
principles and to maintain asset accountability; (3) access to assets is
permitted only in accordance with management's general or specific
authorization; and (4) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(z) The Company has reviewed its operations and that of its
subsidiaries to evaluate the extent to which the business or operations of the
Company or any of its subsidiaries will be affected by the Year 2000 Problem
(that is, any significant risk that computer hardware or software applications
used by the Company and its subsidiaries will not, in the case of dates or time
periods occurring after December 31, 1999, function at least as effectively as
in the case of dates or time periods occurring prior to January 1, 2000); as a
result of such review, (i) the Company has no reason to believe, and does not
believe, that (A) there are any issues related to the Company's preparedness to
address the Year 2000 Problem that are of a character required to be described
or referred to in the Registration Statement or Prospectus which have not been
accurately described in the Registration Statement or Prospectus and (B) the
Year 2000 Problem will have a material adverse effect on the condition,
financial or otherwise, or on the earnings, business or operations of the
Company and its subsidiaries, taken as a whole, or result in any material loss
or interference with the business or operations of the Company and its
subsidiaries, taken as a whole; and (ii) the Company reasonably believes, after
due inquiry, that the suppliers, vendors, customers or other material third
parties used or served by the Company and such subsidiaries are addressing or
will address the Year 2000 Problem in a timely manner, except to the extent that
a failure to address the Year 2000 Problem by any supplier, vendor, customer or
material third party would not have a material adverse effect on the condition,
financial or otherwise, or on the earnings, business or operations of the
Company and its subsidiaries, taken as a whole.
(aa) The Nasdaq Stock Market, Inc. has approved the Common Stock for
listing on the Nasdaq National Market, subject only to official notice of
issuance.
(bb) Except for the Shares, all outstanding shares of Common Stock,
and all securities convertible into or exercisable or exchangeable for Common
Stock, are subject to valid and binding agreement (collectively, the "Lock-up
Agreements") that restrict the holders thereof from selling, making any short
sale of, granting any option for the purchase of, or otherwise transferring or
disposing of, any such shares of Common Stock, or any such securities
convertible into or exercisable or exchangeable for Common Stock, for a period
of 180 days after the date of the Prospectus without the prior written consent
of Morgan Stanley & Co. Incorporated.
-6-
<PAGE>
(cc) The Company (i) has notified each holder of a currently
outstanding option issued under the 1998 Stock Option Plan (the "Option Plan")
and each person who has acquired shares of Common Stock pursuant to the exercise
of any option granted under the Option Plan that pursuant to the terms of the
Option Plan, that none of such options or shares may be sold or otherwise
transferred or disposed of for a period of 180 days after the date of the
Prospectus and (ii) has imposed a stop-transfer instruction with the Company's
transfer agent in order to enforce the foregoing lock-up provision imposed
pursuant to the Option Plan.
(dd) The Company (i) has notified each stockholder who is party to the
Third Amended and Restated Investors' Rights Agreement dated January 29, 1999,
(the "Investors' Rights Agreement"), that pursuant to the terms of the
Investors' Rights Agreement, none of the shares of the Company's capital stock
held by such stockholder may be sold or otherwise transferred or disposed of for
a period of 180 days after the date of the Prospectus and (ii) has imposed a
stop-transfer instruction with the Company's transfer agent in order to enforce
the foregoing lock-up provision imposed pursuant to the Investors' Rights
Agreement.
(ee) The issuance of __________ shares of the Company's Common Stock,
$0.001 par value per share, on the Closing Date, will fulfill the Company's
obligations to Amazon.com, Inc. under the Letter Agreement.
Furthermore, the Company represents and warrants to Morgan Stanley that (i)
the Registration Statement, the Prospectus and any preliminary prospectus
comply, and any further amendments or supplements thereto will comply, with any
applicable laws or regulations of foreign jurisdictions in which the Prospectus
or any preliminary prospectus, as amended or supplemented, if applicable, are
distributed in connection with the Directed Share Program, and that (ii) no
authorization, approval, consent, license, order, registration or qualification
of or with any government, governmental instrumentality or court, other than
such as have been obtained, is necessary under the securities laws and
regulations of foreign jurisdictions in which the Directed Shares are offered
outside the United States.
The Company has not offered, or caused the Underwriters to offer, Shares to
any person pursuant to the Directed Share Program with the specific intent to
unlawfully influence (i) a customer or supplier of the Company to alter the
customer's or supplier's level or type of business with the Company, or (ii) a
trade journalist or publication to write or publish favorable information about
the Company or its products.
2. Agreements to Sell and Purchase. The Company hereby agrees to sell to
the several Underwriters, and each Underwriter, upon the basis of the
representations and warranties herein contained, but subject to the conditions
hereinafter stated, agrees, severally and not jointly, to purchase from the
Company the respective numbers of Firm Shares set forth in Schedule I hereto
opposite its name at $______ a share (the "Purchase Price").
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company agrees to sell
to the Underwriters the Additional Shares, and the Underwriters shall have a one
time right to purchase, severally and not jointly, up to _______________
Additional Shares at the Purchase Price. If you, on behalf of the Underwriters,
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<PAGE>
elect to exercise such option, you shall so notify the Company in writing not
later than 30 days after the date of this Agreement, which notice shall specify
the number of Additional Shares to be purchased by the Underwriters and the date
on which such shares are to be purchased. Such date may be the same as the
Closing Date (as defined below) but not earlier than the Closing Date nor later
than ten business days after the date of such notice. Additional Shares may be
purchased as provided in Section 4 hereof solely for the purpose of covering
over allotments made in connection with the offering of the Firm Shares. If any
Additional Shares are to be purchased, each Underwriter agrees, severally and
not jointly, to purchase the number of Additional Shares (subject to such
adjustments to eliminate fractional shares as you may determine) that bears the
same proportion to the total number of Additional Shares to be purchased as the
number of Firm Shares set forth in Schedule I hereto opposite the name of such
Underwriter bears to the total number of Firm Shares.
The Company hereby agrees that, without the prior written consent of Morgan
Stanley & Co. Incorporated on behalf of the Underwriters, it will not, during
the period ending 180 days after the date of the Prospectus, (i) offer, pledge,
sell, contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant to purchase,
lend, or otherwise transfer or dispose of, directly or indirectly, any shares of
Common Stock or any securities convertible into or exercisable or exchangeable
for Common Stock or (ii) enter into any swap or other arrangement that transfers
to another, in whole or in part, any of the economic consequences of ownership
of the Common Stock, whether any such transaction described in clause (i) or
(ii) above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise. The foregoing sentence shall not apply to (A)
the Shares to be sold hereunder or (B) the issuance by the Company of shares of
Common Stock upon the exercise of an option or warrant or the conversion of a
security outstanding on the date hereof of which the Underwriters have been
advised in writing.
3. Terms of Public Offering. The Company is advised by you that the
Underwriters propose to make a public offering of their respective portions of
the Shares as soon after the Registration Statement and this Agreement have
become effective as in your judgment is advisable. The Company is further
advised by you that the Shares are to be offered to the public initially at
$_____________ a share (the "Public Offering Price") and to certain dealers
selected by you at a price that represents a concession not in excess of $______
a share under the Public Offering Price, and that any Underwriter may allow, and
such dealers may reallow, a concession, not in excess of $_____ a share, to any
Underwriter or to certain other dealers.
4. Payment and Delivery. Payment for the Firm Shares shall be made to
the Company in Federal or other funds immediately available in New York City
against delivery of such Firm Shares for the respective accounts of the several
Underwriters at 10:00 a.m., New York City time, on July ___, 1999, or at such
other time on the same or such other date, not later than July ___, 1999, as
shall be designated in writing by you. The time and date of such payment are
hereinafter referred to as the "Closing Date".
Payment for any Additional Shares shall be made to the Company in Federal
or other funds immediately available in New York City against delivery of such
Additional Shares for the respective accounts of the several Underwriters at
10:00 a.m., New York City time, on the date specified in the notice described in
Section 2 or at such other time on the same or on such other date,
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in any event not later than _______, 1999, as shall be designated in writing by
you. The time and date of such payment are hereinafter referred to as the
"Option Closing Date".
Certificates for the Firm Shares and Additional Shares shall be in
definitive form and registered in such names and in such denominations as you
shall request in writing not later than one full business day prior to the
Closing Date or the Option Closing Date, as the case may be. The certificates
evidencing the Firm Shares and Additional Shares shall be delivered to you on
the Closing Date or the Option Closing Date, as the case may be, for the
respective accounts of the several Underwriters, with any transfer taxes payable
in connection with the transfer of the Shares to the Underwriters duly paid,
against payment of the Purchase Price therefor.
5. Conditions to the Underwriters' Obligations. The obligations of the
Company to sell the Shares to the Underwriters and the several obligations of
the Underwriters to purchase and pay for the Shares on the Closing Date are
subject to the condition that the Registration Statement shall have become
effective not later than [_____] (New York City time) on the date hereof.
The several obligations of the Underwriters are subject to the following
further conditions:
(a) Subsequent to the execution and delivery of this Agreement and
prior to the Closing Date:
(i) there shall not have occurred any downgrading, nor shall any
notice have been given of any intended or potential downgrading or of any review
for a possible change that does not indicate the direction of the possible
change, in the rating accorded any of the Company's securities by any
"nationally recognized statistical rating organization," as such term is defined
for purposes of Rule 436(g)(2) under the Securities Act; and
(ii) there shall not have occurred any change, or any development
involving a prospective change, in the condition, financial or otherwise, or in
the earnings, business or operations of the Company and its subsidiaries, taken
as a whole, from that set forth in the Prospectus (exclusive of any amendments
or supplements thereto subsequent to the date of this Agreement) that, in your
judgment, is material and adverse and that makes it, in your judgment,
impracticable to market the Shares on the terms and in the manner contemplated
in the Prospectus.
(b) The Underwriters shall have received on the Closing Date a
certificate, dated the Closing Date and signed by an executive officer of the
Company, to the effect set forth in Section 5(a)(i) above and to the effect that
the representations and warranties of the Company contained in this Agreement
are true and correct as of the Closing Date and that the Company has complied
with all of the agreements and satisfied all of the conditions on its part to be
performed or satisfied hereunder on or before the Closing Date.
The officer signing and delivering such certificate may rely upon the best
of his or her knowledge as to proceedings threatened.
(c) The Underwriters shall have received on the Closing Date an
opinion of Venture Law Group, outside counsel for the Company, dated the Closing
Date, to the effect that:
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(i) the Company has been duly incorporated, is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, has the corporate power and authority to own its property and to
conduct its business as described in the Prospectus and is duly qualified to
transact business and is in good standing in each jurisdiction in which the
conduct of its business or its ownership or leasing of property requires such
qualification, except to the extent that the failure to be so qualified or be in
good standing would not have a material adverse effect on the Company and its
subsidiaries, taken as a whole;
(ii) each subsidiary of the Company has been duly incorporated, is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has the corporate power and authority to own
its property and to conduct its business as described in the Prospectus and is
duly qualified to transact business and is in good standing in each jurisdiction
in which the conduct of its business or its ownership or leasing of property
requires such qualification, except to the extent that the failure to be so
qualified or be in good standing would not have a material adverse effect on the
Company and its subsidiaries, taken as a whole;
(iii) the authorized capital stock of the Company conforms as to legal
matters to the description thereof contained in the Prospectus;
(iv) the shares of Common Stock outstanding prior to the issuance of
the Shares have been duly authorized and are validly issued, fully paid and non
assessable;
(v) all of the issued shares of capital stock of each subsidiary of
the Company have been duly and validly authorized and issued, are fully paid and
non-assessable and are owned directly by the Company, free and clear of all
liens, encumbrances, equities or claims;
(vi) the Shares have been duly authorized and, when issued and
delivered in accordance with the terms of this Agreement, will be validly
issued, fully paid and non assessable, and the issuance of such Shares will not
be subject to any preemptive or similar rights;
(vii) this Agreement has been duly authorized, executed and delivered
by the Company;
(viii) the execution and delivery by the Company of, and the
performance by the Company of its obligations under, this Agreement will not
contravene any provision of applicable law or the certificate of incorporation
or by laws of the Company or, to the best of such counsel's knowledge, any
agreement or other instrument binding upon the Company or any of its
subsidiaries that is material to the Company and its subsidiaries, taken as a
whole, or, to the best of such counsel's knowledge, any judgment, order or
decree of any governmental body, agency or court having jurisdiction over the
Company or any subsidiary, and no consent, approval, authorization or order of,
or qualification with, any governmental body or agency is required for the
performance by the Company of its obligations under this Agreement, except such
as may be required by the securities or Blue Sky laws of the various states in
connection with the offer and sale of the Shares;
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(ix) the statements (A) in the Prospectus under the captions "Risk
Factors(Substantial Sales of Our Common Stock Could Cause Our Stock Price to
Fall," "Management(Stock Plans," "Management(401(k) Plan,"
"Management(Employment Agreements," "Management(Limitation of Liability and
Indemnification Matters," "Certain Transactions," "Description of Capital
Stock," "Shares Eligible for Future Sale" and "Underwriters" and (B) in the
Registration Statement in Items 14 and 15, in each case insofar as such
statements constitute summaries of the legal matters, documents or proceedings
referred to therein, fairly present the information called for with respect to
such legal matters, documents and proceedings and fairly summarize the matters
referred to therein;
(x) after due inquiry, such counsel does not know of any legal or
governmental proceedings pending or threatened to which the Company or any of
its subsidiaries is a party or to which any of the properties of the Company or
any of its subsidiaries is subject that are required to be described in the
Registration Statement or the Prospectus and are not so described or of any
statutes, regulations, contracts or other documents that are required to be
described in the Registration Statement or the Prospectus or to be filed as
exhibits to the Registration Statement that are not described or filed as
required;
(xi) the Company is not and, after giving effect to the offering and
sale of the Shares and the application of the proceeds thereof as described in
the Prospectus, will not be an "investment company" as such term is defined in
the Investment Company Act of 1940, as amended;
(xii) the Company and its subsidiaries (A) are in compliance with any
and all applicable Environmental Laws, (B) have received all permits, licenses
or other approvals required of them under applicable Environmental Laws to
conduct their respective businesses and (C) are in compliance with all terms and
conditions of any such permit, license or approval, except where such
noncompliance with Environmental Laws, failure to receive required permits,
licenses or other approvals or failure to comply with the terms and conditions
of such permits, licenses or approvals would not, singly or in the aggregate,
have a material adverse effect on the Company and its subsidiaries, taken as a
whole; and
(xiii) such counsel (A) is of the opinion that the Registration
Statement and Prospectus (except for financial statements and schedules and
other financial and statistical data included therein as to which such counsel
need not express any opinion) comply as to form in all material respects with
the Securities Act and the applicable rules and regulations of the Commission
thereunder, (B) has no reason to believe that (except for financial statements
and schedules and other financial and statistical data as to which such counsel
need not express any belief) the Registration Statement and the prospectus
included therein at the time the Registration Statement became effective
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading and (C) has no reason to believe that (except for financial
statements and schedules and other financial and statistical data as to which
such counsel need not express any belief) the Prospectus contains any untrue
statement of a material fact or omits to state a material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading.
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(d) The Underwriters shall have received on the Closing Date an
opinion of Wilson Sonsini Goodrich & Rosati, counsel for the Underwriters, dated
the Closing Date, covering the matters referred to in Sections 5(c)(vi),
5(c)(vii), 5(c)(ix) (but only as to the statements in the Prospectus under
"Description of Capital Stock" and "Underwriters") and 5(c)(xiii) above.
With respect to Section 5(c)(xiii) above, Venture Law Group and Wilson
Sonsini Goodrich & Rosati may state that their opinion and belief are based upon
their participation in the preparation of the Registration Statement and
Prospectus and any amendments or supplements thereto and review and discussion
of the contents thereof, but are without independent check or verification,
except as specified.
(i) The opinion of Venture Law Group described in Section 5(c)
above shall be rendered to the Underwriters at the request of the Company and
shall so state therein.
(e) The Underwriters shall have received, on each of the date hereof
and the Closing Date, a letter dated the date hereof or the Closing Date, as the
case may be, in form and substance satisfactory to the Underwriters, from Ernst
& Young LLP, independent public accountants, containing statements and
information of the type ordinarily included in accountants' "comfort letters" to
underwriters with respect to the financial statements and certain financial
information contained in the Registration Statement and the Prospectus; provided
that the letter delivered on the Closing Date shall use a "cut-off date" not
earlier than the date hereof.
(f) The "lock up" agreements, each substantially in the form of
Exhibit A hereto, between you and certain shareholders, officers and directors
of the Company relating to sales and certain other dispositions of shares of
Common Stock or certain other securities, delivered to you on or before the date
hereof, shall be in full force and effect on the Closing Date.
The several obligations of the Underwriters to purchase Additional Shares
hereunder are subject to the delivery to you on the Option Closing Date of such
documents as you may reasonably request with respect to the good standing of the
Company, the due authorization and issuance of the Additional Shares and other
matters related to the issuance of the Additional Shares including the
certificates, opinions and letters described in this Section 5.
6. Covenants of the Company. In further consideration of the agreements
of the Underwriters herein contained, the Company covenants with each
Underwriter as follows:
(a) To furnish to you, without charge, four signed copies of the
Registration Statement (including exhibits thereto) and for delivery to each
other Underwriter a conformed copy of the Registration Statement (without
exhibits thereto) and to furnish to you in New York City, without charge, prior
to 10:00 a.m. New York City time on the business day next succeeding the date of
this Agreement and during the period mentioned in Section 6(c) below, as many
copies of the Prospectus and any supplements and amendments thereto or to the
Registration Statement as you may reasonably request.
(b) Before amending or supplementing the Registration Statement or
the Prospectus, to furnish to you a copy of each such proposed amendment or
supplement and not to file
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any such proposed amendment or supplement to which you reasonably object, and to
file with the Commission within the applicable period specified in Rule 424(b)
under the Securities Act any prospectus required to be filed pursuant to such
Rule.
(c) If, during such period after the first date of the public
offering of the Shares as in the opinion of counsel for the Underwriters the
Prospectus is required by law to be delivered in connection with sales by an
Underwriter or dealer, any event shall occur or condition exist as a result of
which it is necessary to amend or supplement the Prospectus in order to make the
statements therein, in the light of the circumstances when the Prospectus is
delivered to a purchaser, not misleading, or if, in the opinion of counsel for
the Underwriters, it is necessary to amend or supplement the Prospectus to
comply with applicable law, forthwith to prepare, file with the Commission and
furnish, at its own expense, to the Underwriters and to the dealers (whose names
and addresses you will furnish to the Company) to which Shares may have been
sold by you on behalf of the Underwriters and to any other dealers upon request,
either amendments or supplements to the Prospectus so that the statements in the
Prospectus as so amended or supplemented will not, in the light of the
circumstances when the Prospectus is delivered to a purchaser, be misleading or
so that the Prospectus, as amended or supplemented, will comply with law.
(d) To endeavor to qualify the Shares for offer and sale under the
securities or Blue Sky laws of such jurisdictions as you shall reasonably
request.
(e) To make generally available to the Company's security holders and
to you as soon as practicable an earning statement covering the twelve month
period ending September 30, 2000 that satisfies the provisions of Section 11(a)
of the Securities Act and the rules and regulations of the Commission
thereunder.
(f) Whether or not the transactions contemplated in this Agreement
are consummated or this Agreement is terminated, to pay or cause to be paid all
expenses incident to the performance of its obligations under this Agreement,
including: (i) the fees, disbursements and expenses of the Company's counsel and
the Company's accountants in connection with the registration and delivery of
the Shares under the Securities Act and all other fees or expenses in connection
with the preparation and filing of the Registration Statement, any preliminary
prospectus, the Prospectus and amendments and supplements to any of the
foregoing, including all printing costs associated therewith, and the mailing
and delivering of copies thereof to the Underwriters and dealers, in the
quantities hereinabove specified, (ii) all costs and expenses related to the
transfer and delivery of the Shares to the Underwriters, including any transfer
or other taxes payable thereon, (iii) the cost of printing or producing any Blue
Sky or Legal Investment memorandum in connection with the offer and sale of the
Shares under state securities laws and all expenses in connection with the
qualification of the Shares for offer and sale under state securities laws as
provided in Section 6(d) hereof, including filing fees and the reasonable fees
and disbursements of counsel for the Underwriters in connection with such
qualification and in connection with the Blue Sky or Legal Investment
memorandum, (iv) all filing fees and the reasonable fees and disbursements of
counsel to the Underwriters incurred in connection with the review and
qualification of the offering of the Shares by the National Association of
Securities Dealers, Inc., (v) all fees and expenses in connection with the
preparation and filing of the registration statement on Form 8-A relating to the
Common Stock and all costs and expenses incident to listing the Shares on the
Nasdaq National
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Market, (vi) the cost of printing certificates representing the Shares, (vii)
the costs and charges of any transfer agent, registrar or depositary, (viii) the
costs and expenses of the Company relating to investor presentations on any
"road show" undertaken in connection with the marketing of the offering of the
Shares, including, without limitation, expenses associated with the production
of road show slides and graphics, fees and expenses of any consultants engaged
in connection with the road show presentations with the prior approval of the
Company, travel and lodging expenses of the representatives and officers of the
Company and any such consultants, and the cost of any aircraft chartered in
connection with the road show, and (ix) all other costs and expenses incident to
the performance of the obligations of the Company hereunder for which provision
is not otherwise made in this Section. It is understood, however, that except as
provided in this Section, Section 7 entitled "Indemnity and Contribution", and
the last paragraph of Section 9 below, the Underwriters will pay all of their
costs and expenses, including fees and disbursements of their counsel, stock
transfer taxes payable on resale of any of the Shares by them and any
advertising expenses connected with any offers they may make.
(g) that in connection with the Directed Share Program, the Company
will ensure that the Directed Shares will be restricted to the extent required
by the National Association of Securities Dealers, Inc. (the "NASD") or the NASD
rules from sale, transfer, assignment, pledge or hypothecation for a period of
three months following the date of the effectiveness of the Registration
Statement. Morgan Stanley will notify the Company as to which Participants will
need to be so restricted. The Company will direct the transfer agent to place
stop transfer restrictions upon such securities for such period of time.
(h) to pay all fees and disbursements of counsel incurred by the
Underwriters in connection with the Directed Share Program and stamp duties,
similar taxes or duties or other taxes, if any, incurred by the Underwriters in
connection with the Directed Share Program.
Furthermore, the Company covenants with Morgan Stanley that the Company
will comply with all applicable securities and other applicable laws, rules and
regulations in each foreign jurisdiction in which the Directed Shares are
offered in connection with the Directed Share Program.
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7. Indemnity and Contribution. (a) The Company agrees to indemnify and
hold harmless each Underwriter and each person, if any, who controls any
Underwriter within the meaning of either Section 15 of the Securities Act or
Section 20 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), from and against any and all losses, claims, damages and liabilities
(including, without limitation, any legal or other expenses reasonably incurred
in connection with defending or investigating any such action or claim) caused
by any untrue statement or alleged untrue statement of a material fact contained
in the Registration Statement or any amendment thereof, any preliminary
prospectus or the Prospectus (as amended or supplemented if the Company shall
have furnished any amendments or supplements thereto), or caused by any omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, except
insofar as such losses, claims, damages or liabilities are caused by any such
untrue statement or omission or alleged untrue statement or omission based upon
information relating to any Underwriter furnished to the Company in writing by
such Underwriter through you expressly for use therein.
(b) Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, its directors, its officers who sign the
Registration Statement and each person, if any, who controls the Company within
the meaning of either Section 15 of the Securities Act or Section 20 of the
Exchange Act to the same extent as the foregoing indemnity from the Company to
such Underwriter, but only with reference to information relating to such
Underwriter furnished to the Company in writing by such Underwriter through you
expressly for use in the Registration Statement, any preliminary prospectus, the
Prospectus or any amendments or supplements thereto.
(c) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may be
sought pursuant to Section 7(a) or 7(b), such person (the "indemnified party")
shall promptly notify the person against whom such indemnity may be sought (the
"indemnifying party") in writing and the indemnifying party, upon request of the
indemnified party, shall retain counsel reasonably satisfactory to the
indemnified party to represent the indemnified party and any others the
indemnifying party may designate in such proceeding and shall pay the fees and
disbursements of such counsel related to such proceeding. In any such
proceeding, any indemnified party shall have the right to retain its own
counsel, but the fees and expenses of such counsel shall be at the expense of
such indemnified party unless (i) the indemnifying party and the indemnified
party shall have mutually agreed to the retention of such counsel or (ii) the
named parties to any such proceeding (including any impleaded parties) include
both the indemnifying party and the indemnified party and representation of both
parties by the same counsel would be inappropriate due to actual or potential
differing interests between them. It is understood that the indemnifying party
shall not, in respect of the legal expenses of any indemnified party in
connection with any proceeding or related proceedings in the same jurisdiction,
be liable for the fees and expenses of more than one separate firm (in addition
to any local counsel) for all such indemnified parties and that all such fees
and expenses shall be reimbursed as they are incurred. Such firm shall be
designated in writing by Morgan Stanley & Co. Incorporated, in the case of
parties indemnified pursuant to Section 7(a), and by the Company, in the case of
parties indemnified pursuant to Section 7(b). The indemnifying party shall not
be liable for any settlement of any proceeding effected without its written
consent, but if settled with such consent or if there be a final judgment for
the plaintiff, the indemnifying party agrees to indemnify the indemnified party
from
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and against any loss or liability by reason of such settlement or judgment.
Notwithstanding the foregoing sentence, if at any time an indemnified party
shall have requested an indemnifying party to reimburse the indemnified party
for fees and expenses of counsel as contemplated by the second and third
sentences of this paragraph, the indemnifying party agrees that it shall be
liable for any settlement of any proceeding effected without its written consent
if (i) such settlement is entered into more than 30 days after receipt by such
indemnifying party of the aforesaid request and (ii) such indemnifying party
shall not have reimbursed the indemnified party in accordance with such request
prior to the date of such settlement. No indemnifying party shall, without the
prior written consent of the indemnified party, effect any settlement of any
pending or threatened proceeding in respect of which any indemnified party is or
could have been a party and indemnity could have been sought hereunder by such
indemnified party, unless such settlement includes an unconditional release of
such indemnified party from all liability on claims that are the subject matter
of such proceeding.
(d) To the extent the indemnification provided for in Section 7(a) or
7(b) is unavailable to an indemnified party or insufficient in respect of any
losses, claims, damages or liabilities referred to therein, then each
indemnifying party under such paragraph, in lieu of indemnifying such
indemnified party thereunder, shall contribute to the amount paid or payable by
such indemnified party as a result of such losses, claims, damages or
liabilities (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company on the one hand and the Underwriters on the
other hand from the offering of the Shares or (ii) if the allocation provided by
clause 7(d)(i) above is not permitted by applicable law, in such proportion as
is appropriate to reflect not only the relative benefits referred to in clause
7(d)(i) above but also the relative fault of the Company on the one hand and of
the Underwriters on the other hand in connection with the statements or
omissions that resulted in such losses, claims, damages or liabilities, as well
as any other relevant equitable considerations. The relative benefits received
by the Company on the one hand and the Underwriters on the other hand in
connection with the offering of the Shares shall be deemed to be in the same
respective proportions as the net proceeds from the offering of the Shares
(before deducting expenses) received by the Company and the total underwriting
discounts and commissions received by the Underwriters, in each case as set
forth in the table on the cover of the Prospectus, bear to the aggregate Public
Offering Price of the Shares. The relative fault of the Company on the one hand
and the Underwriters on the other hand shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates to
information supplied by the Company or by the Underwriters and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Underwriters' respective obligations to
contribute pursuant to this Section 7 are several in proportion to the
respective number of Shares they have purchased hereunder, and not joint.
(e) The Company and the Underwriters agree that it would not be just
or equitable if contribution pursuant to this Section 7 were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation that does not take account of the
equitable considerations referred to in Section 7(d). The amount paid or payable
by an indemnified party as a result of the losses, claims, damages and
liabilities referred to in the immediately preceding paragraph shall be deemed
to include, subject to the limitations set forth above, any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
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provisions of this Section 7, no Underwriter shall be required to contribute any
amount in excess of the amount by which the total price at which the Shares
underwritten by it and distributed to the public were offered to the public
exceeds the amount of any damages that such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The remedies provided for in this Section 7 are not
exclusive and shall not limit any rights or remedies which may otherwise be
available to any indemnified party at law or in equity.
(f) The indemnity and contribution provisions contained in this
Section 7 and the representations, warranties and other statements of the
Company contained in this Agreement shall remain operative and in full force and
effect regardless of (i) any termination of this Agreement, (ii) any
investigation made by or on behalf of any Underwriter or any person controlling
any Underwriter or by or on behalf of the Company, its officers or directors or
any person controlling the Company and (iii) acceptance of and payment for any
of the Shares.
8. Directed Share Program Indemnification. (a) The Company agrees to
indemnify and hold harmless Morgan Stanley and each person, if any, who controls
Morgan Stanley within the meaning of either Section 15 of the Securities Act or
Section 20 of the Exchange Act ("Morgan Stanley Entities"), from and against any
and all losses, claims, damages and liabilities (including, without limitation,
any legal or other expenses reasonably incurred in connection with defending or
investigating any such action or claim) (i) caused by any untrue statement or
alleged untrue statement of a material fact contained in any material prepared
by or with the consent of the Company for distribution to Participants in
connection with the Directed Share Program or caused by any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading; (ii) caused by the
failure of any Participant to pay for and accept delivery of Directed Shares
that the Participant agreed to purchase; or (iii) related to, arising out of, or
in connection with the Directed Share Program, other than losses, claims,
damages or liabilities (or expenses relating thereto) that are finally
judicially determined to have resulted from the bad faith or gross negligence of
Morgan Stanley Entities.
(b) In case any proceeding (including any governmental investigation)
shall be instituted involving any Morgan Stanley Entity in respect of which
indemnity may be sought pursuant to Section 8(a), the Morgan Stanley Entity
seeing indemnity, shall promptly notify the Company in writing and the Company,
upon request of the Morgan Stanley Entity, shall retain counsel reasonably
satisfactory to the Morgan Stanley Entity to represent the Morgan Stanley Entity
and any others the Company may designate in such proceeding and shall pay the
fees and disbursements of such counsel related to such proceeding. In any such
proceeding, any Morgan Stanley Entity shall have the right to retain its own
counsel, but the fees and expenses of such counsel shall be at the expense of
such Morgan Stanley Entity unless (i) the Company shall have agreed to the
retention of such counsel or (ii) the named parties to any such proceeding
(including any impleaded parties) include both the Company and the Morgan
Stanley Entity and representation of both parties by the same counsel would be
inappropriate due to actual or potential differing interests between them. The
Company shall not, in respect of the legal expenses of the Morgan Stanley
Entities in connection with any proceeding or related proceedings in the same
jurisdiction,
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<PAGE>
be liable for the fees and expenses of more than one separate firm (in addition
to any local counsel) for all Morgan Stanley Entities. Any such separate firm
for the Morgan Stanley Entities shall be designated in writing by Morgan
Stanley. The Company shall not be liable for any settlement of any proceeding
effected without its written consent, but if settled with such consent or if
there be a final judgment for the plaintiff, the Company agrees to indemnify the
Morgan Stanley Entities from and against any loss or liability by reason of such
settlement or judgment. Notwithstanding the foregoing sentence, if at any time a
Morgan Stanley Entity shall have requested the Company to reimburse it for fees
and expenses of counsel as contemplated by the second and third sentences of
this paragraph, the Company agrees that it shall be liable for any settlement of
any proceeding effected without its written consent if (i) such settlement is
entered into more than 30 days after receipt by the Company of the aforesaid
request and (ii) the Company shall not have reimbursed the Morgan Stanley Entity
in accordance with such request prior to the date of such settlement. The
Company shall not, without the prior written consent of Morgan Stanley, effect
any settlement of any pending or threatened proceeding in respect of which any
Morgan Stanley Entity is or could have been a party and indemnity could have
been sought hereunder by such Morgan Stanley Entity, unless such settlement
includes an unconditional release of the Morgan Stanley Entities from all
liability on claims that are the subject matter of such proceeding.
(c) To the extent the indemnification provided for in Section 8(a) is
unavailable to a Morgan Stanley Entity or insufficient in respect of any losses,
claims, damages or liabilities referred to therein, then the Company in lieu of
indemnifying the Morgan Stanley Entity thereunder, shall contribute to the
amount paid or payable by the Morgan Stanley Entity as a result of such losses,
claims, damages or liabilities (i) in such proportion as is appropriate to
reflect the relative benefits received by the Company on the one hand and the
Morgan Stanley Entities on the other hand from the offering of the Directed
Shares or (ii) if the allocation provided by clause 8(c)(i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause 8(c)(i) above but also the
relative fault of the Company on the one hand and of the Morgan Stanley Entities
on the other hand in connection with any statements or omissions that resulted
in such losses, claims, damages or liabilities, as well as any other relevant
equitable considerations. The relative benefits received by the Company on the
one hand and the Morgan Stanley Entities on the other hand in connection with
the offering of the Directed Shares shall be deemed to be in the same respective
proportions as the net proceeds from the offering of the Directed Shares (before
deducting expenses) and the total underwriting discounts and commissions
received by the Morgan Stanley Entities for the Directed Shares, bear to the
aggregate Public Offering Price of the Directed Shares. If the loss, claim,
damage or liability is caused by an untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact, the
relative fault of the Company on the one hand and the Morgan Stanley Entities on
the other hand shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement or the omission or alleged omission
relates to information supplied by the Company or by the Morgan Stanley Entities
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.
(d) The Company and the Morgan Stanley Entities agree that it would
not be just or equitable if contribution pursuant to this Section 8 were
determined by pro rata allocation (even if the Morgan Stanley Entities were
treated as one entity for such purpose) or by any other method of allocation
that does not take account of the equitable considerations referred to in
Section 8(c). The
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<PAGE>
amount paid or payable by the Morgan Stanley Entities as a result of the losses,
claims, damages and liabilities referred to in the immediately preceding
paragraph shall be deemed to include, subject to the limitations set forth
above, any legal or other expenses reasonably incurred by the Morgan Stanley
Entities in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 8, no Morgan Stanley Entity shall
be required to contribute any amount in excess of the amount by which the total
price at which the Directed Shares distributed to the public were offered to the
public exceeds the amount of any damages that such Morgan Stanley Entity has
otherwise been required to pay. The remedies provided for in this Section 8 are
not exclusive and shall not limit any rights or remedies which may otherwise be
available to any indemnified party at law or in equity.
(e) The indemnity and contribution provisions contained in this
Section 8 shall remain operative and in full force and effect regardless of (i)
any termination of this Agreement, (ii) any investigation made by or on behalf
of any Morgan Stanley Entity or the Company, its officers or directors or any
person controlling the Company and (iii) acceptance of and payment for any of
the Directed Shares.
9. Termination. This Agreement shall be subject to termination by notice
given by you to the Company, if (a) after the execution and delivery of this
Agreement and prior to the Closing Date (i) trading generally shall have been
suspended or materially limited on or by, as the case may be, any of the New
York Stock Exchange, the American Stock Exchange, the National Association of
Securities Dealers, Inc., the Chicago Board of Options Exchange, the Chicago
Mercantile Exchange or the Chicago Board of Trade, (ii) trading of any
securities of the Company shall have been suspended on any exchange or in any
over counter market, (iii) a general moratorium on commercial banking activities
in New York shall have been declared by either Federal or New York State
authorities or (iv) there shall have occurred any outbreak or escalation of
hostilities or any change in financial markets or any calamity or crisis that,
in your judgment, is material and adverse and (b) in the case of any of the
events specified in clauses 9(a)(i) through 9(a)(iv), such event, singly or
together with any other such event, makes it, in your judgment, impracticable to
market the Shares on the terms and in the manner contemplated in the Prospectus.
10. Effectiveness; Defaulting Underwriters. This Agreement shall become
effective upon the execution and delivery hereof by the parties hereto.
If, on the Closing Date or the Option Closing Date, as the case may be, any
one or more of the Underwriters shall fail or refuse to purchase Shares that it
has or they have agreed to purchase hereunder on such date, and the aggregate
number of Shares which such defaulting Underwriter or Underwriters agreed but
failed or refused to purchase is not more than one tenth of the aggregate number
of the Shares to be purchased on such date, the other Underwriters shall be
obligated severally in the proportions that the number of Firm Shares set forth
opposite their respective names in Schedule I bears to the aggregate number of
Firm Shares set forth opposite the names of all such non defaulting
Underwriters, or in such other proportions as you may specify, to purchase the
Shares which such defaulting Underwriter or Underwriters agreed but failed or
refused to purchase on such date; provided that in no event shall the number of
Shares that any Underwriter has agreed to purchase pursuant to this Agreement be
increased pursuant to this Section 10 by an amount in excess of one ninth of
such number of Shares without the written consent of such Underwriter. If, on
the
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<PAGE>
Closing Date, any Underwriter or Underwriters shall fail or refuse to purchase
Firm Shares and the aggregate number of Firm Shares with respect to which such
default occurs is more than one tenth of the aggregate number of Firm Shares to
be purchased, and arrangements satisfactory to you and the Company for the
purchase of such Firm Shares are not made within 36 hours after such default,
this Agreement shall terminate without liability on the part of any non
defaulting Underwriter or the Company. In any such case either you or the
Company shall have the right to postpone the Closing Date, but in no event for
longer than seven days, in order that the required changes, if any, in the
Registration Statement and in the Prospectus or in any other documents or
arrangements may be effected. If, on the Option Closing Date, any Underwriter or
Underwriters shall fail or refuse to purchase Additional Shares and the
aggregate number of Additional Shares with respect to which such default occurs
is more than one-tenth of the aggregate number of Additional Shares to be
purchased, the non-defaulting Underwriters shall have the option to (i)
terminate their obligation hereunder to purchase Additional Shares or (ii)
purchase not less than the number of Additional Shares that such non-defaulting
Underwriters would have been obligated to purchase in the absence of such
default. Any action taken under this paragraph shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
If this Agreement shall be terminated by the Underwriters, or any of them,
because of any failure or refusal on the part of the Company to comply with the
terms or to fulfill any of the conditions of this Agreement, or if for any
reason the Company shall be unable to perform its obligations under this
Agreement, the Company will reimburse the Underwriters or such Underwriters as
have so terminated this Agreement with respect to themselves, severally, for all
out pocket expenses (including the fees and disbursements of their counsel)
reasonably incurred by such Underwriters in connection with this Agreement or
the offering contemplated hereunder.
11. Counterparts. This Agreement may be signed in two or more
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
12. Applicable Law. This Agreement shall be governed by and construed in
accordance with the internal laws of the State of New York.
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<PAGE>
13. Headings. The headings of the sections of this Agreement have been
inserted for convenience of reference only and shall not be deemed a part of
this Agreement.
Very truly yours,
drugstore.com inc.
By:
-----------------------------
Name:
Title:
Accepted as of the date hereof
Morgan Stanley & Co. Incorporated
Donaldson Lufkin & Jenrette Securities Corporation
Thomas Weisel Partners LLC
Acting severally on behalf
of themselves and the
several Underwriters named
in Schedule I hereto.
By: Morgan Stanley & Co. Incorporated
By: __________________________
Name:
Title:
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<PAGE>
SCHEDULE I
Number of
Firm Shares
Underwriter To Be Purchased
Morgan Stanley & Co. Incorporated
Donaldson Lufkin & Jenrette Securities Corporation
Thomas Weisel Partners LLC
_______________
Total ........
===============
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<PAGE>
Exhibit A
[FORM OF LOCK-UP LETTER]
April ___, 1999
Morgan Stanley & Co. Incorporated
Donaldson Lufkin & Jenrette Securities Corporation
Thomas Weisel Partners LLC
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, NY 10036
Dear Sirs and Mesdames:
The undersigned understands that Morgan Stanley & Co. Incorporated ("Morgan
Stanley") proposes to enter into an Underwriting Agreement (the "Underwriting
Agreement") with drugstore.com, inc., a Delaware corporation (the "Company"),
providing for the public offering (the "Public Offering") by the several
Underwriters, including Morgan Stanley (the "Underwriters"), of shares (the
"Shares") of the Common Stock ($0.001 par value) of the Company (the "Common
Stock").
To induce the Underwriters that may participate in the Public Offering to
continue their efforts in connection with the Public Offering, the undersigned
hereby agrees that, without the prior written consent of Morgan Stanley on
behalf of the Underwriters, it will not, during the period commencing on the
date hereof and ending 180 days after the date of the final prospectus relating
to the Public Offering (the "Prospectus"), (1) offer, pledge, sell, contract to
sell, sell any option or contract to purchase, purchase any option or contract
to sell, grant any option, right or warrant to purchase, lend, or otherwise
transfer or dispose of, directly or indirectly, any shares of Common Stock or
any securities convertible into or exercisable or exchangeable for Common Stock
or (2) enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the Common
Stock, whether any such transaction described in clause (1) or (2) above is to
be settled by delivery of Common Stock or such other securities, in cash or
otherwise. The foregoing sentence shall not apply to (a) the sale of any Shares
to the Underwriters pursuant to the Underwriting Agreement or (b) transactions
relating to shares of Common Stock or other securities acquired in open market
transactions after the completion of the Public Offering. In addition, the
undersigned agrees that, without the prior written consent of Morgan Stanley on
behalf of the Underwriters, it will not, during the period commencing on the
date hereof and ending 180 days after the date of the Prospectus, make any
demand for or exercise any right with respect to, the registration of any shares
of Common Stock or any security convertible into or exercisable or exchangeable
for Common Stock.
-ii-
<PAGE>
Whether or not the Public Offering actually occurs depends on a number of
factors, including market conditions. Any Public Offering will only be made
pursuant to an Underwriting Agreement, the terms of which are subject to
negotiation between the Company and the Underwriters.
Very truly yours,
_________________________
(Name)
_________________________
(Address)
-iii-
<PAGE>
EXHIBIT 3.1
FIFTH AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
DRUGSTORE.COM, INC.
The undersigned, Peter M. Neupert and Mark L. Silverman, hereby certify
that:
1. They are the duly elected and acting President and Secretary,
respectively, of drugstore.com, inc., a Delaware corporation.
2. The Certificate of Incorporation of this corporation was originally
filed with the Secretary of State of Delaware on April 2, 1998.
3. The Certificate of Incorporation of this corporation shall be amended
and restated to read in full as follows:
ARTICLE I
"The name of this corporation is drugstore.com, inc. (the "Corporation").
ARTICLE II
The address of the Corporation's registered office in the State of Delaware
is 1013 Centre Road, Wilmington, Delaware 19805, County of New Castle. The name
of its registered agent at such address is Corporation Service Company.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the Delaware General Corporation
Law.
ARTICLE IV
(A) Classes of Stock. The Corporation is authorized to issue two classes
of stock to be designated, respectively, "Common Stock" and "Preferred Stock."
The total number of shares which the Corporation is authorized to issue is
Fifty-Three Million (53,000,000) shares, each with a par value of $0.001 per
share. Thirty Million Two Hundred Thousand (30,200,000) shares shall be Common
Stock and Twenty-Two Million Eight Hundred Thousand (22,800,000) shares shall be
Preferred Stock.
<PAGE>
(B) Rights, Preferences and Restrictions of Preferred Stock. The
Preferred Stock authorized by this Fifth Amended and Restated Certificate of
Incorporation may be issued from time to time in one or more series. The first
series of Preferred Stock shall be designated "Series A Preferred Stock" and
shall consist of Ten Million (10,000,000) shares. The second series of Preferred
Stock shall be designated "Series B Preferred Stock" and shall consist of Five
Million Five Hundred Thousand (5,500,000) shares. The third series of Preferred
Stock shall be designated "Series C Preferred Stock" and shall consist of Five
Million (5,000,000) shares. The fourth series of Preferred Stock shall be
designated "Series D Preferred Stock" and shall consist of Two Million, Three
Hundred Thousand (2,300,000) shares. The rights, preferences, privileges, and
restrictions granted to and imposed on the Series A Preferred Stock, the Series
B Preferred Stock, the Series C Preferred Stock and the Series D Preferred Stock
are as set forth below in this Article IV(B).
1. Dividend Provisions. The holders of shares of Series A, Series B,
Series C and Series D Preferred Stock shall be entitled to receive dividends,
out of any assets legally available therefor, prior and in preference to any
declaration or payment of any dividend (payable other than in Common Stock or
other securities and rights convertible into or entitling the holder thereof to
receive, directly or indirectly, additional shares of Common Stock of the
Corporation) on the Common Stock of the Corporation, at the rate of $0.08 per
share per annum on each outstanding share of Series A Preferred Stock, the rate
of $0.335 per share per annum on each outstanding share of Series B Preferred
Stock, the rate of $0.7825 per share per annum on each outstanding share of
Series C Preferred Stock, and the rate of $1.765 per share per annum on each
outstanding share of Series D Preferred Stock, (in each case as adjusted for any
stock dividends, combinations, splits, recapitalizations and the like with
respect to such shares after May 19, 1999) payable quarterly when, as and if
declared by the Board of Directors. Such dividends shall not be cumulative. In
addition, in the event dividends are paid on any share of Common Stock, an
additional dividend shall be paid with respect to all outstanding shares of
Preferred Stock in an amount equal per share (on an as-if-converted basis) to
the amount paid or set-aside for each share of Common Stock of the Corporation
whenever funds are legally available therefor, when, as and if declared by the
Board of Directors.
2. Liquidation.
(a) Preference. In the event of any liquidation, dissolution or
winding up of the Corporation, either voluntary or involuntary, the holders of
the Series A, Series B, Series C and Series D Preferred Stock shall be entitled
to receive, prior and in preference to any distribution of any of the assets of
the Corporation to the holders of Common Stock by reason of their ownership
thereof, an amount per share equal to (i) $0.80 per share for each share of
Series A Preferred Stock then held by them, (ii) $3.35 per share for each share
of Series B Preferred Stock then held by them, (iii) $7.825 per share for each
share of Series C Preferred Stock then held by them, and (iv) $17.65 per share
for each share of Series D Preferred Stock then held by them, plus declared but
unpaid dividends (in each case as adjusted for any stock dividends,
combinations, splits, recapitalizations and the like with respect to such shares
after May 18, 1999). If, upon the occurrence of such event, the assets and
funds thus distributed among the holders of the Series A, Series B, Series C and
Series D Preferred Stock shall be
<PAGE>
insufficient to permit the payment to such holders of the full aforesaid
preferential amounts, then the entire assets and funds of the Corporation
legally available for distribution shall be distributed ratably among the
holders of the Series A, Series B, Series C and Series D Preferred Stock in
proportion to the preferential amount each such holder is otherwise entitled to
receive.
(b) Remaining Assets. Upon the completion of the distribution
required by Section 2(a) above, if assets remain in the Corporation, the holders
of the Common Stock of the Corporation shall receive all of the remaining assets
of the Corporation.
(c) Certain Acquisitions.
(i) Deemed Liquidation. For purposes of this Section 2, a
liquidation, dissolution or winding up of the Corporation shall be deemed to
occur if the Corporation shall (A) sell, convey, or otherwise dispose of all or
substantially all of its property or business or merge or consolidate with any
other corporation (other than a wholly-owned subsidiary corporation) where the
stockholders of the Corporation own less than fifty percent (50%) of the voting
power of the surviving entity after such merger or consolidation or (B) effect
any other transaction or series of related transactions in which more than fifty
percent (50%) of the voting power of the Corporation is disposed of, provided
that this Section 2(c)(i) shall not apply to a merger effected solely for the
purpose of changing the domicile of the Corporation.
(ii) Valuation of Consideration. In the event of a deemed
liquidation as described in Section 2(c)(i) above, if the consideration received
by the Corporation is other than cash, its value will be deemed its fair market
value. Any securities shall be valued as follows:
(A) Securities not subject to investment letter or
other similar restrictions on free marketability:
(1) If traded on a securities exchange or The Nasdaq
Stock Market, the value shall be deemed to be the average of the closing prices
of the securities on such exchange over the thirty-day period ending three (3)
days prior to the closing;
(2) If actively traded over-the-counter, the value
shall be deemed to be the average of the closing bid or sale prices (whichever
is applicable) over the thirty-day period ending three (3) days prior to the
closing; and
(3) If there is no active public market, the value
shall be the fair market value thereof, as mutually determined by the
Corporation and the holders of at least a majority of the voting power of all
then outstanding shares of Preferred Stock.
(B) The method of valuation of securities subject to
investment letter or other restrictions on free marketability (other than
restrictions arising solely by virtue of a stockholder's status as an affiliate
or former affiliate) shall be to make an appropriate discount from the market
value determined as above in Section 2(c)(ii)(A) to reflect
<PAGE>
the approximate fair market value thereof, as mutually determined by the
Corporation and the holders of a majority of the voting power of all then
outstanding shares of Preferred Stock.
(iii) Notice of Transaction. The Corporation shall give each
holder of record of Preferred Stock written notice of such impending transaction
not later than ten (10) days prior to the stockholders' meeting called to
approve such transaction, or ten (10) days prior to the closing of such
transaction, whichever is earlier, and shall also notify such holders in writing
of the final approval of such transaction. The first of such notices shall
describe the material terms and conditions of the impending transaction and the
provisions of this Section 2, and the Corporation shall thereafter give such
holders prompt notice of any material changes. The transaction shall in no event
take place sooner than ten (10) days after the Corporation has given the first
notice provided for herein or sooner than five (5) days after the Corporation
has given notice of any material changes provided for herein .
(iv) Effect of Noncompliance. In the event the requirements of
Section 2(c)(iii) are not complied with, the Corporation shall forthwith either
cause the closing of the transaction to be postponed until such requirements
have been complied with, or cancel such transaction, in which event the rights,
preferences and privileges of the holders of the Preferred Stock shall revert to
and be the same as such rights, preferences and privileges existing immediately
prior to the date of the first notice referred to in Section 2(c)(iii) hereof.
3. Redemption. The Preferred Stock is not redeemable.
4. Conversion. The holders of the Series A, Series B, Series C and
Series D Preferred Stock shall have conversion rights as follows (the
"Conversion Rights"):
(a) Right to Convert. Subject to Section 4(c), each share of
Series A, Series B, Series C and Series D Preferred Stock shall be convertible,
at the option of the holder thereof, at any time after the date of issuance of
such share, at the office of the Corporation or any transfer agent for such
stock, into such number of fully paid and nonassessable shares of Common Stock
as is determined by dividing (i) $0.80 in the case of the Series A Preferred
Stock, (ii) $3.35 in the case of the Series B Preferred Stock, (iii) $7.825 in
the case of the Series C Preferred Stock, and (iv) $17.65 in the case of the
Series D Preferred Stock by the Conversion Price applicable to such share,
determined as hereafter provided, in effect on the date the certificate is
surrendered for conversion. The initial Conversion Price per share shall be
$0.80 for shares of Series A Preferred Stock, $3.35 for shares of Series B
Preferred Stock, $7.825 for shares of Series C Preferred Stock and $17.65 for
shares of Series D Preferred Stock. Such initial Conversion Price shall be
subject to adjustment as set forth in Section 4(d) below.
(b) Automatic Conversion. Each share of Series A, Series B,
Series C and Series D Preferred Stock shall automatically be converted into
shares of Common Stock at the applicable Conversion Price at the time in effect
for such share immediately upon the earlier of (i) except as provided below in
Section 4(c), the Corporation's sale of its Common Stock in an underwritten
public offering pursuant to a registration statement under the Securities Act of
1933, as amended (the "Securities Act"), the public offering price of which is
not less than $10.00 per share (appropriately adjusted for any stock split,
dividend, combination or other
<PAGE>
recapitalization) and which results in gross cash proceeds in excess of
$15,000,000 or (ii) the date specified by written consent or agreement of the
holders of at least two-thirds (2/3) of the then outstanding shares of Preferred
Stock, voting together as a class.
(c) Mechanics of Conversion. Before any holder of Series A,
Series B, Series C or Series D Preferred Stock shall be entitled to convert the
same into shares of Common Stock, he shall surrender the certificate or
certificates therefor, duly endorsed, at the office of the Corporation or of any
transfer agent for such series of Preferred Stock, and shall give written notice
to the Corporation at its principal corporate office, of the election to convert
the same and shall state therein the name or names in which the certificate or
certificates for shares of Common Stock are to be issued. The Corporation shall,
as soon as practicable thereafter, issue and deliver at such office to such
holder of Preferred Stock, or to the nominee or nominees of such holder, a
certificate or certificates for the number of shares of Common Stock to which
such holder shall be entitled as aforesaid. Such conversion shall be deemed to
have been made immediately prior to the close of business on the date of such
surrender of the shares of such series of Preferred Stock to be converted, and
the person or persons entitled to receive the shares of Common Stock issuable
upon such conversion shall be treated for all purposes as the record holder or
holders of such shares of Common Stock as of such date. If the conversion is in
connection with an underwritten offering of securities registered pursuant to
the Securities Act the conversion may, at the option of any holder tendering
such Preferred Stock for conversion, be conditioned upon the closing with the
underwriters of the sale of securities pursuant to such offering, in which event
the person(s) entitled to receive Common Stock upon conversion of such Preferred
Stock shall not be deemed to have converted such Preferred Stock until
immediately prior to the closing of such sale of securities.
(d) Conversion Price Adjustments of Preferred Stock for Certain
Splits and Combinations. The Conversion Price of the Series A, Series B, Series
C and Series D Preferred Stock shall be subject to adjustment from time to time
as follows:
(i) Stock Splits and Dividends. In the event the Corporation
should at any time or from time to time after the date upon which any shares of
Series A, Series B or Series C Preferred Stock were first issued (the "Purchase
Date" with respect to each such series), or after May 19, 1999 with respect to
the Series D Preferred Stock ( the "Purchase Date" with respect to the Series D
Preferred Stock) fix a record date for the effectuation of a split or
subdivision of the outstanding shares of Common Stock or the determination of
holders of Common Stock entitled to receive a dividend or other distribution
payable in additional shares of Common Stock or other securities or rights
convertible into, or entitling the holder thereof to receive directly or
indirectly, additional shares of Common Stock (hereinafter referred to as
"Common Stock Equivalents") without a corresponding split or subdivision of the
Preferred Stock or a corresponding dividend or other distribution to the
Preferred Stock, then, as of such record date (or the date of such dividend
distribution, split or subdivision if no record date is fixed), the Conversion
Price of each of the Series A, Series B, Series C and Series D Preferred Stock
shall be appropriately decreased so that the number of shares of Common Stock
issuable on conversion of each share of such series shall be increased in
proportion to such increase of the
<PAGE>
aggregate of shares of Common Stock outstanding and those issuable with respect
to such Common Stock Equivalents with the number of shares issuable with respect
to Common Stock Equivalents determined from time to time as provided in Section
4(d)(iii) below.
(ii) Reverse Stock Splits. If the number of shares of Common
Stock outstanding at any time after the Purchase Date is decreased by a
combination of the outstanding shares of Common Stock without a corresponding
decrease of the Preferred Stock, then, following the record date of such
combination, the Conversion Price for each of the Series A, Series B, Series C
and Series D Preferred Stock shall be appropriately increased so that the number
of shares of Common Stock issuable on conversion of each share of such series
shall be decreased in proportion to such decrease in outstanding shares.
(iii) The following provisions shall apply for purposes of
this Section 4(d):
(A) The aggregate maximum number of shares of Common
Stock deliverable upon conversion or exercise of Common Stock Equivalents
(assuming the satisfaction of any conditions to convertibility or
exercisability, including, without limitation, the passage of time, but without
taking into account potential antidilution adjustments) shall be deemed to have
been issued at the time such Common Stock Equivalents were issued.
(B) In the event of any change in the number of
shares of Common Stock deliverable or in the consideration payable to the
Corporation upon conversion or exercise of such Common Stock Equivalents
including, but not limited to, a change resulting from the antidilution
provisions thereof, the Conversion Price of each of the Series A, Series B,
Series C and Series D Preferred Stock, to the extent in any way affected by or
computed using such Common Stock Equivalents, shall be recomputed to reflect
such change, but no further adjustment shall be made for the actual issuance of
Common Stock or any payment of such consideration upon the exercise of any such
options or rights or the conversion or exchange of such securities.
(C) Upon the termination or expiration of the
convertibility or exercisability of any such Common Stock Equivalents, the
Conversion Price of each of the Series A, Series B, Series C and Series D
Preferred Stock, to the extent in any way affected by or computed using such
Common Stock Equivalents, shall be recomputed to reflect the issuance of only
the number of shares of Common Stock (and Common Stock Equivalents which remain
convertible or exercisable) actually issued upon the conversion or exercise of
such Common Stock Equivalents.
(e) Other Distributions. In the event the Corporation shall
declare a distribution payable in securities of other persons, evidences of
indebtedness issued by the Corporation or other persons, assets (excluding cash
dividends) or options or rights not referred to in Section 4(d)(i), then, in
each such case for the purpose of this Section 4(e), the holders of Series A,
Series B, Series C and Series D Preferred Stock shall be entitled to a
proportionate
<PAGE>
share of any such distribution as though they were the holders of the number of
shares of Common Stock of the Corporation into which their shares of Preferred
Stock are convertible as of the record date fixed for the determination of the
holders of Common Stock of the Corporation entitled to receive such
distribution.
(f) Recapitalizations. If at any time or from time to time there
shall be a recapitalization of the Common Stock (other than a subdivision,
combination or merger or sale of assets transaction provided for elsewhere in
this Section 4 or Section 2) provision shall be made so that the holders of the
Series A, Series B, Series C and Series D Preferred Stock shall thereafter be
entitled to receive upon conversion of such Preferred Stock the number of shares
of stock or other securities or property of the Corporation or otherwise, to
which a holder of Common Stock deliverable upon conversion would have been
entitled on such recapitalization. In any such case, appropriate adjustment
shall be made in the application of the provisions of this Section 4 with
respect to the rights of the holders of such Preferred Stock after the
recapitalization to the end that the provisions of this Section 4 (including
adjustment of the Conversion Price then in effect and the number of shares
purchasable upon conversion of such Preferred Stock) shall be applicable after
that event and be as nearly equivalent as practicable.
(g) No Impairment. The Corporation will not, by amendment of its
Certificate of Incorporation or through any reorganization, recapitalization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed hereunder by the
Corporation, but will at all times in good faith assist in the carrying out of
all the provisions of this Section 4 and in the taking of all such action as may
be necessary or appropriate in order to protect the Conversion Rights of the
holders of Preferred Stock against impairment.
(h) No Fractional Shares and Certificate as to Adjustments.
(i) No fractional shares shall be issued upon the conversion
of any share or shares of the Series A, Series B, Series C or Series D Preferred
Stock, and the number of shares of Common Stock to be issued shall be rounded to
the nearest whole share. The number of shares issuable upon such conversion
shall be determined on the basis of the total number of shares of Series A,
Series B, Series C or Series D Preferred Stock the holder is at the time
converting into Common Stock and the number of shares of Common Stock issuable
upon such aggregate conversion.
(ii) Upon the occurrence of each adjustment or readjustment
of the Conversion Price of Series A, Series B, Series C or Series D Preferred
Stock pursuant to this Section 4, the Corporation, at its expense, shall
promptly compute such adjustment or readjustment in accordance with the terms
hereof and prepare and furnish to each holder of such Preferred Stock a
certificate setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment is based. The Corporation
shall, upon the written request at any time of any holder of Series A, Series B,
Series C or Series D Preferred Stock, furnish or cause to be furnished to such
holder a like certificate setting forth (A) such
<PAGE>
adjustment and readjustment, (B) the Conversion Price for such series of
Preferred Stock at the time in effect, and (C) the number of shares of Common
Stock and the amount, if any, of other property which at the time would be
received upon the conversion of a share of such series of Preferred Stock.
(i) Notices of Record Date. In the event of any taking by the
Corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other distribution, the Corporation
shall mail to each holder of Series A, Series B, Series C or Series D Preferred
Stock, at least ten (10) days prior to the date specified therein, a notice
specifying the date on which any such record is to be taken for the purpose of
such dividend, distribution or right, and the amount and character of such
dividend, distribution or right.
(j) Reservation of Stock Issuable Upon Conversion. The
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the shares of the Series A, Series B Series C and Series D
Preferred Stock, such number of its shares of Common Stock as shall from time to
time be sufficient to effect the conversion of all outstanding shares of such
series of Preferred Stock; and if at any time the number of authorized but
unissued shares of Common Stock shall not be sufficient to effect the conversion
of all then outstanding shares of such series of Preferred Stock, in addition to
such other remedies as shall be available to the holder of such Preferred Stock,
the Corporation will take such corporate action as may, in the opinion of its
counsel, be necessary to increase its authorized but unissued shares of Common
Stock to such number of shares as shall be sufficient for such purposes,
including, without limitation, engaging in best efforts to obtain the requisite
stockholder approval of any necessary amendment to this Certificate of
Incorporation.
(k) Notices. Any notice required by the provisions of this
Section 4 to be given to the holders of shares of Series A, Series B, Series C
or Series D Preferred Stock shall be deemed given (i) upon personal delivery to
the party to be notified; (ii) when sent by confirmed telex or facsimile if sent
during normal business hours of the recipient; if not, then on the next business
day; (iii) one (1) day after deposit with a nationally recognized overnight
courier, specifying next day delivery, with written verification of receipt; or
(iv) five (5) days after having been deposited in the United States mail,
postage prepaid. All notices shall be addressed to each holder of record at his
address appearing on the books of the Corporation.
5. Voting Rights. The holder of each share of Series A, Series B,
Series C or Series D Preferred Stock shall have the right to one vote for each
share of Common Stock into which such Preferred Stock could then be converted,
and with respect to such vote, such holder shall have full voting rights and
powers equal to the voting rights and powers of the holders of Common Stock, and
shall be entitled, notwithstanding any provision hereof, to notice of any
stockholders' meeting in accordance with the bylaws of the Corporation, and
shall be entitled to vote, together with holders of Common Stock, with respect
to any question upon which holders of Common Stock have the right to vote.
Fractional votes shall not, however, be permitted and any fractional voting
rights available on an as-converted basis (after aggregating all shares into
<PAGE>
which shares of Series A, Series B, Series C or Series D Preferred Stock held by
each holder could be converted) shall be rounded to the nearest whole number
(with one-half being rounded upward).
6. Protective Provisions. So long as at least 1,000,000 shares of
Preferred Stock are outstanding (as adjusted for stock splits, stock dividends,
combinations or recapitalizations and the like), the Corporation shall not
without first obtaining the approval (by vote or written consent, as provided by
law) of the holders of at least two-thirds (2/3) of the then outstanding shares
of Preferred Stock, voting together as a class:
(a) authorize or issue, or obligate itself to issue, any other
equity security, including any other security convertible into or exercisable
for any equity security, having a preference over, or being on a parity with,
the Series A, Series B, Series C or Series D Preferred Stock with respect to
voting, dividends, conversion or upon liquidation;
(b) effect a liquidation, dissolution or winding up of the
Corporation or a transaction described in Section 2(c)(i) above;
(c) declare or pay any dividend to the holders of shares of
Common Stock or Preferred Stock; or
(d) amend, alter or repeal the Corporation's Certificate of
Incorporation or Bylaws or take any other action, whether by merger,
consolidation or otherwise, in a manner that would alter or change the rights,
preferences or privileges of the shares of Preferred Stock so as to affect
adversely the shares of such class.
7. Status of Converted Stock. In the event any shares of Preferred
Stock shall be converted pursuant to Section 4 hereof, the shares so converted
shall be cancelled and shall not be issuable by the Corporation. The
Certificate of Incorporation of the Corporation shall be appropriately amended
to effect the corresponding reduction in the Corporation's authorized capital
stock. No share or shares of Preferred Stock acquired by the Corporation by
reason of redemption, purchase or otherwise shall be reissued.
(C) Common Stock.
1. Dividend Rights. Subject to the prior rights of holders of all
classes of stock at the time outstanding having prior rights as to dividends,
the holders of the Common Stock shall be entitled to receive, when and as
declared by the Board of Directors, out of any assets of the Corporation legally
available therefor, such dividends as may be declared from time to time by the
Board of Directors.
2. Liquidation Rights. Upon the liquidation, dissolution or winding
up of the Corporation, the assets of the Corporation shall be distributed as
provided in Section 2 of Article IV(B).
3. Redemption. The Common Stock is not redeemable.
<PAGE>
4. Voting Rights. The holder of each share of Common Stock shall
have the right to one vote, and shall be entitled to notice of any stockholders'
meeting in accordance with the bylaws of the Corporation, and shall be entitled
to vote upon such matters and in such manner as may be provided by law.
ARTICLE V
The Board of Directors of the Corporation is expressly authorized to make,
alter or repeal Bylaws of the Corporation.
ARTICLE VI
Elections of directors need not be by written ballot unless otherwise
provided in the Bylaws of the Corporation.
ARTICLE VII
(A) To the fullest extent permitted by the Delaware General Corporation
Law, as the same exists or as may hereafter be amended, a director of the
Corporation shall not be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director.
(B) The Corporation shall indemnify to the fullest extent permitted by law
any person made or threatened to be made a party to an action or proceeding,
whether criminal, civil, administrative or investigative, by reason of the fact
that he, his testator or intestate is or was a director or officer of the
Corporation or any predecessor of the Corporation, or serves or served at any
other enterprise as a director or officer at the request of the Corporation or
any predecessor to the Corporation.
(C) Neither any amendment nor repeal of this Article VII, nor the adoption
of any provision of the Corporation's Certificate of Incorporation inconsistent
with this Article VII, shall eliminate or reduce the effect of this Article VII
in respect of any matter occurring, or any action or proceeding accruing or
arising or that, but for this Article VII, would accrue or arise, prior to such
amendment, repeal or adoption of an inconsistent provision."
* * *
<PAGE>
The foregoing Fifth Amended and Restated Certificate of Incorporation has
been duly adopted by this corporation's Board of Directors and stockholders in
accordance with the applicable provisions of Sections 228, 242 and 245 of the
General Corporation Law of the State of Delaware.
Executed at Bellevue, Washington on May 19, 1999.
/s/ Peter M. Neupert
_________________________________
Peter M. Neupert, President
/s/ Mark L. Silverman
_________________________________
Mark L. Silverman, Secretary
<PAGE>
EXHIBIT 3.2
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
DRUGSTORE.COM, INC.
The undersigned, Peter M. Neupert and Mark L. Silverman, hereby certify
that:
1. They are the duly elected and acting President and Secretary,
respectively, of drugstore.com, inc., a Delaware corporation.
2. The Certificate of Incorporation of this corporation was originally
filed with the Secretary of State of Delaware on April 2, 1998.
3. The Certificate of Incorporation of this corporation shall be amended
and restated to read in full as follows:
"ARTICLE I
The name of this corporation is drugstore.com, inc. (the "Corporation").
ARTICLE II
The address of the Corporation's registered office in the State of Delaware
is 1013 Centre Road, Wilmington, Delaware 19805, County of New Castle. The name
of its registered agent at such address is Corporation Service Company.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of
Delaware.
ARTICLE IV
(A) Classes of Stock. The Corporation is authorized to issue two classes
of stock to be designated, respectively, "Common Stock" and "Preferred Stock."
The total number of shares which the Corporation is authorized to issue is Two
Hundred Sixty Million (260,000,000) shares, each with a par value of $0.0001 per
share. Two Hundred Fifty Million (250,000,000) shares shall be Common Stock and
Ten Million (10,000,000) shares shall be Preferred Stock.
(B) Rights, Preferences and Restrictions of Preferred Stock. The
Preferred Stock may be issued from time to time in one or more series. The Board
of Directors is hereby authorized, within the limitations and restrictions
stated in this Certificate of Incorporation, to determine or alter the rights,
preferences, privileges and restrictions granted to or imposed upon any wholly
unissued series of Preferred Stock and the number of shares constituting any
such
1
<PAGE>
series and the designation thereof, or any of them; and to increase or
decrease the number of shares of any series subsequent to the issuance of shares
of that series, but not below the number of shares of such series then
outstanding. In case the number of shares of any series shall be so decreased,
the shares constituting such decrease shall resume the status which they had
prior to the adoption of the resolution originally fixing the number of shares
of such series.
ARTICLE V
The number of directors of the Corporation shall be fixed from time to time
by a bylaw or amendment thereof duly adopted by the Board of Directors.
ARTICLE VI
In the election of directors, each holder of shares of any class or series
of capital stock of the Corporation shall be entitled to one vote for each share
held. No stockholder will be permitted to cumulate votes at any election of
directors.
ARTICLE VII
No action shall be taken by the stockholders of the Corporation other than
at an annual or special meeting of the stockholders, upon due notice and in
accordance with the provisions of the Corporation's bylaws.
ARTICLE VIII
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Amended and Restated Certificate of Incorporation,
in the manner now or hereafter prescribed by statute, and all rights conferred
upon stockholders herein are granted subject to this reservation.
ARTICLE IX
The Board of Directors of the Corporation is expressly authorized to make,
alter or repeal bylaws of the Corporation.
ARTICLE X
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the bylaws of the Corporation.
ARTICLE XI
The Corporation shall have perpetual existence.
2
<PAGE>
ARTICLE XII
(A) To the fullest extent permitted by the General Corporation Law of
Delaware, as the same may be amended from time to time, a director of the
Corporation shall not be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director.
If the General Corporation Law of Delaware is hereafter amended to authorize,
with the approval of a corporation's stockholders, further reductions in the
liability of a corporation's directors for breach of fiduciary duty, then a
director of the Corporation shall not be liable for any such breach to the
fullest extent permitted by the General Corporation Law of Delaware, as so
amended.
(B) Any repeal or modification of the foregoing provisions of this Article
XII shall not adversely affect any right or protection of a director of the
Corporation with respect to any acts or omissions of such director occurring
prior to such repeal or modification.
ARTICLE XIII
(A) To the fullest extent permitted by applicable law, the Corporation is
also authorized to provide indemnification of (and advancement of expenses to)
such agents (and any other persons to which Delaware law permits the Corporation
to provide indemnification) through bylaw provisions, agreements with such
agents or other persons, vote of stockholders or disinterested directors or
otherwise, in excess of the indemnification and advancement otherwise permitted
by Section 145 of the General Corporation Law of Delaware, subject only to
limits created by applicable Delaware law (statutory or non-statutory), with
respect to actions for breach of duty to a corporation, its stockholders, and
others.
(B) Any repeal or modification of any of the foregoing provisions of this
Article XIII shall not adversely affect any right or protection of a director,
officer, agent or other person existing at the time of, or increase the
liability of any director of the Corporation with respect to any acts or
omissions of such director, officer or agent occurring prior to such repeal or
modification."
* * *
3
<PAGE>
The foregoing Amended and Restated Certificate of Incorporation has been
duly adopted by this Corporation's Board of Directors and stockholders in
accordance with the applicable provisions of Section 228, 242 and 245 of the
General Corporation Law of the State of Delaware.
Executed at Redmond, Washington, on the ____ day of ___________, 1999.
----------------------------------
Peter M. Neupert, President
----------------------------------
Mark L. Silverman, Secretary
4
<PAGE>
EXHIBIT 3.3
BYLAWS
OF
DRUGSTORE.COM, INC.
(as amended and restated on , 1999)
-------------
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I - CORPORATE OFFICES.................................................1
1.1 Registered Office....................................................1
1.2 Other Offices........................................................1
ARTICLE II - MEETINGS OF STOCKHOLDERS.........................................1
2.1 Place of Meetings....................................................1
2.2 Annual Meeting.......................................................1
2.3 Special Meeting......................................................3
2.4 Notice of Stockholder's Meeting; Affidavit of Notice.................3
2.5 Advance Notice of Stockholder Nominees...............................3
2.6 Quorum...............................................................4
2.7 Adjourned Meeting; Notice............................................4
2.8 Conduct of Business..................................................4
2.9 Voting...............................................................5
2.10 Waiver of Notice....................................................5
2.11 Record Date for Stockholder Notice; Voting..........................5
2.12 Proxies.............................................................6
ARTICLE III - DIRECTORS.......................................................6
3.1 Powers...............................................................6
3.2 Number of Directors..................................................6
3.3 Election, Qualification and Term of Office of Directors..............6
3.4 Resignation and Vacancies............................................7
3.5 Place of Meetings; Meetings by Telephone.............................7
3.6 Regular Meetings.....................................................8
3.7 Special Meetings; Notice.............................................8
3.8 Quorum...............................................................8
3.9 Waiver of Notice.....................................................9
3.10 Board Action by Written Consent without a Meeting...................9
3.11 Fees and Compensation of Directors..................................9
3.12 Approval of Loans to Officers.......................................9
3.13 Removal of Directors................................................9
3.14 Chairman of the Board of Directors..................................10
ARTICLE IV - COMMITTEES.......................................................10
4.1 Committees of Directors..............................................10
4.2 Committee Minutes....................................................12
4.3 Meetings and Action of Committees....................................12
ARTICLE V - OFFICERS..........................................................12
5.1 Officers.............................................................12
i
<PAGE>
TABLE OF CONTENTS
(continued)
Page
----
5.2 Appointment of Officers..............................................12
5.3 Subordinate Officers.................................................12
5.4 Removal and Resignation of Officers..................................13
5.5 Vacancies in Offices.................................................13
5.6 Chief Executive Officer..............................................13
5.7 President............................................................13
5.8 Vice Presidents......................................................13
5.9 Secretary............................................................14
5.10 Chief Financial Officer.............................................14
5.11 Representation of Shares of Other Corporations......................15
5.12 Authority and Duties of Officers....................................15
ARTICLE VI - INDEMNIFICATION OF DIRECTORS, OFFICERS,
EMPLOYEES, AND OTHER AGENTS....................................15
6.1 Indemnification of Directors and Officers............................15
6.2 Indemnification of Others............................................15
6.3 Payment of Expenses in Advance.......................................16
6.4 Indemnity Not Exclusive..............................................16
6.5 Insurance............................................................16
6.6 Conflicts............................................................16
ARTICLE VII - RECORDS AND REPORTS.............................................17
7.1 Maintenance and Inspection of Records................................17
7.2 Inspection by Directors..............................................17
7.3 Annual Statement to Stockholders.....................................17
ARTICLE VIII - GENERAL MATTERS................................................18
8.1 Checks...............................................................18
8.2 Execution of Corporate Contracts and Instruments.....................18
8.3 Stock Certificates; Partly Paid Shares...............................18
8.4 Special Designation on Certificates..................................19
8.5 Lost Certificates....................................................19
8.6 Construction; Definitions............................................19
8.7 Dividends............................................................19
8.8 Fiscal Year..........................................................20
8.9 Seal.................................................................20
8.10 Transfer of Stock...................................................20
8.11 Stock Transfer Agreements...........................................20
8.12 Registered Stockholders.............................................20
ARTICLE IX - AMENDMENTS.......................................................20
-ii-
<PAGE>
BYLAWS
OF
DRUGSTORE.COM, INC.
ARTICLE I
CORPORATE OFFICES
1.1 Registered Office.
The address of the Corporation's registered office in the State of
Delaware is 1013 Centre Road, Wilmington, Delaware 19805, County of New Castle.
The name of its registered agent at such address is Corporation Service Company.
1.2 Other Offices.
The Board of Directors may at any time establish other offices at any
place or places where the Corporation is qualified to do business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
2.1 Place of Meetings.
Meetings of stockholders shall be held at any place, within or outside
the State of Delaware, designated by the Board of Directors. In the absence of
any such designation, stockholders' meetings shall be held at the registered
office of the Corporation.
2.2 Annual Meeting.
(a) The annual meeting of stockholders shall be held each year on a date
and at a time designated by the Board of Directors. At the meeting, directors
shall be elected and any other proper business may be transacted.
(b) Nominations of persons for election to the Board of Directors of the
Corporation and the proposal of business to be transacted by the stockholders
may be made at an annual meeting of stockholders (i) pursuant to the
Corporation's notice with respect to such meeting, (ii) by or at the direction
of the Board of Directors or (iii) by any stockholder of the Corporation who was
a stockholder of record at the time of giving of the notice provided for in this
Section 2.2, who is entitled to vote at the meeting and who has complied with
the notice procedures set forth in this Section 2.2.
1
<PAGE>
(c) In addition to the requirements of Section 2.5, for nominations or
other business to be properly brought before an annual meeting by a stockholder
pursuant to clause (iii) of paragraph (b) of this Section 2.2, the stockholder
must have given timely notice thereof in writing to the secretary of the
Corporation and such business must be a proper matter for stockholder action
under the General Corporation Law of Delaware. To be timely, a stockholder's
notice shall be delivered to the secretary at the principal executive offices of
the Corporation not less than 20 days nor more than 90 days prior to the first
anniversary of the preceding year's annual meeting of stockholders; provided,
however, that in the event that the date of the annual meeting is more than 30
days prior to or more than 60 days after such anniversary date, notice by the
stockholder to be timely must be so delivered not earlier than the 90th day
prior to such annual meeting and not later than the close of business on the
later of the 20th day prior to such annual meeting or the 10th day following the
day on which public announcement of the date of such meeting is first made. Such
stockholder's notice shall set forth (i) as to each person whom the stockholder
proposes to nominate for election or reelection as a director all information
relating to such person that is required to be disclosed in solicitations of
proxies for election of directors, or is otherwise required, in each case
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended
(the "Exchange Act") (including such person's written consent to being named in
the proxy statement as a nominee and to serving as a director if elected); (ii)
as to any other business that the stockholder proposes to bring before the
meeting, a brief description of such business, the reasons for conducting such
business at the meeting and any material interest in such business of such
stockholder and the beneficial owner, if any, on whose behalf the proposal is
made; and (iii) as to the stockholder giving the notice and the beneficial
owner, if any, on whose behalf the nomination or proposal is made (A) the name
and address of such stockholder, as they appear on the Corporation's books, and
of such beneficial owner and (B) the class and number of shares of the
Corporation which are owned beneficially and of record by such stockholder and
such beneficial owner.
(d) Only such business shall be conducted at an annual meeting of
stockholders as shall have been brought before the meeting in accordance with
the procedures set forth in this Section 2.2. The chairman of the meeting shall
determine whether a nomination or any business proposed to be transacted by the
stockholders has been properly brought before the meeting and, if any proposed
nomination or business has not been properly brought before the meeting, the
chairman shall declare that such proposed business or nomination shall not be
presented for stockholder action at the meeting.
(e) For purposes of this Section 2.2, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or a comparable national news service.
(f) Nothing in this Section 2.2 shall be deemed to affect any rights of
stockholders to request inclusion of proposals in the Corporation's proxy
statement pursuant to Rule 14a-8 under the Exchange Act.
-2-
<PAGE>
2.3 Special Meeting.
(a) A special meeting of the stockholders may be called at any time
by the Board of Directors, or by the chairman of the board, or by the president.
(b) Nominations of persons for election to the Board of Directors may
be made at a special meeting of stockholders at which directors are to be
elected pursuant to such notice of meeting (i) by or at the direction of the
Board of Directors or (ii) by any stockholder of the Corporation who is a
stockholder of record at the time of giving of notice provided for in Section
2.5, who shall be entitled to vote at the meeting and who complies with the
notice procedures set forth in Section 2.5.
2.4 Notice of Stockholder's Meetings; Affidavit of Notice.
All notices of meetings of stockholders shall be in writing and shall
be sent or otherwise given in accordance with this Section 2.4 of these Bylaws
not less than 10 nor more than 60 days before the date of the meeting to each
stockholder entitled to vote at such meeting (or such longer or shorter time as
is required by Section 2.5 of these Bylaws, if applicable). The notice shall
specify the place, date, and hour of the meeting, and, in the case of a special
meeting, the purpose or purposes for which the meeting is called.
Written notice of any meeting of stockholders, if mailed, is given
when deposited in the United States mail, postage prepaid, directed to the
stockholder at his address as it appears on the records of the Corporation. An
affidavit of the secretary or an assistant secretary or of the transfer agent of
the Corporation that the notice has been given shall, in the absence of fraud,
be prima facie evidence of the facts stated therein.
2.5 Advance Notice of Stockholder Nominees.
Only persons who are nominated in accordance with the procedures set
forth in this Section 2.5 shall be eligible for election as directors.
Nominations of persons for election to the Board of Directors of the Corporation
may be made at a meeting of stockholders by or at the direction of the Board of
Directors or by any stockholder of the Corporation entitled to vote for the
election of directors at the meeting who complies with the notice procedures set
forth in this Section 2.5. Such nominations, other than those made by or at the
direction of the Board of Directors, shall be made pursuant to timely notice in
writing to the secretary of the Corporation. To be timely, a stockholder's
notice shall be delivered to or mailed and received at the principal executive
offices of the Corporation not less than 60 days nor more than 90 days prior to
the meeting; provided, however, that in the event that less than 60 days' notice
or prior public disclosure of the date of the meeting is given or made to
stockholders, notice by the stockholder to be timely must be so received not
later than the close of business on the 10th day following the day on which such
notice of the date of the meeting was mailed or such public disclosure was made.
Such stockholder's notice shall set forth (a) as to each person whom the
stockholder proposes to nominate for election or re-election as a director, (i)
the name, age, business address and residence address of such person, (ii) the
principal occupation or employment of such person, (iii) the class and number of
shares of the Corporation which are beneficially owned by
-3-
<PAGE>
such person and (iv) any other information relating to such person that is
required to be disclosed in solicitations of proxies for election of directors,
or is otherwise required, in each case pursuant to Regulation 14A under the
Exchange Act (including, without limitation, such person's written consent to
being named in the proxy statement as a nominee and to serving as a director if
elected); and (b) as to the stockholder giving the notice (i) the name and
address, as they appear on the Corporation's books, of such stockholder and (ii)
the class and number of shares of the Corporation which are beneficially owned
by such stockholder. At the request of the Board of Directors any person
nominated by the Board of Directors for election as a director shall furnish to
the secretary of the Corporation that information required to be set forth in a
stockholder's notice of nomination which pertains to the nominee. No person
shall be eligible for election as a director of the Corporation unless nominated
in accordance with the procedures set forth in this Section 2.5. The chairman of
the meeting shall, if the facts warrant, determine and declare to the meeting
that a nomination was not made in accordance with the procedures prescribed by
the Bylaws, and if he or she should so determine, he or she shall so declare to
the meeting and the defective nomination shall be disregarded.
2.6 Quorum.
The holders of a majority of the stock issued and outstanding and entitled
to vote thereat, present in person or represented by proxy, shall constitute a
quorum at all meetings of the stockholders for the transaction of business
except as otherwise provided by statute or by the Certificate of Incorporation.
If, however, such quorum is not present or represented at any meeting of the
stockholders, then either (a) the chairman of the meeting or (b) the
stockholders entitled to vote thereat, present in person or represented by
proxy, shall have power to adjourn the meeting from time to time, without notice
other than announcement at the meeting, until a quorum is present or
represented. At such adjourned meeting at which a quorum is present or
represented, any business may be transacted that might have been transacted at
the meeting as originally noticed.
2.7 Adjourned Meeting; Notice.
When a meeting is adjourned to another time or place, unless these
Bylaws otherwise require, notice need not be given of the adjourned meeting if
the time and place thereof are announced at the meeting at which the adjournment
is taken. At the adjourned meeting the Corporation may transact any business
that might have been transacted at the original meeting. If the adjournment is
for more than 30 days, or if after the adjournment a new record date is fixed
for the adjourned meeting, a notice of the adjourned meeting shall be given to
each stockholder of record entitled to vote at the meeting.
2.8 Conduct of Business.
The chairman of any meeting of stockholders shall determine the order
of business and the procedure at the meeting, including the manner of voting and
the conduct of business.
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2.9 Voting.
(a) The stockholders entitled to vote at any meeting of stockholders
shall be determined in accordance with the provisions of Section 2.11 of these
Bylaws, subject to the provisions of Sections 217 and 218 of the General
Corporation Law of Delaware (relating to voting rights of fiduciaries, pledgors
and joint owners of stock and to voting trusts and other voting agreements).
(b) Except as may be otherwise provided in the Certificate of
Incorporation, each stockholder shall be entitled to one vote for each share of
capital stock held by such stockholder.
2.10 Waiver of Notice.
Whenever notice is required to be given under any provision of the
General Corporation Law of Delaware or of the Certificate of Incorporation or
these Bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the stockholders need be specified in any written waiver of notice unless so
required by the Certificate of Incorporation or these Bylaws.
2.11 Record Date for Stockholder Notice; Voting.
In order that the Corporation may determine the stockholders entitled
to notice of or to vote at any meeting of stockholders or any adjournment
thereof or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock or for the purpose of any other lawful
action, the Board of Directors may fix, in advance, a record date, which shall
not be more than 60 nor less than 10 days before the date of such meeting, nor
more than 60 days prior to any other action. If the Board of Directors does not
so fix a record date:
(a) The record date for determining stockholders entitled to notice
of or to vote at a meeting of stockholders shall be at the close of business on
the day next preceding the day on which notice is given, or, if notice is
waived, at the close of business on the day next preceding the day on which the
meeting is held.
(b) The record date for determining stockholders for any other
purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto.
A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
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2.12 Proxies.
Each stockholder entitled to vote at a meeting of stockholders may
authorize another person or persons to act for such stockholder by a written
proxy, signed by the stockholder and filed with the secretary of the
Corporation, but no such proxy shall be voted or acted upon after three years
from its date, unless the proxy provides for a longer period. A proxy shall be
deemed signed if the stockholder's name is placed on the proxy (whether by
manual signature, typewriting, telegraphic transmission or otherwise) by the
stockholder or the stockholder's attorney-in-fact. The revocability of a proxy
that states on its face that it is irrevocable shall be governed by the
provisions of Section 212(e) of the General Corporation Law of Delaware.
ARTICLE III
DIRECTORS
3.1 Powers.
Subject to the provisions of the General Corporation Law of Delaware
and any limitations in the Certificate of Incorporation or these Bylaws relating
to action required to be approved by the stockholders or by the outstanding
shares, the business and affairs of the Corporation shall be managed and all
corporate powers shall be exercised by or under the direction of the Board of
Directors.
3.2 Number of Directors.
The number of directors constituting the entire Board of Directors
shall be eight.
3.3 Election, Qualification and Term of Office of Directors.
Except as provided in Section 3.4 of these Bylaws, directors shall be
elected at each annual meeting of stockholders to hold office until the next
annual meeting. Directors need not be stockholders unless so required by the
Certificate of Incorporation or these Bylaws, wherein other qualifications for
directors may be prescribed. Each director, including a director elected to fill
a vacancy, shall hold office until his or her successor is elected and qualified
or until his or her earlier resignation or removal.
Elections of directors need not be by written ballot.
3.4 Resignation and Vacancies.
Any director may resign at any time upon written notice to the
attention of the secretary of the Corporation. When one or more directors so
resigns and the resignation is effective at a future date, a majority of the
directors then in office, including those who have so resigned, shall have power
to fill such vacancy or vacancies, the vote thereon to take effect when such
resignation or resignations shall become effective, and each director so chosen
shall hold office as provided in this section in the filling of other vacancies.
A vacancy created by the
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removal of a director by the vote of the stockholders or by court order may be
filled only by the affirmative vote of a majority of the shares represented and
voting at a duly held meeting at which a quorum is present (which shares voting
affirmatively also constitute a majority of the quorum. Each director so elected
shall hold office until the next annual meeting of the stockholders and until a
successor has been elected and qualified.
Unless otherwise provided in the Certificate of Incorporation or these
Bylaws:
(a) Vacancies and newly created directorships resulting from any
increase in the authorized number of directors elected by all of the
stockholders having the right to vote as a single class may be filled by a
majority of the directors then in office, although less than a quorum, or by a
sole remaining director.
(b) Whenever the holders of any class or classes of stock or series
thereof are entitled to elect one or more directors by the provisions of the
Certificate of Incorporation, vacancies and newly created directorships of such
class or classes or series may be filled by a majority of the directors elected
by such class or classes or series thereof then in office, or by a sole
remaining director so elected.
If at any time, by reason of death or resignation or other cause, the
Corporation should have no directors in office, then any officer or any
stockholder or an executor, administrator, trustee or guardian of a stockholder,
or other fiduciary entrusted with like responsibility for the person or estate
of a stockholder, may call a special meeting of stockholders in accordance with
the provisions of the Certificate of Incorporation or these Bylaws, or may apply
to the Court of Chancery for a decree summarily ordering an election as provided
in Section 211 of the General Corporation Law of Delaware.
If, at the time of filling any vacancy or any newly created
directorship, the directors then in office constitute less than a majority of
the whole Board of Directors (as constituted immediately prior to any such
increase), then the Court of Chancery may, upon application of any stockholder
or stockholders holding at least 10% of the total number of the shares at the
time outstanding having the right to vote for such directors, summarily order an
election to be held to fill any such vacancies or newly created directorships,
or to replace the directors chosen by the directors then in office as aforesaid,
which election shall be governed by the provisions of Section 211 of the General
Corporation Law of Delaware as far as applicable.
3.5 Place of Meetings; Meetings by Telephone.
The Board of Directors of the Corporation may hold meetings, both
regular and special, either within or outside the State of Delaware.
Unless otherwise restricted by the Certificate of Incorporation or
these Bylaws, members of the Board of Directors, or any committee designated by
the Board of Directors, may participate in a meeting of the Board of Directors,
or any committee, by means of conference telephone or similar communications
equipment by means of which all persons participating in
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the meeting can hear each other, and such participation in a meeting shall
constitute presence in person at the meeting.
3.6 Regular Meetings.
Regular meetings of the Board of Directors may be held without notice
at such time and at such place as shall from time to time be determined by the
Board of Directors.
3.7 Special Meetings; Notice.
Special meetings of the Board of Directors for any purpose or purposes
may be called at any time by the chairman of the board, the president, any vice
president, the secretary or any two directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges prepaid, addressed to each director at that director's address
as it is shown on the records of the Corporation. If the notice is mailed, it
shall be deposited in the United States mail at least four days before the time
of the holding of the meeting. If the notice is delivered personally or by
telephone or by telegram, it shall be delivered personally or by telephone or to
the telegraph company at least 48 hours before the time of the holding of the
meeting. Any oral notice given personally or by telephone may be communicated
either to the director or to a person at the office of the director who the
person giving the notice has reason to believe will promptly communicate it to
the director. The notice need not specify the purpose or the place of the
meeting, if the meeting is to be held at the principal executive office of the
Corporation.
3.8 Quorum.
At all meetings of the Board of Directors, a majority of the
authorized number of directors shall constitute a quorum for the transaction of
business and the act of a majority of the directors present at any meeting at
which there is a quorum shall be the act of the Board of Directors, except as
may be otherwise specifically provided by statute or by the Certificate of
Incorporation. If a quorum is not present at any meeting of the Board of
Directors, then the directors present thereat may adjourn the meeting from time
to time, without notice other than announcement at the meeting, until a quorum
is present.
A meeting at which a quorum is initially present may continue to
transact business notwithstanding the withdrawal of directors, if any action
taken is approved by at least a majority of the required quorum for that
meeting.
3.9 Waiver of Notice.
Whenever notice is required to be given under any provision of the
General Corporation Law of Delaware or of the Certificate of Incorporation or
these Bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall
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constitute a waiver of notice of such meeting, except when the person attends a
meeting for the express purpose of objecting, at the beginning of the meeting,
to the transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the directors, or members of a committee of
directors, need be specified in any written waiver of notice unless so required
by the Certificate of Incorporation or these Bylaws.
3.10 Board Action by Written Consent without a Meeting.
Unless otherwise restricted by the Certificate of Incorporation or
these Bylaws, any action required or permitted to be taken at any meeting of the
Board of Directors, or of any committee thereof, may be taken without a meeting
if all members of the Board of Directors or committee, as the case may be,
consent thereto in writing and the writing or writings are filed with the
minutes of proceedings of the Board of Directors or committee. Written consents
representing actions taken by the board or committee may be executed by telex,
telecopy or other facsimile transmission, and such facsimile shall be valid and
binding to the same extent as if it were an original.
3.11 Fees and Compensation of Directors.
Unless otherwise restricted by the Certificate of Incorporation or
these Bylaws, the Board of Directors shall have the authority to fix the
compensation of directors. No such compensation shall preclude any director from
serving the Corporation in any other capacity and receiving compensation
therefor.
3.12 Approval of Loans to Officers.
The Corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the Corporation or of its
subsidiary, including any officer or employee who is a director of the
Corporation or its subsidiary, whenever, in the judgment of the directors, such
loan, guaranty or assistance may reasonably be expected to benefit the
Corporation. The loan, guaranty or other assistance may be with or without
interest and may be unsecured, or secured in such manner as the Board of
Directors shall approve, including, without limitation, a pledge of shares of
stock of the Corporation. Nothing in this Section 3.2 contained shall be deemed
to deny, limit or restrict the powers of guaranty or warranty of the Corporation
at common law or under any statute.
3.13 Removal of Directors.
Unless otherwise restricted by statute, by the Certificate of
Incorporation or by these Bylaws, any director or the entire Board of Directors
may be removed, with or without cause, by the holders of a majority of the
shares then entitled to vote at an election of directors; provided, however,
that if the stockholders of the Corporation are entitled to cumulative voting,
if less than the entire Board of Directors is to be removed, no director may be
removed without cause if the votes cast against his removal would be sufficient
to elect him if then cumulatively voted at an election of the entire Board of
Directors.
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No reduction of the authorized number of directors shall have the
effect of removing any director prior to the expiration of such director's term
of office.
3.14 Uncle of the Board of Directors.
The Corporation may also have, at the discretion of the Board of
Directors, a chairman of the Board of Directors who shall not be considered an
officer of the Corporation.
ARTICLE IV
COMMITTEES
4.1 Committees of Directors.
The Board of Directors may, by resolution passed by a majority of the
whole Board of Directors, designate one or more committees, with each committee
to consist of one or more of the directors of the Corporation. The Board of
Directors may designate one or more directors as alternate members of any
committee, who may replace any absent or disqualified member at any meeting of
the committee. In the absence or disqualification of a member of a committee,
the member or members thereof present at any meeting and not disqualified from
voting, whether or not such member or members constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member. Any such
committee, to the extent provided in the resolution of the Board of Directors or
in the Bylaws of the Corporation, shall have and may exercise all the powers and
authority of the Board of Directors in the management of the business and
affairs of the Corporation, and may authorize the seal of the Corporation to be
affixed to all papers that may require it; but no such committee shall have the
power or authority to (a) amend the Certificate of Incorporation (except that a
committee may, to the extent authorized in the resolution or resolutions
providing for the issuance of shares of stock adopted by the Board of Directors
as provided in Section 151(a) of the General Corporation Law of Delaware, fix
the designations and any of the preferences or rights of such shares relating to
dividends, redemption, dissolution, any distribution of assets of the
Corporation or the conversion into, or the exchange of such shares for, shares
of any other class or classes or any other series of the same or any other class
or classes of stock of the Corporation or fix the number of shares of any series
of stock or authorize the increase or decrease of the shares of any series), (b)
adopt an agreement of merger or consolidation under Sections 251 or 252 of the
General Corporation Law of Delaware, (c) recommend to the stockholders the sale,
lease or exchange of all or substantially all of the Corporation's property and
assets, (d) recommend to the stockholders a dissolution of the Corporation or a
revocation of a dissolution, or (e) amend the Bylaws of the Corporation; and,
unless the board resolution establishing the committee, the Bylaws or the
Certificate of Incorporation expressly so provide, no such committee shall have
the power or authority to declare a dividend, to authorize the issuance of
stock, or to adopt a certificate of ownership and merger pursuant to Section 253
of the General Corporation Law of Delaware.
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4.2 Committee Minutes.
Each committee shall keep regular minutes of its meetings and report
the same to the Board of Directors when required.
4.3 Meetings and Action of Committees.
Meetings and actions of committees shall be governed by, and held and
taken in accordance with, the provisions of Section 3.5 (place of meetings and
meetings by telephone), Section 3.6 (regular meetings), Section 3.7 (special
meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice), and
Section 3.10 (action without a meeting) of these Bylaws, with such changes in
the context of such provisions as are necessary to substitute the committee and
its members for the Board of Directors and its members; provided, however, that
the time of regular meetings of committees may be determined either by
resolution of the Board of Directors or by resolution of the committee, that
special meetings of committees may also be called by resolution of the Board of
Directors and that notice of special meetings of committees shall also be given
to all alternate members, who shall have the right to attend all meetings of the
committee. The Board of Directors may adopt rules for the government of any
committee not inconsistent with the provisions of these Bylaws.
ARTICLE V
OFFICERS
5.1 Officers.
The officers of the Corporation shall be a chief executive officer, a
president, a secretary, and a chief financial officer. The Corporation may also
have, at the discretion of the Board of Directors, one or more vice presidents,
one or more assistant secretaries, one or more assistant treasurers, and any
such other officers as may be appointed in accordance with the provisions of
Section 5.3 of these Bylaws. Any number of offices may be held by the same
person.
5.2 Appointment of Officers.
The officers of the Corporation, except such officers as may be
appointed in accordance with the provisions of Sections 5.3 or 5.5 of these
Bylaws, shall be appointed by the Board of Directors, subject to the rights, if
any, of an officer under any contract of employment.
5.3 Subordinate Officers.
The Board of Directors may appoint, or empower the chief executive
officer or the president to appoint, such other officers and agents as the
business of the Corporation may require, each of whom shall hold office for such
period, have such authority, and perform such duties as are provided in these
Bylaws or as the Board of Directors may from time to time determine.
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5.4 Removal and Resignation of Officers.
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by an
affirmative vote of the majority of the Board of Directors at any regular or
special meeting of the Board of Directors or, except in the case of an officer
chosen by the Board of Directors, by any officer upon whom such power of removal
may be conferred by the Board of Directors.
Any officer may resign at any time by giving written notice to the
attention of the secretary of the Corporation. Any resignation shall take effect
at the date of the receipt of that notice or at any later time specified in that
notice; and, unless otherwise specified in that notice, the acceptance of the
resignation shall not be necessary to make it effective. Any resignation is
without prejudice to the rights, if any, of the Corporation under any contract
to which the officer is a party.
5.5 Vacancies in Offices.
Any vacancy occurring in any office of the Corporation shall be filled
by the Board of Directors.
5.6 Chief Executive Officer.
Subject to such supervisory powers, if any, as may be given by the
Board of Directors to the chairman of the board, if any, the chief executive
officer of the Corporation shall, subject to the control of the Board of
Directors, have general supervision, direction, and control of the business and
the officers of the Corporation. He or she shall preside at all meetings of the
stockholders and, in the absence or nonexistence of a chairman of the board, at
all meetings of the Board of Directors and shall have the general powers and
duties of management usually vested in the office of chief executive officer of
a corporation and shall have such other powers and duties as may be prescribed
by the Board of Directors or these Bylaws.
5.7 President.
Subject to such supervisory powers, if any, as may be given by the
Board of Directors to the chairman of the board (if any) or the chief executive
officer, the president shall have general supervision, direction, and control of
the business and other officers of the Corporation. He or she shall have the
general powers and duties of management usually vested in the office of
president of a corporation and such other powers and duties as may be prescribed
by the Board of Directors or these Bylaws.
5.8 Vice Presidents.
In the absence or disability of the chief executive officer and
president, the vice presidents, if any, in order of their rank as fixed by the
Board of Directors or, if not ranked, a vice president designated by the Board
of Directors, shall perform all the duties of the president and when so acting
shall have all the powers of, and be subject to all the restrictions upon, the
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president. The vice presidents shall have such other powers and perform such
other duties as from time to time may be prescribed for them respectively by the
Board of Directors, these Bylaws, the president or the chairman of the board.
5.9 Secretary.
The secretary shall keep or cause to be kept, at the principal
executive office of the Corporation or such other place as the Board of
Directors may direct, a book of minutes of all meetings and actions of
directors, committees of directors, and stockholders. The minutes shall show the
time and place of each meeting, the names of those present at directors'
meetings or committee meetings, the number of shares present or represented at
stockholders' meetings, and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal
executive office of the Corporation or at the office of the Corporation's
transfer agent or registrar, as determined by resolution of the Board of
Directors, a share register, or a duplicate share register, showing the names of
all stockholders and their addresses, the number and classes of shares held by
each, the number and date of certificates evidencing such shares, and the number
and date of cancellation of every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings
of the stockholders and of the Board of Directors required to be given by law or
by these Bylaws. He or she shall keep the seal of the Corporation, if one be
adopted, in safe custody and shall have such other powers and perform such other
duties as may be prescribed by the Board of Directors or by these Bylaws.
5.10 Chief Financial Officer.
The chief financial officer shall keep and maintain, or cause to be
kept and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the Corporation, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital
retained earnings, and shares. The books of account shall at all reasonable
times be open to inspection by any director.
The chief financial officer shall deposit all moneys and other
valuables in the name and to the credit of the Corporation with such
depositories as may be designated by the Board of Directors. He or she shall
disburse the funds of the Corporation as may be ordered by the Board of
Directors, shall render to the president, the chief executive officer, or the
directors, upon request, an account of all his or her transactions as chief
financial officer and of the financial condition of the Corporation, and shall
have other powers and perform such other duties as may be prescribed by the
Board of Directors or the Bylaws.
5.11 Representation of Shares of Other Corporations.
The chairman of the board, the chief executive officer, the president,
any vice president, the chief financial officer, the secretary or assistant
secretary of this Corporation, or
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any other person authorized by the Board of Directors or the chief executive
officer or the president or a vice president, is authorized to vote, represent,
and exercise on behalf of this Corporation all rights incident to any and all
shares of any other corporation or corporations standing in the name of this
Corporation. The authority granted herein may be exercised either by such person
directly or by any other person authorized to do so by proxy or power of
attorney duly executed by the person having such authority.
5.12 Authority and Duties of Officers.
In addition to the foregoing authority and duties, all officers of the
Corporation shall respectively have such authority and perform such duties in
the management of the business of the Corporation as may be designated from time
to time by the Board of Directors or the stockholders.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS
6.1 Indemnification of Directors and Officers.
The Corporation shall, to the maximum extent and in the manner
permitted by the General Corporation Law of Delaware, indemnify each of its
directors and officers against expenses (including attorneys' fees), judgments,
fines, settlements and other amounts actually and reasonably incurred in
connection with any proceeding, arising by reason of the fact that such person
is or was an agent of the Corporation. For purposes of this Section 6.1, a
"director" or "officer" of the Corporation includes any person (a) who is or was
a director or officer of the Corporation, (b) who is or was serving at the
request of the Corporation as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise, or (c) who was a director
or officer of a Corporation which was a predecessor corporation of the
Corporation or of another enterprise at the request of such predecessor
corporation.
6.2 Indemnification of Others.
The Corporation shall have the power, to the maximum extent and in the
manner permitted by the General Corporation Law of Delaware, to indemnify each
of its employees and agents (other than directors and officers) against expenses
(including attorneys' fees), judgments, fines, settlements and other amounts
actually and reasonably incurred in connection with any proceeding, arising by
reason of the fact that such person is or was an agent of the Corporation. For
purposes of this Section 6.2, an "employee" or "agent" of the Corporation (other
than a director or officer) includes any person (a) who is or was an employee or
agent of the Corporation, (b) who is or was serving at the request of the
Corporation as an employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, or (c) who was an employee or agent of a
corporation which was a predecessor corporation of the Corporation or of another
enterprise at the request of such predecessor corporation.
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6.3 Payment of Expenses in Advance.
Expenses incurred in defending any action or proceeding for which
indemnification is required pursuant to Section 6.1 or for which indemnification
is permitted pursuant to Section 6.2 following authorization thereof by the
Board of Directors shall be paid by the Corporation in advance of the final
disposition of such action or proceeding upon receipt of an undertaking by or on
behalf of the indemnified party to repay such amount if it shall ultimately be
determined that the indemnified party is not entitled to be indemnified as
authorized in this Article VI.
6.4 Indemnity Not Exclusive.
The indemnification provided by this Article VI shall not be deemed
exclusive of any other rights to which those seeking indemnification may be
entitled under any Bylaw, agreement, vote of shareholders or disinterested
directors or otherwise, both as to action in an official capacity and as to
action in another capacity while holding such office, to the extent that such
additional rights to indemnification are authorized in the Certificate of
Incorporation
6.5 Insurance.
The Corporation may purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee or agent of the Corporation,
or is or was serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against him or her and incurred
by him or her in any such capacity, or arising out of his or her status as such,
whether or not the Corporation would have the power to indemnify him or her
against such liability under the provisions of the General Corporation Law of
Delaware.
6.6 Conflicts.
No indemnification or advance shall be made under this Article VI,
except where such indemnification or advance is mandated by law or the order,
judgment or decree of any court of competent jurisdiction, in any circumstance
where it appears:
(a) That it would be inconsistent with a provision of the Certificate
of Incorporation, these Bylaws, a resolution of the stockholders or an agreement
in effect at the time of the accrual of the alleged cause of the action asserted
in the proceeding in which the expenses were incurred or other amounts were
paid, which prohibits or otherwise limits indemnification; or
(b) That it would be inconsistent with any condition expressly
imposed by a court in approving a settlement.
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ARTICLE VII
RECORDS AND REPORTS
7.1 Maintenance and Inspection of Records.
The Corporation shall, either at its principal executive offices or at
such place or places as designated by the Board of Directors, keep a record of
its stockholders listing their names and addresses and the number and class of
shares held by each stockholder, a copy of these Bylaws as amended to date,
accounting books, and other records.
Any stockholder of record, in person or by attorney or other agent,
shall, upon written demand under oath stating the purpose thereof, have the
right during the usual hours for business to inspect for any proper purpose the
Corporation's stock ledger, a list of its stockholders, and its other books and
records and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder. In every
instance where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing that authorizes the attorney or other agent to so act on
behalf of the stockholder. The demand under oath shall be directed to the
Corporation at its registered office in Delaware or at its principal place of
business.
7.2 Inspection by Directors.
Any director shall have the right to examine the Corporation's stock
ledger, a list of its stockholders, and its other books and records for a
purpose reasonably related to his or her position as a director. The Court of
Chancery is hereby vested with the exclusive jurisdiction to determine whether a
director is entitled to the inspection sought. The Court may summarily order the
Corporation to permit the director to inspect any and all books and records, the
stock ledger, and the stock list and to make copies or extracts therefrom. The
Court may, in its discretion, prescribe any limitations or conditions with
reference to the inspection, or award such other and further relief as the Court
may deem just and proper.
7.3 Annual Statement to Stockholders.
The Board of Directors shall present at each annual meeting, and at
any special meeting of the stockholders when called for by vote of the
stockholders, a full and clear statement of the business and condition of the
Corporation.
ARTICLE VIII
GENERAL MATTERS
8.1 Checks.
From time to time, the Board of Directors shall determine by
resolution which person or persons may sign or endorse all checks, drafts, other
orders for payment of money,
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notes or other evidences of indebtedness that are issued in the name of or
payable to the Corporation, and only the persons so authorized shall sign or
endorse those instruments.
8.2 Execution of Corporate Contracts and Instruments.
The Board of Directors, except as otherwise provided in these Bylaws,
may authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
Corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the Board of Directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the Corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
8.3 Stock Certificates; Partly Paid Shares.
The shares of the Corporation shall be represented by certificates,
provided that the Board of Directors of the Corporation may provide by
resolution or resolutions that some or all of any or all classes or series of
its stock shall be uncertificated shares. Any such resolution shall not apply to
shares represented by a certificate until such certificate is surrendered to the
Corporation. Notwithstanding the adoption of such a resolution by the Board of
Directors, every holder of stock represented by certificates and upon request
every holder of uncertificated shares shall be entitled to have a certificate
signed by, or in the name of the Corporation by the chairman or vice-chairman of
the Board of Directors, or the chief executive officer or the president or vice-
president, and by the chief financial officer or an assistant treasurer, or the
secretary or an assistant secretary of the Corporation representing the number
of shares registered in certificate form. Any or all of the signatures on the
certificate may be a facsimile. In case any officer, transfer agent or registrar
who has signed or whose facsimile signature has been placed upon a certificate
has ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the Corporation with the same effect
as if he or she were such officer, transfer agent or registrar at the date of
issue.
The Corporation may issue the whole or any part of its shares as
partly paid and subject to call for the remainder of the consideration to be
paid therefor. Upon the face or back of each stock certificate issued to
represent any such partly paid shares, upon the books and records of the
Corporation in the case of uncertificated partly paid shares, the total amount
of the consideration to be paid therefor and the amount paid thereon shall be
stated. Upon the declaration of any dividend on fully paid shares, the
Corporation shall declare a dividend upon partly paid shares of the same class,
but only upon the basis of the percentage of the consideration actually paid
thereon.
8.4 Special Designation on Certificates.
If the Corporation is authorized to issue more than one class of stock
or more than one series of any class, then the powers, the designations, the
preferences, and the relative, participating, optional or other special rights
of each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full
-17-
<PAGE>
or summarized on the face or back of the certificate that the Corporation shall
issue to represent such class or series of stock; provided, however, that,
except as otherwise provided in Section 202 of the General Corporation Law of
Delaware, in lieu of the foregoing requirements there may be set forth on the
face or back of the certificate that the Corporation shall issue to represent
such class or series of stock a statement that the Corporation will furnish
without charge to each stockholder who so requests the powers, the designations,
the preferences, and the relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
8.5 Lost Certificates.
Except as provided in this Section 8.5, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the Corporation and canceled at the same time. The Corporation
may issue a new certificate of stock or uncertificated shares in the place of
any certificate previously issued by it, alleged to have been lost, stolen or
destroyed, and the Corporation may require the owner of the lost, stolen or
destroyed certificate, or the owner's legal representative, to give the
Corporation a bond sufficient to indemnify it against any claim that may be made
against it on account of the alleged loss, theft or destruction of any such
certificate or the issuance of such new certificate or uncertificated shares.
8.6 Construction; Definitions.
Unless the context requires otherwise, the general provisions, rules
of construction, and definitions in the Delaware General Corporation Law shall
govern the construction of these Bylaws. Without limiting the generality of this
provision, the singular number includes the plural, the plural number includes
the singular, and the term "person" includes both a corporation and a natural
person.
8.7 Dividends.
The directors of the Corporation, subject to any restrictions
contained in (a) the General Corporation Law of Delaware or (b) the Certificate
of Incorporation, may declare and pay dividends upon the shares of its capital
stock. Dividends may be paid in cash, in property, or in shares of the
Corporation's capital stock.
The directors of the Corporation may set apart out of any of the funds
of the Corporation available for dividends a reserve or reserves for any proper
purpose and may abolish any such reserve. Such purposes shall include but not be
limited to equalizing dividends, repairing or maintaining any property of the
Corporation, and meeting contingencies.
8.8 Fiscal Year.
The fiscal year of the Corporation shall be fixed by resolution of the
Board of Directors and may be changed by the Board of Directors.
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<PAGE>
8.9 Seal.
The Corporation may adopt a corporate seal, which may be altered at
pleasure, and may use the same by causing it or a facsimile thereof, to be
impressed or affixed or in any other manner reproduced.
8.10 Transfer of Stock.
Upon surrender to the Corporation or the transfer agent of the
Corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignation or authority to transfer, it shall be the
duty of the Corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate, and record the transaction in its books.
8.11 Stock Transfer Agreements.
The Corporation shall have power to enter into and perform any
agreement with any number of stockholders of any one or more classes of stock of
the Corporation to restrict the transfer of shares of stock of the Corporation
of any one or more classes owned by such stockholders in any manner not
prohibited by the General Corporation Law of Delaware.
8.12 Registered Stockholders.
The Corporation shall be entitled to recognize the exclusive right of
a person registered on its books as the owner of shares to receive dividends and
to vote as such owner, shall be entitled to hold liable for calls and
assessments the person registered on its books as the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of another person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
ARTICLE IX
AMENDMENTS
The Bylaws of the Corporation may be adopted, amended or repealed by
the stockholders entitled to vote; provided, however, that the Corporation may,
in its Certificate of Incorporation, confer the power to adopt, amend or repeal
Bylaws upon the directors. The fact that such power has been so conferred upon
the directors shall not divest the stockholders of the power, nor limit their
power to adopt, amend or repeal Bylaws.
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<PAGE>
EXHIBIT 10.1
FORM OF INDEMNIFICATION AGREEMENT
DRUGSTORE.COM, INC.
INDEMNIFICATION AGREEMENT
This INDEMNIFICATION AGREEMENT, dated as of ___________, is between
DRUGSTORE.COM, INC., a Delaware corporation (the "Company"), and the person
listed on the signature page hereto ("Indemnitee").
Recitals
A. Indemnitee is a director or officer of the Company and in such capacity is
performing valuable services for the Company.
B. The Company and Indemnitee recognize the difficulty in obtaining directors'
and officers' liability insurance, the significant cost of such insurance and
the periodic reduction in the coverage of such insurance.
C. The Company and Indemnitee further recognize the substantial increase in
litigation subjecting directors and officers to expensive litigation risks at
the same time such liability insurance is being severely limited.
D. The Company has adopted and its stockholders have approved bylaws (the
"Bylaws") providing for the indemnification of the Company's directors and
officers to the full extent permitted by Section 145 of the General Corporation
Law of Delaware (the "Statute").
E. The Bylaws and the Statute specifically provide that they are not
exclusive, and they thereby contemplate that contracts may be entered into
between the Company and its directors and officers with respect to
indemnification of such directors and officers.
F. To induce Indemnitee to serve or continue to serve the Company, the Company
desires to confirm the contract indemnification rights provided in the Bylaws
and agrees to provide Indemnitee with the benefits contemplated by this
Agreement.
Agreements
1. Indemnity of Indemnitee
1.1. Scope
The Company agrees to hold harmless and indemnify Indemnitee to the full extent
permitted by law, notwithstanding that the basis for such indemnification is not
specifically enumerated in this Agreement, the Company's Restated Certificate of
Incorporation, the Bylaws, any other statute or otherwise. In the event of any
change, after the date of this Agreement, in any applicable law, statute or rule
regarding the right of a Delaware corporation to indemnify a member of its Board
of Directors or an officer, such change, to the extent it would expand
Indemnitee's rights hereunder, shall be included within Indemnitee's rights and
the Company's obligations hereunder, and, to the extent it would narrow
Indemnitee's rights or the Company's obligations hereunder, shall be excluded
from this Agreement; provided, however, that any change required by applicable
laws, statutes or rules to be applied to this Agreement shall be so applied
regardless of
<PAGE>
whether the effect of such change is to narrow Indemnitee's rights or the
Company's obligations hereunder.
1.2. Nonexclusivity
The indemnification provided by this Agreement shall not be deemed exclusive of
any rights to which Indemnitee may be entitled under the Company's Restated
Certificate of Incorporation, the Bylaws, any agreement, any vote of
stockholders or disinterested directors, the Statute or otherwise, whether as to
action in Indemnitee's official capacity or otherwise.
1.3. Included Coverage
If Indemnitee was or is made a party, or is threatened to be made a party, to or
is otherwise involved (including, without limitation, as a witness) in any
Proceeding (as defined below), the Company shall hold harmless and indemnify
Indemnitee from and against any and all losses, claims, damages, liabilities or
expenses, including, without limitation, attorneys' fees, judgments, fines,
ERISA excise taxes or penalties, witness fees, amounts paid in settlement and
other expenses incurred in connection with such Proceeding, as well as any
federal, state or local taxes imposed on such Indemnitee as a result of the
actual or deemed receipt of any payments under this Agreement, including all
interest, assessments and other charges paid or payable in connection with such
expenses (collectively, "Damages").
1.4. Definition of Proceeding
For purposes of this Agreement, "Proceeding" shall mean any completed, actual,
pending or threatened action, suit, claim or proceeding, whether civil,
criminal, administrative or investigative (including an action by or in the
right of the Company) and whether formal or informal, in which Indemnitee is,
was or becomes involved by reason of the fact that Indemnitee is or was a
director, officer, employee, trustee or agent of the Company or that, being or
having been such a director, officer, employee, trustee or agent, Indemnitee is
or was serving at the request of the Company as a director, officer, employee,
trustee or agent of another corporation or of a partnership, joint venture,
trust or other enterprise (collectively, a "Related Company"), including service
with respect to an employee benefit plan, whether the basis of such proceeding
is alleged action (or inaction) by Indemnitee in an official capacity as a
director, officer, employee, trustee or agent or in any other capacity while
serving as a director, officer, employee, trustee or agent; provided, however,
that, except with respect to an action to enforce the provisions of this
Agreement, "Proceeding" shall not include any action, suit, claim or proceeding
instituted by or at the direction of Indemnitee, unless such action, suit, claim
or proceeding is or was authorized by the Company's Board of Directors.
1.5. Determination of Entitlement
In the event that a determination of Indemnitee's entitlement to indemnification
is required pursuant to Section 145(d) of the Statute or a successor statute or
pursuant to other applicable law, the appropriate decision maker shall make such
determination; provided, however, that Indemnitee shall initially be presumed in
all cases to be entitled to indemnification, that Indemnitee may establish a
conclusive presumption of any fact necessary to such a determination by
delivering to the Company a declaration made under penalty of perjury that such
fact is true and that, unless the Company shall deliver to Indemnitee a written
notice that Indemnitee is not entitled to indemnification within 20 days after
the Company's receipt of Indemnitee's initial written request for
indemnification, such determination shall conclusively be deemed to have been
made in favor of the Company's provision of indemnification, and that the
Company hereby agrees not to assert otherwise.
<PAGE>
1.6. Contribution
If the indemnification provided under Section 1.1 is unavailable by reason of a
court decision, based on grounds other than any of those set forth in paragraphs
(b) through (d) of Section 4.1, then, in respect of any Proceeding in which the
Company is jointly liable with Indemnitee (or would be if joined in such
Proceeding), the Company shall contribute to the amount of Damages (including
attorneys' fees) actually and reasonably incurred and paid or payable by
Indemnitee in such proportion as is appropriate to reflect (i) the relative
benefits received by the Company on the one hand and Indemnitee on the other
from the transaction from which such Proceeding arose and (ii) the relative
fault of the Company on the one hand and of Indemnitee on the other in
connection with the events that resulted in such Damages as well as any other
relevant equitable considerations. The relative fault of the Company on the one
hand and of Indemnitee on the other shall be determined by reference to, among
other things, the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent the circumstances resulting in such Damages.
The Company agrees that it would not be just and equitable if contribution
pursuant to this Section 1.6 were determined by pro rata allocation or any other
method of allocation that does not take account of the foregoing equitable
considerations.
In connection with the registration of the Company's securities, the
relative benefits received by the Company and the Indemnitee shall be deemed to
be in the same respective proportions that the net proceeds from the offering
(before deducting expenses) received by the Company and the Indemnitee, in each
case as set forth in the table on the cover page of the applicable prospectus,
bear to the aggregate public offering price of the securities so offered. The
relative fault of the Company and the Indemnitee shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company or the Indemnitee and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission.
The Company and the Indemnitee agree that it would not be just and
equitable if contribution pursuant to this Section 1.6 were determined by pro
rata or per capita allocation or by any other method of allocation that does not
take account of the equitable considerations referred to in the immediately
preceding paragraph. In connection with the registration of the Company's
securities, in no event shall Indemnitee be required to contribute any amount
under this Section 1.6 in excess of the lesser of (i) that proportion of the
total of such losses, claims, damages or liabilities indemnified against equal
to the proportion of the total securities sold under such registration statement
that is being sold by such Indemnitee or (ii) the proceeds received by such
Indemnitee from its sale of securities under such registration statement. No
person found guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Securities Act) shall be entitled to contribution from any
person who was not found guilty of such fraudulent misrepresentation.
1.7. Survival
The indemnification and contribution provided under this Agreement shall apply
to any and all Proceedings, notwithstanding that Indemnitee has ceased to serve
the Company or a Related Company, and shall continue so long as Indemnitee shall
be subject to any possible Proceeding, whether civil, criminal or investigative,
by reason of the fact that Indemnitee was a director or
<PAGE>
officer of the Company or serving in any other capacity referred to in Section
1.4 of this Agreement. The indemnification and contribution provided for in this
Agreement will remain in full force and effect regardless of any investigation
made by or on behalf of the Indemnitee or any director, officer, controlling
person, employee or agent of Indemnitee.
2. Expense Advances
2.1. Generally
The right to indemnification of Damages conferred by Section 1 shall include the
right to have the Company pay Indemnitee's expenses in any Proceeding as such
expenses are incurred and in advance of such Proceeding's final disposition
(such right, an "Expense Advance").
2.2. Conditions to Expense Advance
The Company's obligation to provide an Expense Advance is subject to the
following conditions:
2.2.1. Undertaking
If the Proceeding arose in connection with Indemnitee's service as a
director or officer of the Company (and not in any other capacity in which
Indemnitee rendered service, including service to any Related Company), then
Indemnitee or Indemnitee's representative shall have executed and delivered to
the Company an undertaking, which need not be secured and shall be accepted
without reference to Indemnitee's financial ability to make repayment, by or on
behalf of Indemnitee, to repay all Expense Advances if it shall ultimately be
determined by a final, unappealable decision rendered by a court having
jurisdiction over the parties that Indemnitee is not entitled to be indemnified
by the Company.
2.2.2. Cooperation
Indemnitee shall give the Company such information and cooperation as
it may reasonably request and as shall be within Indemnitee's power.
3. Procedures for Enforcement
3.1. Enforcement
In the event that any claim for indemnity, whether an Expense Advance or
otherwise, is made hereunder and is not paid in full within 60 days after
written notice of such claim is delivered to the Company, Indemnitee may, but
need not, at any time thereafter bring suit against the Company to recover the
unpaid amount of the claim (an "Enforcement Action").
3.2. Presumptions in Enforcement Action
In any Enforcement Action, the following presumptions (and limitation on
presumptions) shall apply:
(a) The Company expressly affirms and agrees that it has entered into this
Agreement and assumed the obligations imposed on it hereunder to induce
Indemnitee to continue as a director or officer of the Company;
(b) Neither (i) the failure of the Company (including the Company's Board of
Directors, independent or special legal counsel or the Company's stockholders)
to have made a determination prior to the commencement of the Enforcement Action
that indemnification of Indemnitee is proper in the circumstances nor (ii) an
actual determination by the Company, its Board of Directors, independent or
special legal counsel or stockholders that Indemnitee is not entitled to
indemnification shall be a defense to the Enforcement Action or create a
presumption that Indemnitee is not entitled to indemnification hereunder; and
<PAGE>
(c) If Indemnitee is or was serving as a director or officer of a corporation
of which a majority of the shares entitled to vote in the election of its
directors is held by the Company or in an Indemnitee or management capacity in a
partnership, joint venture, trust or other enterprise of which the Company or a
wholly owned subsidiary of the Company is a general partner or has a majority
ownership, then such corporation, partnership, joint venture, trust or other
enterprise shall conclusively be deemed a Related Company and Indemnitee shall
conclusively be deemed to be serving such Related Company at the Company's
request.
3.3. Attorneys' Fees and Expenses for Enforcement Action
In the event Indemnitee is required to bring an Enforcement Action, the Company
shall pay all of Indemnitee's fees and expenses in bringing and pursuing the
Enforcement Action (including attorneys' fees at any stage, including on
appeal); provided, however, that the Company shall not be required to provide
such payment for such attorneys' fees or expenses if a court of competent
jurisdiction determines that each of the material assertions made by Indemnitee
in such Enforcement Action was not made in good faith.
4. Limitations on Indemnity; Mutual Acknowledgment
4.1. Limitations on Indemnity
The Company shall provide no indemnity pursuant to this Agreement:
(a) On account of any suit in which a final, unappealable judgment is rendered
against Indemnitee for an accounting of profits made from the purchase or sale
by Indemnitee of securities of the Company in violation of the provisions of
Section 16(b) of the Securities Exchange Act of 1934, as amended;
(b) For Damages that have been paid directly to Indemnitee by an insurance
carrier under a policy of directors' and officers' liability insurance
maintained by the Company;
(c) With respect to remuneration paid to Indemnitee if it shall be determined
by a final judgment or other final adjudication that such remuneration was in
violation of law;
(d) On account of Indemnitee's conduct which is finally adjudged to have been
intentional misconduct, a knowing violation of law, a violation of Section 174
of the Statute or a transaction from which Indemnitee derived an improper
personal benefit; or
(e) If a final decision by a court having jurisdiction in the matter shall
determine that such indemnification is not lawful.
4.2. SEC Undertaking
Indemnitee understands and acknowledges that the Company may be required in the
future to undertake with the Securities and Exchange Commission (the "SEC") to
submit in certain circumstances the question of indemnification to a court for a
determination of the Company's right under public policy to indemnify
Indemnitee.
5. Notification and Defense of Claim
5.1. Notification
Promptly after receipt by Indemnitee of notice of the commencement of any
Proceeding, Indemnitee shall, if a claim in respect thereof is to be made
against the Company under this Agreement, notify the Company of the commencement
thereof; but the omission so to notify the Company will not, however, relieve
the Company from any liability which it may have to Indemnitee under this
Agreement unless and only to the extent that such omission can be shown to have
prejudiced the Company's ability to defend the Proceeding.
<PAGE>
5.2. Defense of Claim
With respect to any such Proceeding as to which Indemnitee notifies the Company
of the commencement thereof:
(a) The Company may participate therein at its own expense;
(b) The Company, jointly with any other indemnifying party similarly notified,
may assume the defense thereof, with counsel satisfactory to Indemnitee. After
notice from the Company to Indemnitee of its election so to assume the defense
thereof, the Company shall not be liable to Indemnitee under this Agreement for
any legal or other expenses (other than reasonable costs of investigation)
subsequently incurred by Indemnitee in connection with the defense thereof
unless (i) the employment of counsel by Indemnitee has been authorized by the
Company, (ii) Indemnitee shall have reasonably concluded that there may be a
conflict of interest between the Company (or any other person or persons
included in the joint defense) and Indemnitee in the conduct of the defense of
such action, or (iii) the Company shall not, in fact, have employed counsel to
assume the defense of such action, in each of which cases the fees and expenses
of counsel shall be at the Company's expense. The Company shall not be entitled
to assume the defense of any Proceeding brought by or on behalf of the Company
or as to which Indemnitee shall have reasonably made the conclusion provided for
in (ii) above;
(c) The Company shall not be liable to Indemnitee under this Agreement for any
amounts paid in settlement of any Proceeding effected without its written
consent;
(d) The Company shall not settle any action or claim in any manner that would
impose any penalty or limitation on Indemnitee without Indemnitee's written
consent; and
(e) Neither the Company nor Indemnitee shall unreasonably withhold its consent
to any proposed settlement, provided that Indemnitee may withhold consent to any
settlement that does not provide a complete release of Indemnitee.
6. Severability
Nothing in this Agreement is intended to require or shall be construed as
requiring the Company to do or to fail to do any act in violation of applicable
law. The Company's inability, pursuant to court order, to perform its
obligations under this Agreement shall not constitute a breach of this
Agreement. The provisions of this Agreement shall be severable, as provided in
this Section 6, and if this Agreement or any portion hereof shall be invalidated
on any ground by any court of competent jurisdiction, the Company shall
nevertheless indemnify or make contribution to Indemnitee to the full extent
permitted by any applicable portion of this Agreement that shall not have been
invalidated, and the balance of this Agreement not so invalidated shall be
enforceable in accordance with its terms.
7. Governing Law; Binding Effect; Amendment and Termination
(a) This Agreement shall be interpreted and enforced in accordance with the
laws of Delaware.
(b) This Agreement shall be binding on Indemnitee and on the Company and its
successors and assigns (including any transferee of all or substantially all of
its assets and any successor by merger or otherwise by operation of law), and
shall inure to the benefit of Indemnitee and Indemnitee's heirs, personal
representatives and assigns and to the benefit of the Company and its successors
and assigns. The Company shall not effect any sale of substantially all of its
assets, merger, consolidation or other reorganization in which it is not the
surviving entity, unless the surviving entity agrees in writing to assume all
such obligations of the Company under this Agreement.
<PAGE>
(c) No amendment, modification, termination or cancellation of this Agreement
shall be effective unless in writing signed by both parties hereto.
8. Notices
All notices, claims and other communications hereunder shall be in writing
and made by hand delivery, registered or certified mail (postage prepaid, return
receipt requested), facsimile or overnight air courier guaranteeing next-day
delivery:
(a) If to the Company, to:
drugstore.com, inc.
18650 NE 67th Court
Redmond, WA 98052
Attention: General Counsel
(b) If to Indemnitee, to the address specified on the last page of this
Agreement or to such other address as either party may from time to time furnish
to the other party by a notice given in accordance with the provisions of this
Section 8. All such notices, claims and communications shall be deemed to have
been duly given if (i) personally delivered, at the time delivered, (ii) mailed,
five days after dispatched, (iii) sent by facsimile transmission, upon
confirmation of receipt, and (iv) sent by any other means, upon receipt.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on and as of
the day and year first above written.
DRUGSTORE.COM, INC.,
a Delaware corporation
By:______________________________________
Title:___________________________________
INDEMNITEE:
_________________________________________
Address:
<PAGE>
_________________________________________
_________________________________________
_________________________________________
with a copy to:
_________________________________________
_________________________________________
_________________________________________
<PAGE>
EXHIBIT 10.2
DRUGSTORE.COM, INC.
1998 STOCK PLAN
(as amended May 1999)
1. Purposes of the Plan. The purposes of this 1998 Stock Plan are to
attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees and Consultants of
the Company and its Subsidiaries and to promote the success of the Company's
business. Options granted under the Plan may be Incentive Stock Options (as
defined under Section 422 of the Code) or Nonstatutory Stock Options, as
determined by the Administrator at the time of grant of an Option and subject to
the applicable provisions of Section 422 of the Code, as amended, and the
regulations promulgated thereunder. Stock purchase rights may also be granted
under the Plan.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Administrator" means the Board or any of its Committees appointed
pursuant to Section 4 of the Plan.
(b) "Affiliate" means an entity other than a Subsidiary (as defined
below) in which the Company owns an equity interest.
(c) "Applicable Laws" means the legal requirements relating to the
administration of stock option and restricted stock purchase plans under
applicable U.S. state corporate laws, U.S. federal and applicable state
securities laws, the Code, any stock exchange rules or regulations and the
applicable laws of any other country or jurisdiction where Options or Stock
Purchase Rights are granted under the Plan, as such laws, rules, regulations and
requirements shall be in place from time to time.
(d) "Board" means the Board of Directors of the Company.
(e) "Change in Control" means a sale of all or substantially all of
the Company's assets, or a merger, consolidation or other capital reorganization
of the Company with or into another corporation; provided however that a merger,
consolidation or other capital reorganization in which the holders of more than
50% of the shares of capital stock of the Company outstanding immediately prior
to such transaction continue to hold (either by the voting securities remaining
outstanding or by being converted into voting securities of the surviving
entity) more than 50% of the total voting power represented by the voting
securities of the Company, or such surviving entity, outstanding immediately
after such transaction shall not constitute a Change in Control.
(f) "Code" means the Internal Revenue Code of 1986, as amended.
(g) "Committee" means the Committee appointed by the Board of
Directors in accordance with Section 4(a) and (b) of the Plan.
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<PAGE>
(h) "Common Stock" means the Common Stock of the Company.
(i) "Company" means drugstore.com, inc., a Delaware corporation.
(j) "Consultant" means any person, including an advisor, who renders
services to the Company, or any Parent, Subsidiary or Affiliate, and is
compensated for such services, and any director of the Company whether
compensated for such services or not.
(k) "Continuous Status as an Employee or Consultant" means the absence
of any interruption or termination of service as an Employee or Consultant.
Continuous Status as an Employee or Consultant shall not be considered
interrupted in the case of: (i) sick leave; (ii) military leave; (iii) any
other leave of absence approved by the Administrator, provided that such leave
is for a period of not more than 90 days, unless reemployment upon the
expiration of such leave is guaranteed by contract or statute, or unless
provided otherwise pursuant to Company policy adopted from time to time; or (iv)
in the case of transfers between locations of the Company or between the
Company, its Parent(s), Subsidiaries, Affiliates or their respective successors.
For purposes of this Plan, a change in status from an Employee to a Consultant
or from a Consultant to an Employee will not constitute an interruption of
Continuous Status as an Employee or Consultant.
(l) "Director" means a member of the Board.
(m) "Employee" means any person (including if appropriate, any Named
Executive, Officer or Director) employed by the Company or any Parent,
Subsidiary or Affiliate of the Company, with the status of employment determined
based upon such minimum number of hours or periods worked as shall be determined
by the Administrator in its discretion, subject to any requirements of the Code.
The payment by the Company of a director's fee to a director shall not be
sufficient to constitute "employment" of such director by the Company.
(n) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(o) "Fair Market Value" means, as of any date, the fair market value
of Common Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system including without limitation the National
Market of the National Association of Securities Dealers, Inc. Automated
Quotation ("Nasdaq") System, its Fair Market Value shall be the closing sales
price for such stock (or the closing bid, if no sales were reported), as quoted
on such system or exchange, or the exchange with the greatest volume of trading
in Common Stock for the last market trading day prior to the time of
determination, as reported in The Wall Street Journal or such other source as
the Administrator deems reliable;
(ii) If the Common Stock is quoted on the Nasdaq System (but not
on the National Market thereof) or regularly quoted by a recognized securities
dealer but selling prices are not reported, its Fair Market Value shall be the
mean between the high bid and low asked prices for the Common Stock for the last
market trading day prior to the time of
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determination, as reported in The Wall Street Journal or such other source as
the Administrator deems reliable; or
(iii) In the absence of an established market for the Common Stock,
the Fair Market Value thereof shall be determined in good faith by the
Administrator.
(p) "Incentive Stock Option" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code, as
designated in the applicable written Option Agreement.
(q) "Listed Security" means any security of the Company that is listed
or approved for listing on a national securities exchange or designated or
approved for designation as a national market system security on an interdealer
quotation system by the National Association of Securities Dealers, Inc.
(r) "Named Executive" means any individual who, on the last day of the
Company's fiscal year, is the chief executive officer of the Company (or is
acting in such capacity) or among the four most highly compensated officers of
the Company (other than the chief executive officer). Such officer status shall
be determined pursuant to the executive compensation disclosure rules under the
Exchange Act.
(s) "Nonstatutory Stock Option" means an Option not intended to
qualify as an Incentive Stock Option, as designated in the applicable written
Option Agreement.
(t) "Officer" means a person who is an officer of the Company within
the meaning of Section 16(a) of the Exchange Act and the rules and regulations
promulgated thereunder.
(u) "Option" means a stock option granted pursuant to the Plan.
(v) "Option Agreement" means a written agreement between an Optionee
and the Company reflecting the terms of an Option granted under the Plan and
includes any documents attached to such Option Agreement, including, but not
limited to, a notice of stock option grant and a form of exercise notice.
(w) "Option Exchange Program" means a program whereby outstanding
Options are exchanged for Options with a lower exercise price.
(x) "Optioned Stock" means the Common Stock subject to an Option or a
Stock Purchase Right.
(y) "Optionee" means an Employee or Consultant who receives an Option
or a Stock Purchase Right.
(z) "Parent" means a "parent corporation," whether now or hereafter
existing, as defined in Section 424(e) of the Code, or any successor provision.
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(aa) "Plan" means this 1998 Stock Plan.
(bb) "Reporting Person" means an Officer, Director, or greater than
10% stockholder of the Company within the meaning of Rule 16a-2 under the
Exchange Act, who is required to file reports pursuant to Rule 16a-3 under the
Exchange Act.
(cc) "Restricted Stock" means shares of Common Stock acquired pursuant
to a grant of a Stock Purchase Right under Section 11 below.
(dd) "Restricted Stock Purchase Agreement" means a written agreement
between a holder of a Stock Purchase Right and the Company reflecting the terms
of a Stock Purchase Right granted under the Plan and includes any documents
attached to such agreement.
(ee) "Rule 16b-3" means Rule 16b-3 promulgated under the Exchange Act,
as the same may be amended from time to time, or any successor provision.
(ff) "Share" means a share of the Common Stock, as adjusted in
accordance with Section 13 of the Plan.
(gg) "Stock Exchange" means any stock exchange or consolidated stock
price reporting system on which prices for the Common Stock are quoted at any
given time.
(hh) "Stock Purchase Right" means the right to purchase Common Stock
pursuant to Section 11 below.
(ii) "Subsidiary" means a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of the Code, or any successor
provision.
3. Stock Subject to the Plan. Subject to the provisions of Section 13 of
the Plan, the maximum aggregate number of Shares that may be optioned and sold
under the Plan is [___________] Shares of Common Stock. The Shares may be
authorized, but unissued, or reacquired Common Stock. If an Option should
expire or become unexercisable for any reason without having been exercised in
full, or is surrendered pursuant to an Option Exchange Program, the unpurchased
Shares that were subject thereto shall, unless the Plan shall have been
terminated, become available for future grant under the Plan. In addition, any
Shares of Common Stock which are retained by the Company upon exercise of an
Option or Stock Purchase Right in order to satisfy the exercise or purchase
price for such Option or Stock Purchase Right or any withholding taxes due with
respect to such exercise shall be treated as not issued and shall continue to be
available under the Plan. Shares repurchased by the Company pursuant to any
repurchase right which the Company may have shall not be available for future
grant under the Plan.
4. Administration of the Plan.
(a) General. The Plan shall be administered by the Board or a
Committee, or a combination thereof, as determined by the Board. The Plan may
be administered by different
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administrative bodies with respect to different classes of Optionees and, if
permitted by the Applicable Laws, the Board may authorize one or more officers
(who may (but need not) be Officers) to grant Options or Stock Purchase Rights
to Employees and Consultants.
(b) Administration With Respect to Reporting Persons. With respect to
Options granted to Reporting Persons and Named Executives, the Plan may (but
need not) be administered so as to permit such Options to qualify for the
exemption set forth in Rule 16b-3 and to qualify as performance-based
compensation under Section 162(m) of the Code.
(c) Committee Composition. If a Committee has been appointed pursuant
to this Section 4, such Committee shall continue to serve in its designated
capacity until otherwise directed by the Board. From time to time the Board may
increase the size of any Committee and appoint additional members thereof,
remove members (with or without cause) and appoint new members in substitution
therefor, fill vacancies (however caused) and remove all members of a Committee
and thereafter directly administer the Plan, all to the extent permitted by the
Applicable Laws and, in the case of a Committee administering the Plan pursuant
to Section 4(b) above, to the extent permitted or required by Rule 16b-3 and
Section 162(m) of the Code.
(d) Powers of the Administrator. Subject to the provisions of the
Plan and in the case of a Committee, the specific duties delegated by the Board
to such Committee, and subject to the approval of any relevant authorities,
including the approval, if required, of any Stock Exchange, the Administrator
shall have the authority, in its discretion:
(i) to determine the Fair Market Value of the Common Stock, in
accordance with Section 2(o) of the Plan;
(ii) to select the Consultants and Employees to whom Options and
Stock Purchase Rights or any combination thereof may from time to time be
granted hereunder;
(iii) to determine whether and to what extent Options and Stock
Purchase Rights or any combination thereof are granted hereunder;
(iv) to determine the number of shares of Common Stock to be
covered by each such award granted hereunder;
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions, not inconsistent with
the terms of the Plan, of any award granted hereunder, which terms and
conditions include but are not limited to the exercise or purchase price, the
time or times when Options or Stock Purchase Rights may be exercised (which may
be based on performance criteria), any vesting acceleration or waiver of
forfeiture restrictions, and any restriction or limitation regarding any Option,
Optioned Stock, Stock Purchase Right or Restricted Stock, based in each case on
such factors as the Administrator, in its sole discretion, shall determine;
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(vii) to determine whether and under what circumstances an Option
may be settled in cash under Section 10(g) instead of Common Stock;
(viii)to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Common Stock covered
by such Option shall have declined since the date the Option was granted;
(ix) to determine the terms and restrictions applicable to Stock
Purchase Rights and the Restricted Stock purchased by exercising such Stock
Purchase Rights;
(x) to initiate an Option Exchange Program;
(xi) to construe and interpret the terms of the Plan and awards
granted pursuant to the Plan; and
(xii) in order to fulfill the purposes of the Plan and without
amending the Plan, to modify grants of Options or Stock Purchase Rights to
participants who are foreign nationals or employed outside of the United States
in order to recognize differences in local law, tax policies or customs.
(d) Effect of Administrator's Decision. All decisions, determinations
and interpretations of the Administrator shall be final and binding on all
holders of Options or Stock Purchase Rights.
5. Eligibility.
(a) Recipients of Grants. Nonstatutory Stock Options and Stock
Purchase Rights may be granted to Employees and Consultants. Incentive Stock
Options may be granted only to Employees; provided however that Employees of
Affiliates shall not be eligible to receive Incentive Stock Options. An
Employee or Consultant who has been granted an Option or Stock Purchase Right
may, if he or she is otherwise eligible, be granted additional Options or Stock
Purchase Rights.
(b) Type of Option. Each Option shall be designated in the Option
agreement as either an Incentive Stock Option or a Nonstatutory Stock Option.
However, notwithstanding such designations, to the extent that the aggregate
Fair Market Value of Shares with respect to which Options designated as
Incentive Stock Options are exercisable for the first time by any Optionee
during any calendar year (under all plans of the Company or any Parent or
Subsidiary) exceeds $100,000, such excess Options shall be treated as
Nonstatutory Stock Options. For purposes of this Section 5(b), Incentive Stock
Options shall be taken into account in the order in which they were granted, and
the Fair Market Value of the Shares subject to an Incentive Stock Option shall
be determined as of the date of the grant of such Option.
(c) The Plan shall not confer upon the holder of any Option or Stock
Purchase Right any right with respect to continuation of employment or
consulting relationship with the
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Company, nor shall it interfere in any way with such holder's right or the
Company's right to terminate his or her employment or consulting relationship at
any time, with or without cause.
6. Term of Plan. The Plan shall become effective upon the earlier to
occur of its adoption by the Board of Directors or its approval by the
stockholders of the Company as described in Section 20 of the Plan. It shall
continue in effect for a term of ten years unless sooner terminated under
Section 16 of the Plan.
7. Term of Option. The term of each Option shall be the term stated in
the Option Agreement; provided however that the term shall be no more than ten
years from the date of grant thereof or such shorter term as may be provided in
the Option Agreement and provided further that, in the case of an Incentive
Stock Option granted to an Optionee who, at the time the Option is granted, owns
stock representing more than 10% of the total combined voting power of all
classes of stock of the Company or any Parent or Subsidiary, the term of the
Option shall be five years from the date of grant thereof or such shorter term
as may be provided in the Option Agreement.
8. Limitation. Subject to adjustment as provided in Section 14 below, the
maximum number of Shares which may be subject to Options and Stock Purchase
Rights granted to any one Employee under this Plan for any fiscal year of the
Company shall be [2,500,000] Shares.
9. Option Exercise Price and Consideration.
(a) The per share exercise price for the Shares to be issued pursuant
to exercise of an Option shall be such price as is determined by the Board and
set forth in the Option Agreement, but shall be subject to the following:
(i) In the case of an Incentive Stock Option that is:
(A) granted to an Employee who, at the time of the grant of
such Incentive Stock Option, owns stock representing more than 10% of the total
combined voting power of all classes of stock of the Company or any Parent or
Subsidiary, the per Share exercise price shall be no less than 110% of the Fair
Market Value per Share on the date of grant.
(B) granted to any other Employee, the per Share exercise
price shall be no less than 100% of the Fair Market Value per Share on the date
of grant.
(ii) In the case of a Nonstatutory Stock Option, the per Share
exercise price shall be determined by the Administrator, provided however that
the per share exercise price of an Option granted to a Named Executive of the
Company shall be no less than 100% of the Fair Market Value per Share on the
date of grant if such Option is intended to qualify as performance-based
compensation under Section 162(m) of the Code.
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(iii) Notwithstanding the foregoing, Options may be granted with a
per Share exercise price other than as required above pursuant to a merger or
other corporate transaction.
(b) The consideration to be paid for the Shares to be issued upon
exercise of an Option, including the method of payment, shall be determined by
the Administrator (and, in the case of an Incentive Stock Option, shall be
determined at the time of grant) and may consist entirely of (1) cash, (2)
check, (3) promissory note (subject to the provisions of Section 153 of the
Delaware General Corporation Law), (4) cancellation of indebtedness, (5) other
Shares that (x) in the case of Shares acquired upon exercise of an Option, have
been owned by the Optionee for more than six months on the date of surrender or
such other period as may be required to avoid a charge to the Company's
earnings, and (y) have a Fair Market Value on the date of surrender equal to the
aggregate exercise price of the Shares as to which such Option shall be
exercised, (6) authorization for the Company to retain from the total number of
Shares as to which the Option is exercised that number of Shares having a Fair
Market Value on the date of exercise equal to the exercise price for the total
number of Shares as to which the Option is exercised, (7) delivery of a properly
executed exercise notice together with such other documentation as the
Administrator and the broker, if applicable, shall require to effect an exercise
of the Option and delivery to the Company of the sale or loan proceeds required
to pay the exercise price and any applicable income or employment taxes, (8)
delivery of an irrevocable subscription agreement for the Shares that
irrevocably obligates the option holder to take and pay for the Shares not more
than twelve months after the date of delivery of the subscription agreement, (9)
any combination of the foregoing methods of payment, or (10) such other
consideration and method of payment for the issuance of Shares to the extent
permitted under the Applicable Laws. In making its determination as to the type
of consideration to accept, the Administrator shall consider if acceptance of
such consideration may be reasonably expected to benefit the Company.
10. Exercise of Option.
(a) Procedure for Exercise; Rights as a Stockholder. Any Option
granted hereunder shall be exercisable at such times and under such conditions
as determined by the Administrator and reflected in the Option Agreement, which
may include vesting requirements and/or including performance criteria with
respect to the Company and/or the Optionee. The Administrator shall have the
discretion, after the grant of an Option, to adjust the vesting of an Option
held by an Employee or Consultant as a result in a change in the terms or
conditions under which such person is providing services to the Company, or for
any other reason. The Administrator shall have the discretion to determine
whether and to what extent the vesting of Options shall be tolled during any
unpaid leave of absence; provided however that in the absence of such
determination, vesting of Options shall be tolled during any such leave.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to
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exercise the Option and the Company has received full payment for the Shares
with respect to which the Option is exercised. Full payment may, as authorized
by the Administrator, consist of any consideration and method of payment
allowable under Section 8(b) of the Plan. Until the issuance (as evidenced by
the appropriate entry on the books of the Company or of a duly authorized
transfer agent of the Company) of the stock certificate evidencing such Shares,
no right to vote or receive dividends or any other rights as a stockholder shall
exist with respect to the Optioned Stock, not withstanding the exercise of the
Option. The Company shall issue (or cause to be issued) such stock certificate
promptly upon exercise of the Option. No adjustment will be made for a dividend
or other right for which the record date is prior to the date the stock
certificate is issued, except as provided in Section 12 of the Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares that thereafter may be available, both for purposes of the Plan
and for sale under the Option, by the number of Shares as to which the Option is
exercised.
(b) Termination of Employment or Consulting Relationship. In the
event of termination of an Optionee's Continuous Status as an Employee or
Consultant with the Company, such Optionee may, but only within three months (or
such other period of time as is determined by the Administrator, with such
determination in the case of an Incentive Stock Option being made at the time of
grant of the Option) after the date of such termination (but in no event later
than the expiration date of the term of such Option as set forth in the Option
Agreement), exercise his or her Option to the extent that the Optionee was
entitled to exercise it at the date of such termination. To the extent that the
Optionee was not entitled to exercise the Option at the date of such
termination, or if the Optionee does not exercise such Option to the extent so
entitled within the time specified herein, the Option shall terminate and the
Optioned Stock underlying the unexercised portion of the Option shall revert to
the Plan. No termination shall be deemed to occur and this Section 9(b) shall
not apply if (i) the Optionee is a Consultant who becomes an Employee, or (ii)
the Optionee is an Employee who becomes a Consultant.
(c) Disability of Optionee. Notwithstanding Section 10(b) above, in
the event of termination of an Optionee's Continuous Status as an Employee or
Consultant as a result of his or her total and permanent disability (within the
meaning of Section 22(e)(3) of the Code), such Optionee may, but only within
twelve months from the date of such termination (but in no event later than the
expiration date of the term of such Option as set forth in the Option
Agreement), exercise the Option to the extent otherwise entitled to exercise it
at the date of such termination. To the extent that the Optionee was not
entitled to exercise the Option at the date of termination, or if the Optionee
does not exercise such Option to the extent so entitled within the time
specified herein, the Option shall terminate and the Optioned Stock underlying
the unexercised portion of the Option shall revert to the Plan.
(d) Death of Optionee. In the event of the death of an Optionee
during the period of Continuous Status as an Employee or Consultant since the
date of grant of the Option, or within 30 days following termination of the
Optionee's Continuous Status as an Employee or Consultant, the Option may be
exercised, at any time within six months following the date of death (but in no
event later than the expiration date of the term of such Option as set forth in
the
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Option Agreement), by such Optionee's estate or by a person who acquired the
right to exercise the Option by bequest or inheritance, but only to the extent
of the right to exercise that had accrued at the date of death or, if earlier,
the date of termination of the Optionee's Continuous Status as an Employee or
Consultant. To the extent that the Optionee was not entitled to exercise the
Option at the date of death or termination, as the case may be, or if the
Optionee does not exercise such Option to the extent so entitled within the time
specified herein, the Option shall terminate and the Optioned Stock underlying
the unexercised portion of the Option shall revert to the Plan.
(e) Extension of Exercise Period. The Administrator shall have full
power and authority to extend the period of time for which an Option is to
remain exercisable following termination of an Optionee's Continuous Status as
an Employee or Consultant from the periods set forth in Sections 10(b), 10(c)
and 10(d) above or in the Option Agreement to such greater time as the Board
shall deem appropriate, provided, that in no event shall such option be
exercisable later than the date of expiration of the term of such Option as set
forth in the Option Agreement.
(f) Rule 16b-3. Options granted to Reporting Persons shall comply
with Rule 16b-3 and shall contain such additional conditions or restrictions as
may be required thereunder to qualify for the maximum exemption for Plan
transactions.
(g) Buy-Out Provisions. The Administrator may at any time offer to
buy out for a payment in cash or Shares an Option previously granted based on
such terms and conditions as the Administrator shall establish and communicate
to the Optionee at the time such offer is made.
11. Stock Purchase Rights.
(a) Rights to Purchase. Stock Purchase Rights may be issued either
alone, in addition to, or in tandem with other awards granted under the Plan
and/or cash awards made outside of the Plan. After the Administrator determines
that it will offer Stock Purchase Rights under the Plan, it shall advise the
offeree in writing of the terms, conditions and restrictions related to the
offer, including the number of Shares that such person shall be entitled to
purchase, the price to be paid, and the time within which such person must
accept such offer, which shall in no event exceed 30 days from the date upon
which the Administrator made the determination to grant the Stock Purchase
Right. The offer shall be accepted by execution of a Restricted Stock Purchase
Agreement in the form determined by the Administrator.
(b) Repurchase Option. Unless the Administrator determines otherwise,
the Restricted Stock Purchase Agreement shall grant the Company a repurchase
option exercisable upon the voluntary or involuntary termination of the
purchaser's employment with the Company for any reason (including death or
disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock Purchase Agreement shall be the original purchase price paid by
the purchaser and may be paid by cancellation of any indebtedness of the
purchaser to the Company.
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(c) Other Provisions. The Restricted Stock Purchase Agreement shall
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by the Administrator in its sole discretion. In
addition, the provisions of Restricted Stock Purchase Agreements need not be the
same with respect to each purchaser.
(d) Rights as a Stockholder. Once the Stock Purchase Right is
exercised, the purchaser shall have the rights equivalent to those of a
stockholder, and shall be a stockholder when his or her purchase is entered upon
the records of the duly authorized transfer agent of the Company. No adjustment
will be made for a dividend or other right for which the record date is prior to
the date the Stock Purchase Right is exercised, except as provided in Section 12
of the Plan.
12. Tax Withholding.
(a) General. As a condition to the exercise of Options or Stock
Purchase Rights granted hereunder, the Optionee or holder of such Stock Purchase
Right shall make such arrangements as the Administrator may require for the
satisfaction of any federal, state, local or foreign withholding tax obligations
that may arise in connection with the exercise, receipt or vesting of such
award. The Company shall not be required to issue any Shares under the Plan
until such obligations are satisfied.
(b) Stock Withholding to Satisfy Withholding Tax Obligations. At the
discretion of the Administrator, Optionees may satisfy withholding obligations
as provided in this paragraph. When an Optionee incurs tax liability in
connection with an Option or Stock Purchase Right, which tax liability is
subject to tax withholding under applicable tax laws, and the Optionee is
obligated to pay the Company an amount required to be withheld under applicable
tax laws, the Optionee may satisfy the withholding tax obligation by one or some
combination of the following methods: (i) by cash or check payment, (ii) out of
the Optionee's current compensation, (iii) if permitted by the Administrator, in
its discretion, by surrendering to the Company Shares that (A) in the case of
Shares previously acquired from the Company, have been owned by the Optionee for
more than six months on the date of surrender, and (B) have a Fair Market Value
on the date of surrender equal to or less than the amount required to be
withheld, or (iv) by electing to have the Company withhold from the Shares to be
issued upon exercise of the Option, or the Shares to be issued in connection
with the Stock Purchase Right, if any, that number of Shares having a Fair
Market Value equal to the amount required to be withheld. For this purpose, the
Fair Market Value of the Shares to be withheld shall be determined on the date
that the amount of tax to be withheld is to be determined (the "Tax Date").
Any surrender by a Reporting Person of previously owned Shares to satisfy
tax withholding obligations arising upon exercise of this Option must comply
with the applicable provisions of Rule 16b-3.
All elections by an Optionee to have Shares withheld to satisfy tax
withholding obligations shall be made in writing in a form acceptable to the
Administrator and shall be subject to the following restrictions:
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(x) the election must be made on or prior to the applicable Tax Date;
(y) once made, the election shall be irrevocable as to the particular
Shares of the Option or Stock Purchase Right as to which the election is made;
and
(z) all elections shall be subject to the consent or disapproval of
the Administrator.
In the event the election to have Shares withheld is made by an Optionee
and the Tax Date is deferred under Section 83 of the Code because no election is
filed under Section 83(b) of the Code, the Optionee shall receive the full
number of Shares with respect to which the Option or Stock Purchase Right is
exercised but such Optionee shall be unconditionally obligated to tender back to
the Company the proper number of Shares on the Tax Date.
13. Adjustments Upon Changes in Capitalization, Merger or Certain Other
Transactions.
(a) Changes in Capitalization. Subject to any required action by the
stockholders of the Company, the number of shares of Common Stock covered by
each outstanding Option or Stock Purchase Right, and the number of shares of
Common Stock that have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or that have
been returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, the number of Shares set forth in Section 8 above, as well as
the price per share of Common Stock covered by each such outstanding Option or
Stock Purchase Right, shall be proportionately adjusted for any increase or
decrease in the number of issued shares of Common Stock resulting from a stock
split, reverse stock split, stock dividend, combination, recapitalization or
reclassification of the Common Stock, or any other increase or decrease in the
number of issued shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an Option or Stock
Purchase Right.
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, the Board shall notify the Optionee
at least 15 days prior to such proposed action. To the extent it has not been
previously exercised, the Option or Stock Purchase Right will terminate
immediately prior to the consummation of such proposed action.
(c) Change in Control. In the event of a Change in Control, each
outstanding Option or Stock Purchase Right shall be assumed or an equivalent
option or right shall be substituted by the successor corporation or a Parent or
Subsidiary of such successor corporation, unless such successor corporation does
not agree to assume the outstanding Options or Stock Purchase Rights or to
substitute equivalent options or rights, in which case such Options
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or Stock Purchase Rights shall terminate upon the consummation of the
transaction. For purposes of this Section 13(c), an Option or a Stock Purchase
Right shall be considered assumed, without limitation, if, at the time of
issuance of the stock or other consideration upon such Change in Control, each
holder of an Option or Stock Purchase Right would be entitled to receive upon
exercise of the Option or Stock Purchase Right the same number and kind of
shares of stock or the same amount of property, cash or securities as such
holder would have been entitled to receive upon the occurrence of the
transaction if the holder had been, immediately prior to such transaction, the
holder of the number of Shares of Common Stock covered by the Option or the
Stock Purchase Right at such time (after giving effect to any adjustments in the
number of Shares covered by the Option or Stock Purchase Right as provided for
in this Section 13); provided however that if such consideration received in the
Change in Control was not solely common stock of the successor corporation or
its Parent, the Administrator may, with the consent of the successor
corporation, provide for the consideration to be received upon exercise of the
Option to be solely common stock of the successor corporation or its Parent
equal to the Fair Market Value of the per Share consideration received by
holders of Common Stock in the transaction.
(d) Certain Distributions. In the event of any distribution to the
Company's stockholders of securities of any other entity or other assets (other
than dividends payable in cash or stock of the Company) without receipt of
consideration by the Company, the Administrator may, in its discretion,
appropriately adjust the price per Share of Common Stock covered by each
outstanding Option or Stock Purchase Right to reflect the effect of such
distribution.
14. Non-Transferability of Options and Stock Purchase Rights. Options and
Stock Purchase Rights may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent or distribution, provided that, after the date, if any, upon which the
Common Stock becomes a Listed Security, the Administrator may in its discretion
grant transferable Nonstatutory Stock Options pursuant to Option Agreements
specifying (i) the manner in which such Nonstatutory Stock Options are
transferable and (ii) that any such transfer shall be subject to the Applicable
Laws. The designation of a beneficiary by an Optionee will not constitute a
transfer. An Option or Stock Purchase Right may be exercised, during the
lifetime of the holder of the Option or Stock Purchase Right, only by such
holder or a transferee permitted by this Section 14.
15. Time of Granting Options and Stock Purchase Rights. The date of grant
of an Option or Stock Purchase Right shall, for all purposes, be the date on
which the Administrator makes the determination granting such Option or Stock
Purchase Right, or such other date as is determined by the Board; provided,
however, that in the case of any Incentive Stock Option, the grant date shall be
the later of the date on which the Administrator makes the determination
granting such Incentive Stock Option or the date of commencement of the
Optionee's employment relationship with the Company. Notice of the
determination shall be given to each Employee or Consultant to whom an Option or
Stock Purchase Right is so granted within a reasonable time after the date of
such grant.
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16. Amendment and Termination of the Plan.
(a) Authority to Amend or Terminate. The Board may at any time amend,
alter, suspend or discontinue the Plan, but no amendment, alteration, suspension
or discontinuation (other than an adjustment made pursuant to Section 13 above)
shall be made that would impair the rights of any Optionee under any grant
theretofore made, without his or her consent. In addition, to the extent
necessary and desirable to comply with the Applicable Laws the Company shall
obtain stockholder approval of any Plan amendment in such a manner and to such a
degree as required.
(b) Effect of Amendment or Termination. No amendment or termination
of the Plan shall adversely affect Options already granted, unless mutually
agreed otherwise between the Optionee and the Administrator, which agreement
must be in writing and signed by the Optionee and the Company.
17. Conditions Upon Issuance of Shares. Shares shall not be issued
pursuant to the exercise of an Option or Stock Purchase Right unless the
exercise of such Option or Stock Purchase Right and the issuance and delivery of
such Shares pursuant thereto shall comply with all relevant provisions of law,
including, without limitation, the Securities Act of 1933, as amended, the
Exchange Act, the rules and regulations promulgated thereunder, and the
requirements of any Stock Exchange.
As a condition to the exercise of an Option, the Company may require the
person exercising such Option to represent and warrant at the time of any such
exercise that the Shares are being purchased only for investment and without any
present intention to sell or distribute such Shares if, in the opinion of
counsel for the Company, such a representation is required by law.
18. Reservation of Shares. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan. The inability of the
Company to obtain authority from any regulatory body having jurisdiction, which
authority is deemed by the Company's counsel to be necessary to the lawful
issuance and sale of any Shares hereunder, shall relieve the Company of any
liability in respect of the failure to issue or sell such Shares as to which
such requisite authority shall not have been obtained.
19. Agreements. Options and Stock Purchase Rights shall be evidenced by
written Option Agreements and Restricted Stock Purchase Agreements,
respectively, in such form(s) as the Administrator shall approve from time to
time.
20. Stockholder Approval. If required by the Applicable Laws, continuance
of the Plan shall be subject to approval by the stockholders of the Company
within twelve months before or after the date the Plan is adopted. Such
stockholder approval shall be obtained in the degree and manner required under
the Applicable Laws. All Options and Stock Purchase Rights issued under the
Plan shall become void in the event such approval is not obtained.
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21. Documents to Optionees. At the time of issuance of any awards under
the Plan, the Company shall provide to the recipient of such award a copy of the
Plan and any agreement(s) pursuant to which awards granted under the Plan are
issued.
22. Awards Granted to California Residents. Options and Stock Purchase
Rights granted under the Plan to persons resident in California shall be subject
to the provisions set forth in Attachment A hereto. To the extent the
provisions of the Plan conflict with the provisions set forth on Attachment A,
the provisions on Attachment A shall govern the terms of such Options.
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Attachment A
Provisions Applicable to Award Recipients
Resident in California
Until such time as any security of the Company becomes a Listed Security
and if required by the Applicable Laws, the following additional terms shall
apply to Options and Stock Purchase Rights, and Shares issued upon exercise of
such awards, granted under the drugstore.com, inc. 1998 Stock Plan (the "Plan")
to persons resident in California as of the date of grant of any such award
(each such person, a "California Recipient"):
1. In the case of a Nonstatutory Stock Option, that is:
(a) granted to granted to a California Recipient who, at the time of
the grant of such Option, owns stock representing more than 10% of the total
combined voting power of all classes of stock of the Company or any Parent or
Subsidiary, the per Share exercise price shall be no less than 110% of the Fair
Market Value on the date of grant.
(b) granted to any California Recipient who is a Named Executive of
the Company, the per Share exercise price shall be no less than 100% of the Fair
Market Value per Share on the date of grant.
(c) granted to any other California Recipient, the per Share exercise
price shall be no less than 85% of the Fair Market Value per Share on the date
of grant.
2. In the case of Stock Purchase Rights granted to a California Recipient,
the purchase price applicable to such right shall not be less than 85% of the
Fair Market Value of the Shares as of the date of the offer, or, in the case of
a person owning stock representing more than 10% of the total combined voting
power of all classes of stock of the Company or any Parent or Subsidiary, the
price shall not be less than 100% of the Fair Market Value of the Shares as of
the date of the offer.
3. With respect to an Option or Stock Purchase Right issued to any
California Recipient who is not an Officer, Director or Consultant, such Option
or Stock Purchase Right shall become exercisable, or any repurchase option in
favor of the Company shall lapse, at the rate of at least 20% per year over five
years from the date the award is granted.
4. (a) Subject to Section 10(c) of the Plan and to Section 4(b) below, in
the event of termination of a California Recipient's Continuous Status as an
Employee or Consultant with the Company, such California Recipient shall have at
least 30 days after the date of such termination (but in no event later than the
expiration of the term of such Option as set forth in the Option Agreement) to
exercise such Option.
(b) In the event of termination of a California Recipient's Continuous
Status as an Employee or Consultant as a result of a disability which does not
fall within the meaning of total and permanent disability (as set forth in
Section 22(e)(3) of the Code), such California
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Recipient may, but only within six months from the date of such termination (but
in no event later than the expiration date of the term of such Option as set
forth in the Option Agreement), exercise the Option to the extent otherwise
entitled to exercise it at the date of such termination. However, to the extent
that such California Recipient fails to exercise an Option which is an Incentive
Stock Option (within the meaning of Section 422 of the Code) within three months
of the date of such termination, the Option will not qualify for Incentive Stock
Option treatment under the Code. To the extent that the California Recipient was
not entitled to exercise the Option at the date of termination, or if the
California Recipient does not exercise such Option to the extent so entitled
within six months from the date of termination, the Option shall terminate and
the Optioned Stock underlying the unexercised portion of the Option shall revert
to the Plan.
5. The Company shall provide financial statements at least annually to
each California Recipient during the period such person has one or more Options
or Stock Purchase Rights outstanding, and in the case of an individual who
acquired Shares pursuant to the Plan, during the period such individual owns
such Shares. The Company shall not be required to provide such information if
the issuance of awards under the Plan is limited to key employees whose duties
in connection with the Company assure their access to equivalent information.
6. Capitalized terms not defined in this Attachment shall have the
meanings set forth in the Plan.
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EXHIBIT 10.3
DRUGSTORE.COM
1999 EMPLOYEE STOCK PURCHASE PLAN
The following constitute the provisions of the 1999 Employee Stock Purchase
Plan of drugstore.com.
1. Purpose. The purpose of the Plan is to provide employees of the
Company and its Designated Subsidiaries with an opportunity to purchase Common
Stock of the Company. It is the intention of the Company to have the Plan
qualify as an "Employee Stock Purchase Plan" under Section 423 of the Code. The
provisions of the Plan shall, accordingly, be construed so as to extend and
limit participation in a manner consistent with the requirements of that section
of the Code.
2. Definitions.
(a) "Board" means the Board of Directors of the Company.
(b) "Code" means the Internal Revenue Code of 1986, as amended.
(c) "Common Stock" means the Common Stock of the Company.
(d) "Company" means drugstore.com, a Delaware corporation.
(e) "Compensation" means total cash compensation received by an
Employee from the Company or a Designated Subsidiary. By way of illustration,
but not limitation, Compensation includes regular compensation such as salary,
wages, overtime, shift differentials, bonuses, commissions and incentive
compensation, but excludes relocation, expense reimbursements, tuition or other
reimbursements and income realized as a result of participation in any stock
option, stock purchase, or similar plan of the Company or any Designated
Subsidiary.
(f) "Continuous Status as an Employee" means the absence of any
interruption or termination of service as an Employee. Continuous Status as an
Employee shall not be considered interrupted in the case of (i) sick leave; (ii)
military leave; (iii) any other leave of absence approved by the Administrator,
provided that such leave is for a period of not more than 90 days, unless
reemployment upon the expiration of such leave is guaranteed by contract or
statute, or unless provided otherwise pursuant to Company policy adopted from
time to time; or (iv) in the case of transfers between locations of the Company
or between the Company and its Designated Subsidiaries.
(g) "Contributions" means all amounts credited to the account of a
participant pursuant to the Plan.
(h) "Corporate Transaction" means a sale of all or substantially all
of the Company's assets, or a merger, consolidation or other capital
reorganization of the Company with or into another corporation.
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(i) "Designated Subsidiaries" means the Subsidiaries which have been
designated by the Board from time to time in its sole discretion as eligible to
participate in the Plan; provided however that the Board shall only have the
discretion to designate Subsidiaries if the issuance of options to such
Subsidiary's Employees pursuant to the Plan would not cause the Company to incur
adverse accounting charges.
(j) "Employee" means any person, including an Officer, who is
customarily employed for at least twenty (20) hours per week and more than five
(5) months in a calendar year by the Company or one of its Designated
Subsidiaries.
(k) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(l) "Offering Date" means the first business day of each Offering
Period of the Plan, except that in the case of an individual who becomes an
eligible Employee after the first business day of an Offering Period but prior
to the first business day of the fourth calendar month within such Offering
Period, the term "Offering Date" means the first business day of such fourth
calendar month coinciding with or next succeeding the day on which that
individual becomes an eligible Employee.
Options granted after the first business day of an Offering Period
will be subject to the same terms and conditions as the options granted on the
first business day of such Offering Period except that they will have a
different grant date (and thus, potentially, a different Purchase Price) and,
because they expire at the same time as the options granted on the first
business day of such Offering Period, a shorter term.
(m) "Offering Period" means a period of six (6) months commencing on
February 1 and August 1 of each year, other than the first Offering Period as
set forth in Section 4.
(n) "Officer" means a person who is an officer of the Company within
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(o) "Plan" means this 1999 Employee Stock Purchase Plan.
(p) "Purchase Date" means the last day of each Offering Period of the
Plan.
(q) "Purchase Price" means with respect to an Offering Period an
amount equal to 85% of the Fair Market Value (as defined in Section 7(b) below)
of a Share of Common Stock on the Offering Date or on the Purchase Date,
whichever is lower; provided, however, that in the event (i) of any stockholder-
approved increase in the number of Shares available for issuance under the Plan,
and (ii) all or a portion of such additional Shares are to be issued with
respect to the Offering Period that is underway at the time of such increase
("Additional Shares"), and (iii) the Fair Market Value of a Share of Common
Stock on the date of such increase (the "Approval Date Fair Market Value") is
higher than the Fair Market Value on the Offering Date for any such Offering
Period, then in such instance the Purchase Price with respect
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to Additional Shares shall be 85% of the Approval Date Fair Market Value or the
Fair Market Value of a Share of Common Stock on the Purchase Date, whichever is
lower.
(s) "Share" means a share of Common Stock, as adjusted in accordance
with Section 19 of the Plan.
(t) "Subsidiary" means a corporation, domestic or foreign, of which
not less than 50% of the voting shares are held by the Company or a Subsidiary,
whether or not such corporation now exists or is hereafter organized or acquired
by the Company or a Subsidiary.
3. Eligibility.
(a) Any person who is an Employee as of the Offering Date of a given
Offering Period shall be eligible to participate in such Offering Period under
the Plan, subject to the requirements of Section 5(a) and the limitations
imposed by Section 423(b) of the Code.
(b) Any provisions of the Plan to the contrary notwithstanding, no
Employee shall be granted an option under the Plan (i) if, immediately after the
grant, such Employee (or any other person whose stock would be attributed to
such Employee pursuant to Section 424(d) of the Code) would own capital stock of
the Company and/or hold outstanding options to purchase stock possessing five
percent (5%) or more of the total combined voting power or value of all classes
of stock of the Company or of any subsidiary of the Company, or (ii) if such
option would permit his or her rights to purchase stock under all employee stock
purchase plans (described in Section 423 of the Code) of the Company and its
Subsidiaries to accrue at a rate which exceeds Twenty-Five Thousand Dollars
($25,000) of the Fair Market Value (as defined in Section 7(b) below) of such
stock (determined at the time such option is granted) for each calendar year in
which such option is outstanding at any time.
4. Offering Periods. The Plan shall be implemented by a series of
Offering Periods of six (6) months' duration, with new Offering Periods
commencing on or about February 1 and August 1 of each year (or at such other
time or times as may be determined by the Board of Directors). The first
Offering Period shall commence on the effective date of the Registration
Statement on Form S-1 for the initial public offering of the Company's Common
Stock (the "IPO Date") and continue until January 31, 2000. The Plan shall
continue until terminated in accordance with Section 19 hereof. The Board of
Directors of the Company shall have the power to change the duration and/or the
frequency of Offering Periods with respect to future offerings without
stockholder approval if such change is announced at least five (5) days prior to
the scheduled beginning of the first Offering Period to be affected.
5. Participation.
(a) An eligible Employee may become a participant in the Plan by
completing a subscription agreement on the form provided by the Company and
filing it with the Company's Human Resources Department prior to the applicable
Offering Date, unless a later time for filing the subscription agreement is set
by the Board for all eligible Employees with respect to a given
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Offering Period. The subscription agreement shall set forth the percentage of
the participant's Compensation (subject to Section 6(a) below) to be paid as
Contributions pursuant to the Plan.
(b) Payroll deductions shall commence on the first full payroll
following the Offering Date and shall end on the last payroll paid on or prior
to the Purchase Date of the Offering Period to which the subscription agreement
is applicable, unless sooner terminated by the participant as provided in
Section 10.
6. Method of Payment of Contributions.
(a) A participant shall elect to have payroll deductions made on each
payday during the Offering Period in an amount not less than one percent (1%)
and not more than twenty percent (20%) (or such greater percentage as the Board
may establish from time to time before an Offering Date) of such participant's
Compensation on each payday during the Offering Period. All payroll deductions
made by a participant shall be credited to his or her account under the Plan. A
participant may not make any additional payments into such account.
(b) A participant may discontinue his or her participation in the
Plan as provided in Section 10, or, on one occasion only during an Offering
Period may increase or decrease the rate of his or her Contributions with
respect to the Offering Period by completing and filing with the Company a new
subscription agreement authorizing a change in the payroll deduction rate. The
change in rate shall be effective as of the beginning of the next payroll period
following the date of filing of the new subscription agreement, if the agreement
is filed at least five (5) business days prior to such date and, if not, as of
the beginning of the next succeeding payroll period.
(c) Notwithstanding the foregoing, to the extent necessary to comply
with Section 423(b)(8) of the Code and Section 3(b) herein, a participant's
payroll deductions may be decreased during any Offering Period scheduled to end
during the current calendar year to 0%. Payroll deductions shall re-commence at
the rate provided in such participant's subscription agreement at the beginning
of the first Offering Period which is scheduled to end in the following calendar
year, unless terminated by the participant as provided in Section 10.
7. Grant of Option.
(a) On the Offering Date of each Offering Period, each eligible
Employee participating in such Offering Period shall be granted an option to
purchase on each Purchase Date a number of Shares of the Company's Common Stock
determined by dividing such Employee's Contributions accumulated prior to such
Purchase Date and retained in the participant's account as of the Purchase Date
by the applicable Purchase Price; provided however that the maximum number of
Shares an Employee may purchase during each Offering Period shall be 2,500
Shares (subject to any adjustment pursuant to Section 18 below), and provided
further that such purchase shall be subject to the limitations set forth in
Sections 3(b) and 12.
(b) The fair market value of the Company's Common Stock on a given
date (the "Fair Market Value") shall be determined by the Board in its
discretion based on the closing
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sales price of the Common Stock for such date (or, in the event that the Common
Stock is not traded on such date, on the immediately preceding trading date), as
reported by the National Association of Securities Dealers Automated Quotation
(Nasdaq) National Market or, if such price is not reported, the mean of the bid
and asked prices per share of the Common Stock as reported by Nasdaq or, in the
event the Common Stock is listed on a stock exchange, the Fair Market Value per
share shall be the closing sales price on such exchange on such date (or, in the
event that the Common Stock is not traded on such date, on the immediately
preceding trading date), as reported in The Wall Street Journal. For purposes of
the Offering Date that coincides with the IPO Date, the Fair Market Value of a
share of the Common Stock of the Company shall be the Price to Public as set
forth in the final prospectus filed with the Securities and Exchange Commission
pursuant to Rule 424 under the Securities Act of 1933, as amended.
8. Exercise of Option. Unless a participant withdraws from the Plan as
provided in Section 10, his or her option for the purchase of Shares will be
exercised automatically on each Purchase Date of an Offering Period, and the
maximum number of full Shares subject to the option will be purchased at the
applicable Purchase Price with the accumulated Contributions in his or her
account. No fractional Shares shall be issued. The Shares purchased upon
exercise of an option hereunder shall be deemed to be transferred to the
participant on the Purchase Date. During his or her lifetime, a participant's
option to purchase Shares hereunder is exercisable only by him or her.
9. Delivery. As promptly as practicable after a Purchase Date, the
Company shall arrange the delivery to each participant, as appropriate, of a
certificate representing the Shares purchased upon exercise of his or her
option. Any payroll deductions accumulated in a participant's account which are
not sufficient to purchase a full Share shall be retained in the participant's
account for the subsequent Offering Period, subject to earlier withdrawal by the
participant as provided in Section 10 below. Any other amounts left over in a
participant's account after a Purchase Date shall be returned to the
participant.
10. Voluntary Withdrawal; Termination of Employment.
(a) A participant may withdraw all but not less than all the
Contributions credited to his or her account under the Plan at any time prior to
a Purchase Date by submitting a completed "Notice of Withdrawal" form to the
Company's Human Resources Department. All of the participant's Contributions
credited to his or her account will be paid to him or her promptly after receipt
of his or her notice of withdrawal and his or her option for the current period
will be automatically terminated, and no further Contributions for the purchase
of Shares will be made during the Offering Period.
(b) Upon termination of the participant's Continuous Status as an
Employee prior to the Purchase Date of an Offering Period for any reason,
including retirement or death, the Contributions credited to his or her account
will be returned to him or her or, in the case of his or her death, to the
person or persons entitled thereto under Section 14, and his or her option will
be automatically terminated.
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(c) In the event an Employee fails to remain in Continuous Status as
an Employee of the Company for at least twenty (20) hours per week during the
Offering Period in which the employee is a participant, he or she will be deemed
to have elected to withdraw from the Plan and the Contributions credited to his
or her account will be returned to him or her and his or her option terminated.
(d) A participant's withdrawal from an offering will not have any
effect upon his or her eligibility to participate in a succeeding offering or in
any similar plan which may hereafter be adopted by the Company.
11. Interest. No interest shall accrue on the Contributions of a
participant in the Plan.
12. Stock.
(a) Subject to adjustment as provided in Section 18, the maximum
number of Shares which shall be made available for sale under the Plan shall be
500,000 Shares, plus an annual increase on the first day of each of the
Company's fiscal years beginning in 2000, 2001, 2002, 2003 and 2004 equal to the
lesser of (i) 500,000 Shares, (ii) three percent (3%) of the Shares outstanding
on the last day of the immediately preceding fiscal year, or (iii) such lesser
number of Shares as is determined by the Board. If the Board determines that,
on a given Purchase Date, the number of shares with respect to which options are
to be exercised may exceed (1) the number of shares of Common Stock that were
available for sale under the Plan on the Offering Date of the applicable
Offering Period, or (2) the number of shares available for sale under the Plan
on such Purchase Date, the Board may in its sole discretion provide (x) that the
Company shall make a pro rata allocation of the Shares of Common Stock available
for purchase on such Offering Date or Purchase Date, as applicable, in as
uniform a manner as shall be practicable and as it shall determine in its sole
discretion to be equitable among all participants exercising options to purchase
Common Stock on such Purchase Date, and continue the Plan as then in effect, or
(y) that the Company shall make a pro rata allocation of the Shares available
for purchase on such Offering Date or Purchase Date, as applicable, in as
uniform a manner as shall be practicable and as it shall determine in its sole
discretion to be equitable among all participants exercising options to purchase
Common Stock on such Purchase Date, and terminate the Plan pursuant to Section
19 below. The Company may make a pro rata allocation of the Shares available on
the Offering Date of any applicable Offering Period pursuant to the preceding
sentence, notwithstanding any authorization of additional Shares for issuance
under the Plan by the Company's stockholders subsequent to such Offering Date.
(b) The participant shall have no interest or voting right in Shares
covered by his or her option until such option has been exercised.
(c) Shares to be delivered to a participant under the Plan will be
registered in the name of the participant or in the name of the participant and
his or her spouse.
13. Administration. The Board, or a committee named by the Board, shall
supervise and administer the Plan and shall have full power to adopt, amend and
rescind any rules deemed
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desirable and appropriate for the administration of the Plan and not
inconsistent with the Plan, to construe and interpret the Plan, and to make all
other determinations necessary or advisable for the administration of the Plan.
14. Designation of Beneficiary.
(a) A participant may file a written designation of a beneficiary who
is to receive any Shares and cash, if any, from the participant's account under
the Plan in the event of such participant's death subsequent to the end of an
Offering Period but prior to delivery to him or her of such Shares and cash. In
addition, a participant may file a written designation of a beneficiary who is
to receive any cash from the participant's account under the Plan in the event
of such participant's death prior to the Purchase Date of an Offering Period.
If a participant is married and the designated beneficiary is not the spouse,
spousal consent shall be required for such designation to be effective.
(b) Such designation of beneficiary may be changed by the participant
(and his or her spouse, if any) at any time by written notice. In the event of
the death of a participant and in the absence of a beneficiary validly
designated under the Plan who is living at the time of such participant's death,
the Company shall deliver such Shares and/or cash to the executor or
administrator of the estate of the participant, or if no such executor or
administrator has been appointed (to the knowledge of the Company), the Company,
in its discretion, may deliver such Shares and/or cash to the spouse or to any
one or more dependents or relatives of the participant, or if no spouse,
dependent or relative is known to the Company, then to such other person as the
Company may designate.
15. Transferability. Neither Contributions credited to a participant's
account nor any rights with regard to the exercise of an option or to receive
Shares under the Plan may be assigned, transferred, pledged or otherwise
disposed of in any way (other than by will, the laws of descent and
distribution, or as provided in Section 14) by the participant. Any such
attempt at assignment, transfer, pledge or other disposition shall be without
effect, except that the Company may treat such act as an election to withdraw
funds in accordance with Section 10.
16. Use of Funds. All Contributions received or held by the Company under
the Plan may be used by the Company for any corporate purpose, and the Company
shall not be obligated to segregate such Contributions.
17. Reports. Individual accounts will be maintained for each participant
in the Plan. Statements of account will be given to participating Employees at
least annually, which statements will set forth the amounts of Contributions,
the per Share Purchase Price, the number of Shares purchased and the remaining
cash balance, if any.
18. Adjustments Upon Changes in Capitalization; Corporate Transactions.
(a) Adjustment. Subject to any required action by the stockholders
of the Company, the number of Shares covered by each option under the Plan which
has not yet been exercised, the number of Shares which have been authorized for
issuance under the Plan but have
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not yet been placed under option (collectively, the "Reserves"), the maximum
number of Shares of Common Stock which may be purchased by a participant in an
Offering Period, the number of Shares of Common Stock set forth in Section
12(a)(i) above, and the price per Share of Common Stock covered by each option
under the Plan which has not yet been exercised, shall be proportionately
adjusted for any increase or decrease in the number of issued Shares resulting
from a stock split, reverse stock split, stock dividend, combination or
reclassification of the Common Stock (including any such change in the number of
Shares of Common Stock effected in connection with a change in domicile of the
Company), or any other increase or decrease in the number of Shares effected
without receipt of consideration by the Company; provided however that
conversion of any convertible securities of the Company shall not be deemed to
have been "effected without receipt of consideration." Such adjustment shall be
made by the Board, whose determination in that respect shall be final, binding
and conclusive. Except as expressly provided herein, no issue by the Company of
shares of stock of any class, or securities convertible into shares of stock of
any class, shall affect, and no adjustment by reason thereof shall be made with
respect to, the number or price of Shares subject to an option.
(b) Corporate Transactions. In the event of a dissolution or
liquidation of the Company, any Offering Period then in progress will terminate
immediately prior to the consummation of such action, unless otherwise provided
by the Board. In the event of a Corporate Transaction, each option outstanding
under the Plan shall be assumed or an equivalent option shall be substituted by
the successor corporation or a parent or Subsidiary of such successor
corporation. In the event that the successor corporation refuses to assume or
substitute for outstanding options, each Offering Period then in progress shall
be shortened and a new Purchase Date shall be set (the "New Purchase Date"), as
of which date any Offering Period then in progress will terminate. The New
Purchase Date shall be on or before the date of consummation of the transaction
and the Board shall notify each participant in writing, at least ten (10) days
prior to the New Purchase Date, that the Purchase Date for his or her option has
been changed to the New Purchase Date and that his or her option will be
exercised automatically on the New Purchase Date, unless prior to such date he
or she has withdrawn from the Offering Period as provided in Section 10. For
purposes of this Section 18, an option granted under the Plan shall be deemed to
be assumed, without limitation, if, at the time of issuance of the stock or
other consideration upon a Corporate Transaction, each holder of an option under
the Plan would be entitled to receive upon exercise of the option the same
number and kind of shares of stock or the same amount of property, cash or
securities as such holder would have been entitled to receive upon the
occurrence of the transaction if the holder had been, immediately prior to the
transaction, the holder of the number of Shares of Common Stock covered by the
option at such time (after giving effect to any adjustments in the number of
Shares covered by the option as provided for in this Section 18); provided
however that if the consideration received in the transaction is not solely
common stock of the successor corporation or its parent (as defined in Section
424(e) of the Code), the Board may, with the consent of the successor
corporation, provide for the consideration to be received upon exercise of the
option to be solely common stock of the successor corporation or its parent
equal in Fair Market Value to the per Share consideration received by holders of
Common Stock in the transaction.
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The Board may, if it so determines in the exercise of its sole discretion,
also make provision for adjusting the Reserves, as well as the price per Share
of Common Stock covered by each outstanding option, in the event that the
Company effects one or more reorganizations, recapitalizations, rights offerings
or other increases or reductions of Shares of its outstanding Common Stock, and
in the event of the Company's being consolidated with or merged into any other
corporation.
19. Amendment or Termination.
(a) The Board may at any time and for any reason terminate or amend
the Plan. Except as provided in Section 18, no such termination of the Plan may
affect options previously granted, provided that the Plan or an Offering Period
may be terminated by the Board on a Purchase Date or by the Board's setting a
new Purchase Date with respect to an Offering Period then in progress if the
Board determines that termination of the Plan and/or the Offering Period is in
the best interests of the Company and the stockholders or if continuation of the
Plan and/or the Offering Period would cause the Company to incur adverse
accounting charges as a result of a change after the effective date of the Plan
in the generally accepted accounting rules applicable to the Plan. Except as
provided in Section 18 and in this Section 19, no amendment to the Plan shall
make any change in any option previously granted which adversely affects the
rights of any participant. In addition, to the extent necessary to comply with
Rule 16b-3 under the Exchange Act, or under Section 423 of the Code (or any
successor rule or provision or any applicable law or regulation), the Company
shall obtain stockholder approval in such a manner and to such a degree as so
required.
(b) Without stockholder consent and without regard to whether any
participant rights may be considered to have been adversely affected, the Board
(or its committee) shall be entitled to change the Offering Periods, limit the
frequency and/or number of changes in the amount withheld during an Offering
Period, establish the exchange ratio applicable to amounts withheld in a
currency other than U.S. dollars, permit payroll withholding in excess of the
amount designated by a participant in order to adjust for delays or mistakes in
the Company's processing of properly completed withholding elections, establish
reasonable waiting and adjustment periods and/or accounting and crediting
procedures to ensure that amounts applied toward the purchase of Common Stock
for each participant properly correspond with amounts withheld from the
participant's Compensation, and establish such other limitations or procedures
as the Board (or its committee) determines in its sole discretion advisable
which are consistent with the Plan.
20. Notices. All notices or other communications by a participant to the
Company under or in connection with the Plan shall be deemed to have been duly
given when received in the form specified by the Company at the location, or by
the person, designated by the Company for the receipt thereof.
21. Conditions Upon Issuance of Shares. Shares shall not be issued with
respect to an option unless the exercise of such option and the issuance and
delivery of such Shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign,
-9-
<PAGE>
including, without limitation, the Securities Act of 1933, as amended, the
Exchange Act, the rules and regulations promulgated thereunder, applicable state
securities laws and the requirements of any stock exchange upon which the Shares
may then be listed, and shall be further subject to the approval of counsel for
the Company with respect to such compliance.
As a condition to the exercise of an option, the Company may require the
person exercising such option to represent and warrant at the time of any such
exercise that the Shares are being purchased only for investment and without any
present intention to sell or distribute such Shares if, in the opinion of
counsel for the Company, such a representation is required by any of the
aforementioned applicable provisions of law.
22. Term of Plan; Effective Date. The Plan shall become effective upon
approval by the Company's stockholders. It shall continue in effect for a term
of ten (10) years unless sooner terminated under Section 19.
23. Additional Restrictions of Rule 16b-3. The terms and conditions of
options granted hereunder to, and the purchase of Shares by, persons subject to
Section 16 of the Exchange Act shall comply with the applicable provisions of
Rule 16b-3. This Plan shall be deemed to contain, and such options shall
contain, and the Shares issued upon exercise thereof shall be subject to, such
additional conditions and restrictions as may be required by Rule 16b-3 to
qualify for the maximum exemption from Section 16 of the Exchange Act with
respect to Plan transactions.
-10-
<PAGE>
DRUGSTORE.COM
1999 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
NEW ELECTION ______
CHANGE OF ELECTION ______
1. I, ________________________, hereby elect to participate in the
drugstore.com 1999 Employee Stock Purchase Plan (the "Plan") for the Offering
Period ______________, ____ to _______________, ____, and subscribe to purchase
shares of the Company's Common Stock in accordance with this Subscription
Agreement and the Plan.
2. I elect to have Contributions in the amount of ____% of my
Compensation, as those terms are defined in the Plan, applied to this purchase.
I understand that this amount must not be less than 1% and not more than 20% of
my Compensation during the Offering Period. (Please note that no fractional
percentages are permitted).
3. I hereby authorize payroll deductions from each paycheck during the
Offering Period at the rate stated in Item 2 of this Subscription Agreement. I
understand that all payroll deductions made by me shall be credited to my
account under the Plan and that I may not make any additional payments into such
account. I understand that all payments made by me shall be accumulated for the
purchase of shares of Common Stock at the applicable purchase price determined
in accordance with the Plan. I further understand that, except as otherwise set
forth in the Plan, shares will be purchased for me automatically on the Purchase
Date of each Offering Period unless I otherwise withdraw from the Plan by giving
written notice to the Company for such purpose.
4. I understand that I may discontinue at any time prior to the Purchase
Date my participation in the Plan as provided in Section 10 of the Plan. I also
understand that I can increase or decrease the rate of my Contributions on one
occasion only during any Offering Period by completing and filing a new
Subscription Agreement with such increase or decrease taking effect as of the
beginning of the payroll period following the date of filing of the new
Subscription Agreement, if filed at least five (5) business days prior to the
beginning of such payroll period. Further, I may change the rate of deductions
for future Offering Periods by filing a new Subscription Agreement, and any such
change will be effective as of the beginning of the next Offering Period. In
addition, I acknowledge that, unless I discontinue my participation in the Plan
as provided in Section 10 of the Plan, my election will continue to be effective
for each successive Offering Period.
<PAGE>
5. I have received a copy of the Company's most recent description of the
Plan and a copy of the complete "drugstore.com 1999 Employee Stock Purchase
Plan." I understand that my participation in the Plan is in all respects
subject to the terms of the Plan.
6. Shares purchased for me under the Plan should be issued in the name(s)
of (name of employee or employee and spouse only):
____________________________________
____________________________________
7. In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due to me under the Plan:
NAME: (Please print) ____________________________________
(First) (Middle) (Last)
______________________ ____________________________________
(Relationship) (Address)
____________________________________
8. I understand that if I dispose of any shares received by me pursuant
to the Plan within 2 years after the Offering Date (the first day of the
Offering Period during which I purchased such shares) or within 1 year after the
Purchase Date, I will be treated for federal income tax purposes as having
received ordinary compensation income at the time of such disposition in an
amount equal to the excess of the fair market value of the shares on the
Purchase Date over the price which I paid for the shares, regardless of whether
I disposed of the shares at a price less than their fair market value at the
Purchase Date. The remainder of the gain or loss, if any, recognized on such
disposition will be treated as capital gain or loss.
I hereby agree to notify the Company in writing within 30 days after the
date of any such disposition, and I will make adequate provision for federal,
state or other tax withholding obligations, if any, which arise upon the
disposition of the Common Stock. The Company may, but will not be obligated to,
withhold from my compensation the amount necessary to meet any applicable
withholding obligation including any withholding necessary to make available to
the Company any tax deductions or benefits attributable to the sale or early
disposition of Common Stock by me.
9. If I dispose of such shares at any time after expiration of the 2-year
and 1-year holding periods, I understand that I will be treated for federal
income tax purposes as having received compensation income only to the extent of
an amount equal to the lesser of (1) the excess of the fair market value of the
shares at the time of such disposition over the purchase price which I paid for
the shares under the option, or (2) 15% of the fair market value of the
-2-
<PAGE>
shares on the Offering Date. The remainder of the gain or loss, if any,
recognized on such disposition will be treated as capital gain or loss.
I understand that this tax summary is only a summary and is subject to
change. I further understand that I should consult a tax advisor concerning the
tax implications of the purchase and sale of stock under the Plan.
10. I hereby agree to be bound by the terms of the Plan. The effectiveness
of this Subscription Agreement is dependent upon my eligibility to participate
in the Plan.
SIGNATURE: ____________________________
SOCIAL SECURITY #: ____________________
DATE: _________________________________
SPOUSE'S SIGNATURE (necessary
if beneficiary is not spouse):
_______________________________________
(Signature)
_______________________________________
(Print name)
-3-
<PAGE>
DRUGSTORE.COM
1999 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
I, __________________________, hereby elect to withdraw my participation in
the drugstore.com 1999 Employee Stock Purchase Plan (the "Plan") for the
Offering Period that began on _________ ___, _____. This withdrawal covers all
Contributions credited to my account and is effective on the date designated
below.
I understand that all Contributions credited to my account will be paid to
me within ten (10) business days of receipt by the Company of this Notice of
Withdrawal and that my option for the current period will automatically
terminate, and that no further Contributions for the purchase of shares can be
made by me during the Offering Period.
The undersigned further understands and agrees that he or she shall be
eligible to participate in succeeding offering periods only by delivering to the
Company a new Subscription Agreement.
Dated: ___________________ _______________________________________
Signature of Employee
_______________________________________
Social Security Number
<PAGE>
EXHIBIT 10.4
DRUGSTORE.COM, INC.
RESTRICTED STOCK PURCHASE AGREEMENT
-----------------------------------
This Restricted Stock Purchase Agreement (the "Agreement") is made as of
---------
June 19, 1998 by and between DrugStore.com, Inc., a Delaware corporation (the
"Company"), and Jed Smith ("Purchaser").
- -------- ---------
1. SALE OF STOCK. Subject to the terms and conditions of this Agreement,
-------------
on the Purchase Date (as defined below) the Company will issue and sell to
Purchaser, and Purchaser agrees to purchase from the Company, 975,000 shares of
the Company's Common Stock (the "Shares") at a purchase price of $0.04 per Share
------
for a total purchase price of $39,000.00. The term "Shares" refers to the
------
purchased Shares and all securities received in replacement of or in connection
with the Shares pursuant to stock dividends or splits, all securities received
in replacement of the Shares in a recapitalization, merger, reorganization,
exchange or the like, and all new, substituted or additional securities or other
properties to which Purchaser is entitled by reason of Purchaser's ownership of
the Shares.
2. PURCHASE. The purchase and sale of the Shares under this Agreement
--------
shall occur at the principal office of the Company simultaneously with the
execution of this Agreement by the parties, or on such other date as the Company
and Purchaser shall agree (the "Purchase Date"). On the Purchase Date, the
-------------
Company will deliver to Purchaser a certificate representing the Shares to be
purchased by Purchaser (which shall be issued in Purchaser's name) against
payment of the purchase price therefor by Purchaser by an assignment of certain
assets as set forth in the Bill of Sale and Instrument of Assignment in the form
attached to this Agreement as Exhibit A.
---------
3. LIMITATIONS ON TRANSFER. In addition to any other limitation on
-----------------------
transfer created by applicable securities laws, Purchaser shall not assign,
encumber or dispose of any interest in the Shares while the Shares are subject
to the Company's Repurchase Option (as defined below). After any Shares have
been released from such Repurchase Option, Purchaser shall not assign, encumber
or dispose of any interest in such Shares except in compliance with the
provisions below and applicable securities laws.
(a) REPURCHASE OPTION.
-----------------
(i) If Purchaser voluntarily terminates his employment
relationship with the Company or if the Company terminates Purchaser's
employment relationship with the Company for Cause (as defined below), the
Company shall upon the date of such termination (the "Termination Date") have an
----------------
irrevocable, exclusive option (the "Repurchase Option") for a period of 60 days
-----------------
from such date to repurchase all or any portion of the Shares held by Purchaser
as of the Termination Date which have not yet been released from the Company's
Repurchase Option at the original purchase price per share specified in Section
1 (adjusted for any stock splits, stock dividends and the like).
<PAGE>
(ii) The Repurchase Option shall be exercised by the Company by
written notice to Purchaser or Purchaser's executor and, at the Company's
option, (A) by delivery to Purchaser or Purchaser's executor with such notice of
a check in the amount of the purchase price for the Shares being purchased, or
(B) in the event Purchaser is indebted to the Company, by cancellation by the
Company of an amount of such indebtedness equal to the purchase price for the
Shares being repurchased, or (C) by a combination of (A) and (B) so that the
combined payment and cancellation of indebtedness equals such purchase price.
Upon delivery of such notice and payment of the purchase price in any of the
ways described above, the Company shall become the legal and beneficial owner of
the Shares being repurchased and all rights and interest therein or related
thereto, and the Company shall have the right to transfer to its own name the
number of Shares being repurchased by the Company, without further action by
Purchaser.
(iii) 75% of the Shares shall initially be subject to the
Repurchase Option. 1/48 of the total number of Shares shall be released from the
Repurchase Option on each monthly anniversary of the Vesting Commencement Date
(as set forth on the signature page of this Agreement), until all Shares are
released from the Repurchase Option. Fractional shares shall be rounded to the
nearest whole share. Notwithstanding the foregoing:
(A) If the Company terminates Purchaser's employment with
the Company other than for Cause, then 121,875 of the Shares (which amount
is 1/8 of the total number of Shares) that are subject to the Repurchase
Option as of such date shall be immediately released from the Repurchase
Option on the effective date of such termination in addition to any Shares
previously released from the Repurchase Option as of such date in
accordance with the second sentence of this Section 3(a)(iii).
(B) In the event of a Change of Control (as defined below)
and (a) Purchaser is not offered a position with similar responsibilities
by the surviving corporation or (b) Purchaser's principal office after the
Change of Control is located more than 50 miles form your residence, 100%
of the Shares shall be released from the Repurchase Option on the effective
date of the transaction.
(iv) The following terms referred to in this Section 3 shall
have the following meanings:
(A) "Cause" means (1) gross negligence or willful
-----
misconduct in the performance of duties to the Company which is
demonstrably and materially injurious to the business or reputation of the
Company or its subsidiaries; (2) commission of any act of fraud against, or
the misappropriation of material property belonging to, the Company; or (3)
conviction of a felony or a crime that is demonstrably and materially
injurious to the business or reputation of the Company, in each case as
determined in good faith by the Board of Directors.
(B) "Change of Control" means (1) the consummation of a
-----------------
merger or consolidation of the Company with or into another entity or any
other corporate reorganization, if persons who were not stockholders of the
Company immediately before
-2-
<PAGE>
the merger, consolidation or other reorganization own immediately after the
merger, consolidation or other reorganization 50% or more of the voting
power of the outstanding securities of each of (i) the continuing or
surviving entity and (ii) any direct or indirect parent corporation of the
continuing or surviving entity; or (2) the sale, transfer or other
disposition of all or substantially all of the Company's assets. A
transaction does not constitute a Change of Control if its sole purpose is
to change the state of the Company's incorporation or to create a holding
company that will be owned in substantially the same proportions by the
persons who held the Company's securities immediately before the
transaction.
(b) RIGHT OF FIRST REFUSAL. Before any Shares held by Purchaser or
----------------------
any transferee of Purchaser (either being sometimes referred to herein as the
"Holder") may be sold or otherwise transferred (including transfer by gift or
- -------
operation of law), the Company or its assignee(s) shall have a right of first
refusal to purchase the Shares on the terms and conditions set forth in this
Section 3(b) (the "Right of First Refusal").
----------------------
(i) NOTICE OF PROPOSED TRANSFER. The Holder of the Shares
---------------------------
shall deliver to the Company a written notice (the "Notice") stating: (A) the
------
Holder's bona fide intention to sell or otherwise transfer such Shares; (B) the
name of each proposed purchaser or other transferee ("Proposed Transferee"); (C)
-------------------
the number of Shares to be transferred to each Proposed Transferee; and (D) the
terms and conditions of each proposed sale or transfer. The Holder shall offer
the Shares at the same price (the "Offered Price") and upon the same terms (or
-------------
terms as similar as reasonably possible) to the Company or its assignee(s).
(ii) EXERCISE OF RIGHT OF FIRST REFUSAL. At any time within 30
----------------------------------
days after receipt of the Notice, the Company and/or its assignee(s) may, by
giving written notice to the Holder, elect to purchase all, but not less than
all, of the Shares proposed to be transferred to any one or more of the Proposed
Transferees, at the purchase price determined in accordance with subsection
(iii) below.
(iii) PURCHASE PRICE. The purchase price ("Purchase Price")
-------------- --------------
for the Shares purchased by the Company or its assignee(s) under this Section
3(b) shall be the Offered Price. If the Offered Price includes consideration
other than cash, the cash equivalent value of the non-cash consideration shall
be determined by the Board of Directors of the Company in good faith.
(iv) PAYMENT. Payment of the Purchase Price shall be made, at
-------
the option of the Company or its assignee(s), in cash (by check), by
cancellation of all or a portion of any outstanding indebtedness of the Holder
to the Company (or, in the case of repurchase by an assignee, to the assignee),
or by any combination thereof within 30 days after receipt of the Notice or in
the manner and at the times set forth in the Notice.
(v) HOLDER'S RIGHT TO TRANSFER. If all of the Shares
--------------------------
proposed in the Notice to be transferred to a given Proposed Transferee are not
purchased by the Company and/or its assignee(s) as provided in this Section
3(b), then the Holder may sell or otherwise transfer such Shares to that
Proposed Transferee at the Offered Price or at a higher price,
-3-
<PAGE>
provided that such sale or other transfer is consummated within 60 days after
the date of the Notice and provided further that any such sale or other transfer
is effected in accordance with any applicable securities laws and the Proposed
Transferee agrees in writing that the provisions of this Section 3 shall
continue to apply to the Shares in the hands of such Proposed Transferee. If the
Shares described in the Notice are not transferred to the Proposed Transferee
within such period, or if the Holder proposes to change the price or other terms
to make them more favorable to the Proposed Transferee, a new Notice shall be
given to the Company, and the Company and/or its assignees shall again be
offered the Right of First Refusal before any Shares held by the Holder may be
sold or otherwise transferred.
(vi) EXCEPTION FOR CERTAIN FAMILY TRANSFERS. Anything to the
--------------------------------------
contrary contained in this Section 3(b) notwithstanding, the transfer of any or
all of the Shares during Purchaser's lifetime or on Purchaser's death by will or
intestacy to Purchaser's Immediate Family (as defined below) or a trust, limited
partnership or limited liability company for the benefit of Purchaser's
Immediate Family shall be exempt from the provisions of this Section 3(b).
"Immediate Family" as used herein shall mean spouse, lineal descendant or
- -----------------
antecedent, father, mother, brother or sister. In such case, the transferee or
other recipient shall receive and hold the Shares so transferred subject to the
provisions of this Section, and there shall be no further transfer of such
Shares except in accordance with the terms of this Section 3.
(c) INVOLUNTARY TRANSFER.
--------------------
(i) COMPANY'S RIGHT TO PURCHASE UPON INVOLUNTARY TRANSFER. In
-----------------------------------------------------
the event, at any time after the date of this Agreement, of any transfer by
operation of law or other involuntary transfer (including divorce or death, but
excluding, in the event of death, a transfer to Immediate Family as set forth in
Section 3(b)(vi) above) of all or a portion of the Shares by the record holder
thereof, the Company shall have the right to purchase all of the Shares
transferred at the greater of the purchase price paid by Purchaser pursuant to
this Agreement or the Fair Market Value of the Shares on the date of transfer.
Upon such a transfer, the person acquiring the Shares shall promptly notify the
Secretary of the Company of such transfer. The right to purchase such Shares
shall be provided to the Company for a period of 30 days following receipt by
the Company of written notice by the person acquiring the Shares.
(ii) PRICE FOR INVOLUNTARY TRANSFER. With respect to any
------------------------------
stock to be transferred pursuant to Section 3(c)(i), the price per Share shall
be a price set by the Board of Directors of the Company that will reflect the
current value of the stock in terms of present earnings and future prospects of
the Company. The Company shall notify Purchaser or his or her executor of the
price so determined within 30 days after receipt by it of written notice of the
transfer or proposed transfer of Shares. However, if Purchaser does not agree
with the valuation as determined by the Board of Directors of the Company,
Purchaser shall be entitled to have the valuation determined by an independent
appraiser to be mutually agreed upon by the Company and Purchaser and whose fees
shall be borne equally by the Company and Purchaser.
(d) ASSIGNMENT. The right of the Company to purchase any part of the
----------
Shares may be assigned in whole or in part to any stockholder or stockholders of
the Company or other
-4-
<PAGE>
persons or organizations; provided, however, that an assignee, other than a
corporation that is the Parent or a 100% owned Subsidiary of the Company, must
pay the Company, upon assignment of such right, cash equal to the difference
between the original purchase price and Fair Market Value, if the original
purchase price is less than the Fair Market Value of the Shares subject to the
assignment.
(e) RESTRICTIONS BINDING ON TRANSFEREES. All transferees of Shares
-----------------------------------
or any interest therein will receive and hold such Shares or interest subject to
the provisions of this Agreement, including, insofar as applicable, the
Repurchase Option. Any sale or transfer of the Shares shall be void unless the
provisions of this Agreement are satisfied.
(f) TERMINATION OF RIGHTS. The Right of First Refusal and the
---------------------
Company's right to repurchase the Shares in the event of an involuntary transfer
pursuant to Section 3(c) above shall terminate upon the first sale of Common
Stock of the Company to the general public pursuant to a registration statement
filed with and declared effective by the Securities and Exchange Commission
under the Securities Act of 1933, as amended (the "Securities Act"). Upon
--------------
termination of the Right of First Refusal and the expiration or exercise of the
Repurchase Option, a new certificate or certificates representing the Shares not
repurchased shall be issued, on request, without the legend referred to in
Section 6(a)(ii) below and delivered to Purchaser.
4. ESCROW OF UNVESTED SHARES. For purposes of facilitating the
-------------------------
enforcement of the provisions of Section 3 above, Purchaser agrees, immediately
upon receipt of the certificate(s) for the Shares subject to the Repurchase
Option, to deliver such certificate(s), together with an Assignment Separate
from Certificate in the form attached to this Agreement as Exhibit B executed by
---------
Purchaser and by Purchaser's spouse (if required for transfer), in blank, to the
Secretary of the Company, or the Secretary's designee, to hold such
certificate(s) and Assignment Separate from Certificate in escrow and to take
all such actions and to effectuate all such transfers and/or releases as are in
accordance with the terms of this Agreement. Purchaser hereby acknowledges that
the Secretary of the Company, or the Secretary's designee, is so appointed as
the escrow holder with the foregoing authorities as a material inducement to
make this Agreement and that said appointment is coupled with an interest and is
accordingly irrevocable. Purchaser agrees that said escrow holder shall not be
liable to any party hereof (or to any other party). The escrow holder may rely
upon any letter, notice or other document executed by any signature purported to
be genuine and may resign at any time. Purchaser agrees that if the Secretary
of the Company, or the Secretary's designee, resigns as escrow holder for any or
no reason, the Board of Directors of the Company shall have the power to appoint
a successor to serve as escrow holder pursuant to the terms of this Agreement.
5. INVESTMENT AND TAXATION REPRESENTATIONS. In connection with the
---------------------------------------
purchase of the Shares, Purchaser represents to the Company the following:
(a) Purchaser is aware of the Company's business affairs and
financial condition and has acquired sufficient information about the Company to
reach an informed and knowledgeable decision to acquire the Shares. Purchaser is
purchasing the Shares for investment
-5-
<PAGE>
for his or her own account only and not with a view to, or for resale in
connection with, any "distribution" thereof within the meaning of the Securities
Act.
(b) Purchaser understands that the Shares have not been registered
under the Securities Act by reason of a specific exemption therefrom, which
exemption depends upon, among other things, the bona fide nature of Purchaser's
investment intent as expressed herein.
(c) Purchaser understands that the Shares are "restricted securities"
under applicable U.S. federal and state securities laws and that, pursuant to
these laws, Purchaser must hold the Shares indefinitely unless they are
registered with the Securities and Exchange Commission and qualified by state
authorities, or an exemption from such registration and qualification
requirements is available. Purchaser acknowledges that the Company has no
obligation to register or qualify the Shares for resale. Purchaser further
acknowledges that if an exemption from registration or qualification is
available, it may be conditioned on various requirements including, but not
limited to, the time and manner of sale, the holding period for the Shares, and
requirements relating to the Company which are outside of Purchaser's control,
and which the Company is under no obligation and may not be able to satisfy.
(d) Purchaser understands that Purchaser may suffer adverse tax
consequences as a result of Purchaser's purchase or disposition of the Shares.
Purchaser represents that Purchaser has consulted any tax consultants Purchaser
deems advisable in connection the purchase or disposition of the Shares and that
Purchaser is not relying on the Company for any tax advice.
6. RESTRICTIVE LEGENDS AND STOP-TRANSFER ORDERS.
--------------------------------------------
(a) LEGENDS. The certificate or certificates representing the Shares
-------
shall bear the following legends (as well as any legends required by applicable
state and federal corporate and securities laws):
(i) THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AND HAVE BEEN
ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN
CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH
SALE OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN EFFECTIVE
REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF
COUNSEL IN A FORM SATISFACTORY TO THE COMPANY THAT SUCH
REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF
1933.
(ii) THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE
TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS OF AN
AGREEMENT BETWEEN
-6-
<PAGE>
THE COMPANY AND THE STOCKHOLDER, A COPY OF WHICH IS ON
FILE WITH THE SECRETARY OF THE COMPANY.
(iii) Any legend required to be placed thereon by the California
Commissioner of Corporations.
(b) STOP-TRANSFER NOTICES. Purchaser agrees that, in order to ensure
---------------------
compliance with the restrictions referred to herein, the Company may issue
appropriate "stop transfer" instructions to its transfer agent, if any, and
that, if the Company transfers its own securities, it may make appropriate
notations to the same effect in its own records.
(c) REFUSAL TO TRANSFER. The Company shall not be required (i) to
-------------------
transfer on its books any Shares that have been sold or otherwise transferred in
violation of any of the provisions of this Agreement or (ii) to treat as owner
of such Shares or to accord the right to vote or pay dividends to any purchaser
or other transferee to whom such Shares shall have been so transferred.
(d) REMOVAL OF LEGEND. When all of the following events have
-----------------
occurred, the Shares then held by Purchaser will no longer be subject to the
legend referred to in Section 6(a)(ii): (i) the termination of the Right of
First Refusal; (ii) the expiration or termination of the market standoff
provisions of Section 9 (and of any agreement entered pursuant to Section 9, and
(iii) the expiration or exercise in full of the Repurchase Option. After such
time, and upon Purchaser's request, a new certificate or certificates
representing the Shares not repurchased shall be issued without the legend
referred to in Section 6(a)(ii), and delivered to Purchaser.
7. NO EMPLOYMENT RIGHTS. Nothing in this Agreement shall affect in any
--------------------
manner whatsoever the right or power of the Company, or a Parent or Subsidiary
of the Company, to terminate Purchaser's employment or consulting relationship,
for any reason, with or without cause.
8. SECTION 83(B) ELECTION. Purchaser understands that Section 83(a) of
----------------------
the Internal Revenue Code of 1986, as amended (the "Code"), taxes as ordinary
----
income the difference between the amount paid for the Shares and the Fair
Market Value of the Shares as of the date any restrictions on the Shares lapse.
In this context, "restriction" means the right of the Company to buy back the
-----------
Shares pursuant to the Repurchase Option set forth in Section 3(a) of this
Agreement. Purchaser understands that Purchaser may elect to be taxed at the
time the Shares are purchased, rather than when and as the Repurchase Option
expires, by filing an election under Section 83(b) (an "83(b) Election") of the
--------------
Code with the Internal Revenue Service within 30 days from the date of purchase.
Even if the Fair Market Value of the Shares at the time of the execution of this
Agreement equals the amount paid for the Shares, the election must be made to
avoid income under Section 83(a) in the future. Purchaser understands that
failure to file such an election in a timely manner may result in adverse tax
consequences for Purchaser. Purchaser further understands that an additional
copy of such election form should be filed with his federal income tax return
for the calendar year in which the date of this Agreement falls. Purchaser
acknowledges that the foregoing is only a summary of the effect of United States
-7-
<PAGE>
federal income taxation with respect to purchase of the Shares hereunder, and
does not purport to be complete. Purchaser further acknowledges that the Company
has directed Purchaser to seek independent advice regarding the applicable
provisions of the Code, the income tax laws of any municipality, state or
foreign country in which Purchaser may reside, and the tax consequences of
Purchaser's death.
Purchaser agrees that he will execute and deliver to the Company with
this executed Agreement a copy of the Acknowledgment and Statement of Decision
Regarding Section 83(b) Election (the "Acknowledgment"), attached hereto as
--------------
Exhibit C. Purchaser further agrees that Purchaser will execute and submit with
- ---------
the Acknowledgment a copy of the 83(b) Election, attached hereto as Exhibit D,
---------
if Purchaser has indicated in the Acknowledgment his decision to make such an
election.
9. MARKET STANDOFF AGREEMENT. In connection with the initial public
-------------------------
offering of the Company's securities and upon request of the Company or the
underwriters managing such underwritten offering of the Company's securities,
Purchaser agrees not to sell, make any short sale of, loan, grant any option for
the purchase of, or otherwise dispose of any Shares (other than those included
in the registration) without the prior written consent of the Company or such
underwriters, as the case may be, for such period of time (not to exceed 180
days) from the effective date of such registration as may be requested by the
Company or such managing underwriters and to execute an agreement reflecting the
foregoing as may be requested by the underwriters at the time of the Company's
initial public offering.
10. MISCELLANEOUS.
-------------
(a) GOVERNING LAW. This Agreement and all acts and transactions
-------------
pursuant hereto and the rights and obligations of the parties hereto shall be
governed, construed and interpreted in accordance with the laws of the State of
California, without giving effect to principles of conflicts of law.
(b) ENTIRE AGREEMENT; ENFORCEMENT OF RIGHTS. This Agreement sets
---------------------------------------
forth the entire agreement and understanding of the parties relating to the
subject matter herein and merges all prior discussions between them. No
modification of or amendment to this Agreement, nor any waiver of any rights
under this Agreement, shall be effective unless in writing signed by the parties
to this Agreement. The failure by either party to enforce any rights under this
Agreement shall not be construed as a waiver of any rights of such party.
(c) SEVERABILITY. If one or more provisions of this Agreement are
------------
held to be unenforceable under applicable law, the parties agree to renegotiate
such provision in good faith. In the event that the parties cannot reach a
mutually agreeable and enforceable replacement for such provision, then (i) such
provision shall be excluded from this Agreement, (ii) the balance of the
Agreement shall be interpreted as if such provision were so excluded and (iii)
the balance of the Agreement shall be enforceable in accordance with its terms.
(d) CONSTRUCTION. This Agreement is the result of negotiations
------------
between and has been reviewed by each of the parties hereto and their respective
counsel, if any; accordingly,
-8-
<PAGE>
this Agreement shall be deemed to be the product of all of the parties hereto,
and no ambiguity shall be construed in favor of or against any one of the
parties hereto.
(e) NOTICES. Any notice required or permitted by this Agreement
-------
shall be in writing and shall be deemed sufficient when delivered personally or
sent by telegram or fax or 48 hours after being deposited in the U.S. mail, as
certified or registered mail, with postage prepaid, and addressed to the party
to be notified at such party's address as set forth below or as subsequently
modified by written notice.
(f) COUNTERPARTS. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.
(g) SUCCESSORS AND ASSIGNS. The rights and benefits of this
----------------------
shall inure to the benefit of, and be enforceable by the Company's successors
and assigns. The rights and obligations of Purchaser under this Agreement may
only be assigned with the prior written consent of the Company.
(h) CALIFORNIA CORPORATE SECURITIES LAW. THE SALE OF THE SECURITIES
-----------------------------------
WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE
COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF THE
SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR
PRIOR TO THE QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES IS EXEMPT
FROM QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF THE CALIFORNIA
CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY
CONDITIONED UPON THE QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS SO EXEMPT.
[Signature Page Follows]
-9-
<PAGE>
The parties have executed this Agreement as of the date first set forth
above.
DRUGSTORE.COM, INC.
By: /s/ Brook H. Byers
--------------------------------------------
Title: _________________________________________
Address: _______________________________________
_________________________________________________
_________________________________________________
PURCHASER:
JED SMITH
/s/ Jed A. Smith
------------------------------------------------
(Signature)
Address: 2750 Sand Hill Road
--------------------------------------
Menlo Park, CA 94025
---------------------------------------
PURCHASER ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO
SECTION 3 HEREOF IS EARNED ONLY BY CONTINUING SERVICE AS AN EMPLOYEE OR
CONSULTANT AT THE WILL OF THE COMPANY. PURCHASER FURTHER ACKNOWLEDGES AND
AGREES THAT NOTHING IN THIS AGREEMENT SHALL CONFER UPON PURCHASER ANY RIGHT WITH
RESPECT TO CONTINUATION OF SUCH EMPLOYMENT OR CONSULTING RELATIONSHIP WITH THE
COMPANY, NOR SHALL IT INTERFERE IN ANY WAY WITH PURCHASER'S RIGHT OR THE
COMPANY'S RIGHT TO TERMINATE PURCHASER'S EMPLOYMENT OR CONSULTING RELATIONSHIP
AT ANY TIME, WITH OR WITHOUT CAUSE.
Vesting Commencement
Date: October 1, 1997
I, Fiona Rotberg, spouse of Jed Smith, have read and hereby approve the
foregoing Agreement. In consideration of the Company's granting my spouse the
right to purchase the Shares as set forth in the Agreement, I hereby agree to be
irrevocably bound by the Agreement and further agree that any community property
or similar interest that I may have in the Shares shall be similarly bound by
the Agreement. I hereby appoint my spouse as my attorney-in-fact with respect
to any amendment or exercise of any rights under the Agreement.
/s/ Fiona Rotberg
------------------
Spouse of Jed Smith
-10-
<PAGE>
EXHIBIT A
---------
BILL OF SALE
------------
Jed Smith (the "Transferor"), for good and valuable consideration, the
----------
receipt and sufficiency of which is hereby acknowledged, hereby sells,
transfers, assigns and conveys to DrugStore.com, Inc. and its successors and
assigns ("Transferee"), all of the assets listed on Attachment A hereto (the
---------- ------------
"Assets").
- -------
Transferor hereby appoints Transferee the attorney in fact of Transferor,
with full power of substitution on behalf of Transferee to demand and receive
any of the Assets and to give receipts and releases for the same, to institute
and prosecute in the name of Transferor, but for the benefit of Transferee, any
legal or equitable proceedings Transferee deems proper in order to enforce any
rights in the Assets and to defend or compromise any legal or equitable
proceedings relating to the Assets as Transferee shall deem advisable.
Transferor hereby declares that the appointment made and powers granted hereby
are coupled with an interest and shall be irrevocable by Transferor.
Transferor hereby agrees that Transferor and Transferor's successors and
assigns will do, execute, acknowledge and deliver, or will cause to be done,
executed, acknowledged and delivered such further acts, documents, or
instruments confirming the conveyance of any of the Assets to Transferee as
Transferee shall reasonably deem necessary, provided that Transferee shall
provide all necessary documentation to Transferor.
This Bill of Sale is executed and delivered in, and shall be construed and
enforced in accordance with the laws of the State of California, and shall be
binding upon and inure to the benefit of the successors and assigns of the
parties hereto.
Transferor has signed this instrument as of __________________, 1998.
/s/ Jed A. Smith
- -----------------
Jed Smith
<PAGE>
ATTACHMENT A TO BILL OF SALE
----------------------------
All rights, title and interest to the concept, idea and business of
DrugStore.com, including, without limitation its business plan and prospects and
technology.
-2-
<PAGE>
EXHIBIT B
---------
ASSIGNMENT SEPARATE FROM CERTIFICATE
------------------------------------
FOR VALUE RECEIVED and pursuant to that certain Restricted Stock Purchase
Agreement between the undersigned ("Purchaser") and DrugStore.com, Inc. (the
---------
"Company") dated _______________, 1998 (the "Agreement"), Purchaser hereby
- -------- ---------
sells, assigns and transfers unto the Company _________________________________
(________) shares of the Common Stock of the Company, standing in Purchaser's
name on the books of the Company and represented by Certificate No. ____, and
hereby irrevocably constitutes and appoints
________________________________________________ to transfer said stock on the
books of the Company with full power of substitution in the premises. THIS
ASSIGNMENT MAY ONLY BE USED AS AUTHORIZED BY THE AGREEMENT AND THE EXHIBITS
THERETO.
Dated: 6/29/98
--------
Signature:
/s/ Jed A. Smith
---------------------------------------
Jed Smith
/s/ Fiona Rotberg
---------------------------------------
Spouse of Jed Smith (if applicable)
Instruction: Please do not fill in any blanks other than the signature line.
The purpose of this assignment is to enable the Company to exercise its
repurchase option set forth in the Agreement without requiring additional
signatures on the part of Purchaser.
-3-
<PAGE>
EXHIBIT C
---------
ACKNOWLEDGMENT AND STATEMENT OF DECISION
-----------------------------------------
REGARDING SECTION 83(B) ELECTION
--------------------------------
The undersigned has entered a stock purchase agreement with DrugStore.com,
Inc., a Delaware corporation (the "Company"), pursuant to which the undersigned
-------
is purchasing 975,000 shares of Common Stock of the Company (the "Shares"). In
------
connection with the purchase of the Shares, the undersigned hereby represents as
follows:
1. The undersigned has carefully reviewed the stock purchase agreement
pursuant to which the undersigned is purchasing the Shares.
2. The undersigned either [check and complete as applicable]:
(a) ____ has consulted, and has been fully advised by, the undersigned's
own tax advisor, __________________________, whose business address is
_____________________________, regarding the federal, state and local
tax consequences of purchasing shares under the Plan, and particularly
regarding the advisability of making elections pursuant to Section
83(b) of the Internal Revenue Code of 1986, as amended (the "Code")
----
and pursuant to the corresponding provisions, if any, of applicable
state law; or
(b) ____ has knowingly chosen not to consult such a tax advisor.
3. The undersigned hereby states that the undersigned has decided [check
as applicable]:
(a) ____ to make an election pursuant to Section 83(b) of the Code, and is
submitting to the Company, together with the undersigned's executed
Restricted Stock Purchase Agreement, an executed form entitled
"Election Under Section 83(b) of the Internal Revenue Code of 1986;"
or
(b) ____ not to make an election pursuant to Section 83(b) of the Code.
<PAGE>
4. Neither the Company nor any subsidiary or representative of the Company
has made any warranty or representation to the undersigned with respect to the
tax consequences of the undersigned's purchase of shares under the Plan or of
the making or failure to make an election pursuant to Section 83(b) of the Code
or the corresponding provisions, if any, of applicable state law.
Date: ___________ /s/ Jed A. Smith
----------------------------------------
Jed Smith
Date: 6/29/98 /s/ Fiona Rotberg
----------- ----------------------------------------
Spouse of Jed Smith
-2-
<PAGE>
EXHIBIT D
---------
ELECTION UNDER SECTION 83(b)
----------------------------
OF THE INTERNAL REVENUE CODE OF 1986
------------------------------------
The undersigned taxpayer hereby elects, pursuant to Section 83(b) of the
Internal Revenue Code, to include in taxpayer's gross income for the current
taxable year, the amount of any compensation taxable to taxpayer in connection
with taxpayer's receipt of the property described below:
1. The name, address, taxpayer identification number and taxable year of the
undersigned are as follows:
NAME OF TAXPAYER: Jed Smith
NAME OF SPOUSE: Fiona J. Y. Rotberg
----------------------------------------
ADDRESS: 15 Central Rd.
-------------------------------------
Somerville, MA 02143
-------------------------------------
IDENTIFICATION NO. OF TAXPAYER: _______________
IDENTIFICATION NO. OF SPOUSE: _______________
TAXABLE YEAR: _______________
2. The property with respect to which the election is made is described as
follows:
731,250 shares of the Common Stock (the "Shares"), $0.001 par value, of
------
DrugStore.com, Inc., a Delaware corporation (the "Company").
-------
3. The date on which the property was transferred is: _______________
4. The property is subject to the following restrictions:
Repurchase option at cost in favor of the Company upon termination of
taxpayer's employment or consulting relationship.
5. The fair market value at the time of transfer, determined without regard to
any restriction other than a restriction which by its terms will never
lapse, of such property is: ___________.
6. The amount (if any) paid for such property: __________________.
The undersigned has submitted a copy of this statement to the person for whom
the services were performed in connection with the undersigned's receipt of the
above-described property. The transferee of such property is the person
performing the services in connection with the transfer of said property.
The undersigned understands that the foregoing election may not be revoked
- --------------------------------------------------------------------------
except with the consent of the Commissioner.
- -------------------------------------------
Dated: _________ /s/ Jed A. Smith
---------------------------
Jed Smith
Dated: 6/29/98 /s/ Fiona Rotberg
--------- ---------------------------
Spouse of Jed Smith
<PAGE>
RECEIPT
-------
DrugStore.com, Inc. (the "Company") hereby acknowledges receipt of the
assets described in the Bill of Sale attached as Exhibit A to the Restricted
Stock Purchase Agreement, dated as of June ___, 1998, between the Company and
Jed Smith as consideration for Certificate No. _______ for 975,000 shares of
the Company's Common Stock.
Dated: ________________
DRUGSTORE.COM, INC.
By: /s/ Brook H. Byers
-------------------------------------
Title:
__________________________________
<PAGE>
RECEIPT AND CONSENT
-------------------
The undersigned hereby acknowledges receipt of a photocopy of Certificate
No. ______ for 975,000 shares of Common Stock of DrugStore.com, Inc. (the
"Company").
-------
The undersigned further acknowledges that the Secretary of the Company, or
his or her designee, is acting as escrow holder pursuant to the Restricted Stock
Purchase Agreement Purchaser has previously entered into with the Company. As
escrow holder, the Secretary of the Company, or his or her designee, holds the
original of the aforementioned certificate issued in the undersigned's name.
Dated: _________________________
_________________________________
Jed Smith
<PAGE>
EXHIBIT 10.5
DRUGSTORE.COM, INC.
RESTRICTED STOCK PURCHASE AGREEMENT
-----------------------------------
This Restricted Stock Purchase Agreement (the "Agreement") is made as of
---------
7/23/98, by and between DrugStore.com, Inc., a Delaware corporation (the
"Company"), and Peter Neupert ("Purchaser").
------- ---------
1. SALE OF STOCK. Subject to the terms and conditions of this Agreement,
-------------
on the Purchase Date (as defined below) the Company will issue and sell to
Purchaser, and Purchaser agrees to purchase from the Company, 1,260,000 shares
of the Company's Common Stock (the "Shares") at a purchase price of $0.04 per
------
Share for a total purchase price of $50,400.00. The term "Shares" refers to the
------
purchased Shares and all securities received in replacement of or in connection
with the Shares pursuant to stock dividends or splits, all securities received
in replacement of the Shares in a recapitalization, merger, reorganization,
exchange or the like, and all new, substituted or additional securities or other
properties to which Purchaser is entitled by reason of Purchaser's ownership of
the Shares.
2. PURCHASE. The purchase and sale of the Shares under this Agreement
--------
shall occur at the principal office of the Company simultaneously with the
execution of this Agreement by the parties, or on such other date as the Company
and Purchaser shall agree (the "Purchase Date"). On the Purchase Date, the
-------------
Company will deliver to Purchaser a certificate representing the Shares to be
purchased by Purchaser (which shall be issued in Purchaser's name) against
payment of the purchase price therefor by Purchaser by (a) check made payable to
the Company, (b) cancellation of indebtedness of the Company to Purchaser, or
(c) by a combination of the foregoing.
3. LIMITATIONS ON TRANSFER. In addition to any other limitation on
-----------------------
transfer created by applicable securities laws, Purchaser shall not assign,
encumber or dispose of any interest in the Shares while the Shares are subject
to the Company's Repurchase Option (as defined below). After any Shares have
been released from such Repurchase Option, Purchaser shall not assign, encumber
or dispose of any interest in such Shares except in compliance with the
provisions below and applicable securities laws.
(a) REPURCHASE OPTION.
-----------------
(i) If Purchaser voluntarily terminates his employment
relationship with the Company or if the Company terminates Purchaser's
employment relationship with the Company for Cause (as defined below), the
Company shall upon the date of such termination (the "Termination Date") have an
----------------
irrevocable, exclusive option (the "Repurchase Option") for a period of 60 days
-----------------
from such date to repurchase all or any portion of the Shares held by Purchaser
as of the Termination Date which have not yet been released from the Company's
Repurchase Option at the original purchase price per share specified in Section
1 (adjusted for any stock splits, stock dividends and the like).
<PAGE>
(ii) The Repurchase Option shall be exercised by the Company by
written notice to Purchaser or Purchaser's executor and, at the Company's
option, (A) by delivery to Purchaser or Purchaser's executor with such notice of
a check in the amount of the purchase price for the Shares being purchased, or
(B) in the event Purchaser is indebted to the Company, by cancellation by the
Company of an amount of such indebtedness equal to the purchase price for the
Shares being repurchased, or (C) by a combination of (A) and (B) so that the
combined payment and cancellation of indebtedness equals such purchase price.
Upon delivery of such notice and payment of the purchase price in any of the
ways described above, the Company shall become the legal and beneficial owner of
the Shares being repurchased and all rights and interest therein or related
thereto, and the Company shall have the right to transfer to its own name the
number of Shares being repurchased by the Company, without further action by
Purchaser.
(iii) 75% of the Shares shall initially be subject to the
Repurchase Option. 1/48 of the total number of Shares shall be released from the
Repurchase Option on each monthly anniversary of the Vesting Commencement Date
(as set forth on the signature page of this Agreement), until all Shares are
released from the Repurchase Option. Fractional shares shall be rounded to the
nearest whole share. Notwithstanding the foregoing:
(A) If the Company terminates Purchaser's employment with the
Company other than for Cause, then 236,250 of the Shares that are subject
to the Repurchase Option as of such date shall be immediately released from
the Repurchase Option on the effective date of such termination in addition
to any Shares previously released from the Repurchase Option as of such
date in accordance with the second sentence of this Section 3(a)(iii).
(B) In the event of a Change of Control (as defined below)
during the term of Purchaser's employment with the Company and (a)
Purchaser is not offered a position with similar responsibilities (at the
same or greater base salary and bonus potential) by the surviving
corporation or (b) Purchaser's principal office after the Change of Control
is located more than 50 miles from your residence, 100% of the Shares shall
be released from the Repurchase Option on the effective date of the
transaction. For purposes of the foregoing sentence, it is agreed that
managing the online division of a major drugstore chain will not constitute
a position with similar responsibilities. Subject to such exception,
however, Purchaser and the Company agree that a position with similar
responsibilities will include any position in which Purchaser continues to
run the operations of the Company with full executive responsibility for
strategic and business planning, profit and loss, marketing, pricing and
sales. Purchaser further agrees that Purchaser's responsibilities at the
surviving corporation shall not be considered to be dissimilar solely
because the acquiring company combines and operates warehousing,
distribution and other similar operations.
(iv) The following terms referred to in this Section 3 shall
have the following meanings:
-2-
<PAGE>
(A) "Cause" means (1) willful and repeated failure to comply
-----
with the lawful directions of the Company's board of directors, (2) gross
negligence or willful misconduct in the performance of duties to the
Company which is demonstrably and materially injurious to the business or
reputation of the Company or its subsidiaries; (3) commission of any act of
fraud against, or the misappropriation of material property belonging to,
the Company; or (4) conviction of a felony or a crime that is demonstrably
and materially injurious to the business or reputation of the Company, in
each case as determined in good faith by the Board of Directors.
(B) "Change of Control" means (1) the consummation of a
-----------------
merger or consolidation of the Company with or into another entity or any
other corporate reorganization, if persons who were not stockholders of the
Company immediately before the merger, consolidation or other
reorganization own immediately after the merger, consolidation or other
reorganization 50% or more of the voting power of the outstanding
securities of each of (i) the continuing or surviving entity and (ii) any
direct or indirect parent corporation of the continuing or surviving
entity; or (2) the sale, transfer or other disposition of all or
substantially all of the Company's assets. A transaction does not
constitute a Change of Control if its sole purpose is to change the state
of the Company's incorporation or to create a holding company that will be
owned in substantially the same proportions by the persons who held the
Company's securities immediately before the transaction.
(b) RIGHT OF FIRST REFUSAL. Before any Shares held by Purchaser or
----------------------
any transferee of Purchaser (either being sometimes referred to herein as the
"Holder") may be sold or otherwise transferred (including transfer by gift or
- -------
operation of law), the Company or its assignee(s) shall have a right of first
refusal to purchase the Shares on the terms and conditions set forth in this
Section 3(b) (the "Right of First Refusal").
----------------------
(i) NOTICE OF PROPOSED TRANSFER. The Holder of the Shares shall
---------------------------
deliver to the Company a written notice (the "Notice") stating: (A) the
------
Holder's bona fide intention to sell or otherwise transfer such Shares; (B) the
name of each proposed purchaser or other transferee ("Proposed Transferee"); (C)
-------------------
the number of Shares to be transferred to each Proposed Transferee; and (D) the
terms and conditions of each proposed sale or transfer. The Holder shall offer
the Shares at the same price (the "Offered Price") and upon the same terms (or
-------------
terms as similar as reasonably possible) to the Company or its assignee(s).
(ii) EXERCISE OF RIGHT OF FIRST REFUSAL. At any time within
----------------------------------
30 days after receipt of the Notice, the Company and/or its assignee(s) may, by
giving written notice to the Holder, elect to purchase all, but not less than
all, of the Shares proposed to be transferred to any one or more of the Proposed
Transferees, at the purchase price determined in accordance with subsection
(iii) below.
(iii) PURCHASE PRICE. The purchase price ("Purchase Price") for
-------------- --------------
the Shares purchased by the Company or its assignee(s) under this Section 3(b)
shall be the Offered Price. If the Offered Price includes consideration other
than cash, the cash equivalent value of
-3-
<PAGE>
the non-cash consideration shall be determined by the Board of Directors of the
Company in good faith.
(iv) PAYMENT. Payment of the Purchase Price shall be made, at
-------
the option of the Company or its assignee(s), in cash (by check), by
cancellation of all or a portion of any outstanding indebtedness of the Holder
to the Company (or, in the case of repurchase by an assignee, to the assignee),
or by any combination thereof within 30 days after receipt of the Notice or in
the manner and at the times set forth in the Notice.
(v) HOLDER'S RIGHT TO TRANSFER. If all of the Shares proposed
--------------------------
in the Notice to be transferred to a given Proposed Transferee are not purchased
by the Company and/or its assignee(s) as provided in this Section 3(b), then the
Holder may sell or otherwise transfer such Shares to that Proposed Transferee at
the Offered Price or at a higher price, provided that such sale or other
transfer is consummated within 60 days after the date of the Notice and provided
further that any such sale or other transfer is effected in accordance with any
applicable securities laws and the Proposed Transferee agrees in writing that
the provisions of this Section 3 shall continue to apply to the Shares in the
hands of such Proposed Transferee. If the Shares described in the Notice are not
transferred to the Proposed Transferee within such period, or if the Holder
proposes to change the price or other terms to make them more favorable to the
Proposed Transferee, a new Notice shall be given to the Company, and the Company
and/or its assignees shall again be offered the Right of First Refusal before
any Shares held by the Holder may be sold or otherwise transferred.
(vi) EXCEPTION FOR CERTAIN FAMILY TRANSFERS. Anything to the
--------------------------------------
contrary contained in this Section 3(b) notwithstanding, the transfer of any or
all of the Shares during Purchaser's lifetime or on Purchaser's death by will or
intestacy to Purchaser's Immediate Family (as defined below) or a trust, limited
partnership or limited liability company for the benefit of Purchaser's
Immediate Family shall be exempt from the provisions of this Section 3(b).
"Immediate Family" as used herein shall mean spouse, lineal descendant or
- -----------------
antecedent, father, mother, brother or sister. In such case, the transferee or
other recipient shall receive and hold the Shares so transferred subject to the
provisions of this Section, and there shall be no further transfer of such
Shares except in accordance with the terms of this Section 3.
(c) INVOLUNTARY TRANSFER.
--------------------
(i) COMPANY'S RIGHT TO PURCHASE UPON INVOLUNTARY TRANSFER. In
-----------------------------------------------------
the event, at any time after the date of this Agreement, of any transfer by
operation of law or other involuntary transfer (including divorce or death, but
excluding, in the event of death, a transfer to Immediate Family as set forth in
Section 3(b)(vi) above) of all or a portion of the Shares by the record holder
thereof, the Company shall have the right to purchase all of the Shares
transferred at the greater of the purchase price paid by Purchaser pursuant to
this Agreement or the Fair Market Value of the Shares on the date of transfer.
Upon such a transfer, the person acquiring the Shares shall promptly notify the
Secretary of the Company of such transfer. The right to purchase such Shares
shall be provided to the Company for a period of 30 days following receipt by
the Company of written notice by the person acquiring the Shares.
-4-
<PAGE>
(ii) PRICE FOR INVOLUNTARY TRANSFER. With respect to any stock
------------------------------
to be transferred pursuant to Section 3(c)(i), the price per Share shall be a
price set by the Board of Directors of the Company that will reflect the current
value of the stock in terms of present earnings and future prospects of the
Company. The Company shall notify Purchaser or his or her executor of the price
so determined within 30 days after receipt by it of written notice of the
transfer or proposed transfer of Shares. However, if Purchaser does not agree
with the valuation as determined by the Board of Directors of the Company,
Purchaser shall be entitled to have the valuation determined by an independent
appraiser to be mutually agreed upon by the Company and Purchaser and whose fees
shall be borne equally by the Company and Purchaser.
(d) ASSIGNMENT. The right of the Company to purchase any part of the
----------
Shares may be assigned in whole or in part to any stockholder or stockholders of
the Company or other persons or organizations; provided, however, that an
assignee, other than a corporation that is the Parent or a 100% owned Subsidiary
of the Company, must pay the Company, upon assignment of such right, cash equal
to the difference between the original purchase price and Fair Market Value, if
the original purchase price is less than the Fair Market Value of the Shares
subject to the assignment.
(e) RESTRICTIONS BINDING ON TRANSFEREES. All transferees of Shares or
-----------------------------------
any interest therein will receive and hold such Shares or interest subject to
the provisions of this Agreement, including, insofar as applicable, the
Repurchase Option. Any sale or transfer of the Shares shall be void unless the
provisions of this Agreement are satisfied.
(f) TERMINATION OF RIGHTS. The Right of First Refusal and the
---------------------
Company's right to repurchase the Shares in the event of an involuntary transfer
pursuant to Section 3(c) above shall terminate upon the first sale of Common
Stock of the Company to the general public pursuant to a registration statement
filed with and declared effective by the Securities and Exchange Commission
under the Securities Act of 1933, as amended (the "Securities Act"). Upon
--------------
termination of the Right of First Refusal and the expiration or exercise of the
Repurchase Option, a new certificate or certificates representing the Shares not
repurchased shall be issued, on request, without the legend referred to in
Section 6(a)(ii) below and delivered to Purchaser.
4. ESCROW OF UNVESTED SHARES. For purposes of facilitating the
-------------------------
enforcement of the provisions of Section 3 above, Purchaser agrees, immediately
upon receipt of the certificate(s) for the Shares subject to the Repurchase
Option, to deliver such certificate(s), together with an Assignment Separate
from Certificate in the form attached to this Agreement as Exhibit A executed by
---------
Purchaser and by Purchaser's spouse (if required for transfer), in blank, to the
Secretary of the Company, or the Secretary's designee, to hold such
certificate(s) and Assignment Separate from Certificate in escrow and to take
all such actions and to effectuate all such transfers and/or releases as are in
accordance with the terms of this Agreement. Purchaser hereby acknowledges that
the Secretary of the Company, or the Secretary's designee, is so appointed as
the escrow holder with the foregoing authorities as a material inducement to
make this Agreement and that said appointment is coupled with an interest and is
accordingly irrevocable. Purchaser agrees that said escrow holder shall not be
liable to any party hereof (or to any other party). The escrow holder may rely
upon any letter, notice or other document
-5-
<PAGE>
executed by any signature purported to be genuine and may resign at any time.
Purchaser agrees that if the Secretary of the Company, or the Secretary's
designee, resigns as escrow holder for any or no reason, the Board of Directors
of the Company shall have the power to appoint a successor to serve as escrow
holder pursuant to the terms of this Agreement.
5. INVESTMENT AND TAXATION REPRESENTATIONS. In connection with the
---------------------------------------
purchase of the Shares, Purchaser represents to the Company the following:
(a) Purchaser is aware of the Company's business affairs and
financial condition and has acquired sufficient information about the Company to
reach an informed and knowledgeable decision to acquire the Shares. Purchaser is
purchasing the Shares for investment for his or her own account only and not
with a view to, or for resale in connection with, any "distribution" thereof
within the meaning of the Securities Act.
(b) Purchaser understands that the Shares have not been registered
under the Securities Act by reason of a specific exemption therefrom, which
exemption depends upon, among other things, the bona fide nature of Purchaser's
investment intent as expressed herein.
(c) Purchaser understands that the Shares are "restricted securities"
under applicable U.S. federal and state securities laws and that, pursuant to
these laws, Purchaser must hold the Shares indefinitely unless they are
registered with the Securities and Exchange Commission and qualified by state
authorities, or an exemption from such registration and qualification
requirements is available. Purchaser acknowledges that the Company has no
obligation to register or qualify the Shares for resale. Purchaser further
acknowledges that if an exemption from registration or qualification is
available, it may be conditioned on various requirements including, but not
limited to, the time and manner of sale, the holding period for the Shares, and
requirements relating to the Company which are outside of Purchaser's control,
and which the Company is under no obligation and may not be able to satisfy.
(d) Purchaser understands that Purchaser may suffer adverse tax
consequences as a result of Purchaser's purchase or disposition of the Shares.
Purchaser represents that Purchaser has consulted any tax consultants Purchaser
deems advisable in connection with the purchase or disposition of the Shares and
that Purchaser is not relying on the Company for any tax advice.
6. RESTRICTIVE LEGENDS AND STOP-TRANSFER ORDERS.
--------------------------------------------
(a) LEGENDS. The certificate or certificates representing the Shares
-------
shall bear the following legends (as well as any legends required by applicable
state and federal corporate and securities laws):
(i) THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, OR THE
SECURITIES LAW OF ANY STATE AND HAVE BEEN ACQUIRED FOR
INVESTMENT AND NOT WITH A VIEW TO, OR
-6-
<PAGE>
IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO
SUCH SALE OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN
EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN
OPINION OF COUNSEL IN A FORM SATISFACTORY TO THE COMPANY
THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES
ACT OF 1933.
(ii) THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE
TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS OF AN
AGREEMENT BETWEEN THE COMPANY AND THE STOCKHOLDER, A COPY OF
WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY.
(b) STOP-TRANSFER NOTICES. Purchaser agrees that, in order to ensure
---------------------
compliance with the restrictions referred to herein, the Company may issue
appropriate "stop transfer" instructions to its transfer agent, if any, and
that, if the Company transfers its own securities, it may make appropriate
notations to the same effect in its own records.
(c) REFUSAL TO TRANSFER. The Company shall not be required (i) to
-------------------
transfer on its books any Shares that have been sold or otherwise transferred in
violation of any of the provisions of this Agreement or (ii) to treat as owner
of such Shares or to accord the right to vote or pay dividends to any purchaser
or other transferee to whom such Shares shall have been so transferred.
(d) REMOVAL OF LEGEND. When all of the following events have
-----------------
occurred, the Shares then held by Purchaser will no longer be subject to the
legend referred to in Section 6(a)(ii): (i) the termination of the Right of
First Refusal; (ii) the expiration or termination of the market standoff
provisions of Section 9 (and of any agreement entered pursuant to Section 9, and
(iii) the expiration or exercise in full of the Repurchase Option. After such
time, and upon Purchaser's request, a new certificate or certificates
representing the Shares not repurchased shall be issued without the legend
referred to in Section 6(a)(ii), and delivered to Purchaser.
7. NO EMPLOYMENT RIGHTS. Nothing in this Agreement shall affect in any
--------------------
manner whatsoever the right or power of the Company, or a Parent or Subsidiary
of the Company, to terminate Purchaser's employment or consulting relationship,
for any reason, with or without cause.
8. SECTION 83(B) ELECTION. Purchaser understands that Section 83(a) of
----------------------
the Internal Revenue Code of 1986, as amended (the "Code"), taxes as ordinary
----
income the difference between the amount paid for the Shares and the Fair Market
Value of the Shares as of the date any restrictions on the Shares lapse. In this
context, "restriction" means the right of the Company to buy back the Shares
-----------
pursuant to the Repurchase Option set forth in Section 3(a) of this Agreement.
Purchaser understands that Purchaser may elect to be taxed at the time the
-7-
<PAGE>
Shares are purchased, rather than when and as the Repurchase Option expires, by
filing an election under Section 83(b) (an "83(b) Election") of the Code with
--------------
the Internal Revenue Service within 30 days from the date of purchase. Even if
the Fair Market Value of the Shares at the time of the execution of this
Agreement equals the amount paid for the Shares, the election must be made to
avoid income under Section 83(a) in the future. Purchaser understands that
failure to file such an election in a timely manner may result in adverse tax
consequences for Purchaser. Purchaser further understands that an additional
copy of such election form should be filed with his federal income tax return
for the calendar year in which the date of this Agreement falls. Purchaser
acknowledges that the foregoing is only a summary of the effect of United States
federal income taxation with respect to purchase of the Shares hereunder, and
does not purport to be complete. Purchaser further acknowledges that the
Company has directed Purchaser to seek independent advice regarding the
applicable provisions of the Code, the income tax laws of any municipality,
state or foreign country in which Purchaser may reside, and the tax consequences
of Purchaser's death.
Purchaser agrees that he will execute and deliver to the Company with
this executed Agreement a copy of the Acknowledgment and Statement of Decision
Regarding Section 83(b) Election (the "Acknowledgment"), attached hereto as
--------------
Exhibit B. Purchaser further agrees that Purchaser will execute and submit with
- ---------
the Acknowledgment a copy of the 83(b) Election, attached hereto as Exhibit C,
---------
if Purchaser has indicated in the Acknowledgment his decision to make such an
election.
9. MARKET STANDOFF AGREEMENT. In connection with the initial public
-------------------------
offering of the Company's securities and upon request of the Company or the
underwriters managing such underwritten offering of the Company's securities,
Purchaser agrees not to sell, make any short sale of, loan, grant any option for
the purchase of, or otherwise dispose of any Shares (other than those included
in the registration) without the prior written consent of the Company or such
underwriters, as the case may be, for such period of time (not to exceed 180
days) from the effective date of such registration as may be requested by the
Company or such managing underwriters and to execute an agreement reflecting the
foregoing as may be requested by the underwriters at the time of the Company's
initial public offering.
10. MISCELLANEOUS.
-------------
(a) GOVERNING LAW. This Agreement and all acts and transactions
-------------
pursuant hereto and the rights and obligations of the parties hereto shall be
governed, construed and interpreted in accordance with the laws of the State of
Washington, without giving effect to principles of conflicts of law.
(b) ENTIRE AGREEMENT; ENFORCEMENT OF RIGHTS. This Agreement sets
---------------------------------------
forth the entire agreement and understanding of the parties relating to the
subject matter herein and merges all prior discussions between them. No
modification of or amendment to this Agreement, nor any waiver of any rights
under this Agreement, shall be effective unless in writing signed by the parties
to this Agreement. The failure by either party to enforce any rights under this
Agreement shall not be construed as a waiver of any rights of such party.
-8-
<PAGE>
(c) SEVERABILITY. If one or more provisions of this Agreement are
------------
held to be unenforceable under applicable law, the parties agree to renegotiate
such provision in good faith. In the event that the parties cannot reach a
mutually agreeable and enforceable replacement for such provision, then (i) such
provision shall be excluded from this Agreement, (ii) the balance of the
Agreement shall be interpreted as if such provision were so excluded and (iii)
the balance of the Agreement shall be enforceable in accordance with its terms.
(d) CONSTRUCTION. This Agreement is the result of negotiations
------------
between and has been reviewed by each of the parties hereto and their respective
counsel, if any; accordingly, this Agreement shall be deemed to be the product
of all of the parties hereto, and no ambiguity shall be construed in favor of or
against any one of the parties hereto.
(e) NOTICES. Any notice required or permitted by this Agreement
-------
shall be in writing and shall be deemed sufficient when delivered personally or
sent by telegram or fax or 48 hours after being deposited in the U.S. mail, as
certified or registered mail, with postage prepaid, and addressed to the party
to be notified at such party's address as set forth below or as subsequently
modified by written notice.
(f) COUNTERPARTS. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.
(g) SUCCESSORS AND ASSIGNS. The rights and benefits of this
----------------------
Agreement shall inure to the benefit of, and be enforceable by the Company's
successors and assigns. The rights and obligations of Purchaser under this
Agreement may only be assigned with the prior written consent of the Company.
[Signature Page Follows]
-9-
<PAGE>
The parties have executed this Agreement as of the date first set forth
above.
DRUGSTORE.COM, INC.
By: /s/ Jed A. Smith
--------------------------
Title: Vice President
-----------------------
Address: 2730 Sand Hill Road
---------------------
Menlo Park, CA 94025
---------------------
PURCHASER:
PETER NEUPERT
/s/ Peter M. Neupert
------------------------------
(Signature)
Address: 13121 N.E. 38th Pl.
---------------------
Bellevue, WA 98005
---------------------
PURCHASER ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO
SECTION 3 HEREOF IS EARNED ONLY BY CONTINUING SERVICE AS AN EMPLOYEE OR
CONSULTANT AT THE WILL OF THE COMPANY. PURCHASER FURTHER ACKNOWLEDGES AND AGREES
THAT NOTHING IN THIS AGREEMENT SHALL CONFER UPON PURCHASER ANY RIGHT WITH
RESPECT TO CONTINUATION OF SUCH EMPLOYMENT OR CONSULTING RELATIONSHIP WITH THE
COMPANY, NOR SHALL IT INTERFERE IN ANY WAY WITH PURCHASER'S RIGHT OR THE
COMPANY'S RIGHT TO TERMINATE PURCHASER'S EMPLOYMENT OR CONSULTING RELATIONSHIP
AT ANY TIME, WITH OR WITHOUT CAUSE.
Vesting Commencement
Date: June 27, 1999
I, Sheryl Neupert, spouse of Peter Neupert, have read and hereby approve the
--------------
foregoing Agreement. In consideration of the Company's granting my spouse the
right to purchase the Shares as set forth in the Agreement, I hereby agree to be
irrevocably bound by the Agreement and further agree that any community property
or similar interest that I may have in the Shares shall be similarly bound by
the Agreement. I hereby appoint my spouse as my attorney-in-fact with respect to
any amendment or exercise of any rights under the Agreement.
/s/ Sheryl Neupert
-----------------------
Spouse of Peter Neupert
-10-
<PAGE>
EXHIBIT B
---------
ACKNOWLEDGMENT AND STATEMENT OF DECISION
-----------------------------------------
REGARDING SECTION 83(B) ELECTION
--------------------------------
The undersigned has entered a stock purchase agreement with DrugStore.com,
Inc., a Delaware corporation (the "Company"), pursuant to which the undersigned
-------
is purchasing 1,260,000 shares of Common Stock of the Company (the "Shares").
------
In connection with the purchase of the Shares, the undersigned hereby represents
as follows:
1. The undersigned has carefully reviewed the stock purchase agreement
pursuant to which the undersigned is purchasing the Shares.
2. The undersigned either [check and complete as applicable]:
(a) ____ has consulted, and has been fully advised by, the undersigned's
own tax advisor, __________________________, whose business address is
_____________________________, regarding the federal, state and local
tax consequences of purchasing shares under the Plan, and particularly
regarding the advisability of making elections pursuant to Section
83(b) of the Internal Revenue Code of 1986, as amended (the "Code")
----
and pursuant to the corresponding provisions, if any, of applicable
state law; or
(b) X has knowingly chosen not to consult such a tax advisor.
----
3. The undersigned hereby states that the undersigned has decided [check
as applicable]:
(a) X to make an election pursuant to Section 83(b) of the Code, and is
---
submitting to the Company, together with the undersigned's executed
Restricted Stock Purchase Agreement, an executed form entitled
"Election Under Section 83(b) of the Internal Revenue Code of 1986;"
or
(b) ____ not to make an election pursuant to Section 83(b) of the Code.
<PAGE>
4. Neither the Company nor any subsidiary or representative of the
Company has made any warranty or representation to the undersigned with respect
to the tax consequences of the undersigned's purchase of shares under the Plan
or of the making or failure to make an election pursuant to Section 83(b) of the
Code or the corresponding provisions, if any, of applicable state law.
Date: 7/23/98 /s/ Peter M. Neupert
--------- -------------------------
Peter M. Neupert
Date: 7/23/98 /s/ Sheryl Neupert
--------- -------------------------
Spouse of Peter Neupert
-2-
<PAGE>
EXHIBIT A
---------
ASSIGNMENT SEPARATE FROM CERTIFICATE
-------------------------------------
FOR VALUE RECEIVED and pursuant to that certain Restricted Stock Purchase
Agreement between the undersigned ("Purchaser") and DrugStore.com, Inc. (the
"Company") dated ____________, 1998 (the Agreement"), Purchaser hereby sells,
assigns and transfers unto the Company ________________________________________
(____________) shares of the Common Stock of the Company, standing in
Purchaser's name on the books of the Company and represented by Certificate No.
____, and hereby irrevocably constitutes and appoints
________________________________________ to transfer said stock on the books of
the Company with full power of substitution in the premises. THIS ASSIGNMENT MAY
ONLY BE USED AS AUTHORIZED BY THE AGREEMENT AND THE EXHIBITS THERETO.
Dated: __________________
Signature:
/s/ Peter M. Neupert
---------------------------------------
Peter M. Neupert
/s/ Sheryl Neupert
---------------------------------------
Spouse of Peter Neupert (if applicable)
Instruction: Please do not fill in any blanks other than the signature line. The
purpose of this assignment is to enable the Company to exercise its repurchase
option set forth in Agreement without requiring additional signatures on the
part of Purchaser.
<PAGE>
EXHIBIT C
---------
ELECTION UNDER SECTION 83(b)
----------------------------
OF THE INTERNAL REVENUE CODE OF 1986
------------------------------------
The undersigned taxpayer hereby elects, pursuant to Section 83(b) of the
Internal Revenue Code, to include in taxpayer's gross income for the current
taxable year, the amount of any compensation taxable to taxpayer in connection
with taxpayer's receipt of the property described below:
1. The name, address, taxpayer identification number and taxable year of the
undersigned are as follows:
NAME OF TAXPAYER: Peter Neupert
NAME OF SPOUSE: Sheryl Neupert
-----------------
ADDRESS: 13121 N.E. 38th Pl.
-------------------
Bellevue, WA 98005
-------------------
IDENTIFICATION NO. OF TAXPAYER: ###-##-####
-----------
IDENTIFICATION NO. OF SPOUSE: ###-##-####
-----------
TAXABLE YEAR: 1998
------
2. The property with respect to which the election is made is described as
follows:
945,000 shares of the Common Stock (the "Shares"), $0.001 par value, of
------
DrugStore.com, Inc., a Delaware corporation (the "Company").
-------
3. The date on which the property was transferred is: 7/23/98
-------
4. The property is subject to the following restrictions:
Repurchase option at cost in favor of the Company upon termination of
taxpayer's employment or consulting relationship.
5. The fair market value at the time of transfer, determined without regard to
any restriction other than a restriction which by its terms will never
lapse, of such property is: $37,800.00.
6. The amount (if any) paid for such property: $37,800 .
------------
The undersigned has submitted a copy of this statement to the person for whom
the services were performed in connection with the undersigned's receipt of the
above-described property. The transferee of such property is the person
performing the services in connection with the transfer of said property.
The undersigned understands that the foregoing election may not be revoked
- --------------------------------------------------------------------------
except with the consent of the Commissioner.
- -------------------------------------------
Dated: 7/23/98 /s/ Peter M. Neupert
------- -------------------------
Peter M. Neupert
Dated: 7/23/98 /s/ Sheryl Neupert
-------- -------------------------
Spouse of Peter Neupert
<PAGE>
RECEIPT AND CONSENT
-------------------
The undersigned hereby acknowledges receipt of a photocopy of Certificate
No. ______ for 1,260,000 shares of Common Stock of DrugStore.com, Inc. (the
"Company").
-------
The undersigned further acknowledges that the Secretary of the Company, or
his or her designee, is acting as escrow holder pursuant to the Restricted Stock
Purchase Agreement Purchaser has previously entered into with the Company. As
escrow holder, the Secretary of the Company, or his or her designee, holds the
original of the aforementioned certificate issued in the undersigned's name.
Dated: _____________________
_____________________________
Peter Neupert
<PAGE>
EXHIBIT 10.6
DRUGSTORE.COM, INC.
Warrant
<PAGE>
THE SECURITIES EVIDENCED BY THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED OR APPLICABLE STATE SECURITIES LAWS, AND NO
INTEREST MAY BE SOLD, DISTRIBUTED, ASSIGNED, OFFERED, PLEDGED OR OTHERWISE
TRANSFERRED UNLESS (A) THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH
ACT AND APPLICABLE STATE SECURITIES LAWS COVERING ANY SUCH TRANSACTION INVOLVING
SAID SECURITIES, (B) THE COMPANY RECEIVES AN OPINION OF LEGAL COUNSEL FOR THE
HOLDER OF THE SECURITIES SATISFACTORY TO THE COMPANY STATING THAT SUCH
TRANSACTION IS EXEMPT FROM REGISTRATION, OR (C) THE COMPANY OTHERWISE SATISFIES
ITSELF THAT SUCH TRANSACTION IS EXEMPT FROM REGISTRATION.
No. W-1 WARRANT TO PURCHASE
ISSUED: February 1, 1999 COMMON STOCK
Void After February 1, 2002
DRUGSTORE.COM, INC.
Warrant
THIS IS TO CERTIFY that, for value received and subject to these terms and
conditions, Dial 800 LP, or such person to whom this Warrant is transferred (the
"Holder"), is entitled to exercise this Warrant to purchase 10,000 fully paid
and nonassessable shares of drugstore.com, inc., a Delaware corporation (the
"Company"), $.001 par value per share, Common Stock (the "Warrant Stock") at a
price per share of $7.825 (the "Exercise Price") (such number of shares, type of
security and the Exercise Price being subject to adjustment as provided below).
1. Method of Exercise
Subject to Section 4, this Warrant may be exercised by the Holder, at any
time after the date of issuance, but not later than February 1, 2002 (the
"Exercise Period"), in whole by delivering to the Company (a) this Warrant
certificate, (b) a certified or cashier's check payable to the Company in the
amount of the Exercise Price multiplied by the number of shares for which this
Warrant is being exercised (the "Purchase Price"), and (c) the Notice of
Exercise attached as Exhibit A duly completed and executed by the Holder. Upon
exercise, the Holder shall be entitled to
<PAGE>
receive from the Company a stock certificate in proper form representing the
number of shares of Warrant Stock purchased.
2. Delivery of Stock Certificates; No Fractional Shares
2.1 Within 14 days after the payment of the Purchase Price following the
exercise of this Warrant, the Company at its expense shall issue in the name of
and deliver to the Holder (a) a certificate or certificates for the number of
fully paid and nonassessable shares of Warrant Stock to which the Holder shall
be entitled upon such exercise. The Holder shall for all purposes be deemed to
have become the holder of record of such shares of Warrant Stock on the date
this Warrant was exercised, irrespective of the date of delivery of the
certificate or certificates representing the Warrant Stock; provided that, if
the date such exercise is made is a date when the stock transfer books of the
Company are closed, such person shall be deemed to have become the holder of
record of such shares of Warrant Stock at the close of business on the next
succeeding date on which the stock transfer books are open.
2.2 No fractional shares shall be issued upon the exercise of this
Warrant. In lieu of fractional shares, the Company shall pay the Holder a sum in
cash equal to such fraction multiplied by the Exercise Price.
3. Covenants as to Warrant Stock
The Company covenants that at all times during the Exercise Period there
shall be reserved for issuance and delivery upon exercise of this Warrant such
number of shares of Warrant Stock as is necessary for exercise in full of this
Warrant and, from time to time, it will take all steps necessary to amend its
Certificate of Incorporation to provide sufficient reserves of shares of Warrant
Stock. All shares of Warrant Stock issued pursuant to the exercise of this
Warrant will, upon their issuance, be validly issued and outstanding, fully paid
and nonassessable, free and clear of all liens and other encumbrances or
restrictions on sale and free and clear of all preemptive rights, except
restrictions arising (a) under federal and state securities laws, (b) not by or
through the Company, or (c) by agreement between the Company and the Holder or
its successors.
4. Adjustments; Termination of Warrant Upon Certain Events
4.1 Effect of Reorganization--Change in Control; Termination of Warrant
Upon a merger, consolidation, acquisition of all or substantially all of
the property or stock, liquidation or other reorganization of the Company
(collectively, a
-2-
<PAGE>
"Reorganization") during the Exercise Period, as a result of which the
stockholders of the Company receive cash, stock or other property in exchange
for their shares of Warrant Stock and the holders of the Company's voting equity
securities immediately prior to such Reorganization together own less than a
majority interest of the voting equity securities of the successor corporation
following such Reorganization, the Holder shall be given notice of such proposed
action as provided in Section 7. If the proposed action is approved according to
applicable law by the shareholders of all corporations or other entities that
are parties to the proposed action, the Holder shall be so notified in writing
by the Company by registered or certified mail at least 10 business days before
its effectiveness. Notwithstanding the period of exercisability stated on the
face of this Warrant, this Warrant shall become forever null and void to the
extent not exercised on or before 5:00 p.m., Pacific time, on the tenth business
day following the delivery of such notice.
4.2 Adjustments for Stock Splits, Dividends
If the Company shall issue any shares of the same class as the Warrant
Stock as a stock dividend or subdivide the number of outstanding shares of such
class into a greater number of shares, then, in either such case, the Exercise
Price in effect before such dividend or subdivision shall be proportionately
reduced and the number of shares of Warrant Stock at that time issuable pursuant
to the exercise of this Warrant shall be proportionately increased; and,
conversely, if the Company shall contract the number of outstanding shares of
the same class as the Warrant Stock by combining such shares into a smaller
number of shares, then the Exercise Price in effect before such combination
shall be proportionately increased and the number of shares of Warrant Stock at
that time issuable pursuant to the exercise or conversion of this Warrant shall
be proportionately decreased. Each adjustment in the number of shares of Warrant
Stock issuable shall be to the nearest whole share.
5. Securities Laws Restrictions; Legend on Warrant Stock
5.1 This Warrant and the securities issuable upon exercise have not been
registered under the Securities Act of 1933, as amended or applicable state
securities laws, and no interest may be sold, distributed, assigned, offered,
pledged or otherwise transferred unless (a) there is an effective registration
statement under such Act and applicable state securities laws covering any such
transaction involving said securities, (b) the Company receives an opinion of
legal counsel for the holder of the securities satisfactory to the Company
stating that such transaction is exempt from registration, or (c) the Company
otherwise satisfies itself that such transaction is exempt from registration.
-3-
<PAGE>
5.2 A legend setting forth or referring to the above restrictions shall be
placed on this Warrant, any replacement and any certificate representing the
Warrant Stock, and a stop transfer order shall be placed on the books of the
Company and with any transfer agent until such securities may be legally sold or
otherwise transferred.
6. Exchange of Warrant; Lost or Damaged Warrant Certificate
This Warrant is exchangeable upon its surrender by the Holder at the office
of the Company. Upon receipt by the Company of satisfactory evidence of the
loss, theft, destruction or damage of this Warrant and either (in the case of
loss, theft or destruction) reasonable indemnification (including posting of a
bond) or (in the case of damage) the surrender of this Warrant for cancellation,
the Company will execute and deliver to the Holder, without charge, a new
Warrant of like denomination.
7. Notices of Record Date, etc.
In the event of a
(a) reorganization of the Company, any reclassification or
recapitalization of the capital stock of the Company, or any transfer of all or
substantially all the assets of the Company to, or consolidation or merger of,
the Company with or into any person; or
(b) voluntary or involuntary dissolution, liquidation or winding-up
of the Company;
the Company will mail to the Holder a notice at least 20 business days prior to
the date specified in the notice.
8. Investment Intent
By accepting this Warrant, the Holder represents that it is acquiring this
Warrant for investment and not with a view to, or for sale in connection with,
any distribution thereof.
9. Miscellaneous
9.1 Holder as Owner
The Company may deem and treat the holder of record of this Warrant as the
absolute owner for all purposes regardless of any notice to the contrary.
-4-
<PAGE>
9.2 No Stockholder Rights
This Warrant shall not entitle the Holder to any voting rights or any other
rights as a stockholder of the Company or to any other rights except the rights
stated herein; and no dividend or interest shall be payable or shall accrue in
respect of this Warrant or the Warrant Stock, until this Warrant is exercised.
9.3 Notices
Unless otherwise provided, any notice under this Warrant shall be given in
writing and shall be deemed effectively given (a) upon personal delivery to the
party to be notified, (b) upon confirmation of receipt by fax by the party to be
notified, (c) one business day after deposit with a reputable overnight courier,
prepaid for overnight delivery and addressed as set forth in (d), or (d) three
days after deposit with the United States Post Office, postage prepaid,
registered or certified with return receipt requested and addressed to the party
to be notified at the address indicated below, or at such other address as such
party may designate by 10 days' advance written notice to the other party given
in the foregoing manner.
If to the Holder:
To the address last furnished
in writing to the Company by
the Holder
If to the Company:
Attn: General Counsel
drugstore.com, inc.
18650 NE 67th Court
Redmond, WA 98052
(425) 881-8131 (425) 586-2137
9.4 Amendments and Waivers
Any term of this Warrant may be amended and the observance of any term may
be waived (either generally or in a particular instance and either retroactively
or prospectively) only with the written consent of the Company and the Holder.
Any amendment or waiver effected in accordance with this Section 9.4 shall be
binding on each future Holder and the Company.
-5-
<PAGE>
9.5 Governing Law; Jurisdiction; Venue
This Warrant shall be governed by and construed under the laws of the state
of Washington without regard to principles of conflict of laws. The parties
irrevocably consent to the jurisdiction and venue of the state and federal
courts located in King County, Washington in connection with any action relating
to this Warrant.
9.6 Successors and Assigns; Transfer
This Warrant shall may not be sold, assigned or transferred without the
prior written consent of the Company. This warrant shall inure to the benefit
of and be binding on the respective successors and assigns of the parties.
IN WITNESS WHEREOF, the Company has executed this Warrant as of the date
first written above.
drugstore.com, inc.
By ___________________________________
Vice President and General Counsel
-6-
<PAGE>
Exhibit A
NOTICE OF EXERCISE
To drugstore.com, inc.:
The undersigned hereby irrevocably elects to purchase all shares of Common
of drugstore.com, inc. (the "Company") issuable upon the exercise of the
attached Warrant and requests that certificates for such shares be issued in the
name of and delivered to the address of the undersigned, at the address stated
below. The undersigned agrees with and represents to the Company that said
shares of the Common of the Company are acquired for the account of the
undersigned for investment and not with a view to, or for sale in connection
with, any distribution or public offering within the meaning of the Securities
Act of 1933, as amended.
Payment enclosed in the amount of $___________
Dated: ________________________
Name of Holder of Warrant: _____________________________________________
(please print)
Address: _______________________________________________________________
Signature: _____________________________________________________________
<PAGE>
ASSIGNMENT
For value received the undersigned sells, assigns and transfers to the
transferee named below the attached Warrant, together with all right, title and
interest, and does irrevocably constitute and appoint the transfer agent of
drugstore.com, inc. (the "Company") as the undersigned's attorney, to transfer
said Warrant on the books of the Company, with full power of substitution in the
premises.
Dated: _________________________________
Name of Holder of Warrant: ______________________________________________
(please print)
Address: ________________________________________________________________
Signature: ______________________________________________________________
Name of transferee: _____________________________________________________
(please print)
Address of transferee: __________________________________________________
<PAGE>
EXHIBIT 10.7
DRUGSTORE.COM, INC.
SERIES A PREFERRED STOCK PURCHASE AGREEMENT
-------------------------------------------
This Series A Preferred Stock Purchase Agreement (the "Agreement") is made
---------
as of June 22, 1998 by and between DrugStore.com, a Delaware corporation (the
"Company"), and the investors listed on Exhibit A attached hereto (each a
------- ---------
"Purchaser" and together the "Purchasers").
--------- ----------
The parties hereby agree as follows:
1. PURCHASE AND SALE OF PREFERRED STOCK.
------------------------------------
1.1 SALE AND ISSUANCE OF SERIES A PREFERRED STOCK.
---------------------------------------------
(a) The Company shall adopt and file with the Secretary of State
of the State of Delaware on or before the Closing (as defined below) the Amended
and Restated Certificate of Incorporation in the form attached hereto as Exhibit
-------
B (the "Restated Certificate").
- - --------------------
(b) Subject to the terms and conditions of this Agreement, each
Purchaser severally agrees to purchase and the Company agrees to sell and issue
to each Purchaser that number of shares of Series A Preferred Stock listed
opposite such Purchaser's name on Exhibit A attached hereto at a purchase price
---------
of $0.80 per share. The shares of Series A Preferred Stock issued to each
Purchaser pursuant to this Agreement are hereinafter referred to as the "Stock."
-----
The Stock and the Common Stock issuable upon conversion of the Stock are
hereinafter referred to as the "Securities." The Securities shall have the
----------
rights, privileges, preferences and restrictions as set forth in the Restated
Certificate.
1.2 CLOSING; DELIVERY.
-----------------
(a) The purchase and sale of 4,937,500 shares of the Stock shall
take place at the offices of Venture Law Group, 2775 Sand Hill Road, Menlo Park,
California, at 10:00 a.m., on June 22, 1998 or at such other time and place as
the Company and the Purchasers purchasing a majority of such Stock mutually
agree upon, orally or in writing (which time and place are designated as the
"Closing").
-------
(b) At the Closing, the Company shall deliver to each Purchaser
a certificate representing the Stock being purchased hereby against payment of
the purchase price therefor by check payable to the Company, wire transfer to
the Company's bank account or cancellation of indebtedness (including without
limitation conversion of the outstanding principal amount of that certain
Convertible Promissory Note dated April 8, 1998 issued by the Company to Kleiner
Perkins Caufield & Byers VIII) (or any combination of the foregoing).
(c) At any time within sixty (60) days of the Closing, the
Company shall have the right to sell up to an additional 5,187,500 shares of
Series A Preferred Stock to one or more additional investors approved by the
Company's board of directors, at the price and on the terms set forth herein.
The purchase of any such additional Stock shall be effected by the
<PAGE>
execution and delivery of additional signature pages to this Agreement, the
Investors' Rights Agreement (as defined in Section 2.4 below), and the Voting
Agreement (as defined in Section 2.4 below) and payment of the purchase price
for such additional shares of Series A Preferred Stock by check payable to the
Company, wire transfer to the Company's bank account or cancellation of
indebtedness (or any combination of the foregoing), or as consideration for a
transfer of technology by such purchaser and/or other obligations of such
purchaser. Such shares of Series A Preferred Stock shall be considered "Stock"
or "Series A Preferred Stock" for purposes of this Agreement and the Investors'
Rights Agreement, and the purchaser of such shares shall be considered a
"Purchaser" under this Agreement and an "Investor" under the Investors' Rights
Agreement and the Voting Agreement.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
---------------------------------------------
represents and warrants to each Purchaser that, except as set forth on the
Schedule of Exceptions attached hereto as Exhibit C, which exceptions shall be
----------
deemed to be representations and warranties as if made hereunder:
2.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. The Company is a
---------------------------------------------
corporation duly incorporated, validly existing and in good standing under the
laws of the State of Delaware and has all requisite corporate power and
authority to carry on its business as now conducted. The Company is not required
to qualify to transact business in any other jurisdiction, except where the
failure so to qualify would not have a material adverse effect on its business
or properties.
2.2 CAPITALIZATION. Upon the filing of the Restated Certificate, the
--------------
authorized capital of the Company consists, or will consist, immediately prior
to the Closing, of:
(a) 10,125,000 shares of Preferred Stock, all of which shares
have been designated Series A Preferred Stock, none of which are issued and
outstanding immediately prior to the Closing.
(b) 15,000,000 shares of Common Stock, 975,000 shares of which
are issued and outstanding immediately prior to the Closing. All of the
outstanding shares of Common Stock have been duly authorized, fully paid and are
nonassessable and issued in compliance with all applicable federal and state
securities laws.
(c) Except for the conversion privileges of the Preferred Stock,
and except as set forth in the Investors' Rights Agreement (as defined below),
there are no outstanding options, warrants, rights (including conversion or
preemptive rights and rights of first refusal or similar rights) or agreements,
orally or in writing, for the purchase or acquisition from the Company of any
shares of its capital stock.
2.3 SUBSIDIARIES. The Company does not currently own or control,
-------------
directly or indirectly, any interest in any other corporation, association, or
other business entity.
2.4 AUTHORIZATION. All corporate action on the part of the Company,
-------------
its officers, directors and stockholders necessary for the authorization,
execution and delivery of this
2
<PAGE>
Agreement, the Investors' Rights Agreement in the form attached hereto as
Exhibit D (the "Investors' Rights Agreement"), and the Voting Agreement in the
- --------- ---------------------------
form attached hereto as Exhibit E (the "Voting Agreement" and collectively with
--------- ----------------
this Agreement and the Investors' Rights Agreement, the "Agreements"), the
----------
performance of all obligations of the Company hereunder and thereunder and the
authorization, issuance and delivery of the Securities has been taken or will be
taken prior to the Closing, and the Agreements, when executed and delivered by
the Company, will constitute valid and legally binding obligations of the
Company, enforceable against the Company in accordance with their terms except
(i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance, and other laws of general application affecting
enforcement of creditors' rights generally, as limited by laws relating to the
availability of specific performance, injunctive relief, or other equitable
remedies, or (ii) to the extent the indemnification provisions contained in the
Investors' Rights Agreement may be limited by applicable federal or state
securities laws.
2.5 VALID ISSUANCE OF SECURITIES. The Stock that is being issued to
----------------------------
the Purchasers hereunder, when issued, sold and delivered in accordance with the
terms hereof for the consideration expressed herein, will be duly and validly
issued, fully paid and nonassessable and free of restrictions on transfer other
than restrictions on transfer under this Agreement, the Investors' Rights
Agreement and applicable state and federal securities laws. Based in part upon
the representations of the Purchasers in this Agreement and subject to the
provisions of Section 2.6 below, the Stock will be issued in compliance with all
applicable federal and state securities laws. The Common Stock issuable upon
conversion of the Stock has been duly and validly reserved for issuance, and
upon issuance in accordance with the terms of the Restated Certificate, will be
duly and validly issued, fully paid and nonassessable and free of restrictions
on transfer other than restrictions on transfer under this Agreement, the
Investors' Rights Agreement and applicable federal and state securities laws and
will be issued in compliance with all applicable federal and state securities
laws.
2.6 GOVERNMENTAL CONSENTS. No consent, approval, order or
---------------------
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state or local governmental authority on the part of
the Company is required in connection with the consummation of the transactions
contemplated by this Agreement, except for filings pursuant to Section 25102(f)
of the California Corporate Securities Law of 1968, as amended, and the rules
thereunder, other applicable state securities laws, and the Securities Act of
1933, as amended (the "Securities Act") and the rules thereunder.
--------------
2.7 LITIGATION. There is no action, suit, proceeding or investigation
----------
pending or, to the Company's knowledge, currently threatened against the Company
that questions the validity of the Agreements or the right of the Company to
enter into them, or to consummate the transactions contemplated hereby or
thereby, or that might result, either individually or in the aggregate, in any
material adverse changes in the assets, condition or affairs of the Company,
financially or otherwise, nor is the Company aware that there is any basis for
the foregoing. The Company is not a party or subject to the provisions of any
order, writ, injunction, judgment or decree of any court or government agency or
instrumentality. There is no action, suit,
3
<PAGE>
proceeding or investigation by the Company currently pending or that the Company
intends to initiate.
2.8 INTELLECTUAL PROPERTY. To its knowledge, the Company owns or
---------------------
possesses sufficient legal rights to all patents, trademarks, service marks,
tradenames, copyrights, trade secrets, licenses, information and proprietary
rights necessary for its business as now conducted without any conflict with, or
infringement of, the rights of others. The Company has not received any
communications alleging that the Company has violated or, by conducting its
business, would violate any of the patents, trademarks, service marks,
tradenames, copyrights, trade secrets or other proprietary rights of any other
person or entity. The Company is not aware that any of its employees is
obligated under any contract or other agreement, or subject to any judgment,
decree or order of any court or administrative agency, that would interfere with
the use of such employee's best efforts to promote the interest of the Company
or that would conflict with the Company's business. Neither the execution or
delivery of this Agreement, nor the carrying on of the Company's business as now
conducted by the employees of the Company, will, to the Company's knowledge,
conflict with or result in a breach of the terms, conditions, or provisions of,
or constitute a default under, any contract, covenant or instrument under which
any such employee is now obligated. The Company does not believe it is or will
be necessary to use any inventions of any of its employees (or persons it
currently intends to hire) made prior to their employment by the Company.
2.9 COMPLIANCE WITH OTHER INSTRUMENTS. The Company is not in
---------------------------------
violation or default of any provisions of its Restated Certificate or Bylaws or
in violation or default of any instrument, judgment, order, writ, decree or
contract to which it is a party or by which it is bound or, to its knowledge, of
any provision of any federal or state statute, rule or regulation applicable to
the Company, the effect of which would have a material adverse effect on the
Company. The execution, delivery and performance of the Agreements and the
consummation of the transactions contemplated hereby or thereby will not result
in any such violation or be in conflict with or constitute, with or without the
passage of time and giving of notice, either a default under any such provision,
instrument, judgment, order, writ, decree or contract or an event which results
in the creation of any lien, charge or encumbrance upon any assets of the
Company.
2.10 AGREEMENTS; ACTION.
------------------
(a) Except for agreements explicitly contemplated by the
Agreements, there are no agreements, understandings, instruments, contracts or
proposed transactions to which the Company is a party or by which it is bound
that involve (i) obligations (contingent or otherwise) of, or payments to, the
Company in excess of, $25,000, (ii) the license of any patent, copyright, trade
secret or other proprietary right to or from the Company (other than standard
"off the shelf" product licenses), or (iii) the grant of rights to manufacture,
produce, assemble, license, market, or sell its products to any other person or
affect the Company's exclusive right to develop, manufacture, assemble,
distribute, market or sell its products.
(b) The Company has not (i) declared or paid any dividends, or
authorized or made any distribution upon or with respect to any class or series
of its capital stock,
4
<PAGE>
(ii) incurred any indebtedness for money borrowed or incurred any other
liabilities individually in excess of $25,000 or in excess of $100,000 in the
aggregate, (iii) made any loans or advances to any person, other than ordinary
advances for business expenses, or (iv) sold, exchanged or otherwise disposed of
any of its assets or rights, other than in the ordinary course of business.
2.11 NO CONFLICT OF INTEREST. The Company is not indebted, directly or
-----------------------
indirectly, to any of its officers or directors or to their respective spouses
or children, in any amount whatsoever other than in connection with expenses or
advances of expenses incurred in the ordinary course of business or relocation
expenses of employees. None of the Company's officers or directors, or any
members of their immediate families, are, directly or indirectly, indebted to
the Company (other than in connection with purchases of the Company's stock) or,
to the Company's knowledge, have any direct or indirect ownership interest in
any firm or corporation with which the Company is affiliated or with which the
Company has a business relationship, or any firm or corporation that competes
with the Company except that officers, directors and/or stockholders of the
Company may own stock in (but not exceeding two percent of the outstanding
capital stock of) any publicly traded company that may compete with the Company.
To the Company's knowledge, none of the Company's officers or directors or any
members of their immediate families are, directly or indirectly, interested in
any material contract with the Company. The Company is not a guarantor or
indemnitor of any indebtedness of any other person, firm or corporation.
2.12 RIGHTS OF REGISTRATION AND VOTING RIGHTS. Except as contemplated
----------------------------------------
in the Investors' Rights Agreement, the Company has not granted or agreed to
grant any registration rights, including piggyback rights, to any person or
entity. To the Company's knowledge, except as provided in the Voting Agreement,
no stockholder of the Company has entered into any agreements with respect to
the voting of capital shares of the Company.
2.13 TITLE TO PROPERTY AND ASSETS. The Company owns its property and
----------------------------
assets free and clear of all mortgages, liens, loans and encumbrances, except
such encumbrances and liens which arise in the ordinary course of business and
do not materially impair the Company's ownership or use of such property or
assets. With respect to the property and assets it leases, the Company is in
compliance with such leases and, to its knowledge, holds a valid leasehold
interest free of any liens, claims or encumbrances.
2.14 CHANGES. Since the Company's inception, there has not been:
-------
(a) any damage, destruction or loss, whether or not covered by
insurance, materially and adversely affecting the business, properties,
prospects, or financial condition of the Company;
(b) any waiver or compromise by the Company of a valuable right
or of a material debt owed to it;
(c) any satisfaction or discharge of any lien, claim, or
encumbrance or payment of any obligation by the Company, except in the ordinary
course of business and that is not material to the business, properties,
prospects or financial condition of the Company;
5
<PAGE>
(d) any material change to a material contract or agreement by
which the Company or any of its assets is bound or subject;
(e) any sale or assignment of any patents, trademarks,
copyrights, trade secrets or other intangible assets;
(f) any mortgage, pledge, transfer of a security interest in, or
lien, created by the Company, with respect to any of its material properties or
assets, except liens for taxes not yet due or payable;
(g) any loans or guarantees made by the Company to or for the
benefit of its employees, officers or directors, or any members of their
immediate families, other than travel advances and other advances made in the
ordinary course of its business;
(h) any declaration, setting aside or payment or other
distribution in respect to any of the Company's capital stock, or any direct or
indirect redemption, purchase, or other acquisition of any of such stock by the
Company;
(i) to the Company's knowledge, any other event or condition of
any character that might materially and adversely affect the business,
properties, prospects or financial condition of the Company; or
(j) any arrangement or commitment by the Company to do any of
the things described in this Section 2.14.
2.15 TAX RETURNS AND PAYMENTS. The Company has filed all tax returns
------------------------
and reports as required by law. These returns and reports are true and correct
in all material respects. The Company has paid all taxes and other assessments
due.
2.16 LABOR AGREEMENTS AND ACTIONS. The Company is not bound by or
----------------------------
subject to (and none of its assets or properties is bound by or subject to) any
written or oral, express or implied, contract, commitment or arrangement with
any labor union, and no labor union has requested or, to the knowledge of the
Company, has sought to represent any of the employees, representatives or agents
of the Company. There is no strike or other labor dispute involving the Company
pending, or to the knowledge of the Company threatened, which could have a
material adverse effect on the assets, properties, financial condition,
operating results, or business of the Company, nor is the Company aware of any
labor organization activity involving its employees. The employment of each
officer and employee of the Company is terminable at the will of the Company. To
its knowledge, the Company has complied in all material respects with all
applicable state and federal equal employment opportunity laws and with other
laws related to employment.
2.17 CONFIDENTIAL INFORMATION AND INVENTION ASSIGNMENT AGREEMENTS.
------------------------------------------------------------
Each employee, consultant and officer of the Company has executed an agreement
with the Company regarding confidentiality and proprietary information. The
Company is not aware that
6
<PAGE>
any of its employees or consultants is in violation thereof, and the Company
will use its best efforts to prevent any such violation.
2.18 PERMITS. The Company has all franchises, permits, licenses and
-------
any similar authority necessary for the conduct of its business, the lack of
which could materially and adversely affect the business, properties, prospects,
or financial condition of the Company. The Company is not in default in any
material respect under any of such franchises, permits, licenses or other
similar authority.
2.19 CORPORATE DOCUMENTS. The Restated Certificate and Bylaws of the
-------------------
Company are in the form made available to counsel for the Purchasers. The copy
of the minute books of the Company made available to the Purchasers contains
minutes of all meetings of directors and stockholders and all actions by written
consent without a meeting by the directors and stockholders since the date of
incorporation and reflects all actions by the directors and stockholders with
respect to all transactions referred to in such minutes accurately in all
material respects.
3. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS. Each Purchaser
------------------------------------------------
hereby represents and warrants to the Company that:
3.1 AUTHORIZATION. Such Purchaser has full power and authority to
-------------
enter into this Agreement. The Agreements, when executed and delivered by the
Purchaser, will constitute valid and legally binding obligations of the
Purchaser, enforceable in accordance with their terms, except (a) as limited by
applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance, and any other laws of general application affecting enforcement of
creditors' rights generally, and as limited by laws relating to the availability
of a specific performance, injunctive relief, or other equitable remedies, or
(b) to the extent the indemnification provisions contained in the Investors'
Rights Agreement may be limited by applicable federal or state securities laws.
3.2 PURCHASE ENTIRELY FOR OWN ACCOUNT. This Agreement is made with
---------------------------------
the Purchaser in reliance upon the Purchaser's representation to the Company,
which by the Purchaser's execution of this Agreement, the Purchaser hereby
confirms, that the Securities to be acquired by the Purchaser will be acquired
for investment for the Purchaser's own account, not as a nominee or agent, and
not with a view to the resale or distribution of any part thereof, and that the
Purchaser has no present intention of selling, granting any participation in, or
otherwise distributing the same. By executing this Agreement, the Purchaser
further represents that the Purchaser does not presently have any contract,
undertaking, agreement or arrangement with any person to sell, transfer or grant
participation to such person or to any third person, with respect to any of the
Securities. The Purchaser has not been formed for the specific purpose of
acquiring the Securities.
3.3 DISCLOSURE OF INFORMATION. The Purchaser has had an opportunity
-------------------------
to discuss the Company's business, management, financial affairs and the terms
and conditions of the offering of the Stock with the Company's management and
has had an opportunity to review the Company's facilities. The Purchaser
understands that such discussions, as well as any
7
<PAGE>
written information delivered by the Company to the Purchaser, were intended to
describe the aspects of the Company's business that it believes to be material.
3.4 RESTRICTED SECURITIES. The Purchaser understands that the
---------------------
Securities have not been, and will not be, registered under the Securities Act,
by reason of a specific exemption from the registration provisions of the
Securities Act which depends upon, among other things, the bona fide nature of
the investment intent and the accuracy of the Purchaser's representations as
expressed herein. The Purchaser understands that the Securities are "restricted
securities" under applicable U.S. federal and state securities laws and that,
pursuant to these laws, the Purchaser must hold the Securities indefinitely
unless they are registered with the Securities and Exchange Commission and
qualified by state authorities, or an exemption from such registration and
qualification requirements is available. The Purchaser acknowledges that the
Company has no obligation to register or qualify the Securities for resale
except as set forth in the Investors' Rights Agreement. The Purchaser further
acknowledges that if an exemption from registration or qualification is
available, it may be conditioned on various requirements including, but not
limited to, the time and manner of sale, the holding period for the Securities,
and on requirements relating to the Company that are outside of the Purchaser's
control, and which the Company is under no obligation and may not be able to
satisfy.
3.5 NO PUBLIC MARKET. The Purchaser understands that no public market
----------------
now exists for any of the securities issued by the Company, and that the Company
has made no assurances that a public market will ever exist for the Securities.
3.6 LEGENDS. The Purchaser understands that the Securities, and any
-------
securities issued in respect thereof or exchange therefor, may bear one or all
of the following legends:
(a) "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AND HAVE BEEN ACQUIRED FOR
INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR
DISTRIBUTION THEREOF. NO SUCH SALE OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN
EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL IN A
FORM SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER
THE SECURITIES ACT OF 1933."
(b) Any legend set forth in the other Agreements.
(c) Any legend required by the Blue Sky laws of any state to the
extent such laws are applicable to the shares represented by the certificate so
legended.
3.7 ACCREDITED INVESTOR. The Purchaser is an accredited investor as
-------------------
defined in Rule 501(a) of Regulation D promulgated under the Securities Act.
8
<PAGE>
4. CONDITIONS OF THE PURCHASERS' OBLIGATIONS AT CLOSING. The obligations
----------------------------------------------------
of each Purchaser to the Company under this Agreement are subject to the
fulfillment, on or before the Closing, of each of the following conditions,
unless otherwise waived:
4.1 REPRESENTATIONS AND WARRANTIES. The representations and
------------------------------
warranties of the Company contained in Section 2 shall be true and correct in
all material respects on and as of the Closing with the same effect as though
such representations and warranties had been made on and as of the date of the
Closing.
4.2 PERFORMANCE. The Company shall have performed and complied with
-----------
all covenants, agreements, obligations and conditions contained in this
Agreement that are required to be performed or complied with by it on or before
the Closing.
4.3 COMPLIANCE CERTIFICATE. The President of the Company shall
----------------------
deliver to the Purchasers at the Closing a certificate certifying that the
conditions specified in Sections 4.1 and 4.2 have been fulfilled.
4.4 QUALIFICATIONS. All authorizations, approvals or permits, if any,
--------------
of any governmental authority or regulatory body of the United States or of any
state that are required in connection with the lawful issuance and sale of the
Stock pursuant to this Agreement shall be obtained and effective as of the
Closing.
4.5 OPINION OF COMPANY COUNSEL. The Purchasers at the Closing shall
--------------------------
have received from Venture Law Group, counsel for the Company, an opinion dated
as of the Closing in substantially the form of Exhibit F.
---------
4.6 BOARD OF DIRECTORS. As of the Closing, the Board shall have five
------------------
(5) authorized directors and shall be comprised of Jed Smith, John Doerr and
Brook Byers, with two vacancies to be filled pursuant to the provisions of the
Voting Agreement.
4.7 INVESTORS' RIGHTS AGREEMENT. The Company and each Purchaser shall
---------------------------
have executed and delivered the Investors' Rights Agreement in substantially the
form attached as Exhibit D.
---------
4.8 VOTING AGREEMENT. The Company, Jed Smith and each Purchaser at
----------------
the Closing shall have executed and delivered the Voting Agreement in
substantially the form attached as Exhibit E.
---------
4.9 RESTATED CERTIFICATE. The Company shall have filed the Restated
--------------------
Certificate with the Secretary of State of Delaware on or prior to the Closing,
which shall continue to be in full force and effect as of the Closing.
5. CONDITIONS OF THE COMPANY'S OBLIGATIONS AT CLOSING. The obligations of
--------------------------------------------------
the Company to each Purchaser under this Agreement are subject to the
fulfillment, on or before the Closing, of each of the following conditions,
unless otherwise waived:
9
<PAGE>
5.1 REPRESENTATIONS AND WARRANTIES. The representations and
------------------------------
warranties of each Purchaser contained in Section 3 shall be true and correct in
all material respects on and as of the Closing with the same effect as though
such representations and warranties had been made on and as of the Closing.
5.2 PERFORMANCE. All covenants, agreements and conditions contained
-----------
in this Agreement to be performed by the Purchasers on or prior to the Closing
shall have been performed or complied with in all material respects.
5.3 QUALIFICATIONS. All authorizations, approvals or permits, if any,
--------------
of any governmental authority or regulatory body of the United States or of any
state that are required in connection with the lawful issuance and sale of the
Stock pursuant to this Agreement shall be obtained and effective as of the
Closing.
5.4 INVESTORS' RIGHTS AGREEMENT. The Company and each Purchaser shall
---------------------------
have executed and delivered the Investors' Rights Agreement in substantially the
form attached as Exhibit D.
---------
5.5 VOTING AGREEMENT. The Company, Jed Smith and each Purchaser at
----------------
the Closing shall have executed and delivered the Voting Agreement in
substantially the form attached as Exhibit E.
---------
5.6 RESTATED CERTIFICATE. The Company shall have filed the Restated
--------------------
Certificate with the Secretary of State of Delaware on or prior to the Closing,
which shall continue to be in full force and effect as of the Closing.
6. MISCELLANEOUS.
-------------
6.1 SURVIVAL OF WARRANTIES. Unless otherwise set forth in this
-----------------------
Agreement, the warranties, representations and covenants of the Company and the
Purchasers contained in or made pursuant to this Agreement shall survive the
execution and delivery of this Agreement and the Closing for a period of one (1)
year following the Closing.
6.2 TRANSFER; SUCCESSORS AND ASSIGNS. The terms and conditions of
--------------------------------
this Agreement shall inure to the benefit of and be binding upon the respective
successors and assigns of the parties. Nothing in this Agreement, express or
implied, is intended to confer upon any party other than the parties hereto or
their respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.
6.3 GOVERNING LAW. This Agreement and all acts and transactions
-------------
pursuant hereto and the rights and obligations of the parties hereto shall be
governed, construed and interpreted in accordance with the laws of the State of
California, without giving effect to principles of conflicts of law.
10
<PAGE>
6.4 COUNTERPARTS. This Agreement may be executed in two or more
-------------
counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.
6.5 TITLES AND SUBTITLES. The titles and subtitles used in this
--------------------
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
6.6 NOTICES. Any notice required or permitted by this Agreement shall
-------
be in writing and shall be deemed sufficient upon delivery, when delivered
personally or by overnight courier or sent by telegram or fax, or forty-eight
(48) hours after being deposited in the U.S. mail, as certified or registered
mail, with postage prepaid, addressed to the party to be notified at such
party's address as set forth on the signature page or Exhibit A hereto, or as
---------
subsequently modified by written notice, and if to the Company, with a copy to
Venture Law Group, 2800 Sand Hill Road, Menlo Park, CA 94025 attn: Mark
Silverman.
6.7 FINDER'S FEE. Each party represents that it neither is nor will
------------
be obligated for any finder's fee or commission in connection with this
transaction. Each Purchaser agrees to indemnify and to hold harmless the Company
from any liability for any commission or compensation in the nature of a
finder's fee (and the costs and expenses of defending against such liability or
asserted liability) for which each Purchaser or any of its officers, employees,
or representatives is responsible. The Company agrees to indemnify and hold
harmless each Purchaser from any liability for any commission or compensation in
the nature of a finder's fee (and the costs and expenses of defending against
such liability or asserted liability) for which the Company or any of its
officers, employees or representatives is responsible.
6.8 FEES AND EXPENSES. If the Closing is consummated, the Company
-----------------
shall pay the reasonable fees and expenses of special counsel for the
Purchasers, incurred with respect to this Agreement, the documents referred to
herein and the transactions contemplated hereby and thereby, provided such fees
and expenses do not exceed $10,000.
6.9 ATTORNEY'S FEES. If any action at law or in equity (including
----------------
arbitration) is necessary to enforce or interpret the terms of any of the
Agreements, the prevailing party shall be entitled to reasonable attorney's
fees, costs and necessary disbursements in addition to any other relief to which
such party may be entitled.
6.10 AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended
----------------------
or waived only with the written consent of the Company and the holders of at
least a majority of the Stock purchased hereunder. Any amendment or waiver
effected in accordance with this Section 6.10 shall be binding upon the
Purchasers and each transferee of the Securities, each future holder of all such
Securities, and the Company.
6.11 SEVERABILITY. If one or more provisions of this Agreement are
------------
held to be unenforceable under applicable law, the parties agree to renegotiate
such provision in good faith. In the event that the parties cannot reach a
mutually agreeable and enforceable replacement for such provision, then (a) such
provision shall be excluded from this Agreement, (b) the balance of
11
<PAGE>
the Agreement shall be interpreted as if such provision were so excluded and (c)
the balance of the Agreement shall be enforceable in accordance with its terms.
6.12 DELAYS OR OMISSIONS. No delay or omission to exercise any right,
-------------------
power or remedy accruing to any party under this Agreement, upon any breach or
default of any other party under this Agreement, shall impair any such right,
power or remedy of such non-breaching or non-defaulting party nor shall it be
construed to be a waiver of any such breach or default, or an acquiescence
therein, or of or in any similar breach or default thereafter occurring; nor
shall any waiver of any single breach or default be deemed a waiver of any other
breach or default theretofore or thereafter occurring. Any waiver, permit,
consent or approval of any kind or character on the part of any party of any
breach or default under this Agreement, or any waiver on the part of any party
of any provisions or conditions of this Agreement, must be in writing and shall
be effective only to the extent specifically set forth in such writing. All
remedies, either under this Agreement or by law or otherwise afforded to any
party, shall be cumulative and not alternative.
6.13 ENTIRE AGREEMENT. This Agreement, and the documents referred to
----------------
herein constitute the entire agreement between the parties hereto pertaining to
the subject matter hereof, and any and all other written or oral agreements
relating to the subject matter hereof existing between the parties hereto are
expressly canceled.
6.14 CORPORATE SECURITIES LAW. THE SALE OF THE SECURITIES WHICH ARE
------------------------
THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF
CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF THE SECURITIES OR
THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO THE
QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES IS EXEMPT FROM THE
QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF THE CALIFORNIA CORPORATIONS
CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON
THE QUALIFICATION BEING OBTAINED UNLESS THE SALE IS SO EXEMPT.
6.15 CONFIDENTIALITY. Each party hereto agrees that, except with the
---------------
prior written permission of the other party, it shall at all times keep
confidential and not divulge, furnish or make accessible to anyone any
confidential information, knowledge or data concerning or relating to the
business or financial affairs of the other parties to which such party has been
or shall become privy by reason of this Agreement, discussions or negotiations
relating to this Agreement, the performance of its obligations hereunder or the
ownership of Stock purchased hereunder. The provisions of this Section 6.15
shall be in addition to, and not in substitution for, the provisions of any
separate nondisclosure agreement executed by the parties hereto with respect to
the transactions contemplated hereby.
6.16 EXCULPATION AMONG PURCHASERS. Each Purchaser acknowledges that it
----------------------------
is not relying upon any person, firm or corporation, other than the Company and
its officers and directors, in making its investment or decision to invest in
the Company. Each Purchaser agrees that no Purchaser nor the respective
controlling persons, officers, directors, partners, agents, or
12
<PAGE>
employees of any Purchaser shall be liable to any other Purchaser for any action
heretofore or hereafter taken or omitted to be taken by any of them in
connection with the purchase of the Securities.
6.17 WAIVER OF CONFLICTS. Each party to this Agreement acknowledges
-------------------
that Venture Law Group, counsel for the Company, has in the past performed and
may continue to perform legal services for certain of the Purchasers in matters
unrelated to the transactions described in this Agreement, including the
representation of such Purchasers in venture capital financings. Accordingly,
each party to this Agreement hereby (a) acknowledges that they have had an
opportunity to ask for information relevant to this disclosure; and (b) gives
its informed consent to Venture Law Group's representation of certain of the
Purchasers in such unrelated matters and to Venture Law Group's representation
of the Company in connection with this Agreement and the transactions
contemplated hereby.
[Signature Pages Follow]
13
<PAGE>
The parties have executed this Series A Preferred Stock Purchase
Agreement as of the date first written above.
COMPANY:
DRUGSTORE.COM, INC.
By: /s/ Jed A. Smith
--------------------------
Name: Jed Smith
Title: President and CEO
PURCHASERS:
KLEINER PERKINS CAUFIELD & BYERS VIII, L.P.
By: KPCB VIII Associates, L.P., its
General Partner
By: /s/ Brook H. Byers
--------------------------
a General Partner
Address: 2750 Sand Hill Road
Menlo Park, CA 94025
KPCB VIII FOUNDERS FUND, L.P.
By: KPCB VIII Associates, L.P., its
General Partner
By: /s/ Brook H. Byers
--------------------------
a General Partner
Address: 2750 Sand Hill Road
Menlo Park, CA 94025
SIGNATURE PAGE TO
SERIES A PREFERRED STOCK PURCHASE AGREEMENT
<PAGE>
KPCB LIFE SCIENCES ZAIBATSU FUND II, L.P.
By: KPCB VII Associates, L.P., its
General Partner
By: /s/ Brook H. Byers
--------------------------
a General Partner
Address: 2750 Sand Hill Road
Menlo Park, CA 94025
DAVID WHORTON
_______________________________
(Signature)
Address: ______________________
______________________
_______________________________
(Print name of Purchaser)
By:____________________________
(Signature)
Name: _________________________
(print)
Title:_________________________
Address:_______________________
_______________________
SIGNATURE PAGE TO
SERIES A PREFERRED STOCK PURCHASE AGREEMENT
<PAGE>
KPCB LIFE SCIENCES ZAIBATSU FUND II, L.P.
By: KPCB VII Associates, L.P., its
General Partner
By:____________________________
a General Partner
Address: 2750 Sand Hill Road
Menlo Park, CA 94025
DAVID WHORTON
/s/ David Whorton
-------------------------------
(Signature)
Address: 2750 Sand Hill Road
-----------------------
Menlo Park, CA 94025
-----------------------
DAVID WHORTON
-------------------------------
(Print name of Purchaser)
By:____________________________
(Signature)
Name:__________________________
(print)
Title:_________________________
Address: ______________________
______________________
SIGNATURE PAGE TO
SERIES A PREFERRED STOCK PURCHASE AGREEMENT
<PAGE>
KPCB LIFE SCIENCES ZAIBATSU FUND II, L.P.
By: KPCB VII Associates, L.P., its
General Partner
By:____________________________
a General Partner
Address: 2750 Sand Hill Road
Menlo Park, CA 94025
DAVID WHORTON
_______________________________
(Signature)
Address:_______________________
_______________________
AMAZON.COM, INC.
(Print name of Purchaser)
By: /s/ Jeff P. Bezos
--------------------------
Name:__________________________
Title:_________________________
Address: 1516 2nd Avenue
Seattle, WA 98101
SIGNATURE PAGE TO
SERIES A PREFERRED STOCK PURCHASE AGREEMENT
<PAGE>
EXHIBITS
--------
Exhibit A - Schedule of Purchasers
Exhibit B - Form of Amended and Restated Certificate of Incorporation
Exhibit C - Schedule of Exceptions to Representations and Warranties
Exhibit D - Form of Investors' Rights Agreement
Exhibit E - Form of Voting Agreement
Exhibit F - Form of Legal Opinion of Venture Law Group
<PAGE>
EXHIBIT A
SCHEDULE OF PURCHASERS
CLOSING JUNE 22, 1998
PURCHASER NAME TOTAL PURCHASE PRICE SHARES
- ------------------------------------------ -------------------- ----------
Kleiner Perkins Caufield & Byers VIII, $3,547,100.00/1/ 4,433,875
L.P.
KPCB VIII Founders Fund, L.P. $ 205,400.00 256,750
KPCB Life Sciences Zaibatsu Fund II, L.P. $ 197,500.00 246,875
TOTAL $3,950,000.00 4,937,500
______________
/1/ $250,000 of such purchase price will be paid by cancellation of a promissory
note dated April 8, 1998 issued by the Company to such purchaser.
<PAGE>
EXHIBIT A
---------
SCHEDULE OF PURCHASERS
CLOSING AUGUST 10, 1998
PURCHASER NAME TOTAL PURCHASE PRICE SHARES
- ------------------------------------------ -------------------- ----------
Amazon.com, Inc. $ 4,000,000/1/ 5,000,000
David Whorton $ 50,000 62,500
TOTAL $4,050,000.00 5,062,500
__________________
/1/ Being issued in consideration for the obligations of Amazon.com and
Amazon.com Drugstore, Inc. ("Amazon.com Sub") set forth in the License
Technology and Marketing Agreement dated August 10, 1998 among Amazon.com, Inc.,
Amazon.com Sub and the Company.
<PAGE>
EXHIBIT B
---------
FORM OF AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
(SEE TAB 17)
<PAGE>
EXHIBIT C
---------
SCHEDULE OF EXCEPTIONS TO
REPRESENTATIONS AND WARRANTIES
<PAGE>
EXHIBIT D
---------
FORM OF FIRST AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
(SEE TAB 21)
<PAGE>
EXHIBIT E
---------
FORM OF AMENDED AND RESTATED VOTING AGREEMENT
(SEE TAB 22)
<PAGE>
EXHIBIT F
---------
FORM OF LEGAL OPINION
OF
VENTURE LAW GROUP
(SEE TAB 28)
<PAGE>
EXHIBIT 10.8
DRUGSTORE.COM, INC.
SERIES B PREFERRED STOCK PURCHASE AGREEMENT
This Series B Preferred Stock Purchase Agreement (the "Agreement") is made
---------
as of October 9, 1998 by and between DrugStore.com, Inc., a Delaware corporation
(the "Company"), and the investors listed on Exhibit A attached hereto (each a
------- ---------
"Purchaser" and together the "Purchasers").
-------- ----------
The parties hereby agree as follows:
1. PURCHASE AND SALE OF PREFERRED STOCK .
------------------------------------
1.1 SALE AND ISSUANCE OF SERIES B PREFERRED STOCK.
---------------------------------------------
(a) The Company shall adopt and file with the Secretary of State
of the State of Delaware on or before the Closing (as defined below) the Third
Amended and Restated Certificate of Incorporation in the form attached hereto as
Exhibit B (the "Restated Certificate").
- --------- --------------------
(b) Subject to the terms and conditions of this Agreement, each
Purchaser severally agrees to purchase and the Company agrees to sell and issue
to each Purchaser that number of shares of Series B Preferred Stock listed
opposite such Purchaser's name on Exhibit A attached hereto at a purchase price
---------
of $3.35 per share. The shares of Series B Preferred Stock issued to each
Purchaser pursuant to this Agreement are hereinafter referred to as the "Stock."
-----
The Stock and the Common Stock issuable upon conversion of the Stock are
hereinafter referred to as the "Securities." The Securities shall have the
----------
rights, privileges, preferences and restrictions as set forth in the Restated
Certificate.
1.2 CLOSING; DELIVERY.
-----------------
(a) The purchase and sale of 4,656,715 shares of the Stock shall
take place at the offices of Venture Law Group, 2775 Sand Hill Road, Menlo Park,
California, at 10:00 a.m., on October 9, 1998 or at such other time and place as
the Company and the Purchasers purchasing a majority of such Stock mutually
agree upon, orally or in writing (which time and place are designated as the
"Closing").
-------
(b) At the Closing, the Company shall deliver to each Purchaser
a certificate representing the Stock being purchased hereby against payment of
the purchase price therefor by check payable to the Company, wire transfer to
the Company's bank account or cancellation of indebtedness (or any combination
of the foregoing).
(c) At any time within sixty (60) days of the Closing, the
Company shall have the right to sell up to an additional 843,285 shares of
Series B Preferred Stock to one or more additional investors approved by the
Company's board of directors, at the price and on the terms set forth herein.
The purchase of any such additional Stock shall be effected by the execution and
delivery of additional signature pages to this Agreement and the Investors'
Rights
<PAGE>
Agreement (as defined in Section 2.4 below) and payment of the purchase price
for such additional shares of Series B Preferred Stock by check payable to the
Company, wire transfer to the Company's bank account or cancellation of
indebtedness (or any combination of the foregoing), or as consideration for a
transfer of technology by such purchaser and/or other obligations of such
purchaser. Such shares of Series B Preferred Stock shall be considered "Stock"
or "Series B Preferred Stock" for purposes of this Agreement and the Investors'
Rights Agreement, and the purchaser of such shares shall be considered a
"Purchaser" under this Agreement and an "Investor" under the Investors' Rights
Agreement.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
---------------------------------------------
represents and warrants to each Purchaser that, except as set forth on the
Schedule of Exceptions attached hereto as Exhibit C, which exceptions shall be
---------
deemed to be representations and warranties as if made hereunder:
2.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. The Company is a
---------------------------------------------
corporation duly incorporated, validly existing and in good standing under the
laws of the State of Delaware and has all requisite corporate power and
authority to carry on its business as now conducted. The Company is qualified to
transact business in the state of Washington and is in good standing under the
laws of the state of Washington. The Company is not required to qualify to
transact business in any other jurisdiction, except where the failure so to
qualify would not have a material adverse effect on its business or properties.
2.2 CAPITALIZATION. Upon the filing of the Restated Certificate, the
--------------
authorized capital of the Company consists, or will consist, immediately prior
to the Closing, of:
(a) 15,500,000 shares of Preferred Stock, (i) 10,000,000 of
which shares have been designated Series A Preferred Stock, all of which are
issued and outstanding immediately prior to the Closing and (ii) 5,500,000 of
which shares have been designated Series B Preferred Stock, none of which are
issued and outstanding immediately prior to the Closing.
(b) 20,500,000 shares of Common Stock, 2,273,000 shares of which
are issued and outstanding immediately prior to the Closing. All of the
outstanding shares of Common Stock have been duly authorized, fully paid and are
nonassessable and issued in compliance with all applicable federal and state
securities laws.
(c) Except for the conversion privileges of the Preferred Stock,
and except as set forth in the Investors' Rights Agreement (as defined below),
there are no outstanding options, warrants, rights (including conversion or
preemptive rights and rights of first refusal or similar rights) or agreements,
orally or in writing, for the purchase or acquisition from the Company of any
shares of its capital stock.
2.3 SUBSIDIARIES. The Company does not currently own or control,
------------
directly or indirectly, any interest in any other corporation, association, or
other business entity.
2.4 AUTHORIZATION. All corporate action on the part of the Company,
-------------
its officers, directors and stockholders necessary for the authorization,
execution and delivery of this
2
<PAGE>
Agreement, the Second Amended and Restated Investors' Rights Agreement in the
form attached hereto as Exhibit D (the "Investors' Rights Agreement"), and
--------- ---------------------------
collectively with this Agreement, the "Agreements"), the performance of all
----------
obligations of the Company hereunder and thereunder and the authorization,
issuance and delivery of the Securities has been taken or will be taken prior to
the Closing, and the Agreements, when executed and delivered by the Company,
will constitute valid and legally binding obligations of the Company,
enforceable against the Company in accordance with their terms except (i) as
limited by applicable bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance, and other laws of general application affecting
enforcement of creditors' rights generally, as limited by laws relating to the
availability of specific performance, injunctive relief, or other equitable
remedies, or (ii) to the extent the indemnification provisions contained in the
Investors' Rights Agreement may be limited by applicable federal or state
securities laws.
2.5 VALID ISSUANCE OF SECURITIES. The Stock that is being issued to
----------------------------
the Purchasers hereunder, when issued, sold and delivered in accordance with the
terms hereof for the consideration expressed herein, will be duly and validly
issued, fully paid and nonassessable and free of restrictions on transfer other
than restrictions on transfer under this Agreement, the Investors' Rights
Agreement and applicable state and federal securities laws. Based in part upon
the representations of the Purchasers in this Agreement and subject to the
provisions of Section 2.6 below, the Stock will be issued in compliance with all
applicable federal and state securities laws. The Common Stock issuable upon
conversion of the Stock has been duly and validly reserved for issuance, and
upon issuance in accordance with the terms of the Restated Certificate, will be
duly and validly issued, fully paid and nonassessable and free of restrictions
on transfer other than restrictions on transfer under this Agreement, the
Investors' Rights Agreement and applicable federal and state securities laws and
will be issued in compliance with all applicable federal and state securities
laws.
2.6 GOVERNMENTAL CONSENTS. No consent, approval, order or
---------------------
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state or local governmental authority on the part of
the Company is required in connection with the consummation of the transactions
contemplated by this Agreement, except for filings pursuant to Section 25102(f)
of the California Corporate Securities Law of 1968, as amended, and the rules
thereunder, other applicable state securities laws, and the Securities Act of
1933, as amended (the "Securities Act") and the rules thereunder.
--------------
2.7 LITIGATION. There is no action, suit, proceeding or investigation
----------
pending or, to the Company's knowledge, currently threatened against the Company
that questions the validity of the Agreements or the right of the Company to
enter into them, or to consummate the transactions contemplated hereby or
thereby, or that might result, either individually or in the aggregate, in any
material adverse changes in the assets, condition or affairs of the Company,
financially or otherwise, nor is the Company aware that there is any basis for
the foregoing. The Company is not a party or subject to the provisions of any
order, writ, injunction, judgment or decree of any court or government agency or
instrumentality. There is no action, suit, proceeding or investigation by the
Company currently pending or that the Company intends to initiate.
3
<PAGE>
2.8 INTELLECTUAL PROPERTY. To its knowledge, the Company owns or
---------------------
possesses sufficient legal rights to all patents, trademarks, service marks,
tradenames, copyrights, trade secrets, licenses, information and proprietary
rights necessary for its business as now conducted without any conflict with, or
infringement of, the rights of others. The Company has not received any
communications alleging that the Company has violated or, by conducting its
business, would violate any of the patents, trademarks, service marks,
tradenames, copyrights, trade secrets or other proprietary rights of any other
person or entity. The Company is not aware that any of its employees is
obligated under any contract or other agreement, or subject to any judgment,
decree or order of any court or administrative agency, that would interfere with
the use of such employee's best efforts to promote the interest of the Company
or that would conflict with the Company's business. Neither the execution or
delivery of this Agreement, nor the carrying on of the Company's business as now
conducted by the employees of the Company, will, to the Company's knowledge,
conflict with or result in a breach of the terms, conditions, or provisions of,
or constitute a default under, any contract, covenant or instrument under which
any such employee is now obligated. The Company does not believe it is or will
be necessary to use any inventions of any of its employees (or persons it
currently intends to hire) made prior to their employment by the Company.
2.9 COMPLIANCE WITH OTHER INSTRUMENTS. The Company is not in
---------------------------------
violation or default of any provisions of its Restated Certificate or Bylaws or
in violation or default of any instrument, judgment, order, writ, decree or
contract to which it is a party or by which it is bound or, to its knowledge, of
any provision of any federal or state statute, rule or regulation applicable to
the Company, the effect of which would have a material adverse effect on the
Company. The execution, delivery and performance of the Agreements and the
consummation of the transactions contemplated hereby or thereby will not result
in any such violation or be in conflict with or constitute, with or without the
passage of time and giving of notice, either a default under any such provision,
instrument, judgment, order, writ, decree or contract or an event which results
in the creation of any lien, charge or encumbrance upon any assets of the
Company.
2.10 AGREEMENTS; ACTION.
------------------
(a) Except for agreements explicitly contemplated by the
Agreements, there are no agreements, understandings, instruments, contracts or
proposed transactions to which the Company is a party or by which it is bound
that involve (i) obligations (contingent or otherwise) of, or payments to, the
Company in excess of, $50,000, (ii) the license of any patent, copyright, trade
secret or other proprietary right to or from the Company (other than standard
"off the shelf" product licenses), or (iii) the grant of rights to manufacture,
produce, assemble, license, market, or sell its products to any other person or
affect the Company's exclusive right to develop, manufacture, assemble,
distribute, market or sell its products.
(b) The Company has not (i) declared or paid any dividends, or
authorized or made any distribution upon or with respect to any class or series
of its capital stock, (ii) incurred any indebtedness for money borrowed or
incurred any other liabilities individually in excess of $50,000 or in excess of
$300,000 in the aggregate, (iii) made any loans or advances
4
<PAGE>
to any person, other than ordinary advances for business expenses, or (iv) sold,
exchanged or otherwise disposed of any of its assets or rights, other than in
the ordinary course of business.
2.11 NO CONFLICT OF INTEREST. The Company is not indebted, directly or
-----------------------
indirectly, to any of its officers or directors or to their respective spouses
or children, in any amount whatsoever other than in connection with expenses or
advances of expenses incurred in the ordinary course of business or relocation
expenses of employees. None of the Company's officers or directors, or any
members of their immediate families, are, directly or indirectly, indebted to
the Company (other than in connection with purchases of the Company's stock) or,
to the Company's knowledge, have any direct or indirect ownership interest in
any firm or corporation with which the Company is affiliated or with which the
Company has a business relationship, or any firm or corporation that competes
with the Company except that officers, directors and/or stockholders of the
Company may own stock in (but not exceeding two percent of the outstanding
capital stock of) any publicly traded company that may compete with the Company.
To the Company's knowledge, none of the Company's officers or directors or any
members of their immediate families are, directly or indirectly, interested in
any material contract with the Company. The Company is not a guarantor or
indemnitor of any indebtedness of any other person, firm or corporation.
2.12 RIGHTS OF REGISTRATION AND VOTING RIGHTS. Except as contemplated
----------------------------------------
in the Investors' Rights Agreement, the Company has not granted or agreed to
grant any registration rights, including piggyback rights, to any person or
entity. To the Company's knowledge, except as provided in the Company's Amended
and Restated Voting Agreement dated August 10, 1998 with certain stockholders,
no stockholder of the Company has entered into any agreements with respect to
the voting of capital shares of the Company.
2.13 TITLE TO PROPERTY AND ASSETS. The Company owns its property and
----------------------------
assets free and clear of all mortgages, liens, loans and encumbrances, except
such encumbrances and liens which arise in the ordinary course of business and
do not materially impair the Company's ownership or use of such property or
assets. With respect to the property and assets it leases, the Company is in
compliance with such leases and, to its knowledge, holds a valid leasehold
interest free of any liens, claims or encumbrances.
2.14 CHANGES. Since the Company's inception, there has not been:
-------
(a) any damage, destruction or loss, whether or not covered by
insurance, materially and adversely affecting the business, properties,
prospects, or financial condition of the Company;
(b) any waiver or compromise by the Company of a valuable right
or of a material debt owed to it;
(c) any satisfaction or discharge of any lien, claim, or
encumbrance or payment of any obligation by the Company, except in the ordinary
course of business and that is not material to the business, properties,
prospects or financial condition of the Company;
5
<PAGE>
(d) any material change to a material contract or agreement by
which the Company or any of its assets is bound or subject;
(e) any sale or assignment of any patents, trademarks,
copyrights, trade secrets or other intangible assets;
(f) any mortgage, pledge, transfer of a security interest in, or
lien, created by the Company, with respect to any of its material properties or
assets, except liens for taxes not yet due or payable;
(g) any loans or guarantees made by the Company to or for the
benefit of its employees, officers or directors, or any members of their
immediate families, other than travel advances and other advances made in the
ordinary course of its business;
(h) any declaration, setting aside or payment or other
distribution in respect to any of the Company's capital stock, or any direct or
indirect redemption, purchase, or other acquisition of any of such stock by the
Company;
(i) to the Company's knowledge, any other event or condition of
any character that might materially and adversely affect the business,
properties, prospects or financial condition of the Company; or
(j) any arrangement or commitment by the Company to do any of the
things described in this Section 2.14.
2.15 TAX RETURNS AND PAYMENTS. The Company has filed all tax returns
------------------------
and reports as required by law. These returns and reports are true and correct
in all material respects. The Company has paid all taxes and other assessments
due.
2.16 LABOR AGREEMENTS AND ACTIONS. The Company is not bound by or
----------------------------
subject to (and none of its assets or properties is bound by or subject to) any
written or oral, express or implied, contract, commitment or arrangement with
any labor union, and no labor union has requested or, to the knowledge of the
Company, has sought to represent any of the employees, representatives or agents
of the Company. There is no strike or other labor dispute involving the Company
pending, or to the knowledge of the Company threatened, which could have a
material adverse effect on the assets, properties, financial condition,
operating results, or business of the Company, nor is the Company aware of any
labor organization activity involving its employees. The employment of each
officer and employee of the Company is terminable at the will of the Company. To
its knowledge, the Company has complied in all material respects with all
applicable state and federal equal employment opportunity laws and with other
laws related to employment.
2.17 CONFIDENTIAL INFORMATION AND INVENTION ASSIGNMENT AGREEMENTS.
------------------------------------------------------------
Each employee, consultant and officer of the Company has executed an agreement
with the Company regarding confidentiality and proprietary information. The
Company is not aware that
6
<PAGE>
any of its employees or consultants is in violation thereof, and the Company
will use its best efforts to prevent any such violation.
2.18 PERMITS. The Company has all franchises, permits, licenses and
-------
any similar authority necessary for the conduct of its business, the lack of
which could materially and adversely affect the business, properties, prospects,
or financial condition of the Company. The Company is not in default in any
material respect under any of such franchises, permits, licenses or other
similar authority.
2.19 CORPORATE DOCUMENTS. The Restated Certificate and Bylaws of the
-------------------
Company are in the form made available to counsel for the Purchasers. The copy
of the minute books of the Company made available to the Purchasers contains
minutes of all meetings of directors and stockholders and all actions by written
consent without a meeting by the directors and stockholders since the date of
incorporation and reflects all actions by the directors and stockholders with
respect to all transactions referred to in such minutes accurately in all
material respects.
3. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS. Each Purchaser
------------------------------------------------
hereby represents and warrants to the Company that:
3.1 AUTHORIZATION. Such Purchaser has full power and authority to
-------------
enter into this Agreement. The Agreements, when executed and delivered by the
Purchaser, will constitute valid and legally binding obligations of the
Purchaser, enforceable in accordance with their terms, except (a) as limited by
applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance, and any other laws of general application affecting enforcement of
creditors' rights generally, and as limited by laws relating to the availability
of a specific performance, injunctive relief, or other equitable remedies, or
(b) to the extent the indemnification provisions contained in the Investors'
Rights Agreement may be limited by applicable federal or state securities laws.
3.2 PURCHASE ENTIRELY FOR OWN ACCOUNT. This Agreement is made with
---------------------------------
the Purchaser in reliance upon the Purchaser's representation to the Company,
which by the Purchaser's execution of this Agreement, the Purchaser hereby
confirms, that the Securities to be acquired by the Purchaser will be acquired
for investment for the Purchaser's own account, not as a nominee or agent, and
not with a view to the resale or distribution of any part thereof, and that the
Purchaser has no present intention of selling, granting any participation in, or
otherwise distributing the same. By executing this Agreement, the Purchaser
further represents that the Purchaser does not presently have any contract,
undertaking, agreement or arrangement with any person to sell, transfer or grant
participation to such person or to any third person, with respect to any of the
Securities. The Purchaser has not been formed for the specific purpose of
acquiring the Securities.
3.3 DISCLOSURE OF INFORMATION. The Purchaser has had an opportunity
-------------------------
to discuss the Company's business, management, financial affairs and the terms
and conditions of the offering of the Stock with the Company's management and
has had an opportunity to review the Company's facilities. The Purchaser
understands that such discussions, as well as any
7
<PAGE>
written information delivered by the Company to the Purchaser, were intended to
describe the aspects of the Company's business that it believes to be material.
3.4 RESTRICTED SECURITIES. The Purchaser understands that the
---------------------
Securities have not been, and will not be, registered under the Securities Act,
by reason of a specific exemption from the registration provisions of the
Securities Act which depends upon, among other things, the bona fide nature of
the investment intent and the accuracy of the Purchaser's representations as
expressed herein. The Purchaser understands that the Securities are "restricted
securities" under applicable U.S. federal and state securities laws and that,
pursuant to these laws, the Purchaser must hold the Securities indefinitely
unless they are registered with the Securities and Exchange Commission and
qualified by state authorities, or an exemption from such registration and
qualification requirements is available. The Purchaser acknowledges that the
Company has no obligation to register or qualify the Securities for resale
except as set forth in the Investors' Rights Agreement. The Purchaser further
acknowledges that if an exemption from registration or qualification is
available, it may be conditioned on various requirements including, but not
limited to, the time and manner of sale, the holding period for the Securities,
and on requirements relating to the Company that are outside of the Purchaser's
control, and which the Company is under no obligation and may not be able to
satisfy.
3.5 NO PUBLIC MARKET. The Purchaser understands that no public
----------------
market now exists for any of the securities issued by the Company, and that the
Company has made no assurances that a public market will ever exist for the
Securities.
3.6 LEGENDS. The Purchaser understands that the Securities,
-------
and any securities issued in respect thereof or exchange therefor, may bear one
or all of the following legends:
(a) "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AND HAVE BEEN ACQUIRED FOR
INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR
DISTRIBUTION THEREOF. NO SUCH SALE OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN
EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL IN A
FORM SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER
THE SECURITIES ACT OF 1933."
(b) Any legend set forth in the other Agreements.
(c) Any legend required by the Blue Sky laws of any
state to the extent such laws are applicable to the shares represented by the
certificate so legended.
3.7 ACCREDITED INVESTOR. The Purchaser is an accredited investor as
-------------------
defined in Rule 501(a) of Regulation D promulgated under the Securities Act.
8
<PAGE>
4. CONDITIONS OF THE PURCHASERS' OBLIGATIONS AT CLOSING. The obligations
----------------------------------------------------
of each Purchaser to the Company under this Agreement are subject to the
fulfillment, on or before the Closing, of each of the following conditions,
unless otherwise waived:
4.1 REPRESENTATIONS AND WARRANTIES. The representations and
------------------------------
warranties of the Company contained in Section 2 shall be true and correct in
all material respects on and as of the Closing with the same effect as though
such representations and warranties had been made on and as of the date of the
Closing.
4.2 PERFORMANCE. The Company shall have performed and complied
-----------
with all covenants, agreements, obligations and conditions contained in this
Agreement that are required to be performed or complied with by it on or before
the Closing.
4.3 COMPLIANCE CERTIFICATE. The President of the Company shall
----------------------
deliver to the Purchasers at the Closing a certificate certifying that the
conditions specified in Sections 4.1 and 4.2 have been fulfilled.
4.4 QUALIFICATIONS. All authorizations, approvals or permits, if any,
--------------
of any governmental authority or regulatory body of the United States or of any
state that are required in connection with the lawful issuance and sale of the
Stock pursuant to this Agreement shall be obtained and effective as of the
Closing.
4.5 OPINION OF COMPANY COUNSEL. The Purchasers at the Closing shall
--------------------------
have received from Venture Law Group, counsel for the Company, an opinion dated
as of the Closing in substantially the form of Exhibit E.
---------
4.6 BOARD OF DIRECTORS. As of the Closing, the Board shall have six
------------------
(6) authorized directors and shall be comprised of Peter Neupert, Jed Smith,
John Doerr, Brook Byers and Jeff Bezos, with one vacancy to be filled pursuant
to the provisions of the Company's Amended and Restated Voting Agreement dated
August 10, 1998 with certain stockholders.
4.7 INVESTORS' RIGHTS AGREEMENT. The Company and each Purchaser shall
---------------------------
have executed and delivered the Investors' Rights Agreement in substantially the
form attached as Exhibit D.
---------
4.8 RESTATED CERTIFICATE. The Company shall have filed the Restated
--------------------
Certificate with the Secretary of State of Delaware on or prior to the Closing,
which shall continue to be in full force and effect as of the Closing.
5. CONDITIONS OF THE COMPANY'S OBLIGATIONS AT CLOSING. The obligations of
--------------------------------------------------
the Company to each Purchaser under this Agreement are subject to the
fulfillment, on or before the Closing, of each of the following conditions,
unless otherwise waived:
5.1 REPRESENTATIONS AND WARRANTIES. The representations and
------------------------------
warranties of each Purchaser contained in Section 3 shall be true and correct in
all material respects on and as
9
<PAGE>
of the Closing with the same effect as though such representations and
warranties had been made on and as of the Closing.
5.2 PERFORMANCE. All covenants, agreements and conditions contained
-----------
in this Agreement to be performed by the Purchasers on or prior to the Closing
shall have been performed or complied with in all material respects.
5.3 QUALIFICATIONS. All authorizations, approvals or permits, if any,
--------------
of any governmental authority or regulatory body of the United States or of any
state that are required in connection with the lawful issuance and sale of the
Stock pursuant to this Agreement shall be obtained and effective as of the
Closing.
5.4 INVESTORS' RIGHTS AGREEMENT. The Company and each Purchaser shall
---------------------------
have executed and delivered the Investors' Rights Agreement in substantially the
form attached as Exhibit D.
---------
5.5 RESTATED CERTIFICATE. The Company shall have filed the Restated
--------------------
Certificate with the Secretary of State of Delaware on or prior to the Closing,
which shall continue to be in full force and effect as of the Closing.
6. MISCELLANEOUS.
-------------
6.1 SURVIVAL OF WARRANTIES. Unless otherwise set forth in this
----------------------
Agreement, the warranties, representations and covenants of the Company and the
Purchasers contained in or made pursuant to this Agreement shall survive the
execution and delivery of this Agreement and the Closing for a period of one (1)
year following the Closing.
6.2 TRANSFER; SUCCESSORS AND ASSIGNS. The terms and conditions of
--------------------------------
this Agreement shall inure to the benefit of and be binding upon the respective
successors and assigns of the parties. Nothing in this Agreement, express or
implied, is intended to confer upon any party other than the parties hereto or
their respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.
6.3 GOVERNING LAW. This Agreement and all acts and transactions
-------------
pursuant hereto and the rights and obligations of the parties hereto shall be
governed, construed and interpreted in accordance with the laws of the State of
California, without giving effect to principles of conflicts of law.
6.4 COUNTERPARTS. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.
6.5 TITLES AND SUBTITLES. The titles and subtitles used in this
--------------------
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
10
<PAGE>
6.6 NOTICES. Any notice required or permitted by this Agreement shall
-------
be in writing and shall be deemed sufficient upon delivery, when delivered
personally or by overnight courier or sent by telegram or fax, or forty-eight
(48) hours after being deposited in the U.S. mail, as certified or registered
mail, with postage prepaid, addressed to the party to be notified at such
party's address as set forth on the signature page or Exhibit A hereto, or as
---------
subsequently modified by written notice, and if to the Company, with a copy to
Venture Law Group, 2800 Sand Hill Road, Menlo Park, CA 94025 attn: Mark
Silverman.
6.7 FINDER'S FEE. Each party represents that it neither is nor will
------------
be obligated for any finder's fee or commission in connection with this
transaction. Each Purchaser agrees to indemnify and to hold harmless the Company
from any liability for any commission or compensation in the nature of a
finder's fee (and the costs and expenses of defending against such liability or
asserted liability) for which each Purchaser or any of its officers, employees,
or representatives is responsible. The Company agrees to indemnify and hold
harmless each Purchaser from any liability for any commission or compensation in
the nature of a finder's fee (and the costs and expenses of defending against
such liability or asserted liability) for which the Company or any of its
officers, employees or representatives is responsible.
6.8 FEES AND EXPENSES. If the Closing is consummated, the Company
-----------------
shall pay the reasonable fees and expenses of one special counsel for the
Purchasers, incurred with respect to this Agreement, the documents referred to
herein and the transactions contemplated hereby and thereby, provided such fees
and expenses do not exceed $5,000.
6.9 ATTORNEY'S FEES. If any action at law or in equity (including
---------------
arbitration) is necessary to enforce or interpret the terms of any of the
Agreements, the prevailing party shall be entitled to reasonable attorney's
fees, costs and necessary disbursements in addition to any other relief to which
such party may be entitled.
6.10 AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended
----------------------
or waived only with the written consent of the Company and the holders of at
least a majority of the Stock purchased hereunder. Any amendment or waiver
effected in accordance with this Section 6.10 shall be binding upon the
Purchasers and each transferee of the Securities, each future holder of all such
Securities, and the Company.
6.11 SEVERABILITY. If one or more provisions of this Agreement are
------------
held to be unenforceable under applicable law, the parties agree to renegotiate
such provision in good faith. In the event that the parties cannot reach a
mutually agreeable and enforceable replacement for such provision, then (a) such
provision shall be excluded from this Agreement, (b) the balance of the
Agreement shall be interpreted as if such provision were so excluded and (c) the
balance of the Agreement shall be enforceable in accordance with its terms.
6.12 DELAYS OR OMISSIONS. No delay or omission to exercise any right,
-------------------
power or remedy accruing to any party under this Agreement, upon any breach or
default of any other party under this Agreement, shall impair any such right,
power or remedy of such non-breaching or non-defaulting party nor shall it be
construed to be a waiver of any such breach or default, or an acquiescence
therein, or of or in any similar breach or default thereafter occurring; nor
shall
11
<PAGE>
any waiver of any single breach or default be deemed a waiver of any other
breach or default theretofore or thereafter occurring. Any waiver, permit,
consent or approval of any kind or character on the part of any party of any
breach or default under this Agreement, or any waiver on the part of any party
of any provisions or conditions of this Agreement, must be in writing and shall
be effective only to the extent specifically set forth in such writing. All
remedies, either under this Agreement or by law or otherwise afforded to any
party, shall be cumulative and not alternative.
6.13 ENTIRE AGREEMENT. This Agreement, and the documents referred to
----------------
herein constitute the entire agreement between the parties hereto pertaining to
the subject matter hereof, and any and all other written or oral agreements
relating to the subject matter hereof existing between the parties hereto are
expressly canceled.
6.14 CORPORATE SECURITIES LAW. THE SALE OF THE SECURITIES WHICH ARE
------------------------
THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF
CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF THE SECURITIES OR
THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO THE
QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES IS EXEMPT FROM THE
QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF THE CALIFORNIA CORPORATIONS
CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON
THE QUALIFICATION BEING OBTAINED UNLESS THE SALE IS SO EXEMPT.
6.15 CONFIDENTIALITY. Except as provided below, each party hereto
---------------
agrees that, except with the prior written permission of the other party, it
shall at all times keep confidential and not divulge, furnish or make accessible
to anyone any confidential information, knowledge or data concerning or relating
to the business or financial affairs of the other parties to which such party
has been or shall become privy by reason of this Agreement, discussions or
negotiations relating to this Agreement, the performance of its obligations
hereunder or the ownership of Stock purchased hereunder. The provisions of this
Section 6.15 shall be in addition to, and not in substitution for, the
provisions of any separate nondisclosure agreement executed by the parties
hereto with respect to the transactions contemplated hereby. Notwithstanding the
foregoing provisions of this Section 6.15, with regard to the obligations of
Amazon.com, Inc. ("Amazon.com"), the existing Nondisclosure Agreement between
----------
the Company and Amazon.com dated August 10, 1998 shall remain in full force and
effect and shall supersede in all respects the obligations contained in this
Section 6.15 that would otherwise be binding upon Amazon.com.
6.16 EXCULPATION AMONG PURCHASERS. Each Purchaser acknowledges that it
----------------------------
is not relying upon any person, firm or corporation, other than the Company and
its officers and directors, in making its investment or decision to invest in
the Company. Each Purchaser agrees that no Purchaser nor the respective
controlling persons, officers, directors, partners, agents, or employees of any
Purchaser shall be liable to any other Purchaser for any action heretofore or
12
<PAGE>
hereafter taken or omitted to be taken by any of them in connection with the
purchase of the Securities.
6.17 WAIVER OF CONFLICTS. Each party to this Agreement acknowledges
-------------------
that Venture Law Group, counsel for the Company, has in the past performed and
may continue to perform legal services for certain of the Purchasers in matters
unrelated to the transactions described in this Agreement, including the
representation of such Purchasers in venture capital financings. Accordingly,
each party to this Agreement hereby (a) acknowledges that they have had an
opportunity to ask for information relevant to this disclosure; and (b) gives
its informed consent to Venture Law Group's representation of certain of the
Purchasers in such unrelated matters and to Venture Law Group's representation
of the Company in connection with this Agreement and the transactions
contemplated hereby.
[Signature Pages Follow]
13
<PAGE>
The parties have executed this Series B Preferred Stock Purchase Agreement
as of the date first written above.
COMPANY:
DRUGSTORE.COM, INC.
By: /s/ Peter M. Neupert
--------------------------------
Name: Peter M. Neupert
Title: President and CEO
Address: 18650 NE 67th Court
Redmond, WA 98052
PURCHASERS:
KLEINER PERKINS CAUFIELD & BYERS
VIII, L.P.
By: KPCB VIII Associates, L.P., its
General Partner
By:________________________________
a General Partner
Address: 2750 Sand Hill Road
Menlo Park, CA 94025
KPCB VIII FOUNDERS FUND, L.P.
By: KPCB VIII Associates, L.P.,
its General Partner
By:________________________________
a General Partner
Address: 2750 Sand Hill Road
Menlo Park, CA 94025
SIGNATURE PAGE TO
SERIES B PREFERRED STOCK PURCHASE AGREEMENT
<PAGE>
The parties have executed this Series B Preferred Stock Purchase Agreement
as of the date first written above.
COMPANY:
DRUGSTORE.COM, INC.
By:________________________________
Name: Peter Neupert
Title: President and CEO
Address: 18650 NE 67th Court
Redmond, WA 98052
PURCHASERS:
KLEINER PERKINS CAUFIELD & BYERS
VIII, L.P.
By: KPCB VIII Associates, L.P., its
General Partner
By: /s/ Brook H. Byers
--------------------------------
a General Partner
Address: 2750 Sand Hill Road
Menlo Park, CA 94025
KPCB VIII FOUNDERS FUND, L.P.
By: KPCB VIII Associates, L.P.,
its General Partner
By: /s/ Brook H. Byers
--------------------------------
a General Partner
Address: 2750 Sand Hill Road
Menlo Park, CA 94025
SIGNATURE PAGE TO
SERIES B PREFERRED STOCK PURCHASE AGREEMENT
<PAGE>
KPCB LIFE SCIENCES ZAIBATSU FUND II,
L.P.
By: KPCB VII Associates, L.P., its
General Partner
By: /s/ Brook H. Byers
---------------------------------
a General Partner
Address: 2750 Sand Hill Road
Menlo Park, CA 94025
AMAZON.COM, INC.
By:_________________________________
(Signature)
Name:_______________________________
(print)
Title:______________________________
Address: 1516 2nd Avenue
Seattle, WA 98101
____________________________________
(Print name of Purchaser)
By:_________________________________
(Signature)
Name:_______________________________
(print)
Title:______________________________
Address: ___________________________
___________________________
SIGNATURE PAGE TO
SERIES B PREFERRED STOCK PURCHASE AGREEMENT
<PAGE>
KPCB LIFE SCIENCES ZAIBATSU FUND II,
L.P.
By: KPCB VII Associates, L.P., its
General Partner
By: /s/
---------------------------------
a General Partner
Address: 2750 Sand Hill Road
Menlo Park, CA 94025
AMAZON.COM, INC.
By: /s/ Alan Caplan
---------------------------------
(Signature)
Name: ALAN CAPLAN
-------------------------------
(print)
Title: Vice President
------------------------------
Address: 1516 2nd Avenue
Seattle, WA 98101
____________________________________
(Print name of Purchaser)
By:_________________________________
(Signature)
Name:_______________________________
(print)
Title:______________________________
Address: ___________________________
___________________________
SIGNATURE PAGE TO
SERIES B PREFERRED STOCK PURCHASE AGREEMENT
<PAGE>
EXHIBITS
--------
Exhibit A - Schedule of Purchasers
Exhibit B - Form of Third Amended and Restated Certificate of Incorporation
Exhibit C- Schedule of Exceptions to Representations and Warranties
Exhibit D - Form of Second Amended and Restated Investors' Rights Agreement
Exhibit E - Form of Legal Opinion of Venture Law Group
<PAGE>
EXHIBIT A
---------
SCHEDULE OF PURCHASERS
<TABLE>
<CAPTION>
PURCHASER NAME TOTAL PURCHASE PRICE SHARES
- ------------------------------------------ -------------------- --------
<S> <C> <C>
Kleiner Perkins Caufield & Byers VIII, L.P. $5,028,798.90 1,501,134
KPCB VIII Founders Fund, L.P. $291,198.75 86,925
KPCB Life Sciences Zaibatsu Fund II, L.P. $279,999.70 83,582
Amazon.com, Inc. $9,999,997.90 2,985,074
TOTAL $15,599,995.25 4,656,715
</TABLE>
<PAGE>
EXHIBIT B
---------
FORM OF THIRD AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
SEE TAB NO.3
<PAGE>
EXHIBIT C
---------
SCHEDULE OF EXCEPTIONS TO
REPRESENTATIONS AND WARRANTIES
<PAGE>
EXHIBIT C
---------
SCHEDULE OF EXCEPTIONS
Set forth below are exceptions to the representations and warranties of
DrugStore.com, Inc. (the "Company") contained in Section 2 of the Series B
-------
Preferred Stock Purchase Agreement (the "Agreement"). Section references in this
---------
Schedule of Exceptions are for convenience only; each disclosure are exception
set forth below is intended to qualify all of the Company's representations and
warranties in the Agreement. All capitalized terms used herein and not defined
herein shall have the same meanings as in the Agreement.
Section 2.2 -- Capitalization
- -----------------------------
1. The Company has adopted a 1998 Stock Plan, which reserves 2,735,000
shares of Common Stock for issuance to officers, directors, employees and
consultants of the Company. To date, options to purchase 999,500 shares have
been issued under such Plan and an additional 8,000 shares of Common Stock have
been issued under the Plan.
2. The Company has offered, or is in the process of issuing, shares of
Common Stock (or options therefor) to certain potential employees and
consultants.
Section 2.8 -- Intellectual Property
- ------------------------------------
1. Jed Smith, the Company's current Vice President of Strategy and
Business Development, performed some of the preliminary work for the founding of
the Company during the period of time while he was employed by Cybersmith, Inc.
("Cybersmith"). Mr. Smith and Cybersmith have entered into a letter agreement
----------
confirming that Cybersmith does not own or have any rights to any work product
or intellectual property that Mr. Smith developed on behalf of the Company
during his tenure at Cybersmith.
2. The Company may use certain intellectual property that was developed
by Jed Smith prior to his employment with the Company and was assigned to the
Company in June 1998 as partial consideration for Mr. Smith's purchase of Common
Stock from the Company.
3. The Company is working with its trademark counsel to determine the
availability of certain trademarks it may use in connection with its business,
and if appropriate, to register such trademarks.
Section 2.10 -- Agreements; Action
- ----------------------------------
1. The Company has entered into offer letters with Jed Smith and Peter
Neupert, copies of which have been provided to counsel for the Purchasers.
<PAGE>
2. The Company has entered into a Technology License and Marketing
Agreement with Amazon.com, Inc. ("Amazon.com"), pursuant to which the parties
----------
have licensed to each other certain proprietary technology and agreed to
undertake certain joint marketing efforts.
3. The Company has entered into an agreement with Excite, Inc. regarding
the promotion of the Company's business to Excite users.
4. The Company has entered into an agreement (and an amendment to such
agreement) with Yahoo! Inc. regarding the promotion of the Company's business to
Yahoo! users.
5. The Company has entered into an agreement with TriNet to provide
certain payroll and benefit services to the Company.
6. The Company is in discussions with several potential lenders,
including Comdisco, regarding obtaining a bank line of credit and an equipment
lease line.
7. In August 1998, the Company entered into an office lease for its
current facilities in Redmond, Washington.
Section 2.11 -- No Conflict of Interest
- ---------------------------------------
1. Kleiner Perkins Caufield & Byers ("KPCB"), a major stockholder of the
----
Company, was an early investor in Amazon.com and maintains a substantial equity
stake in Amazon.com. John Doerr and Brook Byers, directors of the Company, are
both partners of KPCB. Mr. Doerr is also a member of Amazon.com's board of
directors. Amazon.com is a major stockholder of the Company and is party to the
Technology License and Marketing Agreement discussed under Section 2.10 above.
2. See arrangements with Jed Smith and Peter Neupert listed below.
Section 2.16 -- Labor Agreements and Actions
- --------------------------------------------
1. The Company's offer letters with Jed Smith and Peter Neupert provide
for certain arrangements with regard to termination of employment without cause.
2. The Company may enter into offer letters with other new executive
officers when hired.
-2-
<PAGE>
EXHIBIT D
---------
FORM OF SECOND AMENDED AND RESTATED INVESTORS' RIGHTS
AGREEMENT
SEE TAB NO.7
<PAGE>
EXHIBIT E
---------
FORM OF LEGAL OPINION
OF
VENTURE LAW GROUP
SEE TAB NO.10
<PAGE>
EXHIBIT 10.9
DRUGSTORE.COM, INC.
SERIES B PREFERRED STOCK RESCISSION AGREEMENT
This Series B Preferred Stock Rescission Agreement (the "Agreement") is
---------
made as of November 23, 1998 by and between DrugStore.com, Inc., a Delaware
corporation (the "Company"), and the investors listed on Exhibit A attached
------- ---------
hereto (each a "Purchaser" and together the "Purchasers").
--------- ----------
RECITALS
A. Pursuant to that certain Series B Preferred Stock Purchase
Agreement dated October 9, 1998 by and between the Company, the Purchasers and
certain other investors (the "Purchase Agreement"), the Company sold and the
------------------
Purchasers purchased an aggregate of 1,671,641 shares of the Company's Series B
Preferred Stock (the "Shares"), at a price of $3.35 per share for a total
------
purchase price of $5,599,997.35.
B. The Company and the Purchasers deem it to be in their respective
best interests to rescind the Purchasers' purchase of an aggregate of 89,552 of
the Shares.
AGREEMENT
Accordingly, the parties agree as follows:
1. RESCISSION OF SHARES. The Company and the Purchasers hereby
--------------------
rescind the sale of 89,552 of the Shares (the "Rescinded Shares"), in the
----------------
specific amounts listed on Exhibit A. Each Purchaser acknowledges and agrees
that it shall have no further right, title or interest in any of the Rescinded
Shares.
2. REFUND OF PURCHASE PRICE. The Company shall promptly refund to
------------------------
each Purchaser (by check or wire transfer) the amount paid by such Purchaser for
the Rescinded Shares, as indicated on Exhibit A (the "Purchase Price").
--------- --------------
3. ENTIRE AGREEMENT. This Agreement, along with the Purchase
----------------
Agreement and the documents referred to herein and therein, constitute the
entire agreement between the parties pertaining to the subject matter hereof,
and any and all other written or oral agreements relating to the subject matter
hereof existing between the parties are expressly canceled.
4. COUNTERPARTS. This Agreement may be executed in counterparts,
------------
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
[Signature Page Follows]
<PAGE>
SIGNATURE PAGE TO RESCISSION AGREEMENT
The parties have duly executed this Series B Preferred Stock Rescission
Agreement as of the date first written above.
COMPANY:
DRUGSTORE.COM, INC.
By: /s/ Peter Neupert
----------------------------------------
Name: Peter Neupert
Title: President and CEO
Address: 18650 NE 67th Court
Redmond, WA 98052
PURCHASERS:
KLEINER PERKINS CAUFIELD & BYERS VIII, L.P.
By: KPCB VIII Associates, L.P., its
General Partner
By: /s/ Brook H. Byers
----------------------------------------
a General Partner
Address: 2750 Sand Hill Road
Menlo Park, CA 94025
KPCB VIII FOUNDERS FUND, L.P.
By: KPCB VIII Associates, L.P., its
General Partner
By: /s/ Brook H. Byers
----------------------------------------
a General Partner
Address: 2750 Sand Hill Road
Menlo Park, CA 94025
SIGNATURE PAGE TO RESCISSION AGREEMENT
<PAGE>
KPCB Life Sciences Zaibatsu Fund II, L.P.
By: KPCB VII Associates, L.P., its General
Partner
By: /s/ Brook H. Byers
----------------------------------------
a General Partner
Address: 2750 Sand Hill Road
Menlo Park, CA 94025
SIGNATURE PAGE TO RESCISSION AGREEMENT
<PAGE>
EXHIBIT A
---------
SCHEDULE OF PURCHASERS
<TABLE>
<CAPTION>
PURCHASER NAME PURCHASE PRICE TO BE SHARES TO BE
RETURNED RESCINDED
- ------------------------------------------- ------------------------------ ---------------------
<S> <C> <C>
Kleiner Perkins Caufield & Byers VIII, L.P. $269,400.30 80,418
KPCB VIII Founders Fund, L.P. $ 15,597.60 4,656
KPCB Life Sciences Zaibatsu Fund II, L.P. $ 15,001.30 4,478
TOTAL $299,999.20 89,552
</TABLE>
<PAGE>
DRUGSTORE.COM, INC.
RESCISSION OF SERIES B PREFERRED STOCK FROM KLEINER PERKINS ENTITIES
NOVEMBER 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
ORIGINAL INVESTMENT ORIGINAL SHARES ADJUSTED INVESTMENT ADJUSTED SHARES
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Kleiner Perkins Caufield & Byers VIII, L.P. $ 5,028,798.90 1,501,134 $ 4,759,398.60 1,420,716
- --------------------------------------------------------------------------------------------------------------------------------
KPCB VIII Founders Fund, L.P. $ 291,198.75 86,925 $ 275,601.15 82,269
- --------------------------------------------------------------------------------------------------------------------------------
KPCB Life Sciences Zaibtsu Fund II, L.P. $ 279,999.70 83,582 $ 264,998.40 79,104
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 5,599,997.35 1,671,641 $ 5,299.998.15 1,582,089
- --------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ----------------------------------------------------------------------------------------------
RESCISSION AMOUNT RESCISSION SHARES
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Kleiner Perkins Caufield & Byers VIII, L.P. $ 269,400.30 80,418
- ----------------------------------------------------------------------------------------------
KPCB VIII Founders Fund, L.P. $ 15,597.60 4,656
- ----------------------------------------------------------------------------------------------
KPCB Life Sciences Zaibtsu Fund II, L.P. $ 15,001.30 4,478
- ----------------------------------------------------------------------------------------------
TOTAL $ 299,999.20 89,552
- ----------------------------------------------------------------------------------------------
</TABLE>
Page 1
<PAGE>
EXHIBIT 10.10
DRUGSTORE.COM, INC.
SERIES C PREFERRED STOCK AND CONVERTIBLE NOTE PURCHASE AGREEMENT
----------------------------------------------------------------
This Series C Preferred Stock and Convertible Note Purchase Agreement
(the "Agreement") is made as of January 29, 1999 by and between drugstore.com,
---------
inc., a Delaware corporation (the "Company"), and the investors listed on
-------
Exhibit A attached hereto (each a "Purchaser" and together the "Purchasers").
- --------- --------- ----------
The parties hereby agree as follows:
1. PURCHASE AND SALE OF PREFERRED STOCK AND CONVERTIBLE
----------------------------------------------------
PROMISSORY NOTES .
----------------
1.1 SALE AND ISSUANCE OF SERIES C PREFERRED STOCK.
---------------------------------------------
(a) The Company shall adopt and file with the
Secretary of State of the State of Delaware on or before the Closing (as defined
below) the Fourth Amended and Restated Certificate of Incorporation in the form
attached hereto as Exhibit B (the "Restated Certificate").
--------- --------------------
(b) Subject to the terms and conditions of this
Agreement, each Purchaser (except Amazon.com, Inc. and Kleiner Perkins Caufield
& Byers VIII, L.P.) severally agrees to purchase and the Company agrees to sell
and issue to each such Purchaser that number of shares of Series C Preferred
Stock listed opposite such Purchaser's name on Exhibit A attached hereto at a
---------
purchase price of $7.825 per share. The shares of Series C Preferred Stock
issued to each such Purchaser pursuant to this Agreement are hereinafter
referred to as the "Stock." The Purchasers who are purchasing Stock pursuant to
-----
this Section 1.1 are referred to herein as the "Stock Purchasers."
----------------
(c) The Stock and the Common Stock issuable upon
conversion of the Stock shall have the rights, privileges, preferences and
restrictions as set forth in the Restated Certificate.
1.2 SALE AND ISSUANCE OF CONVERTIBLE PROMISSORY NOTES.
-------------------------------------------------
(a) Subject to the terms and conditions of this
Agreement, Amazon.com, Inc. and Kleiner Perkins Caufield & Byers VIII, L.P.
(each a "Note Purchaser" and together the "Note Purchasers") each agrees to
-------------- ---------------
purchase at the Closing and the Company agrees to sell and issue to each Note
Purchaser a convertible promissory note in substantially the form attached
hereto as Exhibit F (a "Note" and collectively, the "Notes") in the principal
--------- ---- -----
amount specified with respect to such Note Purchaser on Exhibit A to this
---------
Agreement. The purchase price of each Note shall be equal to 100% of the
principal amount of such Note. The Company's agreement with each Note Purchaser
is a separate agreement, and the sales of the Notes to the Note Purchasers are
separate sales.
<PAGE>
(b) The Stock, the Common Stock issuable upon
conversion of the Stock, and the Notes are hereinafter
referred to as the "Securities."
----------
1.3 CLOSING; DELIVERY.
(a) The purchase and sale of 4,472,844 shares of
the Stock and the purchase and sale of the Notes shall take place at the offices
of Venture Law Group, 2775 Sand Hill Road, Menlo Park, California, at 10:00
a.m., on January 29, 1999 or at such other time and place as the Company, the
Stock Purchasers purchasing a majority of such Stock, and the Note Purchasers
purchasing a majority of the principal amount of the Notes, mutually agree upon,
orally or in writing (which time and place are designated as the "Closing").
-------
(b) At the Closing, the Company shall (i) deliver
to each Stock Purchaser a certificate representing the Stock being purchased
hereby against payment of the purchase price therefor by check payable to the
Company, wire transfer to the Company's bank account or cancellation of
indebtedness (or any combination of the foregoing) and (ii) deliver to each Note
Purchaser the Note to be purchased by such Note Purchaser against payment of the
purchase price therefor by check payable to the Company, wire transfer to the
Company's bank account or cancellation of indebtedness (or any combination of
the foregoing).
(c) At any time within sixty (60) days of the
Closing, the Company shall have the right, upon unanimous approval of its Board
of Directors, to sell additional authorized but unissued shares of Series C
Preferred Stock to one or more additional investors approved by the Company's
board of directors, at the price and on the terms set forth herein. The purchase
of any such additional Stock shall be effected by the execution and delivery of
additional signature pages to this Agreement and the Investors' Rights Agreement
(as defined in Section 2.4 below) and payment of the purchase price for such
additional shares of Series C Preferred Stock by check payable to the Company,
wire transfer to the Company's bank account or cancellation of indebtedness (or
any combination of the foregoing), or as consideration for a transfer of
technology by such purchaser and/or other obligations of such purchaser. Such
shares of Series C Preferred Stock shall be considered "Stock" or "Series C
Preferred Stock" for purposes of this Agreement and the Investors' Rights
Agreement, and the purchaser of such shares shall be considered a "Purchaser"
under this Agreement and an "Investor" under the Investors' Rights Agreement.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
---------------------------------------------
represents and warrants to each Purchaser that, except as set forth on the
Schedule of Exceptions attached hereto as Exhibit C, which exceptions shall be
---------
deemed to be representations and warranties as if made hereunder:
2.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. The Company
---------------------------------------------
is a corporation duly incorporated, validly existing and in good standing under
the laws of the State of Delaware and has all requisite corporate power and
authority to carry on its business as now conducted. The Company is qualified to
transact business in the state of Washington and is in good standing under the
laws of the state of Washington. The Company is not required to
-2-
<PAGE>
qualify to transact business in any other jurisdiction, except where the failure
so to qualify would not have a material adverse effect on its business or
properties.
2.2 CAPITALIZATION. Upon the filing of the Restated
--------------
Certificate, the authorized capital of the Company consists, or will consist,
immediately prior to the Closing, of:
(a) 20,500,000 shares of Preferred Stock, (i)
10,000,000 of which shares have been designated Series A Preferred Stock, all of
which are issued and outstanding immediately prior to the Closing, (ii)
5,500,000 of which shares have been designated Series B Preferred Stock,
5,446,268 of which are issued and outstanding immediately prior to the Closing,
and 5,000,000 of which shares have been designated Series C Preferred Stock,
none of which are issued and outstanding immediately prior to the Closing. All
of the outstanding shares of Preferred Stock have been duly authorized, fully
paid and are nonassessable and issued in compliance with all applicable federal
and state securities laws.
(b) 31,000,000 shares of Common Stock, 2,323,000
shares of which are issued and outstanding immediately prior to the Closing. All
of the outstanding shares of Common Stock have been duly authorized, fully paid
and are nonassessable and issued in compliance with all applicable federal and
state securities laws.
(c) Except for the conversion privileges of the
Preferred Stock and the Notes, and except as set forth in the Investors' Rights
Agreement (as defined below), there are no outstanding options, warrants, rights
(including conversion or preemptive rights and rights of first refusal or
similar rights) or agreements, orally or in writing, for the purchase or
acquisition from the Company of any shares of its capital stock.
2.3 SUBSIDIARIES. The Company does not currently own or
------------
control, directly or indirectly, any interest in any other corporation,
association, or other business entity.
2.4 AUTHORIZATION. All corporate action on the part of the
-------------
Company, its officers, directors and stockholders necessary for the
authorization, execution and delivery of this Agreement, the Third Amended and
Restated Investors' Rights Agreement in the form attached hereto as Exhibit D
---------
(the "Investors' Rights Agreement"), and collectively with this Agreement, the
---------------------------
"Agreements"), the performance of all obligations of the Company hereunder and
----------
thereunder and the authorization, issuance and delivery of the Securities has
been taken or will be taken prior to the Closing, and the Agreements, when
executed and delivered by the Company, will constitute valid and legally binding
obligations of the Company, enforceable against the Company in accordance with
their terms except (i) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance, and other laws of general
application affecting enforcement of creditors' rights generally, as limited by
laws relating to the availability of specific performance, injunctive relief, or
other equitable remedies, or (ii) to the extent the indemnification provisions
contained in the Investors' Rights Agreement may be limited by applicable
federal or state securities laws.
2.5 VALID ISSUANCE OF SECURITIES. The Stock that is being
----------------------------
issued to the Stock Purchasers hereunder, when issued, sold and delivered in
accordance with the terms hereof for
-3-
<PAGE>
the consideration expressed herein, will be duly and validly issued, fully paid
and nonassessable and free of restrictions on transfer other than restrictions
on transfer under this Agreement, the Investors' Rights Agreement and applicable
state and federal securities laws. The Notes that are being issued to the Note
Purchasers hereunder, when issued, sold and delivered in accordance with the
terms hereof for the consideration expressed herein, will be duly and validly
issued and free of restrictions on transfer other than restrictions on transfer
under this Agreement, the Notes, the Investors' Rights Agreement and applicable
state and federal securities laws. The Stock that may be issued to the Note
Purchasers upon conversion of the Notes, when issued and delivered in accordance
with the terms thereof, will be duly and validly issued and free of restrictions
on transfer other than restrictions on transfer under this Agreement, the
Investors' Rights Agreement and applicable state and federal securities laws.
Based in part upon the representations of the Purchasers in this Agreement and
subject to the provisions of Section 2.6 below, the Stock and the Notes will be
issued in compliance with all applicable federal and state securities laws. The
Common Stock issuable upon conversion of the Stock has been duly and validly
reserved for issuance, and upon issuance in accordance with the terms of the
Restated Certificate, will be duly and validly issued, fully paid and
nonassessable and free of restrictions on transfer other than restrictions on
transfer under this Agreement, the Investors' Rights Agreement and applicable
federal and state securities laws and will be issued in compliance with all
applicable federal and state securities laws.
2.6 GOVERNMENTAL CONSENTS. No consent, approval, order or
---------------------
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state or local governmental authority on the part of
the Company is required in connection with the consummation of the transactions
contemplated by this Agreement, except for filings pursuant to Section 25102(f)
of the California Corporate Securities Law of 1968, as amended, and the rules
thereunder, other applicable state securities laws, the Securities Act of 1933,
as amended (the "Securities Act") and the rules thereunder, and filings under
--------------
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
---
Act") as required for any conversion of the Notes into Stock.
- ---
2.7 LITIGATION. There is no action, suit, proceeding or
----------
investigation pending or, to the Company's knowledge, currently threatened
against the Company that questions the validity of the Agreements or the right
of the Company to enter into them, or to consummate the transactions
contemplated hereby or thereby, or that might result, either individually or in
the aggregate, in any material adverse changes in the assets, condition or
affairs of the Company, financially or otherwise, nor is the Company aware that
there is any basis for the foregoing. The Company is not a party or subject to
the provisions of any order, writ, injunction, judgment or decree of any court
or government agency or instrumentality. There is no action, suit, proceeding or
investigation by the Company currently pending or that the Company intends to
initiate.
2.8 INTELLECTUAL PROPERTY. To its knowledge, the Company owns
---------------------
or possesses sufficient legal rights to all patents, trademarks, service marks,
tradenames, copyrights, trade secrets, licenses, information and proprietary
rights necessary for its business as now conducted without any conflict with, or
infringement of, the rights of others. The Company has not
-4-
<PAGE>
received any communications alleging that the Company has violated or, by
conducting its business, would violate any of the patents, trademarks, service
marks, tradenames, copyrights, trade secrets or other proprietary rights of any
other person or entity. The Company is not aware that any of its employees is
obligated under any contract or other agreement, or subject to any judgment,
decree or order of any court or administrative agency, that would interfere with
the use of such employee's best efforts to promote the interest of the Company
or that would conflict with the Company's business. Neither the execution or
delivery of this Agreement, nor the carrying on of the Company's business as now
conducted by the employees of the Company, will, to the Company's knowledge,
conflict with or result in a breach of the terms, conditions, or provisions of,
or constitute a default under, any contract, covenant or instrument under which
any such employee is now obligated. The Company does not believe it is or will
be necessary to use any inventions of any of its employees (or persons it
currently intends to hire) made prior to their employment by the Company.
2.9 COMPLIANCE WITH OTHER INSTRUMENTS. The Company is not in
---------------------------------
violation or default of any provisions of its Restated Certificate or Bylaws or
in violation or default of any instrument, judgment, order, writ, decree or
contract to which it is a party or by which it is bound or, to its knowledge, of
any provision of any federal or state statute, rule or regulation applicable to
the Company, the effect of which would have a material adverse effect on the
Company. The execution, delivery and performance of the Agreements and the
consummation of the transactions contemplated hereby or thereby will not result
in any such violation or be in conflict with or constitute, with or without the
passage of time and giving of notice, either a default under any such provision,
instrument, judgment, order, writ, decree or contract or an event which results
in the creation of any lien, charge or encumbrance upon any assets of the
Company.
2.10 AGREEMENTS; ACTION.
------------------
(a) Except for agreements explicitly
contemplated by the Agreements, there are no agreements, understandings,
instruments, contracts or proposed transactions to which the Company is a party
or by which it is bound that involve (i) obligations (contingent or otherwise)
of, or payments to, the Company in excess of, $100,000, (ii) the license of any
patent, copyright, trade secret or other proprietary right to or from the
Company (other than standard "off the shelf" product licenses), or (iii) the
grant of rights to manufacture, produce, assemble, license, market, or sell its
products to any other person or affect the Company's exclusive right to develop,
manufacture, assemble, distribute, market or sell its products.
(b) The Company has not (i) declared or paid any
dividends, or authorized or made any distribution upon or with respect to any
class or series of its capital stock, (ii) incurred any indebtedness for money
borrowed or incurred any other liabilities individually in excess of $100,000 or
in excess of $500,000 in the aggregate, (iii) made any loans or advances to any
person, other than ordinary advances for business expenses, or (iv) sold,
exchanged or otherwise disposed of any of its assets or rights, other than in
the ordinary course of business.
2.11 NO CONFLICT OF INTEREST. The Company is not indebted,
-----------------------
directly or indirectly, to any of its officers or directors or to their
respective spouses or children, in any
-5-
<PAGE>
amount whatsoever other than in connection with expenses or advances of expenses
incurred in the ordinary course of business or relocation expenses of employees.
None of the Company's officers or directors, or any members of their immediate
families, are, directly or indirectly, indebted to the Company (other than in
connection with purchases of the Company's stock) or, to the Company's
knowledge, have any direct or indirect ownership interest in any firm or
corporation with which the Company is affiliated or with which the Company has a
business relationship, or any firm or corporation that competes with the Company
except that officers, directors and/or existing stockholders of the Company may
own stock in (but not exceeding two percent of the outstanding capital stock of)
any publicly traded company that may compete with the Company. To the Company's
knowledge, none of the Company's officers or directors or any members of their
immediate families are, directly or indirectly, interested in any material
contract with the Company. The Company is not a guarantor or indemnitor of any
indebtedness of any other person, firm or corporation.
2.12 RIGHTS OF REGISTRATION AND VOTING RIGHTS. Except as
----------------------------------------
contemplated in the Investors' Rights Agreement, the Company has not granted or
agreed to grant any registration rights, including piggyback rights, to any
person or entity. To the Company's knowledge, except as provided in the
Company's Amended and Restated Voting Agreement dated August 10, 1998 with
certain stockholders, no stockholder of the Company has entered into any
agreements with respect to the voting of capital shares of the Company.
2.13 TITLE TO PROPERTY AND ASSETS. The Company owns its
----------------------------
property and assets free and clear of all mortgages, liens, loans and
encumbrances, except such encumbrances and liens which arise in the ordinary
course of business and do not materially impair the Company's ownership or use
of such property or assets. With respect to the property and assets it leases,
the Company is in compliance with such leases and, to its knowledge, holds a
valid leasehold interest free of any liens, claims or encumbrances.
2.14 CHANGES. Since the Company's inception, there has not
-------
been:
(a) any damage, destruction or loss, whether or not
covered by insurance, materially and adversely affecting the business,
properties, prospects, or financial condition of the Company;
(b) any waiver or compromise by the Company of a
valuable right or of a material debt owed to it;
(c) any satisfaction or discharge of any lien, claim,
or encumbrance or payment of any obligation by the Company, except in the
ordinary course of business and that is not material to the business,
properties, prospects or financial condition of the Company;
(d) any material change to a material contract or
agreement by which the Company or any of its assets is bound or subject;
(e) any sale or assignment of any patents, trademarks,
copyrights, trade secrets or other intangible assets;
-6-
<PAGE>
(f) any mortgage, pledge, transfer of a security
interest in, or lien, created by the Company, with respect to any of its
material properties or assets, except liens for taxes not yet due or payable;
(g) any loans or guarantees made by the Company to
or for the benefit of its employees, officers or directors, or any members of
their immediate families, other than travel advances and other advances made in
the ordinary course of its business;
(h) any declaration, setting aside or payment or
other distribution in respect to any of the Company's capital stock, or any
direct or indirect redemption, purchase, or other acquisition of any of such
stock by the Company;
(i) to the Company's knowledge, any other event or
condition of any character that might materially and adversely affect the
business, properties, prospects or financial condition of the Company; or
(j) any arrangement or commitment by the Company to
do any of the things described in this Section 2.14.
2.15 TAX RETURNS AND PAYMENTS. The Company has filed all
------------------------
tax returns and reports as required by law. These returns and reports are true
and correct in all material respects. The Company has paid all taxes and other
assessments due.
2.16 LABOR AGREEMENTS AND ACTIONS. The Company is not
----------------------------
bound by or subject to (and none of its assets or properties is bound by or
subject to) any written or oral, express or implied, contract, commitment or
arrangement with any labor union, and no labor union has requested or, to the
knowledge of the Company, has sought to represent any of the employees,
representatives or agents of the Company. There is no strike or other labor
dispute involving the Company pending, or to the knowledge of the Company
threatened, which could have a material adverse effect on the assets,
properties, financial condition, operating results, or business of the Company,
nor is the Company aware of any labor organization activity involving its
employees. The employment of each officer and employee of the Company is
terminable at the will of the Company. To its knowledge, the Company has
complied in all material respects with all applicable state and federal equal
employment opportunity laws and with other laws related to employment.
2.17 CONFIDENTIAL INFORMATION AND INVENTION ASSIGNMENT
-------------------------------------------------
AGREEMENTS. Each employee, consultant and officer of the Company has executed an
- ----------
agreement with the Company regarding confidentiality and proprietary
information. The Company is not aware that any of its employees or consultants
is in violation thereof, and the Company will use its best efforts to prevent
any such violation.
2.18 PERMITS. The Company has all franchises, permits,
-------
licenses and any similar authority necessary for the conduct of its business,
the lack of which could materially and adversely affect the business,
properties, prospects, or financial condition of the Company. The
-7-
<PAGE>
Company is not in default in any material respect under any of such franchises,
permits, licenses or other similar authority.
2.19 CORPORATE DOCUMENTS. The Restated Certificate and
-------------------
Bylaws of the Company are in the form made available to counsel for the
Purchasers. The copy of the minute books of the Company made available to the
Purchasers contains minutes of all meetings of directors and stockholders and
all actions by written consent without a meeting by the directors and
stockholders since the date of incorporation and reflects all actions by the
directors and stockholders with respect to all transactions referred to in such
minutes accurately in all material respects.
3. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS. Each
------------------------------------------------
Purchaser hereby represents and warrants to the Company that:
3.1 AUTHORIZATION. Such Purchaser has full power and
-------------
authority to enter into this Agreement. The Agreements, when executed and
delivered by the Purchaser, will constitute valid and legally binding
obligations of the Purchaser, enforceable in accordance with their terms, except
(a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance, and any other laws of general application affecting
enforcement of creditors' rights generally, and as limited by laws relating to
the availability of a specific performance, injunctive relief, or other
equitable remedies, or (b) to the extent the indemnification provisions
contained in the Investors' Rights Agreement may be limited by applicable
federal or state securities laws.
3.2 PURCHASE ENTIRELY FOR OWN ACCOUNT. This Agreement is
---------------------------------
made with the Purchaser in reliance upon the Purchaser's representation to the
Company, which by the Purchaser's execution of this Agreement, the Purchaser
hereby confirms, that the Securities to be acquired by the Purchaser will be
acquired for investment for the Purchaser's own account, not as a nominee or
agent, and not with a view to the resale or distribution of any part thereof,
and that the Purchaser has no present intention of selling, granting any
participation in, or otherwise distributing the same. By executing this
Agreement, the Purchaser further represents that the Purchaser does not
presently have any contract, undertaking, agreement or arrangement with any
person to sell, transfer or grant participation to such person or to any third
person, with respect to any of the Securities. The Purchaser has not been formed
for the specific purpose of acquiring the Securities.
3.3 DISCLOSURE OF INFORMATION. The Purchaser has had an
-------------------------
opportunity to discuss the Company's business, management, financial affairs and
the terms and conditions of the offering of the Stock with the Company's
management and has had an opportunity to review the Company's facilities. The
Purchaser understands that such discussions, as well as any written information
delivered by the Company to the Purchaser, were intended to describe the aspects
of the Company's business that it believes to be material.
3.4 RESTRICTED SECURITIES. The Purchaser understands that
---------------------
the Securities have not been, and will not be, registered under the Securities
Act, by reason of a specific exemption from the registration provisions of the
Securities Act which depends upon, among other things,
-8-
<PAGE>
the bona fide nature of the investment intent and the accuracy of the
Purchaser's representations as expressed herein. The Purchaser understands that
the Securities are "restricted securities" under applicable U.S. federal and
state securities laws and that, pursuant to these laws, the Purchaser must hold
the Securities indefinitely unless they are registered with the Securities and
Exchange Commission and qualified by state authorities, or an exemption from
such registration and qualification requirements is available. The Purchaser
acknowledges that the Company has no obligation to register or qualify the
Securities for resale except as set forth in the Investors' Rights Agreement.
The Purchaser further acknowledges that if an exemption from registration or
qualification is available, it may be conditioned on various requirements
including, but not limited to, the time and manner of sale, the holding period
for the Securities, and on requirements relating to the Company that are outside
of the Purchaser's control, and which the Company is under no obligation and may
not be able to satisfy.
3.5 NO PUBLIC MARKET. The Purchaser understands that no
----------------
public market now exists for any of the securities issued by the Company, and
that the Company has made no assurances that a public market will ever exist for
the Securities.
3.6 LEGENDS. The Purchaser understands that the Securities,
-------
and any securities issued in respect thereof or exchange therefor, may bear one
or all of the following legends:
(a) "THE SECURITIES REPRESENTED BY THIS CERTIFICATE
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AND HAVE BEEN
ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE
OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN
EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL IN A
FORM SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER
THE SECURITIES ACT OF 1933."
(b) Any legend set forth in the other Agreements.
(c) Any legend required by the Blue Sky laws of any
state to the extent such laws are applicable to the shares represented by the
certificate so legended.
3.7 ACCREDITED INVESTOR. The Purchaser is an accredited
-------------------
investor as defined in Rule 501(a) of Regulation D promulgated under the
Securities Act.
4. CONDITIONS OF THE PURCHASERS' OBLIGATIONS AT CLOSING. The
----------------------------------------------------
obligations of each Purchaser to the Company under this Agreement are subject to
the fulfillment, on or before the Closing, of each of the following conditions,
unless otherwise waived:
4.1 REPRESENTATIONS AND WARRANTIES. The representations and
------------------------------
warranties of the Company contained in Section 2 shall be true and correct in
all material respects on and as of the Closing with the same effect as though
such representations and warranties had been made on and as of the date of the
Closing.
-9-
<PAGE>
4.2 PERFORMANCE. The Company shall have performed and complied
-----------
with all covenants, agreements, obligations and conditions contained in this
Agreement that are required to be performed or complied with by it on or before
the Closing.
4.3 COMPLIANCE CERTIFICATE. The President of the Company shall
----------------------
deliver to the Purchasers at the Closing a certificate certifying that the
conditions specified in Sections 4.1 and 4.2 have been fulfilled.
4.4 QUALIFICATIONS. Except as described in Section 6, all
--------------
authorizations, approvals or permits, if any, of any governmental authority or
regulatory body of the United States or of any state that are required in
connection with the lawful issuance and sale of the Stock pursuant to this
Agreement shall be obtained and effective as of the Closing.
4.5 OPINION OF COMPANY COUNSEL. The Purchasers at the Closing shall
--------------------------
have received from Venture Law Group, counsel for the Company, an opinion dated
as of the Closing in substantially the form of Exhibit E.
---------
4.6 INVESTORS' RIGHTS AGREEMENT. The Company and each Purchaser
---------------------------
shall have executed and delivered the Investors' Rights Agreement in
substantially the form attached as Exhibit D.
---------
4.7 RESTATED CERTIFICATE. The Company shall have filed the Restated
--------------------
Certificate with the Secretary of State of Delaware on or prior to the Closing,
which shall continue to be in full force and effect as of the Closing.
5. CONDITIONS OF THE COMPANY'S OBLIGATIONS AT CLOSING. The obligations
--------------------------------------------------
of the Company to each Purchaser under this Agreement are subject to the
fulfillment, on or before the Closing, of each of the following conditions,
unless otherwise waived:
5.1 REPRESENTATIONS AND WARRANTIES. The representations and
------------------------------
warranties of each Purchaser contained in Section 3 shall be true and correct in
all material respects on and as of the Closing with the same effect as though
such representations and warranties had been made on and as of the Closing.
5.2 PERFORMANCE. All covenants, agreements and conditions contained
-----------
in this Agreement to be performed by the Purchasers on or prior to the Closing
shall have been performed or complied with in all material respects.
5.3 QUALIFICATIONS. Except as described in Section 6, all
--------------
authorizations, approvals or permits, if any, of any governmental authority or
regulatory body of the United States or of any state that are required in
connection with the lawful issuance and sale of the Stock pursuant to this
Agreement shall be obtained and effective as of the Closing.
5.4 INVESTORS' RIGHTS AGREEMENT. The Company and each Purchaser
---------------------------
shall have executed and delivered the Investors' Rights Agreement in
substantially the form attached as Exhibit D.
---------
-10-
<PAGE>
5.5 RESTATED CERTIFICATE. The Company shall have filed the
--------------------
Restated Certificate with the Secretary of State of Delaware on or prior to the
Closing, which shall continue to be in full force and effect as of the Closing.
6. HSR ACT FILINGS. As soon as practicable after the Closing, the
---------------
Company and each of the Note Purchasers will separately file with the United
States Federal Trade Commission and the Antitrust Division of the Justice
Department pursuant to the HSR Act all requisite documents and notifications in
order to provide for the conversion of the Notes into shares of the Company's
Series C Preferred Stock. The parties will cooperate and coordinate with one
another in exchanging information and providing reasonable assistance as the
other parties may request in connection with the foregoing.
7. MISCELLANEOUS.
-------------
7.1 SURVIVAL OF WARRANTIES. Unless otherwise set forth in this
----------------------
Agreement, the warranties, representations and covenants of the Company and the
Purchasers contained in or made pursuant to this Agreement shall survive the
execution and delivery of this Agreement and the Closing for a period of one (1)
year following the Closing.
7.2 TRANSFER; SUCCESSORS AND ASSIGNS. The terms and conditions
--------------------------------
of this Agreement shall inure to the benefit of and be binding upon the
respective successors and assigns of the parties. Nothing in this Agreement,
express or implied, is intended to confer upon any party other than the parties
hereto or their respective successors and assigns any rights, remedies,
obligations, or liabilities under or by reason of this Agreement, except as
expressly provided in this Agreement.
7.3 GOVERNING LAW. This Agreement and all acts and
-------------
transactions pursuant hereto and the rights and obligations of the parties
hereto shall be governed, construed and interpreted in accordance with the laws
of the State of California, without giving effect to principles of conflicts of
law.
7.4 COUNTERPARTS. This Agreement may be executed in two or
------------
more counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.
7.5 TITLES AND SUBTITLES. The titles and subtitles used in
--------------------
this Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
7.6 NOTICES. Any notice required or permitted by this
-------
Agreement shall be in writing and shall be deemed sufficient upon delivery, when
delivered personally or by overnight courier or sent by telegram or fax, or
forty-eight (48) hours after being deposited in the U.S. mail, as certified or
registered mail, with postage prepaid, addressed to the party to be notified at
such party's address as set forth on the signature page or Exhibit A hereto, or
as subsequently modified by written notice, and if to the Company, with a copy
to Venture Law Group, 2800 Sand Hill Road, Menlo Park, CA 94025 attn: Joshua
Green.
-11-
<PAGE>
7.7 FINDER'S FEE. Each party represents that it neither is
------------
nor will be obligated for any finder's fee or commission in connection with this
transaction. Each Purchaser agrees to indemnify and to hold harmless the Company
from any liability for any commission or compensation in the nature of a
finder's fee (and the costs and expenses of defending against such liability or
asserted liability) for which each Purchaser or any of its officers, employees,
or representatives is responsible. The Company agrees to indemnify and hold
harmless each Purchaser from any liability for any commission or compensation in
the nature of a finder's fee (and the costs and expenses of defending against
such liability or asserted liability) for which the Company or any of its
officers, employees or representatives is responsible.
7.8 FEES AND EXPENSES. If the Closing is consummated, the
-----------------
Company shall pay the reasonable fees and expenses of one special counsel for
the Purchasers, incurred with respect to this Agreement, the documents referred
to herein and the transactions contemplated hereby and thereby, provided such
fees and expenses do not exceed $5,000.
7.9 ATTORNEY'S FEES. If any action at law or in equity
---------------
(including arbitration) is necessary to enforce or interpret the terms of any of
the Agreements, the prevailing party shall be entitled to reasonable attorney's
fees, costs and necessary disbursements in addition to any other relief to which
such party may be entitled.
7.10 AMENDMENTS AND WAIVERS. Any term of this Agreement may be
----------------------
amended or waived only with the written consent of the Company and the holders
of at least a majority of the Stock purchased hereunder. Any amendment or waiver
effected in accordance with this Section 7.10 shall be binding upon the
Purchasers and each transferee of the Securities, each future holder of all such
Securities, and the Company.
7.11 SEVERABILITY. If one or more provisions of this Agreement
------------
are held to be unenforceable under applicable law, the parties agree to
renegotiate such provision in good faith. In the event that the parties cannot
reach a mutually agreeable and enforceable replacement for such provision, then
(a) such provision shall be excluded from this Agreement, (b) the balance of the
Agreement shall be interpreted as if such provision were so excluded and (c) the
balance of the Agreement shall be enforceable in accordance with its terms.
7.12 DELAYS OR OMISSIONS. No delay or omission to exercise
-------------------
any right, power or remedy accruing to any party under this Agreement, upon any
breach or default of any other party under this Agreement, shall impair any such
right, power or remedy of such non-breaching or non-defaulting party nor shall
it be construed to be a waiver of any such breach or default, or an acquiescence
therein, or of or in any similar breach or default thereafter occurring; nor
shall any waiver of any single breach or default be deemed a waiver of any other
breach or default theretofore or thereafter occurring. Any waiver, permit,
consent or approval of any kind or character on the part of any party of any
breach or default under this Agreement, or any waiver on the part of any party
of any provisions or conditions of this Agreement, must be in writing and shall
be effective only to the extent specifically set forth in such writing. All
remedies, either under this Agreement or by law or otherwise afforded to any
party, shall be cumulative and not alternative.
-12-
<PAGE>
7.13 ENTIRE AGREEMENT. This Agreement, and the documents
----------------
referred to herein constitute the entire agreement between the parties hereto
pertaining to the subject matter hereof, and any and all other written or oral
agreements relating to the subject matter hereof existing between the parties
hereto are expressly canceled.
7.14 CORPORATE SECURITIES LAW. THE SALE OF THE SECURITIES
------------------------
WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE
COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF THE
SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR
PRIOR TO THE QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES IS EXEMPT
FROM THE QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF THE CALIFORNIA
CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY
CONDITIONED UPON THE QUALIFICATION BEING OBTAINED UNLESS THE SALE IS SO EXEMPT.
7.15 CONFIDENTIALITY. Except as provided below, each party
---------------
hereto agrees that, except with the prior written permission of the other party,
it shall at all times keep confidential and not divulge, furnish or make
accessible to anyone any confidential information, knowledge or data concerning
or relating to the business or financial affairs of the other parties to which
such party has been or shall become privy by reason of this Agreement,
discussions or negotiations relating to this Agreement, the performance of its
obligations hereunder or the ownership of Stock purchased hereunder. The
provisions of this Section 7.15 shall be in addition to, and not in substitution
for, the provisions of any separate nondisclosure agreement executed by the
parties hereto with respect to the transactions contemplated hereby.
Notwithstanding the foregoing provisions of this Section 7.15, with regard to
the obligations of Amazon.com, Inc. ("Amazon.com"), the existing Nondisclosure
----------
Agreement between the Company and Amazon.com dated August 10, 1998 shall remain
in full force and effect and shall supersede in all respects the obligations
contained in this Section 7.15 that would otherwise be binding upon Amazon.com.
7.16 EXCULPATION AMONG PURCHASERS. Each Purchaser acknowledges
----------------------------
that it is not relying upon any person, firm or corporation, other than the
Company and its officers and directors, in making its investment or decision to
invest in the Company. Each Purchaser agrees that no Purchaser nor the
respective controlling persons, officers, directors, partners, agents, or
employees of any Purchaser shall be liable to any other Purchaser for any action
heretofore or hereafter taken or omitted to be taken by any of them in
connection with the purchase of the Securities.
7.17 WAIVER OF CONFLICTS. Each party to this Agreement
-------------------
acknowledges that Venture Law Group, counsel for the Company, has in the past
performed and may continue to perform legal services for certain of the
Purchasers in matters unrelated to the transactions described in this Agreement,
including the representation of such Purchasers in venture capital financings.
Accordingly, each party to this Agreement hereby (a) acknowledges that they have
had an opportunity to ask for information relevant to this disclosure; and (b)
gives its informed consent to Venture Law Group's representation of certain of
the Purchasers in such unrelated
-13-
<PAGE>
matters and to Venture Law Group's representation of the Company in connection
with this Agreement and the transactions contemplated hereby.
[Signature Pages Follow]
-14-
<PAGE>
The parties have executed this Series C Preferred Stock Purchase Agreement
as of the date first written above.
COMPANY:
DRUGSTORE.COM, INC.
By: /s/ Peter Neupert
------------------------------
Name: Peter Neupert
Title: President and CEO
Address: 18650 NE 67th Court
Redmond, WA 98052
PURCHASERS:
KLEINER PERKINS CAUFIELD & BYERS VIII,
L.P.
By: KPCB VIII Associates, L.P., its
General Partner
By:
______________________________
a General Partner
Address: 2750 Sand Hill Road
Menlo Park, CA 94025
KPCB VIII FOUNDERS FUND, L.P.
By: KPCB VIII Associates, L.P., its
General Partner
By:
_______________________________
a General Partner
Address: 2750 Sand Hill Road
Menlo Park, CA 94025
SIGNATURE PAGE TO THE SERIES C PREFERRED STOCK AND CONVERTIBLE NOTE PURCHASE
AGREEMENT
<PAGE>
The parties have executed this Series C Preferred Stock Purchase Agreement
as of the date first written above.
COMPANY:
DRUGSTORE.COM, INC.
By:
______________________________
Name: Peter Neupert
Title: President and CEO
Address: 18650 NE 67th Court
Redmond, WA 98052
PURCHASERS:
KLEINER PERKINS CAUFIELD & BYERS VIII,
L.P.
By: KPCB VIII Associates, L.P., its
General Partner
By: /s/ Brook H. Byers
------------------------------
a General Partner
Address: 2750 Sand Hill Road
Menlo Park, CA 94025
KPCB VIII FOUNDERS FUND, L.P.
By: KPCB VIII Associates, L.P., its
General Partner
By: /S/ Brook H. Byers
-------------------------------
a General Partner
Address: 2750 Sand Hill Road
Menlo Park, CA 94025
SIGNATURE PAGE TO THE SERIES C PREFERRED STOCK AND CONVERTIBLE NOTE PURCHASE
AGREEMENT
<PAGE>
KPCB LIFE SCIENCES ZAIBATSU FUND II, L.P.
By: KPCB VII Associates, L.P., its General
Partner
By: /s/ Brook H. Byers
-----------------------------------------
a General Partner
Address: 2750 Sand Hill Road
Menlo Park, CA 94025
AMAZON.COM, INC.
By:
__________________________________________
(Signature)
Name:
________________________________________
(print)
Title:
_______________________________________
Address: 1516 2nd Avenue
Seattle, WA 98101
SIGNATURE PAGE TO THE SERIES C PREFERRED STOCK AND CONVERTIBLE NOTE PURCHASE
AGREEMENT
<PAGE>
KPCB LIFE SCIENCES ZAIBATSU FUND II, L.P.
By: KPCB VII Associates, L.P., its General
Partner
By:
_________________________________________
a General Partner
Address: 2750 Sand Hill Road
Menlo Park, CA 94025
AMAZON.COM, INC.
By: /s/ Randy Tinsley
----------------------------------------
(Signature)
Name:
RANDY TINSLEY
---------------------------------------
(print)
Title: Treasurer
--------------------------------------
Address: 1516 2nd Avenue
Seattle, WA 98101
SIGNATURE PAGE TO THE SERIES C PREFERRED STOCK AND CONVERTIBLE NOTE PURCHASE
AGREEMENT
<PAGE>
MAVERON EQUITY PARTNERS, L.P.
a Delaware Limited Partnership
By: Maveron General Partner LLC,
a Delaware Limited Liability Company
By: /s/ Dan Levitan
-----------------------------------------
Manager
Address:
____________________________________
____________________________________
LIBERTY DS, INC.
By:
________________________________________
(Signature)
Name:
_______________________________________
(print)
Title:
______________________________________
Address:
____________________________________
____________________________________
____________________________________________
(Print name of Purchaser)
By:
_________________________________________
(Signature)
Address:
____________________________________
____________________________________
SIGNATURE PAGE TO THE SERIES C PREFERRED STOCK AND CONVERTIBLE NOTE PURCHASE
AGREEMENT
<PAGE>
MAVERON EQUITY PARTNERS, L.P.
a Delaware Limited Partnership
By: Maveron General Partner LLC,
a Delaware Limited Liability Company
By:
________________________________________
Manager
Address:
____________________________________
____________________________________
LIBERTY DS, INC.
By: /s/ Bruce Ravenel
----------------------------------------
(Signature)
Name: BRUCE W. RAVENEL
---------------------------------------
(print)
Title: EXECUTIVE VICE PRESIDENT
--------------------------------------
Address:
____________________________________
____________________________________
_______________________________________
(Print name of Purchaser)
By:
_________________________________________
(Signature)
Name:_______________________________________
(print)
Title:______________________________________
Address:
____________________________________
____________________________________
SIGNATURE PAGE TO THE SERIES C PREFERRED STOCK AND CONVERTIBLE NOTE PURCHASE
AGREEMENT
<PAGE>
MAVERON EQUITY PARTNERS, L.P.
a Delaware Limited Partnership
By: Maveron General Partner LLC,
a Delaware Limited Liability Company
By: _________________________________________
Manager
Address: ____________________________________
____________________________________
LIBERTY DS, INC.
By: _________________________________________
(Signature)
Name: _______________________________________
(print)
Title: ______________________________________
Address: ____________________________________
____________________________________
PETER NEUPERT
By: /s/ Peter Neupert
-----------------------------------------
(Signature)
Address: 18650 NE 67th Court
------------------------------------
Redmond, WA 98052
------------------------------------
SIGNATURE PAGE TO THE SERIES C PREFERRED STOCK AND CONVERTIBLE NOTE PURCHASE
AGREEMENT
<PAGE>
EXHIBITS
--------
Exhibit A - Schedule of Purchasers
Exhibit B - Form of Fourth Amended and Restated Certificate of
Incorporation
Exhibit C- Schedule of Exceptions to Representations and
Warranties
Exhibit D - Form of Third Amended and Restated Investors' Rights
Agreement
Exhibit E - Form of Legal Opinion of Venture Law Group
Exhibit F - Form of Convertible Promissory Note
<PAGE>
EXHIBIT A
---------
SCHEDULE OF PURCHASERS
<TABLE>
<CAPTION>
PURCHASER NAME TOTAL PURCHASE PRICE SHARES
- --------------------------------- ------------------------------ -----------------------
<S> <C> <C>
Kleiner Perkins Caufield & Byers VIII, L.P. * $ 3,592,003.65 459,042
KPCB VIII Founders Fund, L.P. $ 207,996.33 26,581
KPCB Life Sciences Zaibatsu Fund II, L.P. $ 199,999.18 25,559
Amazon.com, Inc. * $20,000,003.57 2,555,911
Maveron Equity Partners, L.P. $ 5,999,998.73 766,773
Peter Neupert $ 2,500,001.43 319,489
Liberty DS, Inc. $ 2,500,001.43 319,489
TOTAL $35,000,004.32 4,472,844
</TABLE>
* Pursuant to Section 1.2 of this Agreement, such Purchaser is acquiring a Note
and is not purchasing Stock under this Agreement. The number of shares reflected
opposite such Purchaser's name reflect the number of shares of Stock into which
the Note may be converted upon the occurrence of certain events as specified in
the Note.
<PAGE>
EXHIBIT B
---------
FORM OF FOURTH AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
<PAGE>
EXHIBIT C
---------
SCHEDULE OF EXCEPTIONS TO
REPRESENTATIONS AND WARRANTIES
<PAGE>
EXHIBIT C
---------
SCHEDULE OF EXCEPTIONS
Set forth below are exceptions to the representations and warranties of
DrugStore.com, Inc. (the "Company") contained in Section 2 of the Series C
-------
Preferred Stock Purchase Agreement (the "Agreement"). Section references in this
---------
Schedule of Exceptions are for convenience only; each disclosure and exception
set forth below is intended to qualify all of the Company's representations and
warranties in the Agreement. All capitalized terms used herein and not defined
herein shall have the same meanings as in the Agreement.
Section 2.1--Organization, Good Standing and Qualification
- -----------------------------------------------------------
1. The Company is in the process of qualifying to do business in the
state of Texas.
2. The Company is a licensed pharmacy in WA, and is in the process of
registering in most other states.
Section 2.2--Capitalization
- ---------------------------
1. The Company has adopted a 1998 Stock Plan, which reserves 4,235,000
shares of Common Stock for issuance to officers, directors, employees and
consultants of the Company. As of the date hereof, options to purchase 2,414,350
shares have been issued under such Plan and an additional 8,000 shares of Common
Stock have been issued under the Plan pursuant to direct stock issuances.
2. Pursuant to the Plan, the Company has offered, or is in the process of
issuing, shares of Common Stock (or options therefor) to certain potential
employees and consultants.
Section 2.3--Subsidiaries
- -------------------------
1. The Company has a wholly-owned subsidiary called DS Pharmacy, Inc., a
Delaware corporation.
Section 2.7--Litigation
- -----------------------
1. Wal-Mart Stores, Inc. has filed suit against the Company, along with
Amazon.com, Inc. and Kleiner Perkins Caufield & Byers in Arkansas and Washington
alleging that by hiring certain former Wal-Mart employees, the Company (and the
other named parties) are attempting to steal Wal-Mart trade secrets. Although
the Company believes that the suit has no merit, the outcome of any litigation
is uncertain. There can therefore be no assurance that the Company will prevail
in the suit or that the Company will be able to settle the suit on terms
favorable to the Company.
<PAGE>
Section 2.8 -- Intellectual Property
- ------------------------------------
1. Jed Smith, the Company's current Vice President of Strategy and
Business Development, performed some of the preliminary work for the founding of
the Company during the period of time while he was employed by Cybersmith, Inc.
("Cybersmith"). Mr. Smith and Cybersmith have entered into a letter agreement
----------
confirming that Cybersmith does not own or have any rights to any work product
or intellectual property that Mr.Smith developed on behalf of the Company during
his tenure at Cybersmith.
2. The Company may use certain intellectual property that was developed
by Jed Smith prior to his employment with the Company and was assigned to the
Company in June 1998 as partial consideration for Mr. Smith's purchase of Common
Stock from the Company.
3. The Company is working with its trademark counsel to determine the
availability of certain trademarks it may use in connection with its business,
and if appropriate, to register such trademarks.
4. The Company is also exploring the acquisition of certain domain names
in the US and internationally.
5. See Litigation.
Section 2.10 -- Agreements; Action
- ----------------------------------
1. The Company has entered into offer letters with each of its officers.
2. The Company has entered into a Technology License and Marketing
Agreement with Amazon.com, Inc. ("Amazon.com"), pursuant to which the parties
----------
have licensed to each other certain proprietary technology and agreed to
undertake certain joint marketing efforts.
3. The Company has entered into a number of advertising and customer
reference agreements with Internet portal and content sites, including Yahoo!,
Excite, Inc., AOL and others, regarding the promotion of the Company's business
to users of these sites. Certain of these agreements contain nonexclusive
licenses to use the Company's or the third party's trademarks in connection with
such activities.
4. The Company has entered into an agreement with TriNet to provide
certain payroll and benefit services of the Company.
5. The Company is in discussions with several potential lenders,
including Silicon Valley Bank, regarding obtaining a bank line of credit and an
equipment lease line. The Company has financed the purchase of certain computer
through LeaseTech.
-2-
<PAGE>
6. In August 1998, the Company entered into an office lease for its
current facilities in Redmond, Washington. The Company is negotiating to
sublease 50,000 square feet of office space in Bellevue, Washington for
approximately $1.2 million per year with at 6.5 year term.
7. In November 1998 the Company acquired certain assets of Earthwell,
Inc., an online vitamin vendor and hired Earthwell's founder in merchandising.
8. The Company has entered into agreements with a number of managed care
organizations, insurance companies and pharmacy benefit management companies
pursuant to which the Company will obtain reimbursement for prescription drugs
ordered by such companies' patient members from the Company.
9. The Company is in the process of negotiating and finalizing agreements
with RxAmerica LLC for fulfillment of pharmaceuticals ordered by the Company's
customers and Walsh Distribution, Inc. for the fulfillment of most
non-pharmaceutical products ordered by the Company's customers.
10. The Company entered into a number of license agreements for software
for the Company's internal systems and web site, including from PeopleSoft and
Oracle.
11. The Company has licensed content and health and pharmaceutical
management databases, including from HealthNotes.
12. The Company has purchased approximately $250,000 of initial product
inventory, and intends to purchase additional inventory prior to launch of its
web site.
13. The Company has entered into or is currently negotiating contracts for
the shipment of goods to customers.
14. The Company is in the process of finalizing an agreement with
Amazon.com whereby the Company will receive a license to use Amazon.com's
One-Click/1-Click trademarks.
Section 2.11 -- No Conflict of Interest
- ---------------------------------------
1. Kleiner Perkins Caufield & Byers ("KPCB"), a major stockholder of the
----
Company, was an early investor in Amazon.com and maintains a substantial equity
stake in Amazon.com. John Doerr and Brook Byers, directors of the Company, are
both partners of KPCB. Mr. Doerr is also a member of Amazon.com's board of
directors. Amazon.com is a major stockholder of the Company and is party to the
Technology License and Marketing Agreement discussed under Section 2.10 above.
2. See arrangements with certain officers listed below.
-3-
<PAGE>
3. The Company has loaned Kal Raman, the Company's CIO, $250,000 pursuant
to a promissory which is due the earlier of one year from the date of issuance
and Mr. Raman's termination date.
Section 2.14 -- No Changes
- --------------------------
1. On November 23, 1998, in connection with the Company's Series B
Preferred Stock financing, the Company and KPCB recinded KPCB's purchase of
89,552 of the original 1,671,641 shares of Series B Preferred Stock purchased by
KPCB in October 1998.
Section 2.16 -- Labor Agreements and Actions
- --------------------------------------------
1. The Company's offer letters with certain officers provide for certain
arrangements with regard to termination of employment without cause.
2. The Company may enter into offer letters with other new executive
officers when hired.
-4-
<PAGE>
EXHIBIT D
---------
FORM OF THIRD AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
<PAGE>
EXHIBIT E
---------
FORM OF LEGAL OPINION
OF
VENTURE LAW GROUP
<PAGE>
EXHIBIT F
---------
FORM OF CONVERTIBLE PROMISSORY NOTE
<PAGE>
EXHIBIT 10.11
DRUGSTORE.COM, INC.
SERIES D PREFERRED STOCK AND CONVERTIBLE NOTE PURCHASE AGREEMENT
This Series D Preferred Stock and Convertible Note Purchase Agreement (the
"Agreement") is made as of May 19, 1999 by and between drugstore.com, inc., a
Delaware corporation (the "Company"), and the investors listed on Exhibit A
attached hereto (each a "Purchaser" and together the "Purchasers").
The parties hereby agree as follows:
1. Purchase and Sale of Preferred Stock and Convertible Promissory Notes.
1.1 Sale and Issuance of Series D Preferred Stock.
(a) The Company shall adopt and file with the Secretary of State of
the State of Delaware on or before the Closing (as defined below) the Fifth
Amended and Restated Certificate of Incorporation in the form attached hereto as
Exhibit B (the "Restated Certificate").
(b) Subject to the terms and conditions of this Agreement and the
Notes (defined below), each Purchaser severally and not jointly agrees to
purchase and the Company agrees to sell and issue to each such Purchaser that
number of shares of Series D Preferred Stock listed opposite such Purchaser's
name on Exhibit A attached hereto at a purchase price of $17.65 per share upon
conversion of the Notes. The shares of Series D Preferred Stock issued to each
such Purchaser pursuant to this Agreement are hereinafter referred to as the
"Stock."
(c) The Stock and the Common Stock issuable upon conversion of the
Stock shall have the rights, privileges, preferences and restrictions as set
forth in the Restated Certificate.
1.2 Sale and Issuance of Convertible Promissory Notes.
(a) Subject to the terms and conditions of this Agreement, each
Purchaser severally and not jointly agrees to purchase at the Closing and the
Company agrees to sell and issue to each Purchaser a convertible promissory note
in substantially the form attached hereto as Exhibit F (a "Note" and
collectively, the "Notes") in the principal amount specified with respect to
such Purchaser on Exhibit A to this Agreement. The purchase price of each Note
shall be equal to 100% of the principal amount of such Note. The Company's
agreement with each Purchaser is a separate agreement, and the sales of the
Notes to the Purchasers are separate sales.
(b) The Stock, the Common Stock issuable upon conversion of the Stock,
and the Notes are hereinafter referred to as the "Securities."
<PAGE>
1.3 Closing; Delivery.
(a) The purchase and sale of the Notes shall take place at the offices
of Venture Law Group, 2775 Sand Hill Road, Menlo Park, California, at 8:00 a.m.,
on May 19, 1999 or at such other time and place as the Company, the Purchasers
purchasing a majority of the principal amount of the Notes, mutually agree upon,
orally or in writing (which time and place are designated as the "Closing").
(b) At the Closing, the Company shall deliver to each Purchaser the
Note to be purchased by such Purchaser against payment of the purchase price
therefor by check payable to the Company, wire transfer to the Company's bank
account or cancellation of indebtedness (or any combination of the foregoing).
2. Representations and Warranties of the Company. The Company
hereby represents and warrants to each Purchaser that, except as set forth on
the Schedule of Exceptions delivered on the date hereof, which exceptions shall
be deemed to be representations and warranties as if made hereunder:
2.1 Organization, Good Standing and Qualification. The Company is a
corporation duly incorporated, validly existing and in good standing under the
laws of the State of Delaware and has all requisite corporate power and
authority to carry on its business as now conducted. The Company is qualified to
transact business in the state of Washington and is in good standing under the
laws of the state of Washington. The Company is not required to qualify to
transact business in any other jurisdiction, except where the failure so to
qualify would not have a material adverse effect on its business or properties.
2.2 Capitalization. Upon the filing of the Restated Certificate, the
authorized capital of the Company consists, or will consist, immediately prior
to the Closing, of:
(a) 22,800,000 shares of Preferred Stock, (i) 10,000,000 of which
shares have been designated Series A Preferred Stock, all of which are issued
and outstanding immediately prior to the Closing, (ii) 5,500,000 of which shares
have been designated Series B Preferred Stock, 5,446,268 of which are issued and
outstanding immediately prior to the Closing, 5,000,000 of which shares have
been designated Series C Preferred Stock of which 4,472,844 are issued and
outstanding immediately prior to the Closing, and 2,300,000 of which shares have
been designated Series D Preferred Stock none of which are issued and
outstanding immediately prior to the Closing. All of the outstanding shares of
Preferred Stock have been duly authorized, fully paid and are nonassessable,
issued in compliance with all applicable federal and state securities laws, and
are convertible into Common Stock on a one-for-one basis.
(b) 30,200,000 shares of Common Stock, 2,323,000 shares of which are
issued and outstanding and 4,235,000 shares of which are reserved for future
issuance under the Company's 1998 Stock Plan (of which 3,068,684 shares are
currently subject to issuance under outstanding options and 1,158,316 shares
remain available for future grants) immediately prior to the Closing. All of
the outstanding shares of Common Stock have been duly authorized,
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fully paid and are nonassessable and issued in compliance with all applicable
federal and state securities laws.
(c) Except for the conversion privileges of the Preferred Stock and
the Notes, and except as set forth in the Investors' Rights Agreement (as
defined below), there are no outstanding options, warrants, rights (including
conversion or preemptive rights and rights of first refusal or similar rights)
or agreements, orally or in writing, for the purchase or acquisition from the
Company of any shares of its capital stock.
2.3 Subsidiaries. The Company does not currently own or control,
directly or indirectly, any interest in any other corporation, association, or
other business entity.
2.4 Authorization. All corporate action on the part of the Company,
its officers, directors and stockholders necessary for the authorization,
execution and delivery of this Agreement, the Third Amended and Restated
Investors' Rights Agreement in the form attached hereto as Exhibit D (the
"Investors' Rights Agreement") and the Second Amended and Restated Voting
Agreement (the "Voting Agreement", and collectively with the Investors' Rights
Agreement and this Agreement, the "Agreements"), the performance of all
obligations of the Company hereunder and thereunder and the authorization,
issuance and delivery of the Securities has been taken or will be taken prior to
the Closing, and the Agreements, when executed and delivered by the Company,
will constitute valid and legally binding obligations of the Company,
enforceable against the Company in accordance with their terms except (i) as
limited by applicable bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance, and other laws of general application affecting
enforcement of creditors' rights generally, as limited by laws relating to the
availability of specific performance, injunctive relief, or other equitable
remedies, or (ii) to the extent the indemnification provisions contained in the
Investors' Rights Agreement may be limited by applicable federal or state
securities laws.
2.5 Valid Issuance of Securities. The Notes that are being issued
to the Purchasers hereunder, when issued, sold and delivered in accordance with
the terms hereof for the consideration expressed herein, will be duly and
validly issued and free of restrictions on transfer other than restrictions on
transfer under this Agreement, the Notes, the Investors' Rights Agreement and
applicable state and federal securities laws. The Stock that may be issued to
the Purchasers upon conversion of the Notes has been duly and validly reserved
for issuance and, when issued and delivered in accordance with the terms
thereof, will be duly and validly issued and free of restrictions on transfer
other than restrictions on transfer under this Agreement, the Investors' Rights
Agreement and applicable state and federal securities laws. Based in part upon
the representations of the Purchasers in this Agreement and subject to the
provisions of Section 2.6 below, the Securities will be issued in compliance
with all applicable federal and state securities laws. Neither the Company nor
any agent on its behalf has solicited or will solicit any offers to sell or has
offered to sell or will offer to sell all or any part of the Stock or the Notes
to any person or persons so as to bring the sale of such Stock or Notes by the
Company within the registration provisions of the Securities Act or any state
securities laws. Except as set forth in Section 2.6, no governmental orders,
permissions, consents, approvals or authorizations are required to be obtained
and no registrations or declarations are required to be filed in connection
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with the execution and delivery of this Agreement and the issuance of the Stock,
the Notes or Securities, except such as has been duly and validly obtained or
filed, or with respect to any filings that must be made after the Closing, as
will be filed in a timely manner. The Common Stock issuable upon conversion of
the Stock has been duly and validly reserved for issuance, and upon issuance in
accordance with the terms of the Restated Certificate, will be duly and validly
issued, fully paid and nonassessable and free of restrictions on transfer other
than restrictions on transfer under this Agreement, the Investors' Rights
Agreement and applicable federal and state securities laws and will be issued in
compliance with all applicable federal and state securities laws.
2.6 Governmental Consents. No consent, approval, order or
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state or local governmental authority on the part of
the Company is required in connection with the consummation of the transactions
contemplated by this Agreement, except for filings pursuant to Section 25102(f)
of the California Corporate Securities Law of 1968, as amended, and the rules
thereunder, other applicable state securities laws, the Securities Act of 1933,
as amended (the "Securities Act") and the rules thereunder, and filings under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act") as required for any conversion of the Notes into Stock.
2.7 Financial Statements. The Company has delivered to each
Purchaser (a) its audited balance sheet as at December 31, 1998 and audited
statement of income and cash flows for the twelve months ending December 31,
1998 and (b) its unaudited balance sheet as at April 31, 1998 (the "Statement
Date") and unaudited consolidated statement of income and cash flows for the
four month period ending on the Statement Date (collectively, the "Financial
Statements"). The Financial Statements, together with the notes thereto, are
complete and correct in all material respects, have been prepared in accordance
with generally accepted accounting principles applied on a consistent basis
throughout the periods indicated, except as disclosed therein, and present
fairly the financial condition and position of the Company as of December 31,
1998 and the Statement Date; provided, however, that the unaudited financial
statements are subject to normal recurring year-end audit adjustments (which are
not expected to be material), and do not contain all footnotes required under
generally accepted accounting principles.
2.8 Liabilities. The Company has no material liabilities and, to
the best of its knowledge, knows of no material contingent liabilities not
disclosed in the Financial Statements, except current liabilities incurred in
the ordinary course of business subsequent to the Statement Date which have not
been, either in any individual case or in the aggregate, materially adverse.
2.9 Litigation. There is no action, suit, proceeding or
investigation pending or, to the Company's knowledge, currently threatened
against the Company that questions the validity of the Agreements or the right
of the Company to enter into them, or to consummate the transactions
contemplated hereby or thereby, or that might result, either individually or in
the aggregate, in any material adverse changes in the assets, condition or
affairs of the Company, financially or otherwise, nor is the Company aware that
there is any basis for the foregoing. The
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Company is not a party or subject to the provisions of any order, writ,
injunction, judgment or decree of any court or government agency or
instrumentality. There is no action, suit, proceeding or investigation by the
Company currently pending or that the Company intends to initiate.
2.10 Intellectual Property. To its knowledge, the Company owns or
possesses sufficient legal rights to all patents, trademarks, service marks,
tradenames, copyrights, trade secrets, licenses, information and proprietary
rights necessary for its business as now conducted without any conflict with, or
infringement of, the rights of others. The Company has not received any
communications alleging that the Company has violated or, by conducting its
business, would violate any of the patents, trademarks, service marks,
tradenames, copyrights, trade secrets or other proprietary rights of any other
person or entity. The Company is not aware that any of its employees is
obligated under any contract or other agreement, or subject to any judgment,
decree or order of any court or administrative agency, that would interfere with
the use of such employee's best efforts to promote the interest of the Company
or that would conflict with the Company's business. Neither the execution or
delivery of this Agreement, nor the carrying on of the Company's business as now
conducted by the employees of the Company, will, to the Company's knowledge,
conflict with or result in a breach of the terms, conditions, or provisions of,
or constitute a default under, any contract, covenant or instrument under which
any such employee is now obligated. The Company does not believe it is or will
be necessary to use any inventions of any of its employees (or persons it
currently intends to hire) made prior to their employment by the Company.
2.11 Compliance with Other Instruments. The Company is not in
violation or default of any provisions of its Restated Certificate or Bylaws or
in violation or default of any instrument, judgment, order, writ, decree or
contract to which it is a party or by which it is bound or, to its knowledge, of
any provision of any federal or state statute, rule or regulation applicable to
the Company, the effect of which would have a material adverse effect on the
Company. The execution, delivery and performance of the Agreements and the
consummation of the transactions contemplated hereby or thereby will not result
in any such violation or be in conflict with or constitute, with or without the
passage of time and giving of notice, either a default under any such provision,
instrument, judgment, order, writ, decree or contract or an event which results
in the creation of any lien, charge or encumbrance upon any assets of the
Company.
2.12 Agreements; Action.
(a) Except for agreements explicitly contemplated hereby and
agreements between the Company and its employees with respect to the sale of the
Company's Common Stock, there are no agreements, understandings or proposed
transactions between the Company and any of its officers, directors, affiliates
or any affiliate thereof that would be required to be disclosed pursuant to
Regulation S-K, as promulgated by the Securities and Exchange Commission, and
that are not disclosed in the Schedule of Exceptions.
(b) Except for agreements explicitly contemplated by the Agreements,
there are no agreements, understandings, instruments, contracts or proposed
transactions to
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which the Company is a party or by which it is bound that involve (i)
obligations (contingent or otherwise) of, or payments to, the Company in excess
of, $100,000, (ii) the license of any patent, copyright, trade secret or other
proprietary right to or from the Company (other than standard "off the shelf"
product licenses), or (iii) the grant of rights to manufacture, produce,
assemble, license, market, or sell its products to any other person or affect
the Company's exclusive right to develop, manufacture, assemble, distribute,
market or sell its products.
(c) The Company has not (i) declared or paid any dividends, or
authorized or made any distribution upon or with respect to any class or series
of its capital stock, (ii) incurred any indebtedness for money borrowed or
incurred any other liabilities individually in excess of $100,000 or in excess
of $500,000 in the aggregate, (iii) made any loans or advances to any person,
other than ordinary advances for business expenses, or (iv) sold, exchanged or
otherwise disposed of any of its assets or rights, other than in the ordinary
course of business.
(d) For the purposes of subsections (b) and (c) above, all
indebtedness, liabilities, agreements, understandings, instruments, contracts
and proposed transactions involving the same person or entity (including persons
or entities the Company has reason to believe are affiliated therewith) shall be
aggregated for the purpose of meeting the individual minimum dollar amounts of
such subsections.
2.13 No Conflict of Interest. The Company is not indebted, directly
or indirectly, to any of its officers or directors or to their respective
spouses or children, in any amount whatsoever other than in connection with
expenses or advances of expenses incurred in the ordinary course of business or
relocation expenses of employees. None of the Company's officers or directors,
or any members of their immediate families, are, directly or indirectly,
indebted to the Company (other than in connection with purchases of the
Company's stock) or, to the Company's knowledge, have any direct or indirect
ownership interest in any firm or corporation with which the Company is
affiliated or with which the Company has a business relationship, or any firm or
corporation that competes with the Company except that officers, directors
and/or existing stockholders of the Company may own stock in (but not exceeding
two percent of the outstanding capital stock of) any publicly traded company
that may compete with the Company. To the Company's knowledge, none of the
Company's officers or directors or any members of their immediate families are,
directly or indirectly, interested in any material contract with the Company.
The Company is not a guarantor or indemnitor of any indebtedness of any other
person, firm or corporation.
2.14 Rights of Registration and Voting Rights. Except as
contemplated in the Investors' Rights Agreement, the Company has not granted or
agreed to grant any registration rights, including piggyback rights, to any
person or entity. To the Company's knowledge, except as provided in the
Company's Second Amended and Restated Voting Agreement dated May 19, 1999 with
certain stockholders, no stockholder of the Company has entered into any
agreements with respect to the voting of capital shares of the Company.
2.15 Title to Property and Assets. The Company owns its property and
assets free and clear of all mortgages, liens, loans and encumbrances, except
such encumbrances and
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liens which arise in the ordinary course of business and do not materially
impair the Company's ownership or use of such property or assets. With respect
to the property and assets it leases, the Company is in compliance with such
leases and, to its knowledge, holds a valid leasehold interest free of any
liens, claims or encumbrances.
2.16 Changes. Since the Company's inception, there has not been:
(a) any damage, destruction or loss, whether or not covered by
insurance, materially and adversely affecting the business, properties,
prospects, or financial condition of the Company;
(b) any waiver or compromise by the Company of a valuable right or of
a material debt owed to it;
(c) any satisfaction or discharge of any lien, claim, or encumbrance
or payment of any obligation by the Company, except in the ordinary course of
business and that is not material to the business, properties, prospects or
financial condition of the Company;
(d) any material change to a material contract or agreement by which
the Company or any of its assets is bound or subject;
(e) any sale or assignment of any patents, trademarks, copyrights,
trade secrets or other intangible assets;
(f) any mortgage, pledge, transfer of a security interest in, or lien,
created by the Company, with respect to any of its material properties or
assets, except liens for taxes not yet due or payable;
(g) any loans or guarantees made by the Company to or for the benefit
of its employees, officers or directors, or any members of their immediate
families, other than travel advances and other advances made in the ordinary
course of its business;
(h) any declaration, setting aside or payment or other distribution in
respect to any of the Company's capital stock, or any direct or indirect
redemption, purchase, or other acquisition of any of such stock by the Company;
(i) to the Company's knowledge, any other event or condition of any
character that might materially and adversely affect the business, properties,
prospects or financial condition of the Company; or
(j) any arrangement or commitment by the Company to do any of the
things described in this Section 2.14.
2.17 Tax Returns and Payments. The Company has filed all tax returns
and reports as required by law. These returns and reports are true and correct
in all material respects. The Company has paid all taxes and other assessments
due.
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2.18 Labor Agreements and Actions. The Company is not bound by or
subject to (and none of its assets or properties is bound by or subject to) any
written or oral, express or implied, contract, commitment or arrangement with
any labor union, and no labor union has requested or, to the knowledge of the
Company, has sought to represent any of the employees, representatives or agents
of the Company. There is no strike or other labor dispute involving the Company
pending, or to the knowledge of the Company threatened, which could have a
material adverse effect on the assets, properties, financial condition,
operating results, or business of the Company, nor is the Company aware of any
labor organization activity involving its employees. The employment of each
officer and employee of the Company is terminable at the will of the Company.
To its knowledge, the Company has complied in all material respects with all
applicable state and federal equal employment opportunity laws and with other
laws related to employment. To the Company's knowledge, no employee of the
Company, nor any consultant with whom the Company has contracted, is in
violation of any term of any employment contract, proprietary information
agreement or any other agreement relating to the right of any such individual to
be employed by, or to contract with, the Company because of the nature of the
business to be conducted by the Company that would have a material adverse
effect on the Company; and to the Company's knowledge the continued employment
by the Company of its present employees, and the performance of the Company's
contracts with its independent contractors, will not result in any such
violation that would have a material adverse effect on the Company. To its
knowledge, the Company has not received any notice alleging that any such
violation has occurred.
2.19 Confidential Information and Invention Assignment Agreements.
Each employee, consultant and officer of the Company has executed an agreement
with the Company regarding confidentiality and proprietary information in the
form provided to the Purchasers. The Company is not aware that any of its
employees or consultants is in violation thereof, and the Company will use its
best efforts to prevent any such violation.
2.20 Compliance with Laws; Permits. To its knowledge, the Company is
not in violation of any applicable statute, rule, regulation, order or
restriction of any domestic or foreign government or any instrumentality or
agency thereof in respect of the conduct of its business or the ownership of its
properties which violation would materially and adversely affect the business,
assets, liabilities, financial condition, operations or prospects of the
Company. The Company has all franchises, permits, licenses and any similar
authority necessary for the conduct of its business, the lack of which could
materially and adversely affect the business, properties, prospects, or
financial condition of the Company. The Company is not in default in any
material respect under any of such franchises, permits, licenses or other
similar authority.
2.21 Corporate Documents. The Restated Certificate and Bylaws of the
Company are in the form made available to counsel for the Purchasers. The copy
of the minute books of the Company made available to the Purchasers contains
minutes of all meetings of directors and stockholders and all actions by written
consent without a meeting by the directors and stockholders since the date of
incorporation and reflects all actions by the directors and stockholders with
respect to all transactions referred to in such minutes accurately in all
material respects.
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2.22 Full Disclosure. This Agreement, the Exhibits hereto, the
Agreements and all other documents delivered by the Company to Purchasers or
their attorneys or agents in connection herewith or therewith or with the
transactions contemplated hereby or thereby, do not contain any untrue statement
of a material fact nor, to the Company's knowledge, omit to state a material
fact necessary in order to make the statements contained herein or therein not
misleading in light of the circumstances under which they were made. To the
Company's knowledge, there are no facts which (individually or in the aggregate)
materially adversely affect the business, assets, liabilities, financial
condition, prospects or operations of the Company that have not been set forth
in the Agreements, the Exhibits hereto, or in other documents delivered to
Purchasers or their attorneys or agents in connection herewith.
3. Representations and Warranties of the Purchasers. Each Purchaser
hereby represents and warrants to the Company that:
3.1 Authorization. Such Purchaser has full power and authority to
enter into this Agreement. The Agreements, when executed and delivered by the
Purchaser, will constitute valid and legally binding obligations of the
Purchaser, enforceable in accordance with their terms, except (a) as limited by
applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance, and any other laws of general application affecting enforcement of
creditors' rights generally, and as limited by laws relating to the availability
of a specific performance, injunctive relief, or other equitable remedies, or
(b) to the extent the indemnification provisions contained in the Investors'
Rights Agreement may be limited by applicable federal or state securities laws.
3.2 Purchase Entirely for Own Account. This Agreement is made with
the Purchaser in reliance upon the Purchaser's representation to the Company,
which by the Purchaser's execution of this Agreement, the Purchaser hereby
confirms, that the Securities to be acquired by the Purchaser will be acquired
for investment for the Purchaser's own account, not as a nominee or agent, and
not with a view to the resale or distribution of any part thereof, and that the
Purchaser has no present intention of selling, granting any participation in, or
otherwise distributing the same. By executing this Agreement, the Purchaser
further represents that the Purchaser does not presently have any contract,
undertaking, agreement or arrangement with any person to sell, transfer or grant
participation to such person or to any third person, with respect to any of the
Securities. The Purchaser has not been formed for the specific purpose of
acquiring the Securities.
3.3 Disclosure of Information. The Purchaser has had an opportunity
to discuss the Company's business, management, financial affairs and the terms
and conditions of the offering of the Stock with the Company's management and
has had an opportunity to review the Company's facilities. The Purchaser
understands that such discussions, as well as any written information delivered
by the Company to the Purchaser, were intended to describe the aspects of the
Company's business that it believes to be material.
3.4 Restricted Securities. The Purchaser understands that the
Securities have not been, and will not be, registered under the Securities Act,
by reason of a specific exemption
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from the registration provisions of the Securities Act which depends upon, among
other things, the bona fide nature of the investment intent and the accuracy of
the Purchaser's representations as expressed herein. The Purchaser understands
that the Securities are "restricted securities" under applicable U.S. federal
and state securities laws and that, pursuant to these laws, the Purchaser must
hold the Securities indefinitely unless they are registered with the Securities
and Exchange Commission and qualified by state authorities, or an exemption from
such registration and qualification requirements is available. The Purchaser
acknowledges that the Company has no obligation to register or qualify the
Securities for resale except as set forth in the Investors' Rights Agreement.
The Purchaser further acknowledges that if an exemption from registration or
qualification is available, it may be conditioned on various requirements
including, but not limited to, the time and manner of sale, the holding period
for the Securities, and on requirements relating to the Company that are outside
of the Purchaser's control, and which the Company is under no obligation and may
not be able to satisfy.
3.5 No Public Market. The Purchaser understands that no public
market now exists for any of the securities issued by the Company, and that the
Company has made no assurances that a public market will ever exist for the
Securities.
3.6 Legends. The Purchaser understands that the Securities, and any
securities issued in respect thereof or exchange therefor, may bear one or all
of the following legends:
(a) "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AND HAVE BEEN ACQUIRED FOR
INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR
DISTRIBUTION THEREOF. NO SUCH SALE OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN
EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL IN A
FORM SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER
THE SECURITIES ACT OF 1933."
(b) Any legend set forth in the other Agreements.
(c) Any legend required by the Blue Sky laws of any state to the
extent such laws are applicable to the shares represented by the certificate so
legended.
3.7 Accredited Investor. The Purchaser is an accredited investor as
defined in Rule 501(a) of Regulation D promulgated under the Securities Act.
4. Conditions of the Purchasers' Obligations at Closing. The
obligations of each Purchaser to the Company under this Agreement are subject to
the fulfillment, on or before the Closing, of each of the following conditions,
unless otherwise waived:
4.1 Representations and Warranties. The representations and
warranties of the Company contained in Section 2 shall be true and correct in
all material respects on and as of
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the Closing with the same effect as though such representations and warranties
had been made on and as of the date of the Closing.
4.2 Performance. The Company shall have performed and complied with
all covenants, agreements, obligations and conditions contained in this
Agreement that are required to be performed or complied with by it on or before
the Closing and, except as set forth in Section 2.6, the Company shall have
obtained any and all consents, permits and waivers necessary or appropriate for
consummation of the transactions contemplated by the Agreement and the
Agreements.
4.3 Reservation of Conversion Shares. The Stock issuable upon
conversion of the Notes and the Securities issuable upon conversion of the Stock
shall have been duly authorized and reserved for issuance upon such conversions.
4.4 Compliance Certificate. The President of the Company shall
deliver to the Purchasers at the Closing a certificate certifying that the
conditions specified in Sections 4.1, 4.2 and 4.3 have been fulfilled.
4.5 Qualifications. Except as described in Section 6, all
authorizations, approvals or permits, if any, of any governmental authority or
regulatory body of the United States or of any state that are required in
connection with the lawful issuance and sale of the Notes pursuant to this
Agreement shall be obtained and effective as of the Closing.
4.6 Opinion of Company Counsel. The Purchasers at the Closing shall
have received from Venture Law Group, counsel for the Company, an opinion dated
as of the Closing in substantially the form of Exhibit E.
4.7 Investors' Rights Agreement. The Company, each Purchaser and
the parties thereto shall have executed and delivered the Investors' Rights
Agreement in substantially the form attached as Exhibit D.
4.8 Voting Rights Agreement. The Company and certain stockholders
of the Company shall have executed and delivered the Second Amended and Restated
Voting Agreement in substantially the form as Exhibit C attached hereto.
4.9 Restated Certificate. The Company shall have filed the
Restated Certificate with the Secretary of State of Delaware on or prior to the
Closing, which shall continue to be in full force and effect as of the Closing.
5. Conditions of the Company's Obligations at Closing. The
obligations of the Company to each Purchaser under this Agreement are subject to
the fulfillment, on or before the Closing, of each of the following conditions,
unless otherwise waived:
5.1 Representations and Warranties. The representations and
warranties of each Purchaser contained in Section 3 shall be true and correct in
all material respects on and as
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of the Closing with the same effect as though such representations and
warranties had been made on and as of the Closing.
5.2 Performance. All covenants, agreements and conditions contained
in this Agreement to be performed by the Purchasers on or prior to the Closing
shall have been performed or complied with in all material respects.
5.3 Qualifications. Except as described in Section 6, all
authorizations, approvals or permits, if any, of any governmental authority or
regulatory body of the United States or of any state that are required in
connection with the lawful issuance and sale of the Stock pursuant to this
Agreement shall be obtained and effective as of the Closing.
5.4 Investors' Rights Agreement. The Company and each Purchaser
shall have executed and delivered the Investors' Rights Agreement in
substantially the form attached as Exhibit D.
5.5 Restated Certificate. The Company shall have filed the Restated
Certificate with the Secretary of State of Delaware on or prior to the Closing,
which shall continue to be in full force and effect as of the Closing.
6. HSR Act Filings. As soon as practicable after the Closing, the
Company and each of the Purchasers will separately file with the United States
Federal Trade Commission and the Antitrust Division of the Justice Department
pursuant to the HSR Act all requisite documents and notifications in order to
provide for the conversion of the Notes into shares of the Company's Series D
Preferred Stock. The parties will cooperate and coordinate with one another in
exchanging information and providing reasonable assistance as the other parties
may request in connection with the foregoing. So long as the Notes remain
outstanding, the Company agrees not to take any action that would (A) cause the
representations and warranties of the Company contained in Section 2.1 (the
first sentence only), Section 2.4, Section 2.5 and Section 2.6 not to be true in
any material respects on and as of the date of the conversion of the Notes into
the Stock or (B) require, under Delaware law, the consent of the holders of
Series D Preferred Stock, voting as a separate class, if shares of Series D
Preferred Stock were outstanding, unless approved by Vulcan Ventures
Incorporated.
7. Miscellaneous.
7.1 Survival of Warranties. The warranties, representations and
covenants of the Company and the Purchasers contained in or made pursuant to
this Agreement shall survive any investigation made by any Purchaser and the
closing of the transactions contemplated hereby.
7.2 Transfer; Successors and Assigns. The terms and conditions of
this Agreement shall inure to the benefit of and be binding upon the respective
successors and assigns of the parties. Nothing in this Agreement, express or
implied, is intended to confer upon any party other than the parties hereto or
their respective successors and assigns any rights, remedies,
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obligations, or liabilities under or by reason of this Agreement, except as
expressly provided in this Agreement.
7.3 Governing Law. This Agreement and all acts and transactions
pursuant hereto and the rights and obligations of the parties hereto shall be
governed, construed and interpreted in accordance with the laws of the State of
California, without giving effect to principles of conflicts of law.
7.4 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.
7.5 Titles and Subtitles. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
7.6 Notices. Any notice required or permitted by this Agreement
shall be in writing and shall be deemed sufficient upon delivery, when delivered
personally or by overnight courier or sent by telegram or fax, or forty-eight
(48) hours after being deposited in the U.S. mail, as certified or registered
mail, with postage prepaid, addressed to the party to be notified at such
party's address as set forth on the signature page or Exhibit A hereto, or as
subsequently modified by written notice, and if to the Company, with a copy to
Venture Law Group, 2800 Sand Hill Road, Menlo Park, CA 94025 attn: Joshua Green.
7.7 Finder's Fee. Each party represents that it neither is nor will
be obligated for any finder's fee or commission in connection with this
transaction. Each Purchaser agrees to indemnify and to hold harmless the Company
from any liability for any commission or compensation in the nature of a
finder's fee (and the costs and expenses of defending against such liability or
asserted liability) for which each Purchaser or any of its officers, employees,
or representatives is responsible. The Company agrees to indemnify and hold
harmless each Purchaser from any liability for any commission or compensation in
the nature of a finder's fee (and the costs and expenses of defending against
such liability or asserted liability) for which the Company or any of its
officers, employees or representatives is responsible.
7.8 Fees and Expenses. If the Closing is consummated, the Company
shall pay the reasonable fees and expenses of one special counsel for the
Purchasers, incurred with respect to this Agreement, the documents referred to
herein and the transactions contemplated hereby and thereby, provided such fees
and expenses do not exceed $15,000. Except as provided above, the Company and
each Purchaser shall pay their respective filing fees and other expense in
connection with all filings they are required to made under the HSR Act.
7.9 Attorney's Fees. If any action at law or in equity (including
arbitration) is necessary to enforce or interpret the terms of any of the
Agreements, the prevailing party shall be entitled to reasonable attorney's
fees, costs and necessary disbursements in addition to any other relief to which
such party may be entitled.
-13-
<PAGE>
7.10 Amendments and Waivers. Any term of this Agreement may be
amended or waived only with the written consent of the Company and the
Purchasers of at least a majority of the principal amount of the Notes purchased
hereunder. Any amendment or waiver effected in accordance with this Section 7.10
shall be binding upon the Purchasers and each transferee of the Securities, each
future holder of all such Securities, and the Company.
7.11 Severability. If one or more provisions of this Agreement are
held to be unenforceable under applicable law, the parties agree to renegotiate
such provision in good faith. In the event that the parties cannot reach a
mutually agreeable and enforceable replacement for such provision, then (a) such
provision shall be excluded from this Agreement, (b) the balance of the
Agreement shall be interpreted as if such provision were so excluded and (c) the
balance of the Agreement shall be enforceable in accordance with its terms.
7.12 Delays or Omissions. No delay or omission to exercise any
right, power or remedy accruing to any party under this Agreement, upon any
breach or default of any other party under this Agreement, shall impair any such
right, power or remedy of such non-breaching or non-defaulting party nor shall
it be construed to be a waiver of any such breach or default, or an acquiescence
therein, or of or in any similar breach or default thereafter occurring; nor
shall any waiver of any single breach or default be deemed a waiver of any other
breach or default theretofore or thereafter occurring. Any waiver, permit,
consent or approval of any kind or character on the part of any party of any
breach or default under this Agreement, or any waiver on the part of any party
of any provisions or conditions of this Agreement, must be in writing and shall
be effective only to the extent specifically set forth in such writing. All
remedies, either under this Agreement or by law or otherwise afforded to any
party, shall be cumulative and not alternative.
7.13 Entire Agreement. This Agreement, and the documents referred to
herein constitute the entire agreement between the parties hereto pertaining to
the subject matter hereof, and any and all other written or oral agreements
relating to the subject matter hereof existing between the parties hereto are
expressly canceled.
7.14 Corporate Securities Law. THE SALE OF THE SECURITIES WHICH ARE
THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF
CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF THE SECURITIES OR
THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO THE
QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES IS EXEMPT FROM THE
QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF THE CALIFORNIA CORPORATIONS
CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON
THE QUALIFICATION BEING OBTAINED UNLESS THE SALE IS SO EXEMPT.
7.15 Confidentiality. Except as provided below, each party hereto
agrees that, except with the prior written permission of the other party, it
shall at all times keep confidential and not divulge, furnish or make accessible
to anyone any confidential information, knowledge or data concerning or relating
to the business or financial affairs of the other parties to which
-14-
<PAGE>
such party has been or shall become privy by reason of this Agreement,
discussions or negotiations relating to this Agreement, the performance of its
obligations hereunder or the ownership of Stock purchased hereunder. The
provisions of this Section 7.15 shall be in addition to, and not in substitution
for, the provisions of any separate nondisclosure agreement executed by the
parties hereto with respect to the transactions contemplated hereby.
Notwithstanding the foregoing, nothing herein shall prevent any party from
disclosing (i) such information which has been publicly disclosed, (ii) such
information which becomes available to the party on a non-confidential basis
from a source other than a party hereto, provided that such source is not bound
by a confidentiality agreement with such party, (iii) information required to be
disclosed pursuant to subpoena or other court process or otherwise required by
law and (iv) such information was known to such party prior to its first receipt
from the other party. Notwithstanding the foregoing provisions of this Section
7.15, with regard to the obligations of Amazon.com, Inc. ("Amazon.com"), the
existing Nondisclosure Agreement between the Company and Amazon.com dated August
10, 1998 shall remain in full force and effect and shall supersede in all
respects the obligations contained in this Section 7.15 that would otherwise be
binding upon Amazon.com.
7.16 Publicity. Within thirty (30) days of the Closing, the Company
may issue a press release disclosing that Vulcan Ventures Incorporated
("Vulcan") has invested in the Company in a form approved by Vulcan, which
approval will not be unreasonably withheld, conditioned or delayed. No other
announcement regarding Vulcan or its investment in the Company in a press
release, advertisement, professional or trade publication, mass marketing
materials or otherwise to the general public may be made by any party without
Vulcan's prior written consent. Notwithstanding the foregoing, any party may
disclose solely the fact that Vulcan is an investor in the Company and disclose
information as required by law.
7.17 Exculpation Among Purchasers. Each Purchaser acknowledges that
it is not relying upon any person, firm or corporation, other than the Company
.and its officers and directors, in making its investment or decision to invest
in the Company. Each Purchaser agrees that no Purchaser nor the respective
controlling persons, officers, directors, partners, agents, or employees of any
Purchaser shall be liable to any other Purchaser for any action heretofore or
hereafter taken or omitted to be taken by any of them in connection with the
purchase of the Securities.
7.18 Waiver of Conflicts. Each party to this Agreement acknowledges
that Venture Law Group, counsel for the Company, has in the past performed and
may continue to perform legal services for certain of the Purchasers in matters
unrelated to the transactions described in this Agreement, including the
representation of such Purchasers in venture capital financings. Accordingly,
each party to this Agreement hereby (a) acknowledges that they have had an
opportunity to ask for information relevant to this disclosure; and (b) gives
its informed consent to Venture Law Group's representation of certain of the
Purchasers in such unrelated matters and to Venture Law Group's representation
of the Company in connection with this Agreement and the transactions
contemplated hereby.
-15-
<PAGE>
[Signature Pages Follow]
-16-
<PAGE>
The parties have executed this Series D Preferred Stock Purchase Agreement
as of the date first written above.
COMPANY:
DRUGSTORE.COM, INC.
By: /s/ Peter Neupert
-------------------------------------
Name: Peter Neupert
Title: President and CEO
Address: 18650 NE 67th Court
Redmond, WA 98052
PURCHASERS:
Vulcan Ventures, Incorporated
By: /s/ Vulcan Ventures
-------------------------------------
Address: 110 110th Avenue Northeast
Suite 550
Bellevue, Washington 98004
Signature Page to the Series D Preferred Stock and
Convertible Note Purchase Agreement
<PAGE>
EXHIBITS
Exhibit A - Schedule of Purchasers
Exhibit B - Form of Fifth Amended and Restated Certificate of
Incorporation
Exhibit C- Second Amended and Restated Voting Agreement
Exhibit D - Form of Fourth Amended and Restated Investors' Rights
Agreement
Exhibit E - Form of Legal Opinion of Venture Law Group
Exhibit F - Form of Convertible Promissory Note
<PAGE>
EXHIBIT A
SCHEDULE OF PURCHASERS
<TABLE>
<CAPTION>
Purchaser Name Total Purchase Price Shares
<S> <C> <C>
Vulcan Ventures Incorporated $40,000,000.85 2,266,289
</TABLE>
* Pursuant to Section 1.2 of this Agreement, such Purchaser is acquiring a Note
and is not purchasing Stock under this Agreement. The number of shares
reflected opposite such Purchaser's name reflect the number of shares of Stock
into which the Note may be converted upon the occurrence of certain events as
specified in the Note.
<PAGE>
EXHIBIT B
FORM OF FIFTH AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
<PAGE>
EXHIBIT C
SECOND AMENDED AND RESTATED
VOTING AGREEMENT
<PAGE>
EXHIBIT D
FORM OF FOURTH AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
<PAGE>
EXHIBIT E
FORM OF LEGAL OPINION
OF
VENTURE LAW GROUP
<PAGE>
EXHIBIT F
FORM OF CONVERTIBLE PROMISSORY NOTE
<PAGE>
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AND
HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH,
THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISTRIBUTION MAY BE EFFECTED
WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF
COUNSEL IN A FORM SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT
REQUIRED UNDER THE SECURITIES ACT OF 1933.
CONVERTIBLE PROMISSORY NOTE
$40,000,000.85 May 19, 1999
Bellevue, Washington
For value received, drugstore.com, inc., a Delaware corporation (the
"Company"), promises to pay to Vulcan Ventures Incorporated (the "Holder"), the
principal sum of Forty Million Dollars Eighty-Five Cents ($40,000,000.85). No
interest shall accrue or be paid on this Note; provided, that if this Note shall
not have converted in accordance with Section 2 below on or before November 19,
1999, this Note shall bear interest accruing from the date hereof on the unpaid
principal amount at a rate equal to the lower of (i) 7.75% per annum, compounded
annually or (ii) the highest rate permitted by law. This Note is one of a
series of Convertible Promissory Notes containing substantially identical terms
and conditions issued pursuant to that certain Series D Preferred Stock and
Convertible Note Purchase Agreement dated May 19, 1999 (the "Purchase
Agreement"). Such Notes are referred to herein as the "Notes," and the holders
thereof are referred to herein as the "Holders." This Note is subject to the
following terms and conditions.
1. Maturity. Unless converted as provided in Section 2, this Note will
automatically mature and be due and payable on November 19, 1999 (the "Maturity
Date"). Subject to Section 2 below, any interest shall accrue on this Note but
shall not be due and payable until the Maturity Date.
2. Conversion.
(a) HSR Clearance. Under Section 6 of the Purchase Agreement, the
Company and the Holder have agreed to file with the United States Federal Trade
Commission (the "FTC") and the Antitrust Division of the United States
Department of Justice (the "DOJ") pursuant to the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act") all requisite documents and
notifications in order to provide for the conversion of this Note into shares of
the Company's Series D Preferred Stock. Upon the earlier of one business day
after (i) the date all required clearances or pre-termination notices under the
HSR Act have been received from the FTC and the DOJ (or all applicable waiting
periods have expired) or (ii) the date the Holder and the Company are no longer
required by law to make filings under the HSR to convert this Note into capital
stock, the entire principal amount of this Note shall automatically
<PAGE>
convert into fully-paid and non-assessable shares of the Company's Series D
Preferred Stock (the "Stock"); provided, however, the automatic conversion of
such principal amount into shares of the Company's Series D Preferred Stock
shall be conditioned upon (A) the Company having provided to the Holder a
compliance certificate in the form attached hereto as Exhibit A or (B) the
Holder having waived such applicable terms, conditions or certifications
included in such certificate, either individually or in the aggregate. The
number of shares of Stock to be issued upon such conversion shall be equal to
the quotient obtained by dividing (i) the entire outstanding principal amount of
this Note by (ii) $17.65 (as adjusted for any future stock splits, stock
dividends, recapitalizations or the like after May 19, 1999), provided that no
fractional shares shall be issued. In the event that the required clearances
from the FTC and the DOJ are not obtained, this Note shall not be convertible
into the Stock.
(b) Conversion of Series B Preferred Stock. Should all of the
Company's Series D Preferred Stock be, or if outstanding would be, at any time
prior to full payment of this Note, converted into shares of the Company's
Common Stock in accordance with the Company's Certificate of Incorporation, then
subject to Section 2(a), this Note shall become convertible into that number of
shares of the Company's Common Stock equal to the number of shares of the Common
Stock that would have been received if this Note had been converted in full and
the Series D Preferred Stock received thereupon had been simultaneously
converted immediately prior to such event.
(c) Mechanics and Effect of Conversion. No fractional shares of the
Company's capital stock will be issued upon conversion of this Note. In lieu of
any fractional share to which the Holder would otherwise be entitled, the
Company will pay to the Holder in cash the amount of the unconverted principal
and interest balance of this Note that would otherwise be converted into such
fractional share. Upon conversion of this Note pursuant to this Section 2, the
Holder shall surrender this Note, duly endorsed, at the principal offices of the
Company or any transfer agent of the Company. At its expense, the Company will,
as soon as practicable thereafter, issue and deliver to such Holder, at such
principal office, a certificate or certificates for the number of shares to
which such Holder is entitled upon such conversion, together with any other
securities and property to which the Holder is entitled upon such conversion
under the terms of this Note, including a check payable to the Holder for any
cash amounts payable as described herein. Upon conversion of this Note, the
Company will be forever released from all of its obligations and liabilities
under this Note with regard to that portion of the principal amount and accrued
interest being converted including without limitation the obligation to pay such
portion of the principal amount and accrued interest.
3. Payment. All payments shall be made in lawful money of the United
States of America at such place as the Holder hereof may from time to time
designate in writing to the Company. Payment shall be credited first to the
accrued interest then due and payable and the remainder applied to principal.
Prepayment of this Note may be made without penalty, if the Company's Board of
Directors has unanimously determined, in consultation with legal counsel, and
with the consent of the Holders of a majority of the outstanding principal
amount of the Notes, that the required clearances or pre-termination notices
under the HSR Act specified in Section 2(a) are not likely to be obtained,
otherwise this note made not prepaid without the
<PAGE>
consent of the Holders of a majority of the outstanding principal amount of the
Notes; provided, however, that the Company may repay the Note on November 19,
1999 in the event the conditions to conversion set forth in Section 2 hereof
have not occurred.
4. Default.
4.1 Events of Default. Each of the following shall constitute an
"Event of Default."
(a) Default in the payment of any part of the principal or interest of
this Note when due and payable pursuant to the provisions, or a default by the
Company under any other term or condition of this Note; or
(b) The institution by the Company of proceedings to be adjudicated a
bankrupt or insolvent, or the consent by it to the institution of bankruptcy or
insolvency proceedings against it or the filing by it of a petition or answer or
consent seeking reorganization or relief under the Federal Bankruptcy Code, or
any other applicable federal or state law, or the consent by it to the filing of
any such petition or the appointment of a receiver, liquidator, assignee,
trustee, or other similar official, of the Company, or of any substantial part
of its property, or the making by it of an assignment for the benefit of
creditors, or the admission by it in writing of its inability to pay its debts
generally as they become due or the taking of corporate action by the Company in
furtherance of any such action; or
(c) If, within sixty (60) days after the commencement of an action
against the Company seeking any bankruptcy, insolvency, reorganization,
liquidation, dissolution or similar relief under any present or future statute,
law or regulation, such action shall not have been dismissed or all orders or
proceedings thereunder affecting the operations or the business of the Company
stayed, or if the stay of any such order or proceeding shall thereafter be set
aside, or if, within sixty (60) days after the appointment without the consent
or acquiescence of the Company of any trustee, receiver or liquidator of the
Company or of all or any substantial part of the properties of the Company, such
appointment shall not have been vacated; or
(d) Any material misrepresentation by the Company contained in the
Purchase Agreement is false or misleading in any material respect when made; or
(e) Any material breach under the Purchase Agreement by the Company,
including with respect to any covenant set forth in Section 6 thereof and such
default continues unremedied for a period of ten days after notice thereof shall
have been given to the Company by the Holder; or
(f) the Company shall (i)(A) fail to make any payment when due under
the terms of any bond, debenture, note or other evidence of indebtedness, and
such failure shall continue beyond any period of grace provided with respect
thereto, or (B) default in the observance or performance of any other agreement,
term or condition contained in any such bond, debenture, note or other evidence
of indebtedness, and (ii) the effect of such failure or default is to cause, or
permit the holder or holders thereof to cause, upon the expiration of any
<PAGE>
applicable grace periods, indebtedness in an aggregate amount of Five Million
Dollars ($5,000,000) or more to become due prior to its stated date of maturity.
4.2 Remedies upon Default.
(a) Upon an Event of Default, Holder may at any time (unless all
defaults shall theretofore have been remedied) at its option, by written notice
to the Company, declare this Note to be due and payable, whereupon the entire
principal balance under this Note shall forthwith mature and become due and
payable, together with interest accrued thereon, without presentment, demand,
protest, or notice, all of which are hereby waived, provided, however, that upon
the occurrence of an Event of Default under Section 4.1(b) and (c) above, this
Note (including all principal and all accrued interest) shall automatically be
accelerated and become due and payable immediately without any written notice to
the Company.
(b) In case any one or more Events of Default shall occur and be
continuing, Holder may proceed to protect and enforce its rights by an action at
law, suit in equity, or other appropriate proceeding, whether for the specific
performance of any agreement contained in the Purchase Agreement or in this Note
or for an injunction against a violation of any of the terms of the Purchase
Agreement or of this Note, or in the aid of the exercise of any power granted by
the Purchase Agreement, this Note, or by law. In case of a default in the
payment of any principal of or interest on this Note, the Company shall pay to
Holder such further amount as shall be sufficient to cover the cost and expenses
of collection, including, without limitation, reasonable attorney's fees,
expenses, and disbursements. No course of dealing and no delay on the part of
Holder in exercising any right shall operate as a waiver thereof or otherwise
prejudice Holder's rights, powers, or remedies. No right, power, or remedy
conferred by the Purchase Agreement or by this Note upon Holder shall be
exclusive of any rights, power, or remedy referred to in the Purchase Agreement
or in this Note, or now or hereafter available at law, in equity, by statute, or
otherwise.
5. Default Interest Rate. Any amount which is not paid as of the
expiration of five (5) calendar days after its due date shall thereafter bear
interest at the alternative rate (rather than the rate otherwise applicable
hereunder and in addition to any other amounts payable hereunder by reason
thereof) equal to the lesser of two percent (2%) per annum in excess of the then
applicable interest rate as set forth above or the maximum rate of interest
permitted under applicable law (the "Default Rate) until the Event of Default is
fully cured, provided that the imposition of interest at the Default Rate shall
not affect or reduce the obligation to pay any final payment (for whatever
reason) of all outstanding indebtedness hereunder.
6. Transfer; Successors and Assigns. The terms and conditions of this
Note shall inure to the benefit of and be binding upon the respective successors
and assigns of the parties. Notwithstanding the foregoing, the Company may not
assign, pledge or otherwise transfer this Note without the prior written consent
of the Holder, which shall not be unreasonably withheld, and the Holder may not
assign, pledge, or otherwise transfer this Note without the prior written
consent of the Company, which shall not be unreasonably withheld, except for
transfers to affiliates. Subject to the preceding sentence, this Note may be
transferred only upon surrender of
<PAGE>
the original Note for registration of transfer, duly endorsed, or accompanied by
a duly executed written instrument of transfer in form satisfactory to the
Holder. Thereupon, a new note for the same principal amount and interest will be
issued to, and registered in the name of, the transferee. Interest and principal
are payable only to the registered holder of this Note.
7. Governing Law. This Note and all acts and transactions pursuant
hereto and the rights and obligations of the parties hereto shall be governed,
construed and interpreted in accordance with the laws of the State of
Washington, without giving effect to principles of conflicts of law.
8. Notices. Any notice required or permitted by this Note shall be in
writing and shall be deemed sufficient upon delivery, when delivered personally
or one business day after being sent by a nationally-recognized overnight
delivery service (such as Federal Express or UPS), or forty-eight (48) hours
after being deposited in the U.S. mail, as certified or registered mail, with
postage prepaid, addressed to the party to be notified at such party's address
as set forth below or as subsequently modified by written notice.
9. Amendments and Waivers. Any term of this Note may be amended only
with the written consent of the Company and at least a majority in interest of
the Holders. Any amendment or waiver effected in accordance with this Section 7
shall be binding upon the Company, the Holders and each transferee of the Notes.
10. Waiver. Borrower waives presentment and demand for payment, notice of
dishonor, protest and notice of protest of this Note, and shall pay all costs of
collection when incurred, including, without limitation, reasonable attorneys'
fees, costs and other expenses.
The right to plead any and all statutes of limitations as a defense to any
demands hereunder is hereby waived to the full extent permitted by law.
ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR TO
FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON
LAW.
<PAGE>
COMPANY:
DRUGSTORE.COM, INC.
By:
-----------------------------------------
Name:
---------------------------------------
(print)
Title:
--------------------------------------
Address: 13920 SE Eastgate Way, Suite 300
Bellevue, WA 98005
AGREED TO AND ACCEPTED:
Vulcan Ventures Incorporated
By:
------------------------------
Name:
----------------------------
(print)
Title:
---------------------------
Address: 110 110th Avenue Northeast, Suite 550
Bellevue, Washington 98004
<PAGE>
EXHIBIT A
COMPLIANCE CERTIFICATE
The undersigned, Peter Neupert, the President and Chief Executive Officer
of drugstore.com, inc., a Delaware corporation (the "Company"), certifies that
he is authorized to execute this Compliance Certificate for and on behalf of the
Company, and further certifies that:
1. The representations and warranties of the Company contained in Section
2.1 (the first sentence only), Section 2.4, Section 2.5 and Section 2.6 of the
Series D Preferred Stock and Convertible Note Purchase Agreement, dated May 19,
1999 (the "Purchase Agreement"), are true and correct as though made on and as
of the date hereof.
2. Exhibit A to that certain Certificate of the Secretary of
drugstore.com, inc., dated May 19, 1999 (the "Secretary's Certificate"), is a
true and correct copy of the Company's Fifth Amended and Restated Certificate of
Incorporation (the "Restated Certificate"), and since May 19, 1999 no steps have
been taken by the Board of Directors or stockholders of the Company to effect or
authorize any amendment or other modification to such Restated Certificate that
would require, under Delaware law, consent of the holders of the Series D
Preferred Stock, voting as a separate class, if shares of Series D Preferred
Stock were outstanding, unless approved by Vulcan.
3. The Company has performed or fulfilled all covenants, agreements and
conditions contained in the Purchase Agreement and that certain Convertible
Promissory Note, dated May 19, 1999, in the amount of $40,000,000.85 of the
Company in favor of Vulcan Ventures Incorporated to be performed or fulfilled by
the Company on or prior to the date hereof.
In Witness Whereof, the undersigned has hereunto set his hand this ____ day
of _________, 1999.
-------------------------------------
Peter Neupert
President and Chief Executive Officer
<PAGE>
EXHIBIT 10.12
DRUGSTORE.COM, INC.
FOURTH AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
May 19, 1999
<PAGE>
TABLE OF CONTENTS
Page
----
1. Registration Rights............................................... 1
1.1 Definitions................................................. 1
1.2 Request for Registration.................................... 3
1.3 Company Registration........................................ 4
1.4 Form S-3 Registration....................................... 4
1.5 Obligations of the Company.................................. 5
1.6 Furnish Information......................................... 7
1.7 Expenses of Registration.................................... 7
1.8 Underwriting Requirements................................... 8
1.9 Delay of Registration....................................... 9
1.10 Indemnification............................................ 9
1.11 Reports Under Securities Exchange Act of 1934.............. 11
1.12 Assignment of Registration Rights.......................... 12
1.13 Limitations on Subsequent Registration Rights.............. 12
1.14 "Market Stand-Off" Agreement............................... 12
1.15 Termination of Registration Rights......................... 13
2. Covenants of the Company.......................................... 13
2.1 Delivery of Financial Statements............................ 13
2.2 Inspection.................................................. 14
2.3 Right of First Offer........................................ 14
2.4 Employee Confidential Information and Invention
Assignment Agreements....................................... 15
2.5 Termination of Covenants.................................... 15
3. Standstill Agreement.............................................. 15
3.1 No Increase of Ownership Interest........................... 16
3.1 Notice of Voting Securities Purchases....................... 16
3.3 Acts in Concert with Others................................. 16
3.4 Termination of Standstill Agreement......................... 16
3.5 Permitted Transaction....................................... 17
4. Sales by Amazon.com and Kleiner Perkins Caufield & Byers.......... 17
4.1 Right of First Refusal...................................... 17
4.2 Assignment of Right of First Refusal........................ 18
4.3 Permitted Transactions...................................... 19
4.4 Prohibited Transfers........................................ 19
4.5 Legended Certificates....................................... 19
4.6 Termination of Right of First Refusal....................... 19
5. Miscellaneous..................................................... 20
5.1 Successors and Assigns...................................... 20
5.2 Amendments and Waivers...................................... 20
5.3 Notices..................................................... 20
5.4 Severability................................................ 20
-i-
<PAGE>
5.5 Governing Law............................................... 20
5.6 Counterparts................................................ 20
5.7 Titles and Subtitles........................................ 21
5.8 Aggregation of Stock........................................ 21
-ii-
<PAGE>
DRUGSTORE.COM, INC.
FOURTH AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
This Fourth Amended and Restated Investors' Rights Agreement (the
"Agreement") is made as of the 18th day of May, 1999 by and among drugstore.com,
inc., a Delaware corporation (the "Company") and the investors listed on Exhibit
A hereto (the "Investors") and terminates and supersedes in all respects that
certain Third Amended and Restated Investors' Rights Agreement dated January 29,
1999, by and among the Company and certain of the Investors (the "Prior
Agreement").
RECITALS
A. The Company and certain of the Investors have entered into a Series D
Preferred Stock and Convertible Note Purchase Agreement (the "Purchase
Agreement") of even date herewith pursuant to which the Company will sell to
such Investors and such Investors will purchase from the Company shares of the
Company's Series D Preferred Stock. In connection with entering into the
Purchase Agreement, the Company and the Investors wish to enter into this
Agreement in order to provide the Investors with (i) certain rights to register
shares of the Company's Common Stock issuable upon conversion of the Series A,
Series B, Series C, and Series D Preferred Stock held by the Investors, (ii)
certain rights to receive and inspect information pertaining to the Company,
(iii) a right of first offer with respect to certain issuances by the Company of
its securities, and (iv) certain other covenants by the Company. The Company and
the Investors who were parties to the prior Agreement desire to induce the
Investors to purchase shares of Series D Preferred Stock pursuant to the
Purchase Agreement by agreeing to the terms and conditions set forth herein.
B. Pursuant to Section 5.2 of the Prior Agreement, this Agreement is
being executed by the Company and the holders of at least two-thirds (2/3) of
the Registrable Securities (as defined in the Prior Agreement) then outstanding,
thereby agreeing that the Prior Agreement be terminated and superseded and
replaced in its entirety by this Agreement.
AGREEMENT
The parties hereby agree as follows:
1. Registration Rights. The Company and the Investors covenant and agree
as follows:
1.1 Definitions. For purposes of this Section 1:
(a) The terms "register," "registered," and "registration" refer
to a registration effected by preparing and filing a registration statement or
similar document in compliance with the Securities Act of 1933, as amended (the
"Securities Act"), and the declaration or ordering of effectiveness of such
registration statement or document;
<PAGE>
(b) The term "Registrable Securities" means (i) the shares of
Common Stock issuable or issued upon conversion of the Series A Preferred Stock,
the Series B Preferred Stock, the Series C Preferred Stock and the Series D
Preferred Stock, (ii) shares of Common Stock issued or issuable upon conversion
of Series A, Series B, Series C or Series D Preferred Stock issued or issuable
upon exercise of warrants to purchase Series A, Series B, Series C or Series D
Preferred Stock issued to financial institutions or lessors in connection with
commercial credit arrangements, equipment financings or similar transactions
approved in each case by the Board of Directors of the Company, which entities
execute a counterpart signature page hereto and agree to be bound by the terms
hereof, (iii) shares of Common Stock issued or issuable upon conversion of
Series A, Series B, Series C or Series D Preferred Stock issued or issuable upon
exercise of warrants to purchase Series A, Series B, Series C or Series D
Preferred Stock issued to providers of products or technologies (or rights
thereto) to the Company, if such issuance is approved by the Board of Directors
of the Company, which entities execute a counterpart signature page hereto and
agree to be bound by the terms hereof; (iv) shares of Series D Preferred Stock
issued or issuable upon conversion of the Convertible Promissory Notes issued
pursuant to the Purchase Agreement, and (v) any other shares of Common Stock of
the Company issued as (or issuable upon the conversion or exercise of any
warrant, right or other security which is issued as) a dividend or other
distribution with respect to, or in exchange for or in replacement of, the
shares listed in (i), (ii), (iii) and (iv); provided, however, that the
foregoing definition shall exclude in all cases any Registrable Securities sold
by a person in a transaction in which his or her rights under this Agreement are
not assigned. Notwithstanding the foregoing, Common Stock or other securities
shall only be treated as Registrable Securities if and so long as they have not
been (A) sold to or through a broker or dealer or underwriter in a public
distribution or a public securities transaction, or (B) sold in a transaction
exempt from the registration and prospectus delivery requirements of the
Securities Act under Section 4(1) thereof so that all transfer restrictions, and
restrictive legends with respect thereto, if any, are removed upon the
consummation of such sale;
(c) The number of shares of "Registrable Securities then
outstanding" shall be determined by the number of shares of Common Stock
outstanding which are, and the number of shares of Common Stock issuable
pursuant to then exercisable or convertible securities which are, Registrable
Securities;
(d) The term "Holder" means any person owning or having the
right to acquire Registrable Securities or any assignee thereof in accordance
with Section 1.12 of this Agreement;
(e) The term "Form S-3" means such form under the Securities Act
as in effect on the date hereof or any successor form under the Securities Act;
(f) The term "SEC" means the Securities and Exchange Commission;
and
(g) The term "Qualified IPO" means an underwritten public
offering by the Company of shares of its Common Stock pursuant to a registration
statement under the
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Securities Act, which results in gross proceeds in excess of $15,000,000 and the
public offering price of which is at least $10.00 per share (appropriately
adjusted for any stock split, dividend, combination or other recapitalization).
1.2 Request for Registration.
(a) If the Company shall receive at any time after the earlier
of (i) June 22, 2003, or (ii) six (6) months after the effective date of the
first registration statement for a public offering of securities of the Company
(other than a registration statement on Form S-4, S-8 or any successor thereto),
a written request from the Holders of at least thirty-three percent (33%) of the
Registrable Securities then outstanding that the Company file a registration
statement under the Securities Act covering the registration of Registrable
Securities, then the Company shall, within fifteen (15) days of the receipt
thereof, give written notice of such request to all Holders and shall, subject
to the limitations of subsection 1.2(b), use its best efforts to effect as soon
as practicable, and in any event within 90 days of the receipt of such request,
the registration under the Securities Act of all Registrable Securities which
the Holders request to be registered within ten (10) days of the mailing of such
notice by the Company in accordance with Section 5.3.
(b) If the Holders initiating the registration request hereunder
("Initiating Holders") intend to distribute the Registrable Securities covered
by their request by means of an underwriting, they shall so advise the Company
as a part of their request made pursuant to this Section 1.2 and the Company
shall include such information in the written notice referred to in subsection
1.2(a). The underwriter will be selected by a majority in interest of the
Initiating Holders and shall be reasonably acceptable to the Company. In such
event, the right of any Holder to include his Registrable Securities in such
registration shall be conditioned upon such Holder's participation in such
underwriting and the inclusion of such Holder's Registrable Securities in the
underwriting (unless otherwise mutually agreed by a majority in interest of the
Initiating Holders and such Holder) to the extent provided herein. All Holders
proposing to distribute their securities through such underwriting shall
(together with the Company as provided in subsection 1.5(e)) enter into an
underwriting agreement in customary form with the underwriter or underwriters
selected for such underwriting. Notwithstanding any other provision of this
Section 1.2, if the underwriter advises the Initiating Holders in writing that
marketing factors require a limitation of the number of shares to be
underwritten, then the Initiating Holders shall so advise all Holders of
Registrable Securities which would otherwise be underwritten pursuant hereto,
and the number of shares of Registrable Securities that may be included in the
underwriting shall be allocated among all Holders thereof, including the
Initiating Holders, in proportion (as nearly as practicable) to the amount of
Registrable Securities of the Company owned by each Holder; provided, however,
that the number of shares of Registrable Securities to be included in such
underwriting shall not be reduced unless all other securities are first entirely
excluded from the underwriting.
(c) Notwithstanding the foregoing, if the Company shall furnish
to Holders requesting a registration statement pursuant to this Section 1.2, a
certificate signed by the President of the Company stating that in the good
faith judgment of the Board of Directors of
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the Company, it would be seriously detrimental to the Company and its
stockholders for such registration statement to be filed and it is therefore
essential to defer the filing of such registration statement, the Company shall
have the right to defer such filing for a period of not more than 120 days after
receipt of the request of the Initiating Holders; provided, however, that the
Company may not utilize this right more than once in any twelve-month period.
(d) In addition, the Company shall not be obligated to effect,
or to take any action to effect, any registration pursuant to this Section 1.2:
(i) After the Company has effected two (2) registrations
pursuant to this Section 1.2 and such registrations have been declared or
ordered effective;
(ii) During the period starting with the date sixty (60)
days prior to the Company's good faith estimate of the date of filing of, and
ending on a date one hundred eighty (180) days after the effective date of, a
registration subject to Section 1.3 hereof; provided that the Company is
actively employing in good faith all reasonable efforts to cause such
registration statement to become effective;
(iii) If the anticipated aggregate offering price to the
public would not be in excess of $5,000,000; or
(iv) If the Initiating Holders propose to dispose of
shares of Registrable Securities that may be immediately registered on Form S-3
pursuant to a request made pursuant to Section 1.4 below.
1.3 Company Registration. If (but without any obligation to do so)
the Company proposes to register (including for this purpose a registration
effected by the Company for stockholders other than the Holders) any of its
stock under the Securities Act in connection with the public offering of such
securities solely for cash (other than a registration on Form S-4, Form S-8 or
any successors thereto, a registration in which the only stock being registered
is Common Stock issuable upon conversion of debt securities which are also being
registered, or any registration on any form which does not include substantially
the same information as would be required to be included in a registration
statement covering the sale of the Registrable Securities), the Company shall,
at such time, promptly give each Holder written notice of such registration.
Upon the written request of each Holder given within fifteen (15) days after
mailing of such notice by the Company in accordance with Section 5.3, the
Company shall, subject to the provisions of Section 1.8, cause to be registered
under the Securities Act all of the Registrable Securities that each such Holder
has requested to be registered.
1.4 Form S-3 Registration. In case the Company shall receive a
written request or requests (i) from any Holder or Holders of at least twenty
percent (20%) of the Registrable Securities then outstanding (other than Vulcan
Ventures Incorporated ("Vulcan")) or (ii) from Vulcan, provided Vulcan then
holds Registrable Securities with an aggregate offering price of at least $40
million, that, in each case, the Company effect a registration on Form S-3 and
any related qualification or compliance with respect to all or a part of the
Registrable Securities owned by such Holder or Holders, the Company will:
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(a) promptly give written notice of the proposed registration,
and any related qualification or compliance, to all other Holders; and
(b) as soon as practicable, effect such registration and all
such qualifications and compliances as may be so requested and as would permit
or facilitate the sale and distribution of all or such portion of such Holder's
or Holders' Registrable Securities as are specified in such request, together
with all or such portion of the Registrable Securities of any other Holder or
Holders joining in such request as are specified in a written request given
within fifteen (15) days after receipt of such written notice from the Company;
provided, however, that the Company shall not be obligated to effect any such
registration, qualification or compliance, pursuant to this Section 1.4: (i) if
Form S-3 is not available for such offering by the Holders; (ii) if the Holders
propose to sell Registrable Securities at an aggregate price to the public of
less than $500,000; (iii) if the Company shall furnish to the Holders a
certificate signed by the President of the Company stating that in the good
faith judgment of the Board of Directors of the Company, it would be seriously
detrimental to the Company and its stockholders for such Form S-3 Registration
to be effected at such time, in which event the Company shall have the right to
defer the filing of the Form S-3 registration statement for a period of not more
than 120 days after receipt of the request of the Holder or Holders under this
Section 1.4; provided, however, that the Company shall not utilize this right
more than once in any twelve month period; (iv) if the Company has, within the
twelve (12) month period preceding the date of such request, already effected
two registrations on Form S-3 for the Holders pursuant to this Section 1.4; (v)
in any particular jurisdiction in which the Company would be required to qualify
to do business or to execute a general consent to service of process in
effecting such registration, qualification or compliance; or (vi) during the
period ending one hundred eighty (180) days after the effective date of a
registration statement subject to Section 1.3.
(c) Subject to the foregoing, the Company shall file a
registration statement covering the Registrable Securities and other securities
so requested to be registered as soon as practicable after receipt of the
request or requests of the Holders. Registrations effected pursuant to this
Section 1.4 shall not be counted as demands for registration or registrations
effected pursuant to Sections 1.2 or 1.3, respectively.
1.5 Obligations of the Company. Whenever required under this Section
1 to effect the registration of any Registrable Securities, the Company shall,
as expeditiously as reasonably possible:
(a) Prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use all reasonable efforts to cause
such registration statement to become effective, and, upon the request of the
Holders of a majority of the Registrable Securities registered thereunder, keep
such registration statement effective for up to one hundred twenty (120) days.
The Company shall not be required to file, cause to become effective or maintain
the effectiveness of any registration statement (other than a registration
statement on Form S-3 pursuant to Section 1.4) that contemplates a distribution
of securities on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act.
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(b) Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement for up to one hundred twenty
(120) days.
(c) Furnish to the Holders such numbers of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Securities Act, and such other documents as they may
reasonably request in order to facilitate the disposition of Registrable
Securities owned by them.
(d) Use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or Blue Sky
laws of such jurisdictions as shall be reasonably requested by the Holders,
provided that the Company shall not be required in connection therewith or as a
condition thereto to qualify to do business or to file a general consent to
service of process in any such states or jurisdictions.
(e) In the event of any underwritten public offering, enter into
and perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriter of such offering. Each Holder
participating in such underwriting shall also enter into and perform its
obligations under such an agreement.
(f) Notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing, such obligation to continue for one hundred twenty (120) days.
(g) Cause all such Registrable Securities registered pursuant
hereunder to be listed on each securities exchange or market on which similar
securities issued by the Company are then listed.
(h) Provide a transfer agent and registrar for all Registrable
Securities registered pursuant hereunder and a CUSIP number for all such
Registrable Securities, in each case not later than the effective date of such
registration.
(i) Use its best efforts to furnish, at the request of any
Holder requesting registration of Registrable Securities pursuant to this
Section 1, on the date that such Registrable Securities are delivered to the
underwriters for sale in connection with a registration pursuant to this Section
1, if such securities are being sold through underwriters, or, if such
securities are not being sold through underwriters, on the date that the
registration statement with respect to such securities becomes effective, (i) an
opinion, dated such date, of the counsel representing the Company for the
purposes of such registration, in form and substance as is customarily given to
underwriters in an underwritten public offering, addressed to the
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underwriters, if any, and to the Holders requesting registration of Registrable
Securities and (ii) a letter dated such date, from the independent certified
public accountants of the Company, in form and substance as is customarily given
by independent certified public accountants to underwriters in an underwritten
public offering, addressed to the underwriters, if any, and to the Holders
requesting registration of Registrable Securities.
1.6 Furnish Information. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to this Section 1 with
respect to the Registrable Securities of any selling Holder that such Holder
shall furnish to the Company such information regarding itself, the Registrable
Securities held by it, and the intended method of disposition of such securities
as shall be required to effect the registration of such Holder's Registrable
Securities. The Company shall have no obligation with respect to any
registration requested pursuant to Section 1.2 or Section 1.4 of this Agreement
if, as a result of the application of the preceding sentence, the number of
shares or the anticipated aggregate offering price of the Registrable Securities
to be included in the registration does not equal or exceed the number of shares
or the anticipated aggregate offering price required to originally trigger the
Company's obligation to initiate such registration as specified in subsection
1.2(a) or subsection 1.4(b)(2), whichever is applicable.
1.7 Expenses of Registration.
(a) Demand Registration. All expenses (other than underwriting
discounts and commissions, stock transfer taxes and fees of counsel to the
selling Holders in addition to that provided below) incurred in connection with
registrations, filings or qualifications pursuant to Section 1.2, including
(without limitation) all registration, filing and qualification fees, printers'
and accounting fees, fees and disbursements of counsel for the Company, and the
reasonable fees and disbursements of one counsel for the selling Holders
selected by them with the approval of the Company, which approval shall not be
unreasonably withheld, shall be borne by the Company; provided, however, that
the Company shall not be required to pay for any expenses of any registration
proceeding begun pursuant to Section 1.2 if the registration request is
subsequently withdrawn at the request of the Holders of a majority of the
Registrable Securities to be registered (in which case all participating Holders
shall bear such expenses), unless the Holders of a majority of the Registrable
Securities agree to forfeit their right to one demand registration pursuant to
Section 1.2; provided further, however, that if at the time of such withdrawal,
the Holders have learned of a material adverse change in the condition,
business, or prospects of the Company from that known or reasonably foreseeable
to the Holders at the time of their request and have withdrawn the request with
reasonable promptness following disclosure by the Company of such material
adverse change, then the Holders shall not be required to pay any of such
expenses and shall retain their rights pursuant to Section 1.2.
(b) Company Registration. All expenses (other than underwriting
discounts and commissions, stock transfer taxes and fees of counsel to the
selling Holders in addition to that provided below) incurred in connection with
registrations, filings or qualifications of Registrable Securities pursuant to
Section 1.3 for each Holder, including (without limitation) all registration,
filing, and qualification fees, printers' and accounting fees,
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fees and disbursements of counsel for the Company, and the reasonable fees and
disbursements of one counsel for the selling Holders selected by them with the
approval of the Company, which approval shall not be unreasonably withheld,
shall be borne by the Company.
(c) Registration on Form S-3. All expenses (other than
underwriting discounts and commissions, stock transfer taxes and fees of counsel
to the selling Holders in addition to that provided below) incurred in
connection with a registration requested pursuant to Section 1.4, including
(without limitation) all registration, filing, qualification, printers' and
accounting fees and the reasonable fees and disbursements of one counsel for the
selling Holder or Holders selected by them with the approval of the Company,
which approval shall not be unreasonably withheld, and counsel for the Company
shall be borne by the Company.
(d) Underwriting Discounts and Commissions. All underwriting
discounts and commissions incurred in connection with registrations in
connection with each registration statement under Section 1 shall be borne by
the participating sellers (and the Company, if the Company is a seller) in
proportion to the number of shares sold by each, or as they otherwise may agree.
1.8 Underwriting Requirements. In connection with any offering
involving an underwriting of shares of the Company's capital stock, the Company
shall not be required under Section 1.3 to include any of the Holders'
securities in such underwriting unless they accept the terms of the underwriting
as agreed upon between the Company and the underwriters selected by it (or by
other persons entitled to select the underwriters), and then only in such
quantity as the underwriters determine in their sole discretion will not
jeopardize the success of the offering by the Company. If the total amount of
securities, including Registrable Securities, requested by Holders to be
included in such offering exceeds the amount of securities sold other than by
the Company that the underwriters determine in their sole discretion is
compatible with the success of the offering, then the Company shall be required
to include in the offering only that number of such securities, including
Registrable Securities, which the underwriters determine in their sole
discretion will not jeopardize the success of the offering (the securities so
included to be apportioned pro rata among the selling stockholders according to
the total amount of securities entitled to be included therein owned by each
selling stockholder or in such other proportions as shall mutually be agreed to
by such selling stockholders) but in no event shall the amount of securities of
the selling Holders included in the offering be reduced below thirty percent
(30%) of the total amount of securities included in such offering, unless such
offering is the initial public offering of the Company's securities, in which
case, the selling stockholders may be excluded if the underwriters make the
determination described above and no other stockholder's securities are
included. For purposes of the preceding parenthetical concerning apportionment,
for any selling stockholder which is a holder of Registrable Securities and
which is a partnership or corporation, the partners, retired partners and
stockholders of such holder, or the estates and family members of any such
partners and retired partners and any trusts for the benefit of any of the
foregoing persons shall be deemed to be a single "selling stockholder," and any
pro-rata reduction with respect to such "selling stockholder" shall be based
upon the aggregate amount of shares carrying registration rights owned by all
entities and individuals included in such "selling stockholder," as defined in
this sentence.
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1.9 Delay of Registration. No Holder shall have any right to obtain
or seek an injunction restraining or otherwise delaying any such registration as
the result of any controversy that might arise with respect to the
interpretation or implementation of this Section 1.
1.10 Indemnification. In the event any Registrable Securities are
included in a registration statement under this Section 1:
(a) To the extent permitted by law, the Company will indemnify
and hold harmless each Holder, any underwriter (as defined in the Securities
Act) for such Holder each person, if any, who controls such Holder or
underwriter within the meaning of the Securities Act or the Securities Exchange
Act of 1934, as amended (the "Exchange Act") and the partners, officers and
directors of any such Holder, against any losses, claims, damages, or
liabilities (joint or several) to which they may become subject under the
Securities Act, the Exchange Act or other federal or state law, insofar as such
losses, claims, damages, or liabilities (or actions in respect thereof) arise
out of or are based upon any of the following statements, omissions or
violations (collectively a "Violation"): (i) any untrue statement or alleged
untrue statement of a material fact contained in such registration statement,
including any preliminary prospectus or final prospectus contained therein or
any amendments or supplements thereto, (ii) the omission or alleged omission to
state therein a material fact required to be stated therein, or necessary to
make the statements therein not misleading, or (iii) any violation or alleged
violation by the Company of the Securities Act, the Exchange Act, any state
securities law or any rule or regulation promulgated under the Securities Act,
the Exchange Act or any state securities law; and the Company will pay to each
such Holder, underwriter or controlling person, as incurred, any legal or other
expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability, or action; provided, however,
that the indemnity agreement contained in this subsection 1.10(a) shall not
apply to amounts paid in settlement of any such loss, claim, damage, liability,
or action if such settlement is effected without the consent of the Company
(which consent shall not be unreasonably withheld), nor shall the Company be
liable to any Holder, underwriter or controlling person for any such loss,
claim, damage, liability, or action to the extent that it arises out of or is
based upon a Violation which occurs in reliance upon and in conformity with
written information furnished expressly for use in connection with such
registration by any such Holder, underwriter or controlling person.
(b) To the extent permitted by law, each selling Holder will
indemnify and hold harmless the Company, each of its directors, each of its
officers who has signed the registration statement, each person, if any, who
controls the Company within the meaning of the Securities Act, any underwriter,
any other Holder selling securities in such registration statement and any
controlling person of any such underwriter or other Holder, against any losses,
claims, damages, or liabilities (joint or several) to which any of the foregoing
persons may become subject, under the Securities Act, the Exchange Act or other
federal or state law, insofar as such losses, claims, damages, or liabilities
(or actions in respect thereto) arise out of or are based upon any Violation, in
each case to the extent (and only to the extent) that such Violation occurs in
reliance upon and in conformity with written information furnished by such
Holder expressly for use in connection with such registration; and each such
Holder will pay, as incurred, any legal or
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other expenses reasonably incurred by any person intended to be indemnified
pursuant to this subsection 1.10(b), in connection with investigating or
defending any such loss, claim, damage, liability, or action; provided, however,
that the indemnity agreement contained in this subsection 1.10(b) shall not
apply to amounts paid in settlement of any such loss, claim, damage, liability
or action if such settlement is effected without the consent of the Holder,
which consent shall not be unreasonably withheld; provided, that in no event
shall any indemnity under this subsection 1.10(b) exceed the net proceeds from
the offering received by such Holder, except in the case of willful fraud by
such Holder.
(c) Promptly after receipt by an indemnified party under this
Section 1.10 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Section 1.10, deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party
(together with all other indemnified parties which may be represented without
conflict by one counsel) shall have the right to retain one separate counsel,
with the reasonable fees and expenses to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential differing
interests between such indemnified party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action, if prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this Section
1.10, but the omission so to deliver written notice to the indemnifying party
will not relieve it of any liability that it may have to any indemnified party
otherwise than under this Section 1.10.
(d) If the indemnification provided for in this Section 1.10 is
held by a court of competent jurisdiction to be unavailable to an indemnified
party with respect to any loss, liability, claim, damage or expense referred to
therein, then the indemnifying party, in lieu of indemnifying such indemnified
party hereunder, shall contribute to the amount paid or payable by such
indemnified party as a result of such loss, liability, claim, damage, or expense
in such proportion as is appropriate to reflect the relative fault of the
indemnifying party on the one hand and of the indemnified party on the other in
connection with the statements or omissions that resulted in such loss,
liability, claim, damage or expense as well as any other relevant equitable
considerations; provided, that in no event shall any contribution by a Holder
under this Subsection 1.10(d) exceed the net proceeds from the offering received
by such Holder, except in the case of willful fraud by such Holder. The relative
fault of the indemnifying party and of the indemnified party shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission to state a material fact relates to
information supplied by the indemnifying party or by the indemnified party and
the parties' relative intent, knowledge, access to information, and opportunity
to correct or prevent such statement or omission.
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(e) Notwithstanding the foregoing, to the extent that the
provisions on indemnification and contribution contained in the underwriting
agreement entered into in connection with the underwritten public offering are
in conflict with the foregoing provisions, the provisions in the underwriting
agreement shall control.
(f) The obligations of the Company and Holders under this
Section 1.10 shall survive the completion of any offering of Registrable
Securities in a registration statement under this Section 1, and otherwise.
1.11 Reports Under Securities Exchange Act of 1934. With a view to
making available to the Holders the benefits of Rule 144 promulgated under the
Securities Act and any other rule or regulation of the SEC that may at any time
permit a Holder to sell securities of the Company to the public without
registration or pursuant to a registration on Form S-3, the Company agrees to:
(a) make and keep public information available, as those terms
are understood and defined in SEC Rule 144, at all times after ninety (90) days
after the effective date of the first registration statement filed by the
Company for the offering of its securities to the general public so long as the
Company remains subject to the periodic reporting requirements under Sections 13
or 15(d) of the Exchange Act;
(b) take such action, including the voluntary registration of
its Common Stock under Section 12 of the Exchange Act, as is necessary to enable
the Holders to utilize Form S-3 for the sale of their Registrable Securities,
such action to be taken as soon as practicable after the end of the fiscal year
in which the first registration statement filed by the Company for the offering
of its securities to the general public is declared effective;
(c) file with the SEC in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act;
and
(d) furnish to any Holder, so long as the Holder owns any
Registrable Securities, forthwith upon request (i) a written statement by the
Company that it has complied with the reporting requirements of SEC Rule 144 (at
any time after ninety (90) days after the effective date of the first
registration statement filed by the Company), the Securities Act and the
Exchange Act (at any time after it has become subject to such reporting
requirements), or that it qualifies as a registrant whose securities may be
resold pursuant to Form S-3 (at any time after it so qualifies), (ii) a copy of
the most recent annual or quarterly report of the Company and such other reports
and documents so filed by the Company, and (iii) such other information as may
be reasonably requested in availing any Holder of any rule or regulation of the
SEC which permits the selling of any such securities without registration or
pursuant to such form.
1.12 Assignment of Registration Rights. The rights to cause the
Company to register Registrable Securities pursuant to this Section 1 may be
assigned (but only with all related obligations) by a Holder to a transferee or
assignee of at least 1,000,000 shares of such securities (appropriately adjusted
for any stock split, stock dividend, or other recapitalization) or to a partner
or affiliate (within the meaning of Rule 12b-2 of the Exchange Act) of the
Holder,
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provided that (i) the Company is, promptly after such transfer, furnished with
written notice of the name and address of such transferee or assignee and the
securities with respect to which such registration rights are being assigned;
(ii) the transferee or assignee agrees to be bound by the terms and conditions
of this Agreement; and (iii) such assignment shall be effective only if
immediately following such transfer the further disposition of such securities
by the transferee or assignee is restricted under the Securities Act.
Notwithstanding the limitations set forth in the foregoing sentence regarding
the minimum number of shares that must be transferred, any Holder that is a
corporation may transfer such Holder's registration rights to its wholly-owned
subsidiaries without restriction as to the number of shares transferred.
1.13 Limitations on Subsequent Registration Rights. Except as
provided in Section 1.1(b) and Section 5.9, from and after the date of this
Agreement, the Company shall not, without the prior written consent of the
Holders of a majority of the outstanding Registrable Securities, enter into any
agreement with any holder or prospective holder of any securities of the Company
which would allow such holder or prospective holder (a) to include such
securities in any registration filed under Section 1.2 hereof, unless under the
terms of such agreement, such holder or prospective holder may include such
securities in any such registration only to the extent that the inclusion of his
securities will not reduce the amount of the Registrable Securities of the
Holders which is included or (b) to make a demand registration which could
result in such registration statement being declared effective prior to the
earlier of either of the dates set forth in subsection 1.2(a) or within one
hundred twenty (120) days of the effective date of any registration effected
pursuant to Section 1.2.
1.14 "Market Stand-Off" Agreement. Each Holder hereby agrees that,
during the period of duration (up to, but not exceeding, 180 days) specified by
the Company and an underwriter of Common Stock or other securities of the
Company, following the effective date of a registration statement of the Company
filed under the Securities Act, it shall not, to the extent requested by the
Company and such underwriter, directly or indirectly sell, offer to sell,
contract to sell (including, without limitation, any short sale), grant any
option to purchase or otherwise transfer or dispose of (other than to donees who
agree to be similarly bound) any securities of the Company held by it at any
time during such period except Common Stock included in such registration;
provided, however, that:
(a) such agreement shall be applicable to the first such
registration statement of the Company which covers Common Stock (or other
securities) to be sold on its behalf to the public in an underwritten offering;
and
(b) all officers and directors of the Company, and all holders
of one percent or more of the Company's outstanding Common Stock (including
shares issuable upon conversion of Preferred Stock) enter into similar
agreements.
In order to enforce the foregoing covenant, the Company may impose
stop-transfer instructions with respect to the Registrable Securities of each
Holder (and the shares or securities of every other person subject to the
foregoing restriction) until the end of such period, and each Holder agrees
that, if so requested, such Holder will execute an agreement in the form
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provided by the underwriter containing terms which are essentially consistent
with the provisions of this Section 1.14.
Notwithstanding the foregoing, the obligations described in this
Section 1.14 shall not apply to a registration relating solely to employee
benefit plans on Form S-1 or Form S-8 or similar forms which may be promulgated
in the future, or a registration relating solely to a transaction on Form S-4 or
similar forms which may be promulgated in the future.
1.15 Termination of Registration Rights. No Holder shall be entitled
to exercise any right provided for in this Section 1 after the earlier of (i)
five (5) years following the consummation of a Qualified IPO, or (ii) such time
as Rule 144 or another similar exemption under the Securities Act is available
for the sale of all of such Holder's shares during a three-month period without
registration.
2. Covenants of the Company.
2.1 Delivery of Financial Statements. The Company shall deliver to
each Holder of at least 1,500,000 shares of Registrable Securities:
(a) as soon as practicable, but in any event within one hundred
twenty (120) days after the end of each fiscal year of the Company, an income
statement for such fiscal year, a balance sheet of the Company and statement of
stockholder's equity as of the end of such year, and a statement of cash flows
for such year, such year-end financial reports to be in reasonable detail,
prepared in accordance with generally accepted accounting principles ("GAAP"),
and audited and certified by an independent public accounting firm of nationally
recognized standing selected by the Company or otherwise reasonably acceptable
to Holders of a majority of the Registrable Securities then outstanding;
(b) within forty-five (45) days of the end of each quarter, an
unaudited income statement and a statement of cash flows and balance sheet for
and as of the end of such quarter, in reasonable detail; and
(c) as soon as practicable, but in any event at least fifteen
(15) days prior to the end of each fiscal year, an operating budget and business
plan for the next fiscal year.
2.2 Inspection. The Company shall permit each Holder of at least
1,000,000 shares of Registrable Securities, at such Holder's expense, to visit
and inspect the Company's properties, to examine its books of account and
records and to discuss the Company's affairs, finances and accounts with its
officers, all at such reasonable times as may be requested by the Investor;
provided, however, that the Company shall not be obligated pursuant to this
Section 2.2 to provide access to any information which the Board of Directors
reasonably determines in good faith to be a trade secret or similar confidential
information.
2.3 Right of First Offer. Subject to the terms and conditions
specified in this Section 2.3, the Company hereby grants to each Major Investor
(as hereinafter defined) a right of first offer with respect to future sales by
the Company of its Shares (as hereinafter defined). For
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<PAGE>
purposes of this Section 2.3, a "Major Investor" shall mean any person who holds
at least 1,000,000 shares of the Preferred Stock (or the Common Stock issued
upon conversion thereof). For purposes of this Section 2.3, Major Investor
includes any general partners and affiliates of a Major Investor. A Major
Investor who chooses to exercise the right of first offer may designate as
purchasers under such right itself or its partners or affiliates in such
proportions as it deems appropriate.
Each time the Company proposes to offer any shares of, or securities
convertible into or exercisable for any shares of, any class of its capital
stock ("Shares"), the Company shall first make an offering of such Shares to
each Major Investor in accordance with the following provisions:
(a) The Company shall deliver a notice by certified mail or
overnight courier ("Notice") to the Major Investors stating (i) its bona fide
intention to offer such Shares, (ii) the number of such Shares to be offered,
and (iii) the price and terms, if any, upon which it proposes to offer such
Shares.
(b) Within 15 calendar days after delivery of the Notice, each
Major Investor may elect to purchase or obtain, at the price and on the terms
specified in the Notice, up to that portion of such Shares which equals the
proportion that the number of shares of Common Stock issued and held, or
issuable upon conversion and exercise of all convertible or exercisable
securities then held, by such Major Investor bears to the total number of shares
of Common Stock then outstanding (assuming full conversion and exercise of all
convertible or exercisable securities).
(c) The Company may, during the 60-day period following the
expiration of the period provided in subsection 2.3(b) hereof, offer the
remaining unsubscribed portion of the Shares to any person or persons at a price
not less than, and upon terms no more favorable to the offeree than those
specified in the Notice. If the Company does not enter into an agreement for the
sale of the Shares within such period, or if such agreement is not consummated
within 60 days of the execution thereof, the right provided hereunder shall be
deemed to be revived and such Shares shall not be offered unless first reoffered
to the Major Investors in accordance herewith.
(d) The right of first offer in this paragraph 2.3 shall not be
applicable (i) to the issuance or sale of capital stock (or options therefor) to
employees, consultants, officers or directors of the Company pursuant to stock
purchase or stock option plans or agreements approved by the Board of Directors
of the Company (including options granted prior to the date hereof), (ii) to the
issuance of securities in connection with bona fide acquisitions, mergers or
similar transactions, (iii) to the issuance of securities to financial
institutions or lessors in connection with commercial credit arrangements,
equipment financings or similar transactions, (iv) to the issuance and sale of
the Series D Preferred Stock under the Purchase Agreement and the Common Stock
issued upon conversion of the Series A, Series B, Series C or Series D Preferred
Stock, (v) to the issuance of securities in a public offering of securities
pursuant to a registration statement filed under the Securities Act, (vi) to the
issuance of securities pursuant to
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the conversion or exercise of options, warrants, notes, or other rights to
acquire securities of the Company, or (vii) to the issuance of securities
pursuant to stock splits, stock dividends or like transactions.
2.4 Employee Confidential Information and Invention Assignment
Agreements. The Company will require that all future employees, consultants and
officers having access to proprietary information execute Confidential
Information and Invention Assignment Agreements substantially in the form
currently used by the Company and that such form may not be altered in a manner
adverse to the Company without the approval of the Company's President.
2.5 Termination of Covenants.
(a) The covenants set forth in Sections 2.1 through Section 2.3
shall terminate as to each Investor and be of no further force or effect (i)
upon the consummation of a Qualified IPO, or (ii) when the Company shall (A)
sell, convey, or otherwise dispose of all or substantially all of its property
or business or merge or consolidate with any other corporation (other than a
wholly-owned subsidiary corporation) where the stockholders of the Company own
less than fifty percent (50%) of the voting power of the surviving entity after
such merger or consolidation or (B) effect any other transaction or series of
related transactions in which more than fifty percent (50%) of the voting power
of the Company is disposed of, provided that this subsection (ii) shall not
apply to a merger effected exclusively for the purpose of changing the domicile
of the Company.
(b) The covenants set forth in Sections 2.1 and 2.2 shall
terminate as to each Holder and be of no further force or effect when the
Company first becomes subject to the periodic reporting requirements of Sections
13 or 15(d) of the Exchange Act, if this occurs earlier than the events
described in Section 2.5(a) above.
3. Standstill Agreement.
3.1 No Increase of Ownership Interest. At any time following the
date of this Agreement, except with the prior written consent of a majority of
the Company's Board of Directors (excluding the vote of any director(s)
appointed by the respective Investor or otherwise affiliated with such
Investor), no Major Investor, together with any persons or entities affiliated
with such Major Investor (collectively, the "Standstill Investor"), shall
acquire beneficial ownership (as defined in Rule 13d-3 of the Exchange Act) of
any securities of the Company entitled to vote with respect to the election of
any directors of the Company ("Voting Securities"), any security convertible
into, exchangeable for, or exercisable for, or that may become any Voting
Securities or any other right to acquire Voting Securities (such Voting
Securities and rights to acquire Voting Securities are collectively referred to
herein as "Securities"), if after such acquisition, the Voting Securities then
beneficially owned by the Standstill Investor represent more than the Standstill
Investor's Threshold Percentage (defined below) of the Company's then
outstanding Voting Securities (assuming the conversion, exchange and/or exercise
of all convertible, exchangeable and exercisable securities, including all
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<PAGE>
securities reserved for issuance under the Company's stock plans); provided
however, that if at any time the Voting Securities beneficially owned by a
Standstill Investor shall represent less than or the same as the Standstill
Investor's Threshold Percentage, and, subsequently and solely as a result of the
Company's repurchases of Voting Securities or a recapitalization of all the
Company's capital stock, the Voting Securities beneficially owned by a
Standstill Investor shall then represent more than the Standstill Investor's
Threshold Percentage, then such Standstill Investor shall not be deemed in
violation of this Section 3.1 for so long as such Standstill Investor does not
purchase or acquire additional Voting Securities. For purposes of this
Agreement, the "Standstill Investor's Threshold Percentage" shall be equal to
40.0% for each Standstill Investor. Notwithstanding the foregoing, for purposes
of this Section 3.1 and for purposes of Sections 3.2, 3.3, 3.4 and 3.5 only,
Vulcan Ventures Incorporated shall not be considered a "Major Investor" and
shall not be deemed a "Standstill Investor".
3.2 Notice of Voting Securities Purchases. Each Standstill Investor
shall notify the Company as to any future acquisition of beneficial ownership of
Voting Securities, or rights thereto, within ten (10) business days after such
action in order for the Company to monitor compliance with the terms of this
Agreement.
3.3 Acts in Concert with Others. The Standstill Investor shall not
join a partnership, limited partnership, syndicate or other group, or otherwise
act in concert with any third person, for the purpose of acquiring any
Securities that would exceed such Standstill Investor's Threshold Percentage.
3.4 Termination of Standstill Agreement. The covenants set forth in
this Section 3 shall terminate as to each Standstill Investor on the earlier of
(i) August 10, 2002, or (ii) when the Company shall (A) sell, convey, or
otherwise dispose of all or substantially all of its property or business or
merge or consolidate with any other corporation (other than a wholly-owned
subsidiary corporation) where the stockholders of the Company own less than
fifty percent (50%) of the voting power of the surviving entity after such
merger or consolidation or (B) effect any other transaction or series of related
transactions in which more than fifty percent (50%) of the voting power of the
Company is disposed of, except in each case a merger effected exclusively for
the purpose of changing the domicile of the Company.
3.5 Permitted Transaction. Notwithstanding the provisions of this
Section 3, on and after the eleventh business day after the commencement of a
proxy contest, tender offer or exchange offer which could result in a "Change of
Control Transaction" (as defined below) for outstanding Securities or on or
after the public announcement that the Company has entered into an agreement
with a third party not affiliated with the Company that would result in a Change
of Control Transaction, the Standstill Investor shall be permitted to make a
proposal to the Company's Board of Directors or shareholders or to tender or
exchange any Securities beneficially owned by it pursuant to such transaction.
As used herein, "Change of Control Transaction" shall mean (A) any tender or
exchange offer, merger, consolidation, recapitalization or other business
combination or transaction pursuant to which either (i) the holders of the
outstanding voting power immediately prior to the transaction would hold less
than 50% of the outstanding voting power outstanding immediately after the
transaction or (ii)
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<PAGE>
50% of the assets of the Company would be transferred to or controlled by a
third party not affiliated with the Company, except in each case a merger
effected exclusively for the purpose of changing the domicile of the Company, or
(B) any action by the shareholders of the Company that results in the directors,
who as of the date of Closing constitute the Company's Board of Directors (the
"Incumbent Board"), ceasing to constitute at least a majority of the Company's
Board of Directors; provided, however, that any individual becoming a director
subsequent to the date of Closing whose nomination for election by the
shareholders of the Company was approved by the vote of the Incumbent Board
shall be considered as though such individual were a member of the Incumbent
Board.
4. Sales by Amazon.com and Kleiner Perkins Caufield & Byers.
4.1 Right of First Refusal. Before any shares of the Company's
capital stock ("Stock") held by Amazon.com, Inc. ("Amazon.com") or Kleiner
Perkins Caufield & Byers VIII (including its affiliated funds) ("KPCB") (each a
"ROFR Investor") may be sold or otherwise transferred, the Company or its
permitted assignee under Section 4.2 shall have a right of first refusal to
purchase such Stock on the terms and conditions set forth in this Section 4 (the
"Right of First Refusal").
(a) Notice of Proposed Transfer. The ROFR Investor proposing to
make a sale or transfer (the "Seller") shall deliver to the Company and the
other ROFR Investor a written notice (the "Seller Notice") stating: (i) the
Seller's bona fide intention to sell or otherwise transfer such Stock; (ii) the
name of each proposed purchaser or other transferee (the "Proposed Transferee");
(iii) the number of Shares of Stock proposed to be transferred to each Proposed
Transferee; and (iv) the terms and conditions of each proposed sale or transfer.
The Seller shall offer Stock at the same price (the "Offered Price") and upon
the same terms (or terms as similar as reasonably possible) to the Company or
its assignee.
(b) Exercise of Right of First Refusal. At any time within
fifteen (15) business days after receipt of the Seller Notice, the Company or
its assignee may, by giving written notice to the Seller, elect to purchase all
of the Stock proposed to be transferred to any one or more of the Proposed
Transferees, at the purchase price determined in accordance with subsection (c)
below.
(c) Purchase. The purchase price ("Purchase Price") for the
Stock purchased by the Company or its assignee under this Section 4 shall be the
Offered Price. If the Offered Price includes consideration other than cash, the
cash equivalent value of the non-cash consideration shall be determined by the
Board of Directors of the Company in good faith. Payment of the Purchase Price
shall be made, at the option of the Company or its assignee(s), in cash (by
check), by cancellation of all or a portion of any outstanding indebtedness of
the Seller to the Company (or, in the case of purchase by an assignee, to the
assignee), or by any combination thereof within 30 days after the Company or its
assignee provides the written notice to the Seller as provided in subsection (b)
above.
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<PAGE>
(d) Seller's Right to Transfer. If the Stock proposed in the
Seller Notice to be transferred is not purchased by the Company or its assignee
as provided in this Section 4, then the Seller may sell or otherwise transfer
such Stock to that Proposed Transferee at the Offered Price or at a higher
price, provided that such sale or other transfer is consummated within 90 days
after the date of the Seller Notice and provided further that any such sale or
other transfer is effected in accordance with any applicable securities laws. If
any Stock described in the Seller Notice is not transferred to the Proposed
Transferee within such period, or if the Seller proposes to change the price or
other terms to make them more favorable to the Proposed Transferee, a new Seller
Notice shall be given to the Company and the other ROFR Investor, and the
Company and/or its assignee shall again be offered the Right of First Refusal
before any Stock held by the Seller may be sold or otherwise transferred.
(e) Reissuance of Repurchased Shares. Any Stock purchased by
the Company under this Section 4 from a ROFR Investor may be retired by the
Company or held by the Company as treasury stock, but such Stock may not be
reissued by the Company without the prior written consent of the non-selling
ROFR Investor (the "Non-Selling Investor").
4.2 Assignment of Right of First Refusal. In the case of proposed
sales or transfers of Stock by a ROFR Investor, the Company agrees that in the
event that the Company declines to exercise the Right of First Refusal, the
Company will provide the Non-Selling Investor with notice of such determination
at least five (5) business days prior to the end of the period in which the
Right of First Refusal expires under Section 4.1(b). The Non-Selling Investor
shall then have the right, exercisable by notice prior to the end of such
period, to exercise such Right of First Refusal as the Company's assignee. Any
Stock purchased by a ROFR Investor under this Section 4.2 shall not be deemed
Voting Securities under Section 3.1 for purposes of calculating the Standstill
Investor's Threshold Percentage. The Right of First Refusal is not otherwise
assignable by the Company.
4.3 Permitted Transactions. The provisions of this Section 4 shall
not pertain or apply to:
(i) Stock sold pursuant to a registration statement filed
under the Securities Act;
(ii) Distributions of Stock by KPCB to its limited partners and
subsequent resales of such Stock;
(iii) Transfers of Stock by KPCB to any affiliated investment
fund or transfers of Stock by Amazon.com to any wholly-owned subsidiary,
provided in each case that the transferee of such Stock agrees to be bound by
the provisions of this paragraph;
(iv) Stock sold in connection with a transaction or series of
related transactions in which more than 80% of the voting power of the Company
is disposed of; or
(v) Sales or other transfers of Stock to any individual third
party (including all affiliates of such third party), if such transferred Stock
represents less than ten
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<PAGE>
percent (10%) of the total number of shares of Stock held by the ROFR Investor
at the time of transfer.
4.4 Prohibited Transfers. Any attempt by a ROFR Investor to transfer
Stock of the Company in violation of this Section 4 hereof shall be void and the
Company agrees it will not effect such a transfer nor will it treat any alleged
transferee as the holder of such Stock.
4.5 Legended Certificates. Each certificate representing shares of
Stock of the Company now or hereafter owned by the ROFR Investors or issued to
any Permitted Transferee pursuant to Section 4.3(iii) shall be endorsed with the
following legend:
"THE SALE, PLEDGE, HYPOTHECATION OR TRANSFER OF THE SECURITIES
REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO THE TERMS AND CONDITIONS
OF A CERTAIN RIGHT OF FIRST REFUSAL BY AND BETWEEN THE STOCKHOLDER,
THE CORPORATION AND CERTAIN HOLDERS OF PREFERRED STOCK OF THE
CORPORATION. COPIES OF SUCH AGREEMENT MAY BE OBTAINED UPON WRITTEN
REQUEST TO THE SECRETARY OF THE CORPORATION."
The foregoing legend shall be removed upon termination of the Right of
First Refusal in accordance with the provisions of Section 4.6.
4.6 Termination of Right of First Refusal. The Right of First
Refusal under this Section 4 shall terminate at such time as the covenants set
forth in Section 3 shall have terminated pursuant to Section 3.4 above.
5. Miscellaneous.
5.1 Successors and Assigns. Except as otherwise provided in this
Agreement, the terms and conditions of this Agreement shall inure to the benefit
of and be binding upon the respective permitted successors and assigns of the
parties (including transferees of any of the Series A, Series B, Series C or
Series D Preferred Stock or any Common Stock issued upon conversion thereof).
Nothing in this Agreement, express or implied, is intended to confer upon any
party other than the parties hereto or their respective successors and assigns
any rights, remedies, obligations, or liabilities under or by reason of this
Agreement, except as expressly provided in this Agreement. A Holder that is a
corporation may assign or transfer such Holder's rights and obligations to its
wholly-owned subsidiaries without restriction as to the number of shares
acquired.
5.2 Amendments and Waivers. Any term of this Agreement may be
amended or waived only with the written consent of the Company and the holders
of at least two-thirds (2/3) of the Registrable Securities then outstanding. Any
amendment or waiver effected in accordance with this paragraph shall be binding
upon each holder of any Registrable Securities then outstanding, each future
holder of all such Registrable Securities, and the Company.
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<PAGE>
5.3 Notices. Unless otherwise provided, any notice required or
permitted by this Agreement shall be in writing and shall be deemed sufficient
upon delivery, when delivered personally or by overnight courier or sent by
telegram or fax, or forty-eight (48) hours after being deposited in the U.S.
mail, as certified or registered mail, with postage prepaid, and addressed to
the party to be notified at such party's address or fax number as set forth
below or on Exhibit A hereto or as subsequently modified by written notice.
5.4 Severability. If one or more provisions of this Agreement are
held to be unenforceable under applicable law, the parties agree to renegotiate
such provision in good faith. In the event that the parties cannot reach a
mutually agreeable and enforceable replacement for such provision, then (a) such
provision shall be excluded from this Agreement, (b) the balance of the
Agreement shall be interpreted as if such provision were so excluded and (c) the
balance of the Agreement shall be enforceable in accordance with its terms.
5.5 Governing Law. This Agreement and all acts and transactions
pursuant hereto shall be governed, construed and interpreted in accordance with
the laws of the State of California, without giving effect to principles of
conflicts of laws.
5.6 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
5.7 Titles and Subtitles. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
5.8 Aggregation of Stock. All shares of the Preferred Stock (or
Common Stock issuable or issued upon conversion thereof) held or acquired by
affiliated entities or persons shall be aggregated together for the purpose of
determining the availability of any rights under this Agreement.
[Signature Page Follows]
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<PAGE>
The parties have executed this Fourth Amended and Restated Investors'
Rights Agreement as of the date first above written.
COMPANY: INVESTORS:
DRUGSTORE.COM, INC. /s/ Vulcan Ventures
________________________________________
Vulcan Ventures Incorporated
By: /s/ Peter Neupert By:_____________________________________
_______________________________
Peter Neupert, President
Name:___________________________________
Address: 13920 SE Eastgate Way, (print)
Suite 300
Bellevue, WA 98005 Title:__________________________________
Kleiner Perkins Caufield & Byers VIII,
L.P.
By: KPCB VIII Associates, L.P., its
General Partner
By: /s/ KPCB VIII
_____________________________________
a General Partner
Address: 2750 Sand Hill Road
Menlo Park, CA 94025
KPCB VIII Founders Fund, L.P.
By: KPCB VIII Associates, L.P., its
General Partner
By: /s/ KPCB VIII Associates
_____________________________________
a General Partner
Address: 2750 Sand Hill Road
Menlo Park, CA 94025
<PAGE>
KPCB Life Sciences Zaibatsu Fund II, L.P.
By: KPCB VII Associates, L.P., its
General Partner
By: /s/ KPCB Life Sciences Zaibatsu Fund
II
_____________________________________
a General Partner
Address: 2750 Sand Hill Road
Menlo Park, CA 94025
Amazon.com, Inc.
By: /s/ Amazon, Inc.
_____________________________________
Name:___________________________________
Title:__________________________________
Address: 1516 2nd Avenue
Seattle, WA 98101
Peter Neupert
/s/ Peter Neupert
________________________________________
Address: 18650 NE 67th Court
Redmond, WA 98052
SIGNATURE PAGE TO
FOURTH AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT
<PAGE>
EXHIBIT A
INVESTORS
Name and Address
- ---------------------------------------
Kleiner Perkins Caufield & Byers VIII
2750 Sand Hill Road
Menlo Park, CA 94025
KPCB VIII Founders Fund, L.P.
2750 Sand Hill Road
Menlo Park, CA 94025
KPCB Information Sciences Zaibatsu Fund II, L.P.
2750 Sand Hill Road
Menlo Park, CA 94025
David Whorton
c/o Kleiner Perkins Caufield & Byers
2750 Sand Hill Road
Menlo Park, CA 94025
Amazon.com, Inc.
1516 2nd Avenue
Seattle, WA 98101
Attn: General Counsel
Peter Neupert
18650 NE 67th Court
Redmond, WA 98052
Maveron Equity Partners, L.P.
800 Fifth Avenue, Suite 4100
Seattle, WA 98104
Liberty DS, Inc.
8101 Prentice Avenue, Suite 500
Englewood, CO 80111
Vulcan Ventures Incorporated
110 110th Avenue Northeast, Suite 550
Bellevue, Washington 98004
<PAGE>
EXHIBIT 10.13
SUNSET CORPORATE CAMPUS II
BELLEVUE, WASHINGTON
OFFICE LEASE AGREEMENT
BETWEEN
OBAYASHI CORPORATION
a Japan corporation
Landlord
and
THE BOEING COMPANY
a Delaware corporation
Tenant
<PAGE>
OFFICE LEASE AGREEMENT
Sunset Corporate Campus - Building II
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1. LEASE DATA AND EXHIBITS............................................... 1
1.1 Building........................................................ 1
1.2 Premises........................................................ 1
1.3 Usable Area of the Premises; Rentable Area of the Premises...... 1
1.4 Basic Plans Delivery Date....................................... 2
Final Plans Delivery Date....................................... 2
1.5 Commencement Date............................................... 2
1.6 Lease Term...................................................... 2
1.7 Rent............................................................ 2
1.8 Security Deposit................................................ 2
1.9 Parking......................................................... 2
1.10 Notice Addresses................................................ 3
1.11 Payment Addresses............................................... 3
1.12 Exhibits........................................................ 4
1.13 Tenant's Leasing Broker/Agent................................... 4
2. PREMISES.............................................................. 4
3. COMMENCEMENT AND EXPIRATION DATES..................................... 5
3.1 Commencement Date............................................... 5
3.2 Tenant Obligations.............................................. 5
3.3 Tenant Late Possession and Termination Rights................... 5
3.4 Expiration Date................................................. 6
4. ACCEPTANCE OF PREMISES................................................ 6
5. RENT.................................................................. 7
6. SECURITY DEPOSIT...................................................... 7
7. PARKING............................................................... 7
8. USES.................................................................. 8
9. COMMON AREAS AND FACILITIES........................................... 8
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
10. SERVICES AND UTILITIES............................................... 9
10.1 Standard Services.............................................. 9
10.2 Interruption of Services....................................... 9
10.3 Additional Services............................................ 10
11. COSTS OF OPERATIONS AND REAL ESTATE TAXES............................ 10
11.1 Additional Rent................................................ 10
11.2 Definitions.................................................... 10
11.3 Estimated Operating Costs...................................... 14
11.4 Actual Operating Costs......................................... 14
11.5 Records and Adjustments........................................ 14
11.6 Personal Property Taxes........................................ 15
12. CARE OF PREMISES..................................................... 15
13. ACCESS............................................................... 15
14. DAMAGE OR DESTRUCTION................................................ 16
14.1 Damage and Repair.............................................. 16
14.2 Destruction During Last Year of Lease Term..................... 16
14.3 Tenant Improvements............................................ 16
15. WAIVER OF CLAIMS AND SUBROGATION..................................... 16
16. INDEMNIFICATION...................................................... 17
16.1 Tenant Indemnity............................................... 17
16.2 Landlord's Indemnity........................................... 18
17. INSURANCE............................................................ 18
17.1 Liability Insurance............................................ 18
17.2 Property Insurance............................................. 18
17.3 Insurance Policy Requirements.................................. 19
18. ASSIGNMENT AND SUBLETTING............................................ 19
18.1 Assignment or Sublease......................................... 19
18.2 Assignee Obligations........................................... 20
18.3 Sublessee Obligations.......................................... 20
19. SIGNS................................................................ 20
20. LIENS AND INSOLVENCY................................................. 21
20.1 Liens.......................................................... 21
20.2 Insolvency..................................................... 21
20.3 Financial Statements........................................... 21
</TABLE>
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<TABLE>
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21. DEFAULT............................................................... 22
21.1 Cumulative Remedies............................................. 22
21.2 Tenant's Right to Cure.......................................... 22
21.3 Abandonment..................................................... 22
21.4 Landlord's Reentry.............................................. 22
21.5 Reletting the Premises.......................................... 23
21.6 Damages......................................................... 23
21.7 Nonpayment of Additional Rent................................... 23
21.8 Landlord's Default.............................................. 24
22. PRIORITY.............................................................. 24
23. SURRENDER OF POSSESSION............................................... 24
24. REMOVAL OF PROPERTY................................................... 25
25. NON-WAIVER............................................................ 25
26. HOLDOVER.............................................................. 25
27. CONDEMNATION.......................................................... 25
27.1 Entire Taking................................................... 25
27.2 Partial Taking.................................................. 26
27.3 Awards and Damages.............................................. 26
28. NOTICES............................................................... 26
29. COSTS AND ATTORNEYS FEES.............................................. 26
30. LANDLORD'S LIABILITY.................................................. 27
31. ESTOPPEL CERTIFICATES................................................. 27
32. TRANSFER OF LANDLORD'S INTEREST....................................... 27
33. RIGHT TO PERFORM...................................................... 27
34. QUIET ENJOYMENT....................................................... 28
35. HAZARDOUS MATERIALS................................................... 28
35.1 Hazardous Substances Use........................................ 28
35.2 Representation.................................................. 28
35.3 Indemnification................................................. 28
35.4 Definition of "Hazardous Substances"............................ 29
</TABLE>
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36. TELECOMMUNICATIONS LINES AND EQUIPMENT............................... 34
36.1 Location of Tenant's Equipment and Landlord Consent............ 34
36.2 Electromagnetic Fields......................................... 35
37. RULES AND REGULATIONS................................................ 35
38. GENERAL.............................................................. 35
38.1 Headings....................................................... 35
38.2 Heirs and Assigns.............................................. 35
38.3 Payment of Brokers............................................. 35
38.4 No Partnership................................................. 36
38.5 Severability................................................... 36
38.6 Overdue Payments............................................... 36
38.7 Force Majeure.................................................. 36
38.8 Right to Change Public Spaces.................................. 36
38.9 Governing Law; Venue........................................... 37
38.10 Building Directory............................................. 37
38.11 Building Name.................................................. 37
38.12 Recordation.................................................... 37
38.13 Time of Performance............................................ 37
38.14 Execution Authority............................................ 37
38.15 Addenda and Exhibits........................................... 37
38.16 Entire Agreement............................................... 37
39. PRECONSTRUCTION EXPANSION OPTIONS.................................... C-1
39.1 Building I Expansion Space..................................... C-1
39.2 Building II Expansion Space.................................... C-1
40. OPTION TO LEASE ADDITIONAL SPACE IN BUILDING I....................... C-2
41. EARLY TERMINATION RIGHT.............................................. C-2
42. OPTION TO RENEW...................................................... C-2
42.1 Terms and Conditions........................................... C-2
42.2 Determination of Rent.......................................... C-3
42.3 Procedure for Rent Arbitration................................. C-3
43. RIGHT OF FIRST OFFER IN THE BUILDING................................. C-4
44. NO RELOCATION........................................................ C-5
45. RIGHT TO REDUCE AREA OF PREMISES..................................... C-5
46. TENANT'S RIGHT TO EARLY ENTRY........................................ C-5
</TABLE>
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47. REDOCORATING ALLOWANCE............................................... C-5
48. ADDITIONAL BUILDOUT ALLOWANCE........................................ C-6
49. TENANT'S ANTENNAE AND SATELLITE DISHES............................... C-6
</TABLE>
EXHIBIT A - FLOOR PLAN OF PREMISES
EXHIBIT B - TENANT IMPROVEMENTS
EXHIBIT C - ADDENDUM TO LEASE
EXHIBIT D - CERTIFICATE OF LEASE INFORMATION
EXHIBIT E - JANITORIAL SPECIFICATIONS FOR BUILDING
EXHIBIT F - BUILDING SIGNAGE POLICY
EXHIBIT G - BUILDING RULES AND REGULATIONS
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OFFICE LEASE AGREEMENT
Sunset Corporate Campus - Building II
THIS LEASE is dated September 30, 1997, between OBAYASHI CORPORATION, a
Japan corporation ("LANDLORD"), and THE BOEING COMPANY, a Delaware corporation,
acting through its Information, Space and Defense Systems Group ("TENANT").
As parties hereto, Landlord and Tenant agree:
1. LEASE DATA AND EXHIBITS. When used in this Lease, the following terms and
phrases shall have the meanings provided in this Section, unless otherwise
specifically stated in this Lease:
1.1 BUILDING. Building and improvements related thereto located on the
real property described in SECTION 2 hereof, known as Sunset Corporate Campus
Building II ("BUILDING") with an address of 13920 Southeast Eastgate Way,
Bellevue, Washington 98005.
1.2 PREMISES. Consisting of the entire second, third and fourth floors of
the Building, as outlined on the floor plan(s) attached hereto as EXHIBIT A,
including tenant improvements, as described in EXHIBIT B, and any additional
spaces in the Building leased to Tenant pursuant to EXHIBIT C.
1.3 USABLE AREA OF THE PREMISES; RENTABLE AREA OF THE PREMISES. Landlord
and Tenant agree that, for purposes of this Lease, the Usable Area of the
Premises is deemed to be approximately 86,000 square feet and the Rentable Area
of the Premises is deemed to be approximately 89,400 square feet of Rentable
Area, pending completion of the Building and the tenant improvements to the
Premises and subject to the possible expansion of the Premises to include the
additional areas referred to in EXHIBIT C. Upon substantial completion of the
Building and the Premises, the Usable Area of the Premises, Rentable Area of the
Premises, and net rentable area of the Building shall be computed by Landlord
and Landlord and Tenant shall sign a certificate stating the agreed figures. In
the event the Usable Area of the Premises or the Rentable Area of the Premises
or the net rentable area of the Building is altered during the Term, Landlord
may adjust the Usable Area of the Premises, Rentable Area of the Premises and
Tenant's pro rata share (as defined in SECTION 11.2 below) to properly reflect
such event. Landlord and Tenant agree that the overall full-floor load factor
representing the difference between Usable Area of the Premises and the Rentable
Area of the Premises shall not exceed 5.01 percent of the Usable Area of the
Premises. All measurements of "USABLE AREA" and "RENTABLE AREA" shall be made by
Landlord and confirmed by Tenant in writing within sixty(60) days after the
Commencement Date in accordance with the most current standards published by the
Building Owners and Managers Association on the date of such measurements. If
Tenant does not provide such
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confirmation or a written objection to Landlord's measurements within such sixty
(60) day period, Landlord's measurements shall be conclusively deemed accurate.
1.4 BASIC PLANS DELIVERY DATE. See EXHIBIT B.
---
FINAL PLANS DELIVERY DATE. See EXHIBIT B.
---
1.5 COMMENCEMENT DATE. August 1, 1998, or such earlier or later date as
provided in SECTION 3 below, and as set forth on the Certificate of Lease
Information to be signed by the parties promptly following the Commencement
Date.
1.6 LEASE TERM. Seven years, or as otherwise provided in SECTION 3 below
or in EXHIBIT C.
1.7 RENT. Rent shall be payable monthly in accordance with SECTION 5
below. The Rent for the Initial Lease Term shall be as follows:
Years 1 - 3: $24.00 per square foot of Rentable Area of the Premises per
year
Years 4 & 5: $24.50 per square foot of Rentable Area of the Premises per
year
Years 6 & 7: $26.50 per square foot of Rentable Area of the Premises per
year
1.8 SECURITY DEPOSIT. $ -0-
1.9 PARKING. Tenant shall have the right to four automobile parking stalls
per 1,000 square feet of Usable Area of the Premises allocated as follows: (1)
approximately 69% of the parking stalls shall be located in the underground
parking garage adjacent to the Building ("GARAGE PARKING"); (2) approximately
13% of the stalls shall be located in the executive parking portion of the
underground parking garage located directly beneath Building ("EXECUTIVE
PARKING"); and (3) approximately 18% of the parking stalls shall be located on
the surface parking lots located near the Building ("SURFACE PARKING"). Tenant
may elect to take less parking and may designate whether its Garage, Executive
or Surface Parking is to be so reduced upon thirty (30) days' prior written
notice to Landlord, but Tenant shall not have the right to increase the number
of its initial allocated Garage, Executive or Surface Parking spaces without
Landlord's prior written consent. All stalls shall be on an unassigned self-park
(or executive valet) basis (as designated by Landlord from time to time
consistent with this Section) at the prevailing monthly rates established by
Landlord from time to time in accordance with SECTION 7 below; provided,
however, that for the first three hundred sixty-five (365) days of the Lease
Term, Tenant's parking fees have been included in its Rent, and thereafter
Tenant shall be required to purchase permits to park automobiles, with the rates
for each type of parking stall to be in addition to the Rent amounts stated in
SECTION 1.7 or otherwise referred to in this Lease and fixed until the end of
the first full thirty-six (36) calendar months of the Lease Term as follows:
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Garage Parking $20 per stall per month
Executive Parking $35 per stall per month
Surface Parking No charge
Commencing as of the first day of the thirty-seventh (37th) full calendar month
of the Lease Term, the parking permits shall be purchased at Landlord's
published monthly rates for Buildings I and II in the project in which the
Premises are located from time to time in addition to the Rent amounts stated in
Section 1.7 or otherwise referred to in this Lease; provided, however, such
rates for the fourth year of the Lease Term shall not be increased by more than
Fifteen Dollars ($15) per parking stall per month over the initial rates, and
for each of the fifth through seventh years of the Lease Term shall not be
increased by more than Five Dollars ($5.00) per parking stall per month over
such rates for the immediately preceding year. No charge shall be made for
Surface Parking during the initial seven year Lease Term. Landlord agrees that
the parking rates that are charged to Tenant shall be consistent with the rates
charged by Landlord from time to time to a majority of the other tenants in the
project in which the Building is located (excluding any tenants to which parking
rate concessions are provided during the initial months of their tenancy).
1.10 NOTICE ADDRESSES.
Landlord: Obayashi Corporation
c/o Wright Runstad & Company
13810 S.E. Eastgate Way, Suite 180
Bellevue, Washington 98005
with a copy to: O.C. Real Estate Management, Inc.
420 East Third Street, Suite 600
Los Angeles, CA 90013
Attn: Mr. William H. Cunningham, Jr.
Tenant: The Boeing Company
P.O. Box 3999, M/S 46-26
Seattle, WA 98124-2499
Attn: Real Property
1.11 PAYMENT ADDRESSES.
Landlord: Obayashi Corporation
c/o Wright Runstad & Company
13810 S.E. Eastgate Way, Suite 180
Bellevue, Washington 98005
Tenant: The Boeing Company
P.O. Box 3999, M/S 46-26
Seattle, WA 98124-2499
Attn: Real Property
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1.12 EXHIBITS. The following Exhibits or riders are made a part of this
Lease:
Exhibit A - Floor Plan of Premises
Exhibit B - Tenant Improvements
Exhibit C - Addendum to Lease
Exhibit D - Certificate of Lease Information
Exhibit E - Janitorial Specifications for Building
Exhibit F - Building Signage Policy
Exhibit G - Building Rules and Regulations
1.13 TENANT'S LEASING BROKER/AGENT.
Cushman & Wakefield of Washington, Inc.
700 Fifth Avenue, Suite 2700
Seattle, WA 98104
Attn: Gary Danklefsen, Senior Director
2. PREMISES. Landlord does hereby lease to Tenant, and Tenant does hereby
lease from Landlord, upon the terms and conditions herein set forth, the
Premises described in SECTION 1.2 above, as shown on EXHIBIT A attached hereto
and incorporated by this reference, together with rights of ingress and egress
over common areas in the Building located on the land ("Land") more particularly
described as:
LOTS 1, 2, 3, 4, 5 AND TRACT A OF SUNSET RIDGE 1-90 CORPORATE CAMPUS,
A BINDING SITE PLAN, AS PER INSTRUMENT RECORDED UNDER KING COUNTY
RECORDING NO. 9012180243;
EXCEPT THAT PORTION CONVEYED TO THE CITY OF BELLEVUE FOR USE AS A
PUBLIC STREET RECORDED UNDER KING COUNTY RECORDING NO 9101280422;
SITUATE IN THE CITY OF BELLEVUE, COUNTY OF KING, STATE OF WASHINGTON.
PARCEL II:
AN UNDIVIDED 40% INTEREST IN:
LOT 3 OF CITY OF BELLEVUE BOUNDARY LINE ADJUSTMENT NO. 90-5248
RECORDED UNDER RECORDING NO. 9012049030;
EXCEPT THAT PORTION CONVEYED TO THE CITY OF BELLEVUE FOR USE AS A
PUBLIC STREET RECORDED UNDER KING COUNTY RECORDING NO. 9101280422;
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SITUATE IN THE CITY OF BELLEVUE, COUNTY OF KING, STATE OF WASHINGTON.
3. COMMENCEMENT AND EXPIRATION DATES.
---------------------------------
3.1 COMMENCEMENT DATE. Provided that the Premises together with common
facilities for access and service thereto have been substantially completed, the
Commencement Date shall be the date specified in Section 1.5 or such earlier or
later date upon which the Premises and common facilities shall be substantially
completed as may be specified in a notice delivered to Tenant at least thirty
(30) days prior to the Commencement Date specified in such notice; or any
earlier date when the Tenant occupies the Premises for Permitted Uses. In the
event the Commencement Date is established as a later or earlier date than the
date provided in Section 1.5 hereof, Landlord shall confirm the same to Tenant
in writing, which Tenant shall promptly acknowledge in writing. Promptly
following the Commencement Date, the parties shall complete, sign and deliver to
each other a Certificate of Lease Information in the form attached as Exhibit D.
For the purposes of this Agreement, "substantial completion" shall be deemed to
have occurred at such time as (a) Tenant is legally permitted to occupy the
Premises under all applicable government regulations, and (b) Landlord has
completed construction of all of the improvements Initially being made by
Landlord to the Premises to the extent required to conform with the standards of
"substantial completion" promulgated by the American Institute of Architects
(General Conditions of the Contract for Construction, MA Document A201), subject
to completion of "punch list" items.
3.2 TENANT OBLIGATIONS. If completion of the Premises is delayed due to
actions of Tenant or its agents, including without limitation the failure of
Tenant or its agents to fulfill any obligation under this Lease or any Exhibit
hereto, such as Tenant's failure to comply with the Plan Delivery Dates in
Exhibit B, then the Lease shall be deemed to have commenced upon the date when
the Premises would have been substantially completed but for such delay by
Tenant. Landlord shall provide Tenant with written notice of any such actions or
failures.
3.3 TENANT LATE POSSESSION AND TERMINATION RIGHTS. Landlord acknowledges
that delays in the substantial completion of the Building or Premises will cause
substantial harm to Tenant and Tenant's business, and that the resulting damages
will be difficult or impossible to measure. Therefore, if, due to delays from
any cause, except to the extent that such delay is caused by the actions or
omissions of Tenant or its agents, the Building or Premises are not so
substantially completed on August 15, 1998 (with the exception of punch list
items) and subject to the delay provisions of this Section, Landlord shall pay
to Tenant One Thousand Dollars ($1,000) per day thereafter commencing on August
16, 1998, to and including September 15, 1998, and Seventy-five Thousand Dollars
($75,000) for each month thereafter that the Premises are unavailable (prorated
at an equal amount per day up to a maximum of Seventy-five Thousand Dollars
($75,000) per month) which the parties agree is a reasonable estimate of
Tenant's damages resulting from such delay. If this Lease is not executed by
Landlord and Tenant on or before September 1, 1997, then the date on which said
liquidated damages commence shall be postponed for one day for every day between
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September 1, 1997, and the date this Lease is signed by Landlord and Tenant;
provided, however, for the purpose of this sentence, the date of Landlord's
signature shall be deemed to be the earlier of the actual date thereof or five
(5) days after Landlord receives a copy of this Lease executed by Tenant. The
above dates upon which said liquidated damages shall be payable shall each be
extended by up to sixty (60) days to the extent substantial completion of the
Premises is delayed for reasons beyond Landlord's control. There is no
acceleration of the date on which liquidated damages commence if this Lease is
signed prior to September 1, 1997. If Landlord has not made the Premises
available for Tenant's occupancy within six (6) months following August 15, 1998
(or such later date as may result from a delay in the execution of this Lease
under the prior sentence) and such six-month delay in the delivery of the
Premises is not due to actions or omissions of Tenant or its agents, then either
party may terminate this Lease by written notice to the other. Tenant shall also
have the right to terminate this Lease by written notice to Landlord any time
prior to the Commencement Date after it receives written notice from Landlord
that Landlord has determined that it will permanently abandon the construction
of the Building prior to substantial completion, whereupon Tenant's rights to
liquidated damages under this Section shall terminate for any period after the
date of Tenant's notice. If Tenant elects not to give such notice, said damages
shall continue until the date this Lease otherwise terminates. The above-
mentioned liquidated damages and the right to terminate this Lease under this
Section shall be Tenant's sole remedies for delayed delivery or failure to
deliver the Premises, and Tenant shall have no other rights or claims hereunder
at law or in equity.
3.4 EXPIRATION DATE. The Lease shall expire at the end of the last day of
the eighty-fourth (84th) full calendar month of the Lease Term unless renewed in
accordance with Section 42 of Exhibit C.
4. ACCEPTANCE OF PREMISES. The acceptance of the Premises by Tenant shall be
deferred until Landlord informs Tenant of the substantial completion of the
Building and Premises. Tenant shall commence its inspection of the Premises as
soon as practicable thereafter. Within fifteen (15) working days "INSPECTION
PERIOD") after Landlord informs Tenant of such completion, Tenant shall make
such inspection of the Premises as Tenant deems appropriate. Except as otherwise
specified by Tenant in writing to Landlord within the Inspection Period and
except for latent defects not reasonably observable by Tenant, Tenant shall be
deemed to have accepted the Premises in their then condition. If, as a result of
such inspection, Tenant discovers minor deviations or variations from the plans
and specifications for Tenant's improvements which adversely affect Tenant's use
of the Premises or which are inconsistent with the standards ordinarily adhered
to by first-class office buildings in Bellevue, Washington, Tenant shall, during
the Inspection Period, notify Landlord of such deviations. Landlord shall
promptly repair all such items. The existence of such items shall not postpone
the Commencement Date of this Lease or the obligation of Tenant to pay Rent.
5. RENT. Tenant shall pay without notice the Rent and Additional Rent (as
defined in Section 11 and Exhibit C below) without demand, deduction or offset
in lawful money of the United States in advance on or before the first day of
each month at Landlord's Payment Address set forth in Section 1.11 hereof, or to
such other party or at such other place as
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Landlord may hereafter from time to time designate in writing. Rent and
Additional Rent for any partial month at the beginning or end of the Lease Term
shall be prorated in proportion to the number of days in such month. The first
payment of Rent shall include any prorated Rent for the period from the
Commencement Date through the first day of the first full month of the Lease
Term.
6. SECURITY DEPOSIT. No security deposit shall be paid by Tenant in connection
with this Lease unless the same is otherwise agreed to by Tenant or its
successor in interest in writing. Landlord may apply all or any part of any
Security Deposit made or hereafter made by Tenant to the payment of any sum in
default or any other sum which Landlord may be required or may in its reasonable
discretion deem necessary to spend or incur by reason of Tenant's default. In
such event, Tenant shall, within five (5) days of written demand therefor by
Landlord, deposit with Landlord the amount so applied. The amount of the
Security Deposit held by Landlord at the expiration or sooner termination of
this Lease and not applied by Landlord under the provisions of this Section
shall be repaid to Tenant within thirty (30) days after the expiration or sooner
termination of this Lease. Landlord shall not be required to keep any Security
Deposit separate from its general funds and Tenant shall not be entitled to any
interest thereon.
7. PARKING. Tenant shall be entitled to parking spaces as provided in SECTION
1.9 above. All parking spaces are leased to Tenant subject to the rules of
Landlord and the garage operator, and laws, codes and regulations set forth by
authorities having jurisdiction over the Building and Premises. In accordance
with state and city requirements to minimize the use of single occupant vehicles
and to generally reduce parking requirements, Tenant shall participate in
Landlord's transportation management program, provided that Tenant shall not be
subject to any obligation or requirement in connection with Landlord's program
which is in addition to any obligation or requirement otherwise imposed on
Tenant by any governmental agency in connection with any commute trip reduction
or similar regulation. Landlord's program may include providing information and
referral service to Tenant and Tenant's employees regarding bus schedules, car
pooling, van pooling, flex-time and job sharing and may include other
transportation management programs as are deemed appropriate by Landlord from
time-to-time. During Normal Business Hours, as defined in SECTION 10 herein,
Landlord shall make available in or near the Building transient parking for
Tenant's clients and guests. Tenant assumes full financial responsibility for
all parking leased to Tenant or Tenant's employees or used by Tenant's clients
or guests. The parking garage shall be secured by a cardkey access system twenty
four (24) hours per day. At Tenant's option, from and after the end of the first
full twelve (12) calendar months of the Lease Term parking costs shall be added
to Additional Rent rather than invoiced separately.
8. USES. The Premises are to be used only for general office purposes,
including extensive computer use and training purposes ("PERMITTED USES"), and
for no other business or purpose without the prior written consent of Landlord,
which consent may be withheld if Landlord determines that any proposed use is
inconsistent with or detrimental to the maintenance and operation of the
Building as a first-class office building in Bellevue, Washington, or is
inconsistent with any public or private restriction on use of the Premises, the
Building or the Land contained in any statute or ordinances or any lease,
mortgage or
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other agreement or instrument by which the Landlord is bound or to which any of
such property is subject. Tenant shall not commit any act that will increase the
then existing cost of insurance on the Building without Landlord's consent.
Tenant shall promptly pay upon demand the amount of any increase in insurance
costs caused by any act or acts of Tenant. Tenant shall not commit or allow to
be committed any waste upon the Premises, or any public or private nuisance or
other act which disturbs the quiet enjoyment of any other tenant in the Building
or which is unlawful or which will cause any substantial noise, vibration, odor,
smoke or fumes. If Landlord and Tenant shall permit smoking in the Premises,
Tenant shall be required to install, at Tenant's sole cost, special tenant
improvements designed to alleviate the spread of smoke outside the Premises,
including extending demising walls from structure to structure and installing a
dedicated exhaust system for the Premises. If Tenant should disturb the quiet
enjoyment of any other tenant in the Building beyond what is customary in a
Class A office building, Tenant shall provide adequate insulation or take other
action as may be necessary to eliminate the disturbance. Tenant shall comply
with all laws relating to its use, occupancy or alteration of the Premises and
shall observe such reasonable rules and regulations (not inconsistent with the
terms of this Lease) as may be adopted and made available to Tenant by Landlord
from time to time for the safety, care and cleanliness of the Premises or the
Building, and for the preservation of good order therein.
9. COMMON AREAS AND FACILITIES. Landlord gives to Tenant and its agents,
employees, contractors and invitees a nonexclusive license to use the common
areas of the Building subject to Landlord's rights to:
9.1 Establish and enforce reasonable rules and regulations for the
maintenance, management, use and operation of the common areas.
9.2 Close any of the common areas to the extent required in the reasonable
opinion of Landlord to prevent a dedication of any of the common areas or the
accrual of any rights of any person or of the public to the common areas.
9.3 Close any of the common areas temporarily for purposes of cleaning,
maintenance, repair, alterations, improvements or additions.
9.4 Designate other property to become part of the common areas.
9.5 Make changes to the common areas, including, without limitation,
changes in the arrangement and/or location of passageways, doors, doorways,
corridors, elevators, stairs, or toilets; provided, however, Landlord shall not
make any change which will prevent access to the Premises or change the
character of the Building from that of a first-class office building in
Bellevue, Washington.
10. SERVICES AND UTILITIES.
10.1 STANDARD SERVICES. Landlord shall furnish the Premises with
electricity for normal office use, including lighting and operation of low power
usage office machines and the power requirements for the Permitted Uses, water
and elevator service at all times during
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the Lease Term. Landlord shall also provide lamp replacement service for
building standard light fixtures, toilet room supplies, window washing at
reasonable intervals, and customary building janitorial service. The current
customary building janitorial specifications are attached as Exhibit E and may
be amended from time to time by Landlord, consistent with maintaining a Class A
office building in Bellevue, Washington. Tenant shall have the right, upon
thirty (30) days' prior written notice to Landlord, to increase or decrease the
scope of janitorial services from time to time, and any resulting increases or
decreases in Landlord's actual costs of such services shall be paid by or
credited to Tenant, respectively; provided, however, Tenant shall not have the
right to obtain such services from any other provider, and any such increased
service shall be within the services Landlord is reasonably able to provide and
any such decreased service shall not impair Tenant's obligation to maintain the
Premises in a condition typically associated with Class A office buildings. No
janitorial service shall be provided Saturdays, Sundays or legal holidays. The
costs of any janitorial or other service provided by Landlord to Tenant which
are in addition to the services ordinarily provided Building tenants shall be
repaid by Tenant as Additional Rent upon receipt of billings therefor.
From 7:00 a.m. to 6:00 p.m., Monday through Friday, and 8:00 a.m. to 12:00 noon
Saturday, excluding New Years' Day, Memorial Day, July 4th, Labor Day,
Thanksgiving Day and Christmas Day ("NORMAL BUSINESS HOURS"), Landlord shall
furnish heat and air conditioning to the Premises. If requested by Tenant,
Landlord shall furnish heat and air conditioning at times other than Normal
Business Hours and the cost of such services, as established by Landlord from
time to time, shall be paid by Tenant as Additional Rent upon receipt of
billings therefor. Tenant shall have control over activation of heat and air
conditioning within the Premises at times other than Normal Business Hours.
During other than Normal Business Hours, Landlord may restrict access to the
Building in accordance with the Building's security system, provided that,
except when precluded for reasons beyond Landlord's reasonable control, Tenant
shall have at all times during the Lease Term (24 hours of all days) reasonable
access to the Premises. Landlord may provide access to the Building during other
than Normal Business Hours by a cardkey access system with control points at the
garage parking entrance, building front entry, and in the three building
elevator cabs.
10.2 INTERRUPTION OF SERVICES. Landlord shall not be liable for any loss,
injury or damage to person or property caused by or resulting from any
variation, interruption, or failure of any utility services due to any cause
beyond Landlord's reasonable control. No temporary interruption or failure of
such services incident to the making of repairs, alterations or improvements, or
due to accident, strike or conditions or events beyond Landlord's reasonable
control shall be deemed an eviction of Tenant or relieve Tenant from any of
Tenant's obligations hereunder, except if the Premises are not served with
electricity, water, elevator service, heating or air conditioning for any reason
within Landlord's reasonable control for a period of more than forty-eight (48)
consecutive hours, Rent shall abate after such forty-eight (48) hour period to
the extent the same causes any portion of the Premises to be unusable by Tenant
for the Permitted Uses until such time as the Premises are again so usable by
Tenant.
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10.3 ADDITIONAL SERVICES. The Building standard mechanical system is
designed to accommodate heating loads generated by lights using up to 1.2 watts
per square foot and equipment using up to 4.9 watts per square foot. Before
installing lights and equipment in the Premises which in the aggregate exceed
such amount, Tenant shall obtain the written permission of Landlord. Landlord
may refuse to grant such permission unless Tenant shall agree to pay the costs
of Landlord for installation of supplementary air conditioning or electrical
systems as necessitated by such equipment or lights.
In addition, Tenant shall in advance, as Additional Rent on the first day of
each month during the Lease Term, pay Landlord the reasonable amount estimated
by Landlord as the cost of furnishing electricity for the operation of such
equipment or lights and the reasonable amount estimated by Landlord as the cost
of operation and maintenance of supplementary air conditioning units
necessitated by Tenant's use of such equipment or lights. The actual additional
costs of such items shall be determined by Landlord and the amount paid by
Tenant as an estimate shall be adjusted in the same manner in which Estimated
Operating Costs are adjusted to Actual Operating Costs, as provided in SECTIONS
11.3 and 11.4, and subject to the obligation of Landlord to maintain and keep
records and the rights of Tenant in connection with audit of such records
provided in SECTION 11.5. Landlord shall be entitled to install and operate at
Landlord's cost a monitoring/metering system in the Premises to measure the
added demands on electrical, heating, ventilation and air conditioning systems
resulting from such equipment and lights and from Tenant's after-hours heating,
ventilation and air conditioning service requirements. Tenant shall comply with
Landlord's reasonable instructions for the use of blinds and thermostats in the
Building.
11. COSTS OF OPERATIONS AND REAL ESTATE TAXES.
11.1 ADDITIONAL RENT. Tenant shall pay as Additional Rent Tenant's Pro Rata
Share of increases in Operating Costs and Taxes over the actual Operating Costs
and Taxes incurred by Landlord for the calendar year 1998 adjusted to reflect a
fully assessed building and a fill calendar year of expenses (the "BASE
AMOUNT").
11.2 DEFINITIONS. For the purposes of this Section, "TAXES" shall mean
taxes and assessments on real and personal property payable during any calendar
year with respect to the Land, the Building and all property of Landlord, real
or personal, used directly in the operation of the Building and located in or on
the Building; and any assessments upon the Land or the Building for off-site
common area costs, together with any taxes levied or assessed in addition to or
in lieu of any such taxes or any tax upon leasing of the Building or the rents
collected (excluding any net income or franchise tax).
"OPERATING COSTS" shall mean all expenses of Landlord for maintaining,
operating and repairing the Land and Building and the personal property used in
connection therewith, including without limitation insurance premiums,
utilities, customary management fees and other expenses which in accordance with
generally accepted accounting and management practices would be considered an
expense of maintaining, operating or repairing the Building; excluding, however:
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(i) costs of any special services rendered to individual tenants for
which a separate charge is collected by Landlord;
(ii) leasing commissions and other expenses, including legal fees
and disbursements, of obtaining Building tenants;
(iii) costs of improvements required to be capitalized in accordance
with generally accepted accounting principles, except Operating Costs shall
include straight-line amortization over their useful life of capital
improvements (A) made subsequent to initial development of the Building which
are designed with a reasonable probability of improving the operating efficiency
of the Building, or (B) which are incurred because of requirements imposed with
respect to the Building under any amendment to any applicable building, health,
safety, fire, personal disabilities, nondiscrimination or similar law or
regulation ("LAW"), or any new Law, or any new interpretation of a Law;
(iv) costs associated with the operation of any fitness center or
any day care or food services provided by Landlord;
(v) attorneys' fees, costs, disbursements, and other expenses
incurred by Landlord or its agents in connection with disputes with and/or
enforcement of any leases with other tenants, other occupants, or prospective
tenants or other occupants of the Building;
(vi) salaries of executives not involved in the day-to-day
management of the Building;
(vii) franchise taxes or income taxes of Landlord;
(viii) except for such costs for which Tenant is responsible under
Section 11.2(iii)(B) above, costs or expenses (including fines, penalties, and
legal fees) incurred due to violation by Landlord, its employees, agents, and/or
contractors, any tenant (other than Tenant) or other occupant of the Building,
of any terms or conditions of this Lease or of the leases of other tenants in
the Building, and/or of any valid, applicable laws, rules, regulations, and
codes of any federal, state, county, municipal, or other government authority
having jurisdiction over the Building that would not have been incurred but for
such violation by Landlord, its employees, agents, and/or contractors, it being
intended that each party shall be responsible for the costs resulting from its
own violation of such leases and laws, rules, regulations, and codes as such
shall pertain to the Building;
(ix) payments of principal, finance charges, interest, or fees on
debt or amortization of any mortgage, deed of trust, or other debt, and rental
payments (or increases in same) under any ground or underlying lease or leases
(except to the extent that the same may be made to pay or reimburse, or may be
measured by, real estate taxes);
(x) any compensation paid to clerks, attendants or other persons in
any commercial concessions operated by Landlord which are not related to the
operation of the Building;
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(xi) advertising and promotional expenditures that are not
required by law;
(xii) expenses incurred for the correction of any latent or patent
defects in the original construction of the improvements in the Premises or
Building made by Landlord, including any such violations of any building, fire,
electrical, mechanical, safety or other code and any violation of the Americans
with Disabilities Act or any state or local law relating to accessibility;
(xiii) management fees assessed against the Additional Allowance or
to the extent they exceed the lesser of (A) the then prevailing market rate for
management fees paid to third parties for managing Class A office buildings in
Bellevue, Washington, outside of the central business district, or (B) five
percent (5%) of the sum of Rent and Additional Rent;
(xiv) costs of repairs, replacements or other work necessitated by
fire, windstorm, or other casualty to the extent covered by the waiver of claims
provision of this Lease set out in Section 15, or the exercise by governmental
authorities of the right of eminent domain;
(xv) "Tenant allowances," "tenant concessions," workletters and
other costs or expenses (including permit, license, and inspection fees)
incurred in completing, fixturing, furnishing, renovating or otherwise
improving, decorating, or redecorating space for tenants or other occupants of
the Building, or vacant, leasable space in the Building, including space
planning/interior design fees for the same;
(xvi) costs resulting directly from the gross negligence or willful
misconduct of Landlord, its employees, agents, and/or contractors;
(xvii) real estate taxes allocable to the leasehold improvements of
other tenants in the Building;
(xviii) except to the extent Tenant would otherwise be responsible
for the amortized costs thereof pursuant to Section 11.2(iii) if the same had
been purchased, rentals or other related expenses, if any, incurred in leasing
air conditioning systems, elevators, or other equipment ordinarily considered to
be of a capital nature, except equipment which is used in providing janitorial
services and which is not affixed to the Building;
(xix) costs or expenses for sculpture, paintings, or other works of
fine art not typically employed in the common areas of Class A office buildings,
including costs incurred with respect to the purchase, ownership, leasing,
showing, promotion, repair, and/or maintenance of same;
(xx) costs of correcting or repairing defects in any equipment or
in replacing defective equipment to the extent that such costs are covered by
warranties of manufacturers, suppliers, or contractors, or are otherwise borne
by parties other than Landlord;
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(xxi) initial costs of interior and exterior landscaping;
(xxii) costs incurred in removing the property of former tenants
and/or other occupants of the Building other than Tenant;
(xxiii) costs of any "tap fees" or one-time lump sum sewer or water
connection fees assessed in connection with the initial construction of the
Building or any other permit fees, mitigation expenses, exactions or other
assessments levied by any governmental authority as a condition to its approval
of such initial construction;
(xxiv) costs or fees relating to the defense of Landlord's title to
or interest in the Building, the Property, or any part thereof;
(xxv) any inequitable allocation of wages, salaries, and other
compensation and benefits of Landlord's employees' and personnel's work on other
projects, including without limitation, those being periodically developed,
managed, and/or operated by Landlord, in addition to the Building and/or the
Property, among all such projects in reasonable proportions to their time spent
in performing services other than in respect of the Property; or
(xxvi) any costs representing payment to an entity related to
Landlord to the extent that such costs are unreasonable and exceed the fair
market price of goods and services supplied by such related entity.
In the event the average occupancy level of the Building for the base year
and/or any subsequent year was or is not 95% or more of full occupancy, then the
Operating Costs for such year shall be proportionately adjusted by Landlord to
reflect those Operating Costs which would have occurred had the Building been
95% occupied during such year. The foregoing adjustment is intended to eliminate
from consideration changes in total Operating Expenses that result solely from
differences in the occupancy level of the Building.
"TENANT'S PRO RATA SHARE" shall mean a percentage determined by dividing
the Rentable Area of the Premises by the Rentable Area of the Building. If the
Rentable Area of the Premises or the Rentable Area of the Building change,
Tenant's pro rata share shall be adjusted accordingly.
"YEAR" shall mean the calendar year.
11.3 ESTIMATED OPERATING COSTS. At the beginning of each year, Landlord
shall furnish Tenant a written statement of estimated Operating Costs and Taxes
for such year; a calculation of the amount, if any, by which such estimated
Operating Costs and Taxes will exceed the Base Amount; and a calculation of
Tenant's Pro Rata Share of any such amount. Tenant shall pay one-twelfth (1/12)
of said Share as Additional Rent for each month during the year. If at any time
during the year Landlord reasonably believes that the actual Operating Costs and
Taxes will vary from such estimated Operating Costs and Taxes by more than five
percent (5%), Landlord may by written notice to Tenant revise the estimate
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for such year, and Additional Rent for the balance of such year shall be paid
based upon such revised estimates.
11.4 ACTUAL OPERATING COSTS. Within ninety (90) days after the end of each
year or as soon thereafter as practicable, Landlord shall deliver to Tenant a
written statement setting forth Tenant's Pro Rata Share of the actual Operating
Costs and Taxes in excess of the Base Amount during the preceding year. If the
actual Operating Costs and Taxes in excess of the Base Amount exceed the
estimates for such amounts paid by Tenant during the year, Tenant shall pay the
amount of such excess to Landlord as Additional Rent within thirty (30) days
after receipt of such statement. If the actual Operating Costs and Taxes in
excess of the Base Amount are less than the amount paid by Tenant to Landlord,
then the amount of such overpayment by Tenant shall be credited against the next
Additional Rent payable by Tenant hereunder.
11.5 RECORDS AND ADJUSTMENTS. Landlord shall keep records showing all
expenditures made in connection with Operating Costs and Taxes for thirty-six
(36) months thereafter, and such records shall be available for inspection by
Tenant at Tenant's sole cost and expense and upon reasonable prior written
notice to Landlord. Any audit of Landlord's records of Operating Costs and Taxes
shall be performed by an accountant approved by Landlord or by a qualified
employee of Tenant, and shall be completed no later than twelve (12) months
following the end of the year audited. Operating Costs and Taxes shall be
prorated for any portion of a year at the beginning or end of the Lease Term.
Notwithstanding this Section, the Rent payable by Tenant shall in no event be
less than the Rent specified in SECTION 1.7 hereof. If such audit indicates that
the amount charged by Landlord is more than one hundred five percent (105%) of
the amount actually payable by Tenant, Landlord shall be responsible for paying
the costs of the audit and Tenant shall be entitled to audit the two (2)
previous years notwithstanding the expiration of the twelve-month period
referred to above in this SECTION 11.5.
11.6 PERSONAL PROPERTY TAXES. Tenant shall pay all Personal Property Taxes
with respect to Tenant's Property located on the Premises or in the Building.
"TENANT'S PROPERTY" shall include all improvements which are paid for by Tenant
and "PERSONAL PROPERTY TAXES" shall include all property taxes assessed against
Tenant's Property, whether assessed as real or personal property.
12. CARE OF PREMISES. Landlord shall perform all normal maintenance and repairs
to the Premises which Landlord reasonably determines necessary to maintain the
Premises and the Building as a first-class office building; provided that
Landlord shall not be required to maintain or repair any Tenant's Property or
any appliances (such as water heaters, refrigerators, microwaves and the like)
which are part of the Premises (but the foregoing is not intended to relieve
Landlord from its obligation to maintain electrical and plumbing lines supplying
such appliances to the extent such lines are outside of the Premises). Tenant
shall take good care of the Premises. Tenant shall not make any alterations,
additions or improvements ("ALTERATIONS") in or to the Premises, or make changes
to locks on doors, or add, disturb or in any way change any plumbing or wiring
("CHANGES") without first
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obtaining the written consent of Landlord and, where appropriate, in accordance
with plans and specifications approved by Landlord, provided that Tenant may
make Alterations without obtaining the consent of Landlord so long as (a) the
cost of any such Alteration or any similar Alterations in the aggregate does not
exceed Twenty-five Thousand Dollars ($25,000), (b) the Alteration is not to any
structural component of the Building, (c) the Alteration does not involve any
penetration of any floor, ceiling, or structural or exterior wall or affect the
electrical or HVAC systems in the Building, and (d) Tenant adheres to the
requirements of SECTION 4.4 of EXHIBIT B. Any Alterations or Changes required to
be made to the Premises by any amendment to any Law or any new Law shall be made
at Tenant's sole expense and shall be subject to the prior written consent of
Landlord. In such consent, Landlord shall indicate whether or not such
Alternation or Change is to be restored to its original condition at the
termination of this Lease. Tenant shall reimburse Landlord for any reasonable
sums paid to third parties for examination and approval of architectural or
mechanical plans and specifications of the Alterations and Changes and direct
costs reasonably incurred during any inspection or supervision of the
Alterations or Changes. Subject to SECTIONS 14 and 15, all damages or injury
done to the Premises or Building by Tenant or by any persons who may be in or
upon the Premises or Building with the express or implied consent of Tenant,
including but not limited to the cracking or breaking of any glass of windows
and doors, shall be paid for by Tenant.
13. ACCESS. Tenant shall permit Landlord and its agents to enter into and
upon the Premises at all reasonable times and with at least twenty-four (24)
hours' notice for the purpose of inspecting the same or for the purpose of
cleaning, repairing, altering or improving the Premises or the Building. Upon
reasonable notice, which shall not be less than twenty-four (24) hours, Landlord
shall have the right to enter the Premises for the purpose of showing the
Premises to prospective tenants within nine (9) months prior to the expiration
or sooner termination of the Lease Term. Landlord may enter the Premises
without notice in the event of an emergency.
14. DAMAGE OR DESTRUCTION.
14.1 DAMAGE AND REPAIR. If the Building is damaged by fire or any other
cause to such extent that the cost of restoration, as reasonably estimated by
Landlord, will equal or exceed thirty percent (30%) of the replacement value of
the Building (exclusive of foundations) just prior to the occurrence of the
damage, or if insurance proceeds sufficient for restoration are for any reason
unavailable (except for loss deductibles and provided that Landlord has obtained
and maintained the insurance policies required to be maintained by Landlord
pursuant to this Lease), then Landlord may no later than the sixtieth (60th) day
following the damage, give Tenant a notice of election to terminate this Lease.
In the event of such election, this Lease shall be deemed to terminate on the
third day after the giving of such notice, and Tenant shall surrender possession
of the Premises within a reasonable time thereafter, and the Rent and Additional
Rent shall be apportioned as of the date and to the extent such fire or other
cause materially interferes with Tenant's Permitted Uses of the Premises and any
Rent and Additional Rent paid for any period beyond such date shall be repaid to
Tenant. If the cost of restoration as estimated by Landlord shall amount to less
than thirty percent (30%) of said replacement value of the Building and if the
insurance
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proceeds (plus any loss deductibles) are sufficient for restoration are
available (Landlord having obtained and maintained the insurance policies
required to be maintained by Landlord pursuant to this Lease), Landlord shall
restore the Building and the Premises (with improvements substantially
comparable in quality to the improvements to the Premises originally provided by
Landlord hereunder) with reasonable promptness, subject to delays beyond
Landlord's control and delays in the making of insurance adjustments by
Landlord. To the extent that the Premises are rendered untenantable, the Rent
shall proportionately abate, except in the event such damage resulted from or
was contributed to, directly or indirectly, by the act, fault or neglect of
Tenant, Tenant's officers, contractors, agents, employees, clients, customers or
licensees, in which event Rent shall abate only to the extent Landlord receives
proceeds from any rental income insurance policy to compensate Landlord for loss
of Rent hereunder. No damages, compensation or claim shall be payable by
Landlord for inconvenience, loss of business or annoyance arising from any
repair or restoration of any portion of the Premises or the Building.
14.2 DESTRUCTION DURING LAST YEAR OF LEASE TERM. In case the Building shall
be substantially destroyed by fire or other cause at any time during the last
twelve (12) months of the Lease Term, either Landlord or Tenant may terminate
this Lease upon written notice to the other within sixty (60) days of the date
of such destruction.
14.3 TENANT IMPROVEMENTS. Landlord will not be required to carry insurance
of any kind on any improvements paid for by Tenant, with an allowance or
otherwise, as provided in EXHIBIT B or on Tenant's furniture, furnishings,
fixtures, equipment or appurtenances of Tenant under this Lease and Landlord
shall not be obligated to repair any damage thereto or replace the same.
15. WAIVER OF CLAIMS AND SUBROGATION.
15.1 MUTUAL WAIVER OF CLAIMS. Landlord and Tenant do each herewith and
hereby release and relieve the other, and waive their entire claims of recovery
for loss of or damage to Landlord's or Tenant's property arising out of or
incident to fire, lightning, or any other perils normally included in an "All
Risk" property insurance policy when such property constitutes the Premises or
the Building or is in or about the Premises, Building, or land which the
Building is situated, whether or not such loss or damage is due to the
negligence of Landlord or Tenant, their agents, employees, guests, licensees,
invitees, or contractors.
15.2 MUTUAL WAIVER OF SUBROGATION. Each of Landlord and Tenant shall cause
its insurance carriers to waive all rights of subrogation against the other
party hereto to the extent of Landlord's or Tenant's undertaking set forth in
SECTION 16 entitled "Indemnity" and SECTION 15.1 entitled "Mutual Waiver of
Claims."
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16. INDEMNIFICATION.
16.1 TENANT INDEMNITY. Tenant shall indemnify and hold Landlord harmless
from and against any and all claims or liability for bodily injury to or death
of any person or damage to any property arising out of the use of the Premises
or the Building by Tenant or any sublessee, agent, employee, contractor, invitee
or licensee of Tenant or from the conduct of Tenant's business, or from any
activity, work, or thing done, permitted, or suffered by Tenant in or about the
Premises or the Building, except:
(i) to the extent of claims and liabilities caused by the negligent
acts or omissions of Landlord, its agent or employees; or
(ii) claims and liabilities for property damage addressed in SECTION
15.1 entitled "Mutual Waiver of Claims."
Such indemnity shall include all reasonable costs, attorneys' fees, and expenses
incurred in the defense of any such claim or any action or proceeding brought
thereon and any such liability arising during the Lease Term shall survive the
expiration or termination of this Lease. This indemnity will be applicable to a
claim only if Landlord:
(a) notifies Tenant of the claim or liability in writing within
sixty (60) days after Landlord receives written notice of the claim or
liability;
(b) permits Tenant to defend or settle the claim or liability
(unless Landlord is also obligated to indemnify Tenant under SECTION 16.2) so
long as Tenant promptly undertakes such defense or settlement and pursues the
same in good faith and with due diligence; and
(c) cooperates with Tenant at Tenant's expense in any defense or
settlement of the claim or liability.
16.2 LANDLORD'S INDEMNITY. Landlord shall indemnify and hold Tenant
harmless from and against any and all claims or liability for bodily injury to
or death of any person or damage to any property caused by the negligent or
intentionally wrongful acts of Landlord or any agent, employee, contractor,
invitee or licensee of Landlord, except:
(i) to the extent of claims and liabilities caused by the negligent
acts or omissions of Tenant, its sublessees, agents, employees, contractors,
invitees or licensees; or
(ii) claims and liabilities for property damage addressed in Section
15.1 entitled "Mutual Waiver of Claims."
Such indemnity shall include all reasonable costs, attorneys' fees, and expenses
incurred in the defense of any such claim or any action or proceeding brought
thereon and any such liability arising during the Lease Term shall survive the
expiration or termination of this Lease. This indemnity will be applicable to a
claim only if Tenant:
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(a) notifies Landlord of the claim or liability in writing
within sixty (60) days after Tenant receives written notice of the claim or
liability;
(b) permits Landlord to defend or settle the claim or liability
(unless Tenant is also obligated to indemnify Landlord under SECTION 16.1) so
long as Landlord promptly undertakes such defense or settlement and pursues the
same in good faith and with due diligence; and
(c) cooperates with Landlord at Landlord's expense in any
defense or settlement of the claim or liability.
17. INSURANCE.
17.1 LIABILITY INSURANCE. Tenant, at Tenant's own cost and expense, will
provide and keep in full force and effect during the term of this Lease
commercial general liability insurance with limits of not less than Three
Million Dollars ($3,000,000) per occurrence and Five Million Dollars
($5,000,000) in the aggregate, covering bodily injury to persons, including
death and loss of or damage to real and personal property. Such insurance may be
provided under Tenant's general liability insurance policy. During the term of
this Lease, Landlord shall be named as an additional insured under such
insurance to the extent of Tenant's undertaking set forth in SECTION 16,
entitled "Indemnity." A certificate evidencing such insurance coverage shall be
delivered to Landlord not less than fifteen (15) days prior to the commencement
of the Lease Term or the date when Tenant shall enter into possession, whichever
occurs earlier. Such certificate of insurance will provide for thirty (30) days'
advance written notice to Landlord in the event of cancellation.
17.2 PROPERTY INSURANCE. Tenant shall, throughout the Lease Term and any
renewal hereof, at its own expense, keep and maintain in full force and effect,
what is commonly referred to as "All Risk" or "Special" coverage (excluding
earthquake and flood) on Tenant's leasehold improvements for not less than one
hundred percent (100%) of the replacement value, subject to customary and
reasonable deductibles. Landlord shall, throughout the Lease Term and any
renewal hereof, keep and maintain in full force and effect what is commonly
referred to as "All Risk" or "Special" coverage (including earthquake and flood
to the extent Landlord so elects from time to time) on the Building, exclusive
of Tenant's leasehold improvements, for not less than one hundred percent (100%)
of the replacement value, subject to customary and reasonable loss deductibles.
17.3 INSURANCE POLICY REQUIREMENTS. All insurance required under this
Section shall be with companies rated AX or better by A.M. Best or otherwise
reasonably approved by Landlord or Tenant as the case may be. No insurance
policy required under this Section shall be canceled or reduced in coverage
except after thirty (30) days prior written notice to Landlord or Tenant, as the
case may be.
All policies required under this Section shall be written as primary
policies and not contributing to or in excess of any coverage Landlord, as the
case may be, may choose to maintain.
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18. ASSIGNMENT AND SUBLETTING.
18.1 ASSIGNMENT OR SUBLEASE. Tenant shall not assign, mortgage, encumber or
otherwise transfer this Lease or sublet the whole or any part of the Premises
without in each case first obtaining Landlord's prior written consent. Such
consent shall not be unreasonably withheld or delayed except: (1) Landlord may
withhold its consent if the assignee, subtenant or other transferee will not use
the Premises for office purposes consistent with the maintenance and operation
of a Class A office building or the Building; (2) Landlord may withhold in its
absolute and sole discretion consent to any mortgage, hypothecation, pledge or
other encumbrance of any interest in this Lease or the Premises by Tenant or any
subtenant, whereby this Lease or any interest therein becomes collateral for any
obligation of Tenant; and (3) Landlord may withhold its consent to the extent
Landlord determines necessary to comply with a public or private restriction on
use of the Premises, the Building or the Land contained in any statute or
ordinance or any lease, mortgage, or other agreement or instrument by which the
Landlord is bound or to which any of such property is subject. No such
assignment, sublease or other transfer shall relieve Tenant from any liability
under this Lease. Consent to any such assignment, subletting or transfer shall
not operate as a waiver of the necessity for consent to any subsequent
assignment, subletting or transfer. In lieu of granting any such consent,
Landlord reserves the right to notify Tenant within five (5) days of receipt of
Tenant's request for Landlord's consent that Landlord intends to terminate this
Lease or, in the case of a subletting of less than all the Premises, to
terminate this Lease with respect to such portion of the Premises, as of the
proposed effective date of such subletting or assignment, in which event Tenant
may withdraw its request for consent by so notifying Landlord within five (5)
days of Landlord's notice of intent to terminate, or Tenant may allow Landlord
to terminate this Lease, in which case Landlord may enter into the relationship
of landlord and tenant with such proposed assignee or subtenant (subject to the
agreement of such proposed assignee or subtenant) based upon the Rent and other
compensation and terms agreed to by such subtenant or assignee and otherwise
upon the terms and conditions of this Lease. In connection with each request for
an assignment or subletting, Tenant shall pay $500.00 for the cost of processing
such assignment or subletting, including attorneys' fees, upon demand of
Landlord. Tenant shall provide Landlord with copies of all assignments,
subleases and assumption instruments.
If Tenant is a partnership, conversion of Tenant to a limited liability
company or partnership or to a corporation (or to another entity by which the
parties in Tenant would be relieved of liability to any creditors of Tenant)
shall constitute an assignment for purposes of this Section. The foregoing to
the contrary notwithstanding, Landlord's consent shall not be required for any
sublease or assignment by Tenant to a subsidiary or affiliate of Tenant so long
as such subsidiary's or affiliate's use of the Premises is consistent with the
maintenance and operation of a Class A office building along the Interstate 90
corridor in the City of Bellevue, Washington. A subsidiary or affiliate of
Tenant shall mean an entity which controls, is controlled by or is under common
control with Tenant. No such assignment, sublease or other transfer shall
relieve Tenant from any liability under this Lease.
One-half (1/2) of any sums or other economic consideration received by
Tenant as a result of such assignment or subletting, however denominated under
the assignment or
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sublease, which exceed, in the aggregate, (i) the Rent and Additional Rent
Tenant is obligated to pay Landlord under this Lease over the same period
(prorated to reflect obligations allocable to any portion of the Premises
subleased), plus (ii) any customary real estate brokerage commissions or fees
paid by Tenant to an unrelated licensed broker or agent to procure such
assignment or sublease, shall be paid to Landlord as Additional Rent under this
Lease as and when the same are paid to Tenant without affecting or reducing any
other obligations of Tenant hereunder.
18.2 ASSIGNEE OBLIGATIONS. As a condition to Landlord's approval, any
potential assignee otherwise approved by Landlord shall assume in writing all
obligations of Tenant under this Lease and shall be jointly and severally liable
with Tenant for the payment of Rent and performance of all terms, covenants and
conditions of this Lease.
18.3 SUBLESSEE OBLIGATIONS. Any sublessee shall assume all obligations of
Tenant as to that portion of the Premises which is subleased to such sublessee
and shall be jointly and severally liable with Tenant for rental and other
payments and performance of all terms, covenants, and conditions of this Lease
with respect to such portion of the Premises (but with respect to payment of
rentals and other amounts, such sublessee's obligation shall not exceed its
obligation under the sublease).
19. SIGNS. At Tenant's sole cost and expense, Tenant may maintain a single sign
on the exterior of the Building facing Interstate 90 identifying Tenant. The
location, installation and maintenance of the sign shall comply with any and all
applicable codes, laws or regulations, and as well as the Building signage
policy attached hereto as EXHIBIT F as the same may be amended from time to time
by Landlord. Tenant shall be identified in the lobby directory on the main floor
of the Building at Landlord's cost. Tenant shall also have the right, at
Tenant's sole cost and expense to maintain signage identifying Tenant in the
lobby adjacent to the elevators on any floor of the Building occupied
exclusively by Tenant, and on the entrance to the Premises. The allowance
provided in EXHIBIT B may be applied toward the cost of signage allowed under
this Section. Except as provided herein, Tenant shall not place or in any manner
display any sign, graphics, or any advertising matter anywhere in or about the
Premises or the Building at places visible (either directly or indirectly) from
anywhere outside the Premises without first obtaining Landlord's written consent
thereto, such consent to be at Landlord's sole discretion. Tenant shall remove
any and all signs at the expiration or sooner termination of this Lease and
Tenant shall repair any damage to the Premises or the Building caused thereby,
all at Tenant's sole cost and expense. Landlord shall not unreasonably withhold
its consent to normal Tenant identification signs and logos which are consistent
with the Building signage and graphics program.
20. LIENS AND INSOLVENCY.
20.1 LIENS. Tenant shall keep its interest in this Lease and any Tenant's
Property (other than unattached personal property) and the Premises, the Land
and the Building free from any liens arising out of any work performed or
materials ordered or obligations incurred by or on behalf of Tenant and hereby
indemnities and holds Landlord harmless from any liability from any such lien,
including, without limitation, liens arising from any work
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performed pursuant to SECTION 4 of EXHIBIT B hereto. In the event any lien is
filed against the Building, the Land or the Premises by any person claiming by,
through or under Tenant, Tenant shall, upon request of Landlord, at Tenant's
expense immediately either cause such lien to be released of record or at
Landlord's option, furnish to Landlord a bond in form and amount and issued by a
surety reasonably satisfactory to Landlord, indemnifying Landlord, the Land and
the Building against all liability, costs and expenses, including attorneys
fees, which Landlord may incur as a result thereof. Provided that such bond has
been furnished to Landlord, Tenant, at its sole cost and expense and after
written notice to Landlord, may contest, by appropriate proceedings conducted in
good faith and with due diligence, any lien, encumbrance or charge against the
Premises arising from work done or materials provided to or for Tenant, if, and
only if, such proceedings suspend the collection thereof against Landlord,
Tenant and the Premises and neither the Premises, the Building nor the Land nor
any part thereof or interest therein is or will be in any danger of being sold,
forfeited or lost.
20.2 INSOLVENCY. If Tenant becomes insolvent or voluntarily or
involuntarily becomes a debtor or alleged debtor in a bankruptcy proceeding, or
if a receiver, assignee or other liquidating officer is appointed for the
business of Tenant, Landlord at its option may terminate this Lease and Tenant's
right of possession under this Lease and in no event shall this Lease or any
rights or privileges hereunder be an asset of Tenant in any bankruptcy,
insolvency or reorganization proceeding.
20.3 FINANCIAL STATEMENTS. Tenant shall, from time to time during the Lease
Term upon the request of Landlord, submit to Landlord such financial statements
or other financial information as Landlord may reasonably request. Such
statements shall be prepared in accordance with generally accepted accounting
principles consistently applied and, so long as Tenant is in default under this
Lease, shall be audited by an independent certified public accountant at
Tenant's expense not more often than annually. Tenant's obligations under this
Section shall be suspended for so long as Tenant is subject to the reporting
requirements of the Securities Exchange Act of 1934.
21. DEFAULT.
21.1 CUMULATIVE REMEDIES. All rights of Landlord herein enumerated shall be
cumulative, and none shall exclude any other right or remedy allowed by law. In
addition to the other remedies provided in this Lease, Landlord shall be
entitled to restrain by injunction the violation or attempted violation of any
of the covenants, agreements or conditions of this Lease.
21.2 TENANT'S RIGHT TO CURE. Tenant shall have a period of five (5)
business days from the date of written notice from Landlord to Tenant within
which to cure any default in the payment of Rent, Additional Rent or other sums
due hereunder. Tenant shall have a period of fifteen (15) days from the date of
written notice from Landlord to Tenant within which to cure any other default
hereunder which is capable of being cured by Tenant; provided, however, that
with respect to any default capable of being cured by Tenant but which cannot be
cured within such fifteen (15) day period, the default shall not be deemed to
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be uncured if Tenant commences to cure within fifteen (15) days after Landlord's
notice and for so long as Tenant is diligently prosecuting the cure thereof.
21.3 ABANDONMENT. Abandonment means an absence from the Premises of five
(5) consecutive days or more while Tenant is in default or Landlord otherwise
reasonably determines that Tenant has abandoned the Premises and its interest
under this Lease. Abandonment by Tenant shall be considered a default with no
right to cure, allowing Landlord to reenter the Premises under SECTION 21.4. The
Premises shall not be deemed to be abandoned during any period of time when
Tenant is current in the payment of Rent and Additional Rent; provided, however,
during any period in which the Premises are not occupied by Tenant or any
sublessee or assignee of Tenant, Tenant shall be responsible for any additional
costs and insurance premiums incurred by Landlord as a result of such vacancy
and Tenant shall continue to maintain the Premises, including the daily removal
of mail, periodicals and other documents and packages which are delivered to
Tenant at the Premises.
21.4 LANDLORD'S REENTRY. Upon a default under this Lease by Tenant and
expiration of any applicable cure period, Landlord, at its option, may enter the
Premises or any part thereof, and expel, remove or put out Tenant or any other
persons who may be thereon, together with all personal property found therein;
and Landlord may terminate this Lease, or it may from time to time, without
terminating this Lease and as agent of Tenant, relet the Premises or any part
thereof for such term or terms (which may be for a term less than or extending
beyond the Lease Term) and at such rental or rentals and upon such other terms
and conditions as Landlord in its sole discretion may deem advisable, with the
right to repair, remodel and change the Premises, Tenant remaining liable for
any deficiency computed as provided in SECTION 21.5. In the case of any default,
reentry and/or dispossession by summary proceedings or otherwise, all Rent and
Additional Rent shall become due thereupon and be paid up to the time of such
reentry or dispossession, together with such expenses as Landlord may reasonably
incur for attorneys' fees, advertising expenses, brokerage fees and/or putting
the Premises in good order or preparing the same for re-rental, together with
interest thereon as provided in SECTION 38.6 hereof, accruing from the date of
any such expenditure by Landlord.
21.5 RELETTING THE PREMISES. At the option of Landlord, rents received by
Landlord from such reletting shall be applied first to the payment of any
indebtedness from Tenant to Landlord other than Rent and Additional Rent due
hereunder; second, to the payment of reasonable costs and expenses of such
reletting and including, but not limited to, attorneys' fees, advertising fees
and brokerage fees, and to the payment of any repairs, remodeling and changes in
the Premises; third, to the payment of Rent and Additional Rent due and to
become due hereunder, and, if after so applying said Rents there is any
deficiency in the Rent or Additional Rent to be paid by Tenant under this Lease,
Tenant shall pay any deficiency to Landlord monthly on the dates specified
herein and any payment made or suits brought to collect the amount of the
deficiency for any month shall not prejudice in any way the right of Landlord to
collect the deficiency for any subsequent month. Subject to any applicable duty
to mitigate damages imposed by law and all reasonable costs and expenses of
reletting, including, but not limited to, attorneys' fees, advertising fees and
brokerage fees,
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and the costs of any repairs, remodeling and changes in the Premises, the
failure of Landlord to relet the Premises or any part or parts thereof shall not
release or affect Tenant's liability hereunder, nor shall Landlord be liable for
failure to relet, or in the event of reletting, for failure to collect the Rent
thereof, and in no event shall Tenant be entitled to receive any excess of net
Rents collected over sums payable by Tenant to Landlord hereunder. No such
reentry or taking possession of the Premises shall be construed as an election
on Landlord's part to terminate this Lease unless a written notice of such
intention be given to Tenant. Notwithstanding any such reletting without
termination, Landlord may at any time thereafter elect to terminate this Lease
for such previous breach and default. Should Landlord at any time terminate this
Lease by reason of any default, in addition to any other remedy it may have, it
may recover from Tenant the amount of Rent and Additional Rent reserved in this
Lease for the balance of the Lease Term, as it may have been extended, in excess
of the then fair market rental value of the Premises for the same period, plus
all court costs and reasonable attorneys' fees incurred by Landlord in the
collection of the same.
21.6 DAMAGES. Subject to the provisions of SECTIONS 21.4 and 21.5 with
respect to Tenant's liability for unaccrued Rent and Additional Rent, Tenant
shall be liable for all damages incurred by Landlord as a result of Tenant's
default under this Lease, including, without limitation, Tenant's failure to
surrender possession of the Premises upon the expiration or termination of this
Lease, the same to include all costs, expenses, liabilities, commissions and
attorneys' fees for which Landlord becomes obligated to any third party.
21.7 NONPAYMENT OF ADDITIONAL RENT. All costs and expenses which Tenant
assumes or agrees to pay to Landlord pursuant to this Lease shall be deemed
Additional Rent and, in the event of nonpayment thereof, Landlord shall have all
the rights and remedies herein provided for in case of nonpayment of Rent.
21.8 LANDLORD'S DEFAULT. Landlord shall not be in default unless Landlord
fails to perform its obligations under this Lease within a reasonable time, but
in no event later than fifteen (15) days after written notice by Tenant to
Landlord and to the holder of any first mortgage or deed of trust covering the
Premises whose name and address shall have theretofore been furnished to Tenant
in writing and specifying how Landlord has failed to perform such obligations
and the acts required to cure the same; provided, however, that if the nature of
Landlord's obligation is such that more than fifteen (15) days are required for
performance, Landlord shall not be in default if Landlord commences performance
within such fifteen (15) day period and thereafter diligently prosecutes the
same to completion. In no event shall Tenant have the right to terminate this
Lease as a result of Landlord's default and Tenant's remedies shall be limited
to (1) damages and/or (2) an injunction and/or (3) following an additional
fifteen (15) days' written notice to Landlord specifying the alleged defaults
and the actions Tenant intends to undertake, Tenant may cure any Landlord
default which Landlord fails to cure within the time limit set forth in this
Section and said additional fifteen (15) day period so long as such default
results in a material impairment of Tenant's ability to conduct its business at
the Premises or an immediate threat of the lapse of any insurance policy
required to be maintained by Landlord by this Lease. Any sums so expended by
Tenant for the reasonable costs of effecting such cure shall be reimbursed by
Landlord upon demand.
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22. PRIORITY. This Lease shall be subordinate to any first mortgage or deed of
trust (and any other mortgage or deed of trust upon the written election of
Landlord to which the holder of such first mortgage or deed of trust consents)
now existing or hereafter placed upon the Land, the Building or the Premises,
created by or at the instance of Landlord, and to any and all advances to be
made thereunder and to interest thereon and all modifications, renewals and
replacements or extensions thereof ("LANDLORD'S MORTGAGE"), provided that
the holder of such mortgage or deed of trust and Landlord shall execute in
recordable form a nondisturbance agreement in form reasonably satisfactory to
Tenant and Landlord agrees to obtain such an agreement from any holder of any
such interest existing at the time of execution of this Lease and shall make a
good faith effort to do so within sixty (60) days of the date of execution of
this Lease from any holder of any other interest concurrently with such interest
attaching to the Building. Upon request of such holder, Tenant shall attorn to
the holder of any Landlord's Mortgage or any person or persons purchasing or
otherwise acquiring the Land, Building or Premises at any sale or other
proceeding under any Landlord's Mortgage. Tenant shall properly execute,
acknowledge and deliver documents which the holder of any Landlord's Mortgage
may reasonably require to effectuate the provisions of this Section.
23. SURRENDER OF POSSESSION. Subject to the terms of SECTION 14 relating to
damage and destruction, upon expiration or sooner termination of this Lease,
Tenant shall promptly and peacefully surrender the Premises to Landlord in as
good condition as when received by Tenant from Landlord or as thereafter
improved, except for (i) reasonable use, wear and tear, (ii) damage or
destruction covered by SECTION 14; (iii) matters covered by the waiver of claims
set forth in SECTION 15; and (iv) Alterations and Changes, other than those
which Landlord stated in its written consent were required to be removed at
termination of this Lease.
24. REMOVAL OF PROPERTY. Tenant shall remove all of its moveable personal
property and trade fixtures paid for by Tenant which can be removed without
damage to the Premises at the expiration or sooner termination of this Lease,
and shall pay Landlord any damages for injury to the Premises or Building
resulting from such removal; and all other improvements and additions to the
Premises shall, at Landlord's option, thereupon become the property of Landlord.
25. NON-WAIVER. Waiver by Landlord or Tenant of any term, covenant or condition
herein contained or any breach thereof shall not be deemed to be a waiver of
such term, covenant, or condition or of any subsequent breach of the same or any
other term, covenant, or condition herein contained. The subsequent acceptance
of Rent or Additional Rent hereunder by Landlord shall not be deemed to be a
waiver of any preceding breach by Tenant of any term, covenant or condition of
this Lease, other than the failure of Tenant to pay the particular Rent or
Additional Rent so accepted, regardless of Landlord's knowledge of such
preceding breach at the time of acceptance of such Rent or Additional Rent.
26. HOLDOVER. If Tenant shall, with the written consent of Landlord, hold
over after the expiration of the Lease Term, such tenancy shall be deemed a
month-to-month tenancy
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which may be terminated as provided by applicable law. During such tenancy, and
during any period in which Tenant wrongfully occupies the Premises without
Landlord's consent, Tenant shall be bound by all of the terms, covenants and
conditions herein so far as applicable, except Rent, which shall be equivalent
to one hundred twenty-five percent (125%) of the monthly Rent stated herein for
the immediately preceding month, together with the Additional Rent herein
provided for.
27. CONDEMNATION.
27.1 ENTIRE TAKING. If all of the Premises or such portions of the Building
as may be required for the reasonable use of the Premises are taken by eminent
domain, this Lease shall automatically terminate as of the date title vests in
the condemning authority. In the event of a taking of a material part of but
less than all of the Building, where Landlord shall determine that the remaining
portions of the Building cannot be economically and effectively used by it
(whether on account of physical, economic, aesthetic or other reasons) or where
Landlord determines the Building should be restored in such a way as to
materially alter the Premises, Landlord shall forward a written notice to Tenant
of such determination not more than sixty (60) days after the date of taking.
The Lease Term shall expire upon such date as Landlord shall specify in such
notice but not earlier than sixty (60) days after the date of such notice.
27.2 PARTIAL TAKING. Subject to the provisions of the preceding Section
27.1, in case of taking of a part of the Premises, or a portion of the Building
not required for the reasonable use of the Premises, then this Lease shall
continue in full force and effect and the Rent shall be equitably reduced based
on the proportion by which the floor area of the Premises is reduced, such Rent
reduction to be effective as of the date title to such portion vests in the
condemning authority. If a portion of the Premises shall be so taken which
renders the remainder of the Premises unsuitable for continued occupancy by
Tenant under this Lease, Tenant may terminate this Lease by written notice to
Landlord no later than sixty (60) days after the date of such taking and the
Lease Term shall expire upon such date as Tenant shall specify in such notice
not later than sixty (60) days after the date of such notice.
27.3 AWARDS AND DAMAGES. Landlord reserves all rights to damages to the
Premises for any partial, constructive, or entire taking by eminent domain, and
Tenant hereby assigns to Landlord any right Tenant may have to such damages or
award. Tenant shall make no claim against Landlord or the condemning authority
for damages for termination of the leasehold interest or interference with
Tenant's business. Tenant shall have the right, however, to claim and recover
from the condemning authority compensation for any loss to which Tenant may be
put for Tenant's moving expenses, business interruption or taking of Tenant's
personal property and leasehold improvements paid for by Tenant (not including
Tenant's leasehold interest) provided that such damages may be claimed only if
they are awarded separately in the eminent domain proceedings and not out of or
as part of the damages recoverable by Landlord.
28. NOTICES. All notices under this Lease shall be in writing and delivered in
person or sent by registered or certified mail, postage prepaid, to Landlord and
to Tenant at the
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Notice Addresses provided in SECTION 1.10 (provided that after the Commencement
Date any such notice to Landlord may be mailed or delivered by hand to
Landlord's principal office in the Building) and to the holder of any mortgage
or deed of trust at such place as such holder shall specify to Tenant in
writing; or such other addresses as may from time to time be designated by any
such party in writing. Notices mailed as aforesaid shall be deemed given on the
date of such mailing. Either party may change its address for notices by giving
the other thirty (30) days' advance notice thereof by the means above described.
29. COSTS AND ATTORNEYS FEES. If Tenant or Landlord shall bring any action for
any relief against the other, declaratory or otherwise, arising out of this
Lease, including any suit by Landlord for the recovery of Rent, Additional Rent
or other payments hereunder or possession of the Premises, each party shall, and
hereby does, to the extent permitted by law, waive trial by jury and the losing
party shall pay the prevailing party a reasonable sum for attorneys fees in such
suit, at trial and on appeal, and such attorneys fees shall be deemed to have
accrued on the commencement of such action. Such fees and costs shall include
those incurred in any insolvency, bankruptcy, probate, arbitration, mediation or
other proceedings and include the adjudication of issues particularly related to
any such proceeding.
30. LANDLORD'S LIABILITY. Anything in this Lease to the contrary
notwithstanding, covenants, undertakings and agreements herein made on the part
of Landlord are made and intended not as personal covenants, undertakings and
agreements for the purpose of binding Landlord personally or the assets of
Landlord except Landlord's interest in the Premises and Building (including the
proceeds of any insurance policy and any condemnation awards to the extent such
proceeds or awards are riot used to repair or restore any damage to any portion
of the project in which the Building is located caused by the insured loss or
condemnation, or any sale of the Premises and/or Building), but are made and
intended for the purpose of binding only the Landlord's interest in the Premises
and Building (and proceeds as stated above), as the same may from time to time
be encumbered. No personal liability or personal responsibility is assumed by,
nor shall at any time be asserted or enforceable against Landlord or its
partners or their respective heirs, legal representatives, successors or assigns
on account of the Lease or on account of any covenant, undertaking or agreement
of Landlord in this Lease contained.
31. ESTOPPEL CERTIFICATES. Tenant shall, from time to time, upon written
request of Landlord, execute, acknowledge and deliver to Landlord or its
designee a written statement stating: The date this Lease was executed and the
date it expires; the date the Lease Term commenced and the date Tenant accepted
the Premises; the amount of minimum monthly Rent and the date to which such Rent
has been paid; and certifying to the extent true: That this Lease is in full
force and effect; that all conditions under this Lease to be performed by the
Landlord have been satisfied; that there are no claims, defenses or offsets
which the Tenant has against the enforcement of this Lease; that no Rent has
been paid more than one month in advance; and such other matters as Landlord may
reasonably request. Any such statement delivered pursuant to this Section may be
relied upon by a prospective purchaser of Landlord's interest or holder of any
mortgage upon Landlord's interest in the Building. If Tenant shall fail to
respond within twenty (20) days of receipt by Tenant of a
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written request by Landlord as herein provided, Tenant shall be deemed to have
given such certificate as above provided without modification and shall be
deemed to have admitted the accuracy of any information supplied by Landlord to
a prospective purchaser or mortgagee and to have certified that this Lease is in
full force and effect, that there are no uncured defaults in Landlord's
performance, that the security deposit is as stated in the Lease, and that not
more than one month's Rent has been paid in advance.
32. TRANSFER OF LANDLORD'S INTEREST. In the event of any transfers of
Landlord's interest in the Premises or in the Building, other than a transfer
for security purposes only, the transferor shall be automatically relieved of
any and all obligations and liabilities on the part of Landlord accruing from
and after the date of such transfer and such transferee shall have no obligation
or liability with respect to any matter occurring or arising prior to the date
of such transfer. Tenant agrees to attorn to the transferee.
33. RIGHT TO PERFORM. If Tenant shall fail to pay any sum of money required to
be paid by it hereunder or shall fail to perform any other act on its part to be
performed hereunder, and such failure shall continue for ten (10) days after
notice thereof by Landlord, Landlord may, but shall not be obligated so to do,
and without waiving or releasing Tenant from any obligations of Tenant, make
such payment or perform any such other act on Tenant's part to be made or
performed as provided in this Lease. Landlord shall have (in addition to any
other right or remedy of Landlord) the same rights and remedies in the event of
the nonpayment of sums due under this Section as in the case of default by
Tenant in the payment of Rent.
34. QUIET ENJOYMENT. Landlord warrants to Tenant that Landlord holds sufficient
title to Buildings I and II to execute and perform its obligations under this
Lease and Tenant shall have the right to the peaceable and quiet use and
enjoyment of the Premises subject to the provisions of this Lease, as long as
Tenant is not in default hereunder. Landlord shall require other tenants in the
Building to agree not to disturb Tenant beyond what is customary in a Class A
office building.
35. HAZARDOUS MATERIALS.
35.1 HAZARDOUS SUBSTANCES USE. Any and all use, storage, release, handling,
transportation, treatment or storage by Tenant of Hazardous Substances on the
Leased Premises shall be carried out in compliance with all applicable federal,
state and local laws, ordinances and regulations. Tenant shall not use, handle
or store any Hazardous Substances on the Premises or within the project in which
the Building is located under any circumstances, except in accordance with all
laws, to the extent such Hazardous Substances and the quantities thereof are
reasonably necessary for the conduct of Tenant's business at the Premises and
the same are properly disposed of off site in the ordinary course.
35.2 REPRESENTATION. Landlord hereby represents and warrants that to the
best of Landlord's knowledge, but with Landlord having no obligation to have
made any independent study or investigation, and except as identified in the
Report of Independent Cleanup of Petroleum-stained Soil prepared by Hart
Crowser, Job No. J-2372-04, dated May 8, 1991, or
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otherwise disclosed to Tenant in writing prior to Tenant's execution of this
Lease (i) there have been no releases of Hazardous Substances from the Premises,
the Building, or the land on which the Building is situated in violation of any
applicable law; (ii) no Hazardous Substances have been used, generated, treated,
stored, or disposed of at the Premises, the Building, or the land on which the
Building is situated in violation of any applicable law; and (iii) no claim of
liability relating to the presence of Hazardous Substances in violation of any
applicable law at the Premises, the Building, or the land on which the Building
is situated has been made or is threatened by any governmental agency or other
third party For the purposes hereof, "Landlord's knowledge" shall mean only the
current, actual knowledge of William H. Cunningham, Jr., which individual is
hereby confirmed by Landlord as having been Landlord's principal internal
representative with respect to the construction of the Building.
35.3 INDEMNIFICATION. Tenant shall indemnify, defend, and hold harmless
Landlord from any and all damages, losses, costs and attorneys' fees and all
claims of liability asserted against Landlord by a third party, including
without limitation any agency or instrumentality of the federal, state, or local
government, for bodily injury, including death of a person, physical damage to
or loss of use or value of any property, or the costs or expenses of any cleanup
activities (remediation or removal) to the extent required by applicable law,
arising out of or relating to the release of a Hazardous Substance on or about
the project in which the Building is located by Tenant, its sublessees, agents,
employees, invitees, licensees and contractors.
Landlord shall indemnify, defend, and hold harmless Tenant from any and all
damages, losses, costs and attorneys' fees and all claims of liability asserted
against Tenant by a third party, including without limitation any agency or
instrumentality of the federal, state, or local government, for bodily injury,
including death of a person, physical damage to or loss of use or value of
property, or the costs or expenses if any cleanup activities (remediation or
removal) to the extent required by applicable law, arising out of or relating to
the release of a Hazardous Substance on or about the project in which the
Building is located by Landlord, its agents, employees, invitees, licensees and
contractors (excluding any tenants).
35.4 DEFINITION OF "HAZARDOUS SUBSTANCES." For purposes of this Lease, the
term "Hazardous Substances" shall mean any dangerous waste, hazardous waste, or
hazardous substance as defined in the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended (42 U.S.C. (S)(S) 9601, et
--
seq.) or the Resource Conservation and Recovery Act as amended (42 U.S.C. (S)(S)
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6901, et seq.); the Washington Model Toxics Control Act as amended (RCW Ch. 70.
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105D); or the Washington Hazardous Waste Management Act as amended (RCW Ch.
709.105).
36. TELECOMMUNICATIONS LINES AND EQUIPMENT.
36.1 LOCATION OF TENANT'S EQUIPMENT AND LANDLORD CONSENT.
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36.1.1 (a) Tenant may install, maintain, replace, remove and use
communications or computer wires, cables and related devices (collectively, the
"Lines") at the Building in or serving the Premises only with Landlord's prior
written consent, which consent may not be unreasonably withheld. Tenant shall
locate all electronic telecommunications equipment within the Premises and shall
coordinate the location of all Lines with Landlord. Any request for consent
shall contain detailed plans, drawings and specifications identifying all work
to be performed, the time schedule for completion of the work, and the identity
of the entity that will perform the proposed work (which entity shall be subject
to Landlord's approval, which shall not be unreasonably withheld). Landlord
shall have a reasonable time in which to evaluate the request after it is
submitted by Tenant.
36.1.2 In granting its consent Landlord may consider the following
factors, among others, in making its determination: (A) whether or not the
proposed work will interfere with the use of any other then existing or proposed
lines at the Building; (B) whether or not an acceptable number of spare lines
and space for additional lines can be maintained for existing and future
occupants of the Building; and (C) whether the work or resulting Lines would
adversely affect the Land, Building or any space in the Building.
36.1.3 Landlord's approval of, or requirements concerning, the
Lines or any equipment related thereto, the plans, specifications or designs
related thereto, the contractor or subcontractor, or the work performed
hereunder, shall not be deemed a warranty as to the adequacy thereof, and
Landlord hereby disclaims any responsibility or liability for the same, nor
shall Landlord's consent be deemed a recommendation regarding what may or may
not be adequate or appropriate for Tenant's business purposes.
36.1.4 If Landlord consents to Tenant's proposal, Tenant shall pay
all of Tenant's and Landlord's third party costs in connection therewith
(including all costs related to new Lines) and shall use, maintain and operate
the Lines and related equipment in accordance with and subject to all laws
governing the Lines and equipment and at Tenant's sole risk and expense. As soon
as the work in completed, Tenant shall submit as-built drawings to Landlord.
36.1.5 Landlord reserves the right to require that Tenant, at
Tenant's expense, remove any Lines that are installed by Tenant upon the
expiration or termination of this Lease.
36.2 ELECTROMAGNETIC FIELDS. If Tenant at any time uses any equipment that
may create an electromagnetic field exceeding the normal insulation ratings of
ordinary twisted pair riser cable or cause radiation higher than normal
background radiation, Landlord reserves the right to require Tenant to
appropriately insulate the Lines therefor (including riser cables) to prevent
such excessive electromagnetic fields or radiation.
36.3 OTHER TENANTS. Landlord shall ensure that other tenants of the
Building are subject to restrictions that afford Tenant similar assurances
regarding the avoidance of interference with Tenant's Lines as are provided to
Landlord by this Section 36.
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37. RULES AND REGULATIONS. Tenant agrees to abide by all reasonable rules and
regulations for the Building imposed by Landlord as the same may be changed from
time to time upon reasonable notice to Tenant to the extent such rules and
regulations do not conflict with the terms and conditions of this Lease,
materially interfere with Tenant's use or quiet enjoyment of the Premises, or
materially increase Tenant's cost of occupancy and use of the Premises. The
current Building rules and regulations are set forth in Exhibit G attached. The
Building rules and regulations are imposed for the cleanliness, good appearance,
property maintenance and good order and reasonable use of the Premises and the
Building, and as may be necessary for the enjoyment of the Building by all
tenants and their clients, customers and employees. Landlord shall not be liable
for the failure of any other tenant, its agents or employees, to conform to the
rules and regulations.
38. GENERAL.
38.1 HEADINGS. Titles to Sections of this Lease are not a part of this
Lease and shall have no effect upon the construction or interpretation of any
part hereof.
38.2 HEIRS AND ASSIGNS. All of the covenants, agreements, terms and
conditions contained in this Lease shall inure to and be binding upon the
Landlord and Tenant and their respective heirs, executors, administrators,
successors and assigns.
38.3 PAYMENT OF BROKERS. Landlord shall pay the commissions due those real
estate brokers or agents named in Section 1.13. If Tenant has dealt with any
other person or real estate broker with respect to leasing or renting space in
the Building, Tenant shall be solely responsible for the payment of any fee due
said person or firm and Tenant shall indemnify and hold Landlord harmless
against any liability in respect thereto, including Landlord's attorneys' fees
and costs in defense of any such claim.
38.4 NO PARTNERSHIP. This Lease shall not be construed as establishing a
partnership or joint venture between Landlord and Tenant, and neither party
shall be liable for the debts or obligations of the other, except to the extent
specifically and expressly agreed to herein. Except as provided herein, neither
party hereto may make any representation or create any liability on behalf of
the other, and no rights in any third party shall arise by virtue of these
presents.
38.5 SEVERABILITY. Any provision of this Lease which shall prove to be
invalid, void or illegal shall in no way affect, impair or invalidate any other
provision hereof and the remaining provisions hereof shall nevertheless remain
in full force and effect.
38.6 OVERDUE PAYMENTS. Tenant acknowledges that a late payment of Rent or
other sums due hereunder will cause Landlord to incur costs not contemplated by
this Lease. Such costs may include, but not be limited to, processing and
accounting charges, and penalties imposed by terms of any contracts, mortgages
or deeds of trust covering the Building. Therefore, in the event Tenant shall
fail to pay any Rent, Additional Rent or other sums payable by Tenant under this
Lease for five (5) days after such amount is due, then
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<PAGE>
Tenant shall pay Landlord, as Additional Rent, a late charge ("LATE CHARGE")
equal to five percent (5%) of such amount owing, but not in excess of the
highest rate permitted by law. In addition to any Late Charges which may be
incurred hereunder, any Rent, Additional Rent or other sums payable by Tenant
under this Lease which are more than thirty (30) days past due, shall bear
interest at a rate equal to eighteen percent (18%) per annum but not in excess
of the highest lawful rate permitted under applicable laws, calculated from the
original due date thereof to the date of payment, provided, however, the minimum
overdue fee shall be One Hundred Dollars ($100). In addition, if payments are
received by check or draft from Tenant, and two (2) or more of such checks or
drafts are dishonored by the bank or other financial institution they were drawn
upon in any twelve (12) month period, Landlord may thereafter require all Rent
and other payments due hereunder from Tenant to Landlord to be made by bank
cashiers or bank certified check or other similar means of payment and Landlord
shall not be required to accept any checks or drafts of Tenant which do not
comply with such requirements.
38.7 FORCE MAJEURE. Except for the payment of Rent, Additional Rent or
other sums payable by Tenant, time periods for Tenant's or Landlord's
performance under any provisions of this Lease shall be extended for periods of
time during which Tenant's or Landlord's performance is prevented due to
circumstances beyond Tenant's or Landlord's reasonable control.
38.8 RIGHT TO CHANGE PUBLIC SPACES. With the consent of Tenant, which
consent shall not be unreasonably delayed, conditioned or withheld, Landlord
shall have the right at any time after the completion of the Building, without
thereby creating an actual or constructive eviction or incurring any liability
to Tenant therefor, to change the arrangement or location of such of the
following as are not contained within the Premises or any part thereof:
entrances, passageways, doors and doorways, corridors, stairs, toilets and other
like public service portions of the Building. Nevertheless, in no event shall
Landlord diminish any service, change the arrangement or location of the
elevators serving the Premises, make any change which shall diminish the area of
the Premises, or make any change which shall change the character of the
Building from that of a first-class office building in Bellevue, Washington.
38.9 GOVERNING LAW; VENUE. This Lease shall be governed by and construed
in accordance with the laws of the State of Washington. The venue of any action
brought to interpret or enforce any of the terms of this Lease or otherwise
adjudicate the rights and liabilities of the parties hereto shall be laid in the
Superior Court of the State of Washington located in the county in which the
Property is located.
38.10 BUILDING DIRECTORY. Landlord shall maintain in the lobby of the
Building a directory which shall include the name of Tenant and any other names
reasonably requested by Tenant in proportion to the number of listings given to
comparable tenants of the Building.
38.11 BUILDING NAME. The Building will be known by such name as Landlord
may designate from time to time, but except for Obayashi Corporation or
Prudential Insurance
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<PAGE>
Company, Landlord agrees that it shall not name the Building or the project in
which it is located after or in a way that identifies any particular company or
its type of business.
38.12 RECORDATION. Neither Landlord nor Tenant shall record this Lease or
any memorandum or short form of this Lease.
38.13 TIME OF PERFORMANCE. Time is of the essence of this Lease and each
of its provisions.
38.14 EXECUTION AUTHORITY. Each party to this Lease shall provide to the
other party upon request reasonable evidence of the authority of the person
executing this Lease on its behalf.
38.15 ADDENDA AND EXHIBITS. All addenda and exhibits attached to this
Lease are incorporated herein by this reference.
38.16 ENTIRE AGREEMENT. This Lease contains all covenants and agreements
between Landlord and Tenant relating in any manner to the leasing, use and
occupancy of the Premises, to Tenant's use of the Building and other matters set
forth in this Lease. No prior agreements or understanding pertaining to the same
shall be valid or of any force or effect and the covenants and agreements of
this Lease shall not be altered, modified or added to except in writing signed
by Landlord and Tenant.
IN WITNESS WHEREOF this Lease has been executed as of the day and year
first above set forth.
LANDLORD: OBAYASHI CORPORATION,
a Japan corporation
Date: October 10, 1997 By: /s/ Yukio Kanai
----------------
Printed Name: Yukio Kanai
-----------
Its: Attorney-in-fact
----------------
TENANT: THE BOEING COMPANY,
a Delaware corporation
Date: October 1, 1997 By: /s/ Alan R. Bjorklund
----------------------
Printed Name: Alan R. Bjorklund
-----------------
Its: Director ISDS Group Facilities
------------------------------
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<PAGE>
LANDLORD ACKNOWLEDGMENT
STATE OF CALIFORNIA )
) ss.
COUNTY OF LOS ANGELES )
On October 14, 1997, before me, the undersigned, a Notary in and for said
State, personally appeared Yukio Kanai, personally known to me (or proved to me
on the basis of satisfactory evidence) to be the person whose name is subscribed
to the within instrument and acknowledged to me that he executed the same in his
authorized capacity, and that by his signature on the instrument, the person, or
the entity upon behalf of which the person acted, executed the instrument.
WITNESS my hand and official seal.
/s/ Evelyn R. Chavez
--------------------
Notary Public in and for said State
[STAMP APPEARS HERE]
Name (Print): Evelyn R. Chavez
----------------
Residing at Los Angeles
-----------
My appointment expires: 1/8/99
------
TENANT ACKNOWLEDGMENT
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
THIS IS TO CERTIFY that on this 1st day of October, 1997, before me, the
undersigned, a notary public in and for the state of Washington, duly
commissioned and sworn, personally appeared A.R. Bjorklund, to me known to be
the Director, ISDS Facilities of THE BOEING COMPANY, the Delaware corporation
that executed the within and foregoing instrument, and acknowledged the said
instrument to be the free and voluntary act and deed of said corporation for the
uses and purposes therein mentioned, and on oath stated that (s)he was
authorized to execute said instrument, and that the seal affixed, if any, is the
corporate seal of said corporation.
WITNESS my hand and official seal the day and year in this certificate
first above written.
Signature: /s/ Craig W. Brandt
-------------------
Name (Print): Craig W. Brandt
---------------
SEAL APPEARS HERE
NOTARY PUBLIC in and for the State of
Washington, residing at Issaquah
My appointment expires: 8/15/99
-------
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EXHIBIT A
[FLOOR 2 PLAN APPEARS HERE]
A-1
<PAGE>
[FLOOR 3 PLAN APPEARS HERE]
A-2
<PAGE>
[FLOOR 4 PLAN APPEARS HERE]
A-3
<PAGE>
EXHIBIT B
TO
SUNSET CORPORATE CAMPUS II
OFFICE LEASE AGREEMENT
TENANT IMPROVEMENTS
1. IMPROVEMENTS PROVIDED BY LANDLORD
The Building shall be the same construction type, with the same safety
ratings and the same general exterior appearance, as the Sunset Corporate Campus
I building, including similar lobby finishes and a single bank of three
elevators. More specifically, the Building will be constructed in accordance
with the plans and specifications (ZGF Job No. 20169-32) prepared by Zimmer
Gunsul Frasca Partnership, as Landlord's architect.
Landlord agrees to provide the following improvements in the Premises:
1.1 Completed Public and/or Core Areas as outlined in EXHIBIT A,
finished in accordance with all applicable codes, including the Americans with
Disabilities Act, and the plans and specifications for the Building.
1.1.1 Plumbing: Men's restrooms, women's restrooms, and drinking
fountains installed in accordance with the plans and specifications for the
Building.
1.1.2 Electrical: Total electrical service for each floor shall
include two electrical closets, each with 38, 20-ampere, single-pole, 120-volt
circuits.
1.1.3 Transformers: If Tenant requests that they be included with
the improvements made pursuant to this Section, and in order to provide to the
Premises in Building II capacity for eight (8) watts per square foot of power at
the convenience outlets (i.e., the 120/208 volt circuits), Landlord shall
install a second transformer (the "UPGRADE TRANSFORMERS") on each of floors two,
three and four of Building II. The Upgrade Transformers shall be provided and
connected to the power buss at Landlord's expense. The first transformers on
floors two, three and four of Building II shall be provided to and including the
panel pursuant to the shell and core drawings. All work on the load side of the
Upgrade Transformers will be Tenant's responsibility.
1.1.4 Security System: A card key access system with control
points at the garage parking entrance, the Building's front entry and in the
three elevator cabs, with an ability for Tenant to monitor after-hours use and
which is expandable to include monitoring of Tenant's entry and interior doors.
1.2 Tenant's Unimproved Area as outlined in EXHIBIT A to be completed as
outlined in items 1.2.1 through 1.2.9 below:
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1.2.1 Walls: Core walls pre-taped to be finished under tenant
improvements. Columns and perimeter walls covered with gypsum wallboard ready
for tape and paint.
1.2.2 Floor: Prepared to receive carpet. Floor loading capacities:
80 pounds per square foot miscellaneous live load; 20 pounds per square foot
movable partition load, for a total of 100 pounds per square foot live load.
1.2.3 Mechanical - Primary System: Includes cooling duct
distribution loop installed through terminal VAV boxes and thermostats in
ceiling plenum for building standard layout and quantities (15 per floor). The
building standard mechanical system is designed to accommodate heating loads
generated by lights (1.2 watts per square foot) and electrical equipment (4.9
watts per square foot) up to 6.1 watts per square foot. If Tenant's design or
use of the Premises results in concentrated electrical loads in excess of 6.1
watts per square foot (e.g., data processing areas, conference rooms and machine
rooms) and/or Tenant's design or use of the Premises extends beyond Normal
Business Hours, then the cost of any additional engineering design and
installation of mechanical equipment and/or controls required to handle such
excess shall be part of the cost borne by Tenant pursuant to SECTION 2 of this
EXHIBIT B.
1.2.4 Mechanical - Secondary System: Supplemental cooling capacity
is available in the main VAV units and can be accessed by Tenant for a fee. The
system is sized at 20 tons per floor.
1.2.5 Plumbing: Three waste and vent risers to accommodate waste
from sinks and dishwashers.
1.2.6 Fire Sprinklers: Primary distribution loop with turned-down
finished heads per code, minimum number required to get shell and core sign-off.
1.2.7 Electrical: Electrical conduit and junction boxes
distributed throughout using building standard layout and quantities.
1.2.8 Ceiling: Building standard suspended ceiling grid system
installed in a 4' x 4' pattern.
1.2.9 Window Coverings: Levelor blinds installed at all exterior
windows. The items to be completed in Tenant's Unimproved Area do not include
light fixtures.
2. TENANT IMPROVEMENTS AND LANDLORD'S ALLOWANCE
2.1 Design and construction of all improvements in the Premises beyond
those listed in SECTION 1 of this EXHIBIT B shall be provided at Tenant's cost
and shall include, but not be limited to: to the extent not included in Section
1 of this Exhibit B, any modifications
B-2
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and/or additions to the tenant improvements itemized in SECTION 1.2 above, all
space planning, mechanical drawings, a general contractor's fee (not to exceed
5% of the total price of all tenant improvements), architectural, engineering
and construction design and drawings, partitions (including one-half (1/2) the
cost of any public corridor or demising partition on a multi-tenant floor
enclosing the Tenant's Unimproved Area), doors, door frames, hardware, paint,
wall coverings, base, ceilings, lights, mechanical distribution, diffusers,
thermostats, sprinkler distribution, sprinkler heads, emergency speakers, fire
extinguishers and cabinets, telephone and electrical outlets, light switches,
window coverings, floor coverings, all applicable permit fees and sales tax.
Landlord shall submit to Tenant all prices deemed acceptable to Landlord for the
principal components of Tenant's improvements and a brief description of how
those prices were obtained. Except for Landlord's general contractor and
architect, Tenant shall have the right, within five (5) business days after such
prices are so disclosed, to require that the components identified by Tenant
shall be competitively bid by Landlord among not less than three (3) contractors
or suppliers which are in the business of providing similar labor or materials
in the Bellevue, Washington office market. Landlord shall select the lowest of
such bids unless otherwise agreed to by Tenant, which agreement shall not be
unreasonably withheld or delayed. If Tenant fails to request such bidding
process within the aforementioned five (5) business day period, Landlord shall
procure the items at the prices it identified to Tenant.
2.2 In addition to the cost for improvements constructed during shell and
core as specified in SECTION 1.2 above, Landlord shall provide Tenant a tenant
improvement allowance of $25.00 per square foot of the Rentable Area of the
Premises to be credited against the cost of the permitting, drawings, design,
services, materials and labor, and all sales taxes thereon, for the improvements
provided pursuant to SECTION 2.1 of this EXHIBIT B and Tenant's signage (the
"IMPROVEMENT ALLOWANCE"). Tenant agrees that a minimum of $22.00 per square foot
of Rentable Area of the Premises shall be spent on its tenant improvements
within the Premises. Landlord agrees that any portion of the Improvement
Allowance, up to a maximum of $3.00 per square foot of Rentable Area of the
Premises, which is not expended shall be credited to Tenant against sums due
under this Lease.
Landlord agrees to provide Tenant an additional improvement allowance (the
"ADDITIONAL ALLOWANCE") of up to $5.00 per square foot of Usable Area of the
Premises. Any amounts provided to Tenant as an Additional Allowance shall be
repaid to Landlord by Tenant as Additional Rent in accordance with SECTION 48 of
EXHIBIT C to the Lease.
Neither the Improvement Allowance nor the Additional Allowance will be applied
to the common area rest rooms, janitorial closets, electrical rooms or telephone
closets, which shall all be finished at Landlord's expense under SECTION 1.1 of
this EXHIBIT B.
3. DESIGN OF TENANT IMPROVEMENTS
Tenant shall prepare with Tenant's staff, or Tenant shall retain the services of
a qualified office planner approved by Landlord to prepare, the necessary
drawings for Basic Plans and supply the information necessary to complete the
Working Drawings and Engineering Drawings referred to in SECTION 3.2 of this
EXHIBIT B for construction of the tenant
B-3
<PAGE>
improvements in Tenant's Unimproved Area. All Tenant's plans shall be subject to
approval of Landlord in accordance with SECTION 3.3 of this EXHIBIT B.
Tenant's office planner shall ensure that the work shown on Tenant's plans is
compatible with the basic Building plans and that necessary basic Building
modifications are included in Tenant's plans. Such modifications shall be
subject to the Landlord's approval.
On or before the indicated dates, Tenant shall supply Landlord with one (1)
reproducible copy and five (5) black line prints of the following Tenant Plans:
3.1 BASIC PLANS DELIVERY DATE: October 14, 1997.
The Basic Plans due on this date shall be signed by Tenant and include:
Architectural Floor Plans: These shall be fully dimensioned floor plans showing
partition layout. The Basic Plans must state if there will be any equipment that
will require special plumbing, electrical or other special mechanical systems,
area(s) subject to above-normal floor loads, special openings in the floor, or
other major or special features.
3.2 WORKING DRAWINGS DELIVERY DATE: November 28, 1997.
On this date, Tenant's office planner shall produce four (4) sets of Full
Working Drawings for construction from the Basic Plans using a computing system
compatible with AUTOCAD, which system shall be approved by Landlord for
compatibility with the other Building drawings. The four (4) sets of Working
Drawings due on this date shall be signed by the Tenant and include all items in
the Basic Plans referenced in SECTION 3.1 above plus the following additional
information:
3.2.1 Electrical and Telephone Outlets: Locate all power and
telephone requirements: Dimension the position from a corner and give height
above concrete slab for all critically located outlets. Identify all dedicated
circuits and identify all power outlets greater than 120 volts.
3.2.2 Reflected Ceiling Plan: Lighting layout showing location and
type of all Building Standard and special lighting fixtures.
3.2.3 Furniture Layout: Layout showing furniture location so that
Landlord's engineer can review the location of all light fixtures.
3.2.4 Room Layout: Layout identifying each room with a number and
each door with a number.
3.2.5 Special Equipment: Location and specification of the
equipment identified in Section 3.1 above.
B-4
<PAGE>
Landlord's engineers shall prepare plumbing, electrical, heating, air
conditioning and structural plans ("ENGINEERING DRAWINGS") for Tenant's
improvements based on the signed Working Drawings.
3.3 FINAL PLANS REVIEW DATE: December 31, 1997
On this date, Tenant's office planner shall deliver to Landlord and Tenant for
review and approval four (4) complete sets of Final Plans which will incorporate
the Working Drawings referenced in SECTION 3.2 above, plus the following
additional information:
3.3.1 Millwork Details: These drawings shall be in final form with
Tenant's office planner's title block in the lower right hand corner of the
drawing, and shall include construction details of all cabinets, paneling, trim,
bookcases, and door and jamb details for non-Building Standard doors and jambs.
3.3.2 Electric and Telephone Suppliers: For the equipment used in
the power and telephone outlets which require dedicated circuits and/or which
require greater than 120 volts, identify the type of equipment, the
manufacturer's name and the manufacturer's model number, and submit a brochure
for each piece of equipment. Also identify the manufacturer's name of the
telephone system to be used and the power requirements, size, and location of
its processing equipment.
3.3.3 Keying Schedules and Hardware Information: This information
shall be in final form and include a Keying Schedule indicating which doors are
locked and which key(s) open each lock, plus an "X" on the side of the door
where the key will be inserted if a keyed door. Complete specifications for all
non-Building Standard hardware will also be provided.
3.3.4 Room Finish and Color Schedule: This information shall be in
final form and include locations and specifications for all wall finishes, floor
covering and base for each room.
3.3.5 Construction Notes and Specifications: Complete
specifications for every item included except those specified by the Landlord.
3.4 FINAL PLANS DELIVERY DATE: January 16, 1998.
The four (4) sets of Final Plans approved by Landlord and Tenant and due on this
date shall include all the Final Plans referenced in Section 3.3 above. Final
Plans are to be signed by Tenant and delivered to Landlord by the Final Plans
Delivery Date. Landlord shall return one (1) signed set to Tenant for Tenant's
records. Landlord will incorporate Engineering Drawings with Tenant's Final
Plans for transmittal to the Landlord's Contractor.
Tenant shall be responsible for delays and additional costs in completion of
Tenant's work caused by changes made to any of Tenant's Plans after the
specified Plan Delivery Date or
B-5
<PAGE>
by delays in delivery of special materials requiring long lead times. Tenant
shall further be responsible for such delays as provided in SECTION 3.2 of the
Lease.
4. CONSTRUCTION OF TENANT IMPROVEMENTS
4.1 AUTHORIZATION TO PROCEED: Upon completion of the Final Plans and at
the request of Tenant, Landlord shall provide to Tenant written notice of the
price for improvements beyond those listed in SECTION 1 of this EXHIBIT B and a
copy of all bids received by all subcontractors and Landlord shall disclose to
Tenant the full schedule of values upon the commencement of Tenant's
improvements. Within five (5) business days of receipt of such notice, Tenant
shall give Landlord written authorization to complete the Premises in accordance
with such Final Plans. Tenant may in such authorization delete any or all items
of extra cost; however, if Landlord deems these changes to be extensive, at its
option, Landlord may refuse to accept the authorization to proceed until all
changes have been incorporated in the Final Plans signed by Tenant and written
acceptance of the revised price has been received by Landlord from Tenant. In
the absence of such written authorization to proceed, Landlord shall not be
obligated to commence work on the Premises and Tenant shall be responsible for
any increase in the costs of the Tenant's improvements due to any resulting
delay in completion of the Premises and as provided in SECTION 3.2 of the Lease.
4.2 PAYMENTS: Landlord's contractor shall complete Tenant's improvements
in accordance with Tenant's approved Final Plans. Landlord shall prepare a
construction budget for Tenant's improvements containing line items for each
major component of subconstruction as is customary in the industry. Landlord
shall monitor the actual costs of each of such components and all change orders
thereto and require its contractor to retain copies of all invoices. Until
substantial completion of Tenant's improvements, Tenant shall have continuous
reasonable access to Landlord's and its general contractor's books and records
relating to the actual costs of constructing Tenant's improvements and may cause
the same to be audited at Tenant's expense. Landlord's contractor shall meet
with Tenant monthly upon Tenant's request to review the costs paid to date and
to compare the same with Landlord's budget. Landlord shall pay the bills for the
design, permits, services, labor and materials therefor and all sales taxes
thereon up to the amount of the Improvement Allowance, Additional Allowance and
any sums which are in addition to the same directly to the parties entitled
thereto when due. Final billing for all such payments shall be rendered and
payable by Tenant within thirty (30) days after acceptance of the Premises by
Tenant in accordance with the terms of the Lease.
4.3 FINAL PLANS AND MODIFICATIONS: If Tenant shall request any change,
Tenant shall request such change in writing to Landlord and such request shall
be accompanied by all plans and specifications necessary to show and explain
changes from the approved Final Plans. After receiving this information,
Landlord shall give Tenant a written price for the cost of engineering and
design services to incorporate the change in Tenant's Final Plans. If Tenant
approves such price in writing, Landlord shall have such Final Plans changes
made and Tenant shall pay Landlord for this cost as part of the billing referred
to in SECTION 4.2 of this Exhibit. Promptly upon completion of such changes in
the Final Plans, Landlord shall
B-6
<PAGE>
notify Tenant in writing of the costs, if any, which shall be chargeable or
credited to Tenant for such change, addition or deletion. The cost for such
changes, including additions or deletions, whether chargeable or credited to
Tenant, shall include a Landlord coordination fee equal to ten percent (10%) of
up to Twenty-five Thousand Dollars ($25,000) of the cost of such change and five
percent (5%) of the cost of such change above Twenty-five Thousand Dollars
($25,000). In the absence of such notice, Landlord shall proceed in accordance
with the previously approved Final Plans before such change, addition or
deletion was requested. In accordance with SECTION 3.2 of the Lease, Tenant
shall be responsible for any resulting delay in completion of the Premises due
to modification of Final Plans. Tenant shall also be responsible for any
demolition work required as a result of the change.
4.4 IMPROVEMENTS CONSTRUCTED BY TENANT: If Landlord permits any work to be
performed in connection with Tenant improvements on the Premises by Tenant or
Tenant's contractor:
4.4.1 Such work shall proceed upon Landlord's written approval of
(i) Tenant's contractor, (ii) public liability and property damage insurance
carried by Tenant's contractor (such insurance shall be in combined single
limits not less that Five Hundred Thousand Dollars ($500,000) per occurrence and
shall name Landlord and Landlord's property manager as additional insureds),
(iii) detailed plans and specifications for such work, and (iv) the amount to be
paid by Tenant to Landlord for the services still provided by Landlord's
contractor.
4.4.2 All work shall be done in conformity with a valid building
permit when required, a copy of which shall be furnished to Landlord before such
work is commenced, and in any case, all such work shall be performed in
accordance with all applicable governmental regulations. Notwithstanding any
failure by Landlord to object to any such work, Landlord shall have no
responsibility for Tenant's failure to meet all applicable regulations.
4.4.3 For all work by Tenant or Tenant's contractor that has an
aggregate cost in excess of One Hundred Thousand Dollars ($100,000), Tenant
shall use its best efforts to ensure that at least one union general contractor
is given a reasonable opportunity to act in that capacity, or if Tenant or a
non-union general contractor acts in that capacity, Tenant shall use its best
efforts to ensure that at least one union subcontractor is given a reasonable
opportunity to provide the labor and materials for each principal trade group.
Said cost condition shall be calculated by reference to the aggregate costs of
any particular alteration or remodeling project. The foregoing requirements
shall not apply to Tenant's periodic painting or recarpeting or installation of
movable work stations, network cabling and telephone systems, or to any other
similar items after receiving Landlord's written consent.
4.4.4 All work by Tenant or Tenant's contractor shall be scheduled
through Landlord, and Landlord shall make commercially reasonable efforts to
allow Tenant's entry upon the Premises for the purposes of coordinating and
constructing its improvements.
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4.4.5 Tenant or Tenant's contractor shall arrange for necessary
utility, hoisting and elevator service with Landlord's contractor and shall pay
such reasonable charges for such services as may be charged by Landlord's
contractor Landlord shall cause its contractor to be reasonably available to
Tenant for such purposes. This will be included in the general conditions of
SUBSECTION 4.4.1 above.
4.4.6 Tenant shall promptly reimburse Landlord for costs incurred
by Landlord due to faulty work done by Tenant or its contractors, or by reason
of any delays caused by such work, or by reason of inadequate clean-up.
4.4.7 Prior to commencement of any work on the Premises by Tenant
or Tenant's contractor, Tenant or Tenant's contractor shall enter into an
indemnity agreement and a lien priority agreement satisfactory to Landlord
indemnifying and holding harmless Landlord and Landlord's contractors for any
liability, losses or damages directly or indirectly from lien claims affecting
the land, the Building or the Premises arising out of Tenant's or Tenant's
contractor's work or that of subcontractors or suppliers, and subordinating any
such liens to the liens of construction and permanent financing for the
Building.
4.4.8 Landlord shall have the right to post a notice or notices in
conspicuous places in or about the Premises announcing its non-responsibility
for the work being performed therein.
4.5 TENANT'S ENTRY TO PREMISES: Tenant's entry to the Premises for any
purpose, including without limitation, inspection or performance of Tenant
construction by Tenant's agents, prior to the Commencement Date as specified in
SECTION 3.1 of the Lease shall be scheduled in advance with Landlord and shall
be subject to all the terms and conditions of the Lease, except the payment of
Rent. Tenant's entry shall mean entry by Tenant, its officers, contractors,
office planner, licensees, agents, servants, employees, guests, invitees, or
visitors.
4.6 TENANT'S TELEPHONE: Tenant is responsible for Tenant's telephone
service. Tenant shall select Tenant's telephone system and shall coordinate its
installation with Landlord.
4.7 PARTIES' COOPERATION: Landlord and Tenant agree to cooperate with each
other and their respective contractors and suppliers prior to and during the
course of the construction of the Building and the Premises. Landlord shall
provide Tenant with a brief summary of the status of construction of the
Building and Premises upon request, which request may be made monthly or at such
other times as is reasonably warranted by a change in the construction schedule.
Each party shall promptly notify the other in writing of any anticipated delays
in construction, change order requests, or a change in any principal contractors
or suppliers. Subject to compliance with reasonable safety precautions and the
avoidance of interference with construction, Tenant shall have access to the
Building site at all reasonable times to monitor the progress of construction
and Landlord shall respond promptly to Tenant's inquiries about the status of
construction or any perceived failure of the Tenant's improvements to adhere to
the construction schedule or to conform to the approved
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plans or specifications or the requirements of this Lease. Tenant shall assume
all risk of property damage and personal injury (including death) resulting from
its and its agents' entries onto the Building site and shall defend, indemnify,
reimburse and hold Landlord harmless from and against all claims, losses,
expenses, damages and liabilities, including attorneys' fees, related thereto.
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EXHIBIT C
TO
SUNSET CORPORATE CAMPUS II
OFFICE LEASE AGREEMENT
ADDENDUM TO LEASE
The following terms and conditions are part of that certain Office Lease
Agreement dated September 30, 1997, between OBAYASHI CORPORATION, a Japan
corporation ("LANDLORD"), and THE BOEING COMPANY, a Delaware corporation acting
through its Information, Space and Defense System Group ("TENANT") and are
incorporated into such Lease as if fully set forth in the body thereof:
39. PRECONSTRUCTION EXPANSION OPTIONS: On or before the ninetieth (90th) day
after the full execution of this Lease, Landlord shall give Tenant the option to
lease additional space in either Building I or the Building in accordance with
either SECTION 39.1 or 39.2.
39.1 BUILDING I EXPANSION SPACE. If, within ninety (90) days following
execution of the Lease, Silicon Graphics, the existing tenant of 10,656 rentable
square feet on the third floor of Building I, notifies Landlord that it will
vacate that space upon the completion of and its relocation to Building II, then
Tenant may lease that space under a separate lease on substantially the same
terms and conditions contained in this Lease, with the exception that the tenant
improvement allowance will be $8 per rentable square foot, and the parking shall
be that available in or near Building I. Landlord shall give Tenant notice of
the availability of the space promptly upon receiving notice of the existing
tenant's decision to remain in or vacate the space. Tenant must notify Landlord
of its election to exercise this option within ten (10) business days after
Landlord notifies Tenant that the space is available. Failure to give such
notice to Landlord within the time allowed shall constitute a rejection of the
space and extinguish the options contained in this Section. The parties agree to
promptly sign a lease for such space within twenty (20) business days following
Tenant's notice to Landlord exercising this option.
39.2 BUILDING II EXPANSION SPACE. If within ninety (90) days following full
execution of this Lease, Landlord gives the Tenant notice that the expansion
space in Building I referred to in Section 39.1 will not be available, then
Tenant may lease approximately 11,000 square feet of Usable Area on the first
floor of the Building, which additional space shall be added to and become part
of the Premises under this Lease. Tenant must notify Landlord of its election to
exercise this option within ten (10) business days after Landlord notifies
Tenant that the space is available. Failure to give such notice to Landlord
within the time allowed shall constitute a rejection of the space and extinguish
the options contained in this Section. The parties agree to so amend this Lease
within twenty (20) business days following Tenant's notice to Landlord
exercising this option. All of the terms and conditions of the Lease shall apply
to such additional space and Landlord shall make
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available to Tenant a tenant improvement allowance equal to Twenty-five Dollars
($25.00) per square foot of Rentable Area in such expansion space.
40. OPTION TO LEASE ADDITIONAL SPACE IN BUILDING I: Subject to the rights of
other tenants existing prior to the date of this Lease, Tenant shall have a one
time right to lease the entire fourth floor of Building I, which is comprised of
approximately 29,000 square feet of Usable Area if it becomes available at the
end of the existing lease of that space. This space is currently leased to
Starwave Corporation. The lease to Starwave Corporation expires on May 31, 2000.
Such expansion option shall be triggered by notice from Landlord of the terms
and conditions on which the subject space is to be leased, as determined solely
by Landlord. Tenant shall have until ten (10) business days after Landlord
notifies Tenant in which to exercise the right to lease such space by accepting
the terms and conditions in Landlord's notice. If Tenant rejects or does not
respond to Landlord that it will take the new space on the terms offered, then
Landlord may enter a lease for such space on such terms as Landlord determines,
except Landlord shall reoffer such space to Tenant and Tenant shall accept or
reject such offer by the means above described if the base rent of the new lease
is less than ninety percent (90%) of the base rent offered to Tenant for such
space. Tenant's rights under this Section shall apply only to a term commencing
on or about June 1, 2000.
41. EARLY TERMINATION RIGHT: Provided that Tenant is not in default under the
terms of this Lease, and upon prior written notice to Landlord at least twelve
(12) months before the end of the first sixty (60) full calendar months of the
Lease Term, Tenant shall have a one-time right to terminate the Lease effective
upon the last day of said sixtieth (60th) month. Upon termination of the Lease
pursuant to this termination right, Tenant shall pay to Landlord an amount equal
to six (6) months' Rent and Additional Rent (fully serviced) as calculated by
reference to the rental rate applicable to Tenant on the date the Lease
terminates.
42. OPTION TO RENEW: So long as Tenant is not then in default under the Lease
(and Tenant shall not be deemed to be in default unless Landlord has declared to
Tenant in writing that Tenant is in default under the Lease) and has not
received any notice of default from Landlord acting pursuant to the Lease during
the immediately preceding six (6) months, Tenant shall have a single right to
extend the term of the Lease for an additional, consecutive five (5) year period
(the "ADDITIONAL TERM"), on the terms and conditions stated in this Section.
42.1 TERMS AND CONDITIONS. If Tenant exercises its right under this
Section, then the Additional Term shall commence on the first day following the
initial seven (7) year (and initial partial month, if any) term and shall
terminate five (5) years thereafter. To exercise its right to extend the Lease
for the Additional Term, Tenant must deliver to Landlord a written notice
exercising its rights under this Section, at least twelve (12) months prior to
the date the initial Lease Term will expire. All of the terms and conditions of
the Lease shall apply during the Additional Term, except (a) the Base Rent shall
be an amount mutually agreed to by Landlord and Tenant or determined as set
forth below; (b) after the exercise of the extension option, there shall be no
further extension options; and (c) Landlord shall have
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no tenant improvement obligations with respect to the Premises except to provide
Tenant with a "REDECORATING ALLOWANCE" as provided in SECTION 47 below. When the
rental rate for the Additional Term is determined (either by agreement of the
parties or pursuant to arbitration as provided below), Landlord and Tenant shall
enter into a lease extension agreement setting forth the new Base Rent for the
Premises and such other terms as may be applicable. If at the time Tenant
delivers to Landlord its written notice electing to extend the term of the
Lease, or at any time between such date and the commencement date of the
Additional Term, Tenant defaults under the Lease and fails to cure the default
within the applicable cure period, if any, Landlord shall have the option to
declare Tenant's notice of exercise null and void by written notice to Tenant,
in which case the term of the Lease shall expire on the expiration of the then
current Lease term.
42.2 DETERMINATION OF RENT. If Tenant exercises an extension right under
this Section, then the monthly Base Rent for the Additional Term shall be
ninety-five percent (95%) of the monthly Fair Market Rent (defined below) for
comparable space in the Building or comparable Class A office buildings located
in the Interstate 90 corridor in the City of Bellevue, Washington, as of the
first day of the Additional Term; provided, however, in no event shall the sum
of the Base Rent and the Additional Rent for the Additional Term be less than
the sum of the Base Rent and the Additional Rent for the last month of the
initial Lease Term. For purposes of the Lease and this Addendum, the term "FAIR
MARKET RENT" shall mean the annual "fully serviced" rate per rentable square
foot that willing, non-equity, non-renewal tenants are then paying for
comparable space in the Building or comparable Class A office buildings located
in the Interstate 90 corridor in the City of Bellevue, Washington, in leases
having a five (5) year term. Landlord shall advise Tenant in writing of
Landlord's determination of Fair Market Rent not later than thirty (30) days
after Tenant exercises its extension right. Within thirty (30) days after
receiving Landlord's determination of Fair Market Rent, Tenant shall notify
Landlord in writing whether or not Tenant accepts Landlord's determination of
the Fair Market Rent. If Tenant disagrees with Landlord's determination of Fair
Market Rent and yet Tenant desires to preserve its extension option, then Tenant
shall advise Landlord of Tenant's determination of Fair Market Rent in the
notice required pursuant to the preceding sentence. If Tenant fails to so notify
Landlord prior to the expiration of its thirty (30) day period to respond to
Landlord's notice, then Tenant's notice exercising its extension rights under
this Section shall be deemed null and void unless otherwise agreed by Landlord
in writing. If Tenant does not accept Landlord's determination of Fair Market
Rent, and Tenant has given Landlord the notice required above of Tenant's
determination of Fair Market Rent, then the parties shall promptly meet and
attempt to resolve their differences. If the parties have not agreed on the Fair
Market Rent within ninety (90) days after Tenant has exercised its extension
right (the "ARBITRATION COMMENCEMENT DATE"), and Tenant's extension option is
still in effect in accordance with this Section, then unless otherwise agreed by
the parties, the parties shall submit the matter to binding arbitration in
accordance with the terms of this Section.
42.3 PROCEDURE FOR RENT ARBITRATION. The arbitration will be conducted by
three real estate appraisers who are members of M.A.I. or a similar nationally
recognized appraisal organization, and have been active over the five (5) year
period ending on the Arbitration Commencement Date in the appraisal of downtown
office properties in Bellevue,
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Washington. One appraiser will be selected by Tenant, one appraiser will be
selected by Landlord, and the third appraiser will be selected by the two
appraisers so chosen, If the two appraisers chosen by the parties cannot agree
on the third appraiser within fifteen (15) days after the date the second
appraiser has been appointed, the third appraiser will be selected by
application of either party to the then Seattle Regional Director of the
American Arbitration Association and neither party shall raise any question as
to such appointment. In such event, the parties shall indemnify and hold the
presiding judge fully and completely harmless from and against all claims
arising out of the presiding judge's appointment of the third appraiser. Each
party shall select its appraiser within fifteen (15) days after the Arbitration
Commencement Date. If either party fails to select its appraiser within such
fifteen (15) day period, then the appraiser selected by the other party shall be
the sole arbitrator for determining Fair Market Rent. Within thirty (30) days
after the selection of the third appraiser (or if only one appraiser is to
render the decision, within thirty (30) days after the last day of the above-
referenced fifteen (15) day period), the appraiser(s) shall determine the Fair
Market Rent. The decision of a majority of the appraisers shall control. If a
majority of the appraisers do not agree within the stipulated time period, then
each appraiser shall in a written reasoned report render his or her separate
determination as to the Fair Market Rent within five (5) days after the
expiration of the thirty (30) day period. In such case, the three determinations
shall be averaged to determine the Fair Market Rent; however, if the lowest Fair
Market Rent or the highest Fair Market Rent is ten percent (10%) lower or
higher, as applicable, than the middle Fair Market Rent, then such low Fair
Market Rent and/or the high Fair Market Rent, as applicable, shall be
disregarded and the remaining Fair Market Rent(s) will be averaged in order to
establish the Fair Market Rent. For example, if one of the determinations of
Fair Market Rent is more than ten percent (10%) lower or higher than the middle
determination of Fair Market Rent, the remaining two determinations of Fair
Market Rent will be averaged. By way of further example, if the lowest
determination of Fair Market Rent and the highest determination of Fair Market
Rent are both more than ten percent (10%) lower and higher, respectively, than
the middle determination of Fair Market Rent, both such determinations will be
disregarded, and the middle Fair Market Rent shall control. Both parties may
submit any information to the arbitrators for their consideration, with copies
to the other party. The arbitrators shall have the right to consult experts and
competent authorities for factual information or evidence pertaining to the
determination of Fair Market Rent. The arbitrators shall render their decision
and award in writing with counterpart copies to each party. The arbitrators
shall have no power to modify the provisions of the Lease. The determination of
the arbitrators will be final and binding upon Landlord and Tenant. The cost of
the arbitration will be paid by Landlord if the Fair Market Rent is ninety
percent (90%) or less than the Fair Market Rent specified in the notice given by
Landlord to Tenant; by Tenant if the Fair Market Rent is one hundred ten percent
(110%) or more than the Fair Market Rent specified in the notice given Tenant to
Landlord; and otherwise shall be shared equally by Landlord and Tenant.
43. RIGHT OF FIRST OFFER IN THE BUILDING: Subject to the rights of other
tenants existing prior to the date of this Lease, Tenant shall have a right of
first offer to lease additional space on the first (1st) and fifth (5th) floors
of the Building. Such right of first offer shall be triggered by notice from
Landlord of the terms and conditions on which the subject space is to be leased.
Tenant shall have ten (10) business after Landlord's notice is
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given in which to exercise the right to make the first offer on such space by
accepting the terms and conditions in Landlord's notice. If Tenant rejects or
does not respond to Landlord that it will take the new space on the terms
offered within the 10-day period, then Landlord may enter a lease for such space
on such terms as Landlord determines, except Landlord shall reoffer such space
to Tenant and Tenant shall accept or reject such offer by the means above
described if the base rent is less than ninety percent (90%) of the base rent
offered to Tenant in the notice from Landlord pursuant to this Section.
44. NO RELOCATION: Tenant is not subject to relocation by Landlord in the
Building.
45. RIGHT TO REDUCE AREA OF PREMISES: Tenant shall have a one-time right to
reduce the area of the Premises by vacating one half (1/2) of the lowest or
highest floor of the Building then subject to this Lease effective upon the last
day of the sixtieth (60th) full calendar month of the initial Lease Term.
Tenant's right to reduce the area of the Premises is conditioned on (a) Tenant's
prior written notice to Landlord at least twelve (12) months before such
reduction is to be effective, (b) Landlord's approval of the resulting floor
plans in writing, (c) Tenant's failure to exercise its right to terminate the
Lease under SECTION 41 above, (d) Tenant not being in default under the terms of
the Lease, and (e) payment by Tenant to Landlord of an amount equal to the
unamortized leasing commissions and tenant improvements allocable to the space
Tenant chooses to vacate, as calculated on a straight line basis over the
initial seven (7) year Lease Term (with any initial partial month disregarded).
Landlord shall provide to Tenant a detailed statement of such costs and an
amortization schedule for Tenant's review and approval no later than thirty (30)
days after such reduction in area becomes effective. Tenant shall approve such
costs and schedule or notify Landlord of its obligations thereto in writing
within fifteen (15) days after Tenant's receipt thereof. In the absence of
providing such response within that period Tenant shall be deemed to have given
its approval.
46. TENANT'S RIGHT TO EARLY ENTRY: Tenant shall have the right to enter the
Premises at no Rent for a period of eight (8) weeks prior to the projected
Commencement Date for the limited purposes of installing furniture, fixtures,
cabling, wiring and equipment and preparing the Premises for occupancy, provided
Tenant's exercise of this right does not (a) delay the Commencement Date, (b)
result in any additional cost to Landlord, or (c) create any conditions
dangerous to the health or safety of Landlord, Tenant, or their respective
employees, contractors, consultants or other agents. Tenant's ability to install
the items listed above during the eight (8) weeks before the Commencement Date
must be coordinated with and will be subject to the construction schedule for
the Building and the tenant improvements therein.
47. REDECORATING ALLOWANCE: Provided that Tenant does not terminate this Lease
as provided in SECTION 41, Landlord shall provide Tenant with a redecorating
allowance of $3.00 per square foot of Tenant's Rentable Area following the fifth
anniversary of the Commencement Date. In the event that Tenant exercises its
right to renew as provided in SECTION 42, Landlord shall provide Tenant with an
additional redecorating allowance of $3.00 per square foot of Tenant's Rentable
Area following the seventh anniversary of the Commencement Date.
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48. ADDITIONAL BUILDOUT ALLOWANCE: Landlord agrees to provided Tenant with an
additional allowance of up to $5.00 per square foot of Rentable Area of the
Premises to be used for payment of tenant improvements to the Premises over an
above the allowance provided in SECTION 2.2 of EXHIBIT B. Tenant shall repay
this additional allowance as Additional Rent in equal monthly payments
sufficient to completely amortized the principal with interest at the rate of
9.5% per annum over the first five (5) years of the Lease Term.
49. TENANT'S ANTENNAE AND SATELLITE DISHES: Subject to Landlord's prior written
approval, Tenant shall have the non-exclusive right to install up to two
satellite dishes and up to two whip antennae on the roof of the Building at
Tenant's sole cost and expense. Tenant shall pay to Landlord, without notice,
rent in the amount of One Hundred Dollars ($100) per diameter foot per month for
each satellite dish and One Hundred Dollars ($100) per month for each antenna
Tenant installs. Tenant shall reimburse Landlord for all charges for electricity
or other utilities used in connection with Tenants operation of such satellite
dish or antenna. Tenant shall be liable for the installation, engineering and
maintenance of any antenna or satellite dish, and agrees to indemnify and hold
Landlord harmless from any and all loss, costs (including attorneys' fees),
damages, expenses and liabilities arising in connection with claims or damages
relating to the injury or death of any person or to property damage due to any
acts or omissions of Tenant, Tenant's agents, employees, customers, invitees,
contractors or subcontractors in connection with Tenant's antenna or satellite
dish. Landlord retains the right to allow others to install antennae or
satellite dishes on the roof of the Building. Upon reasonable prior notice to
Landlord; Tenant and/or its contractors, agents and subcontractors shall have
the right of access to the antenna or satellite dish at all reasonable times,
provided that Tenant shall afford Landlord the opportunity to have Landlord's
representatives accompany Tenant while exercising such access rights. Tenant
agrees to comply with any and all security regulations of the Building and any
and all codes, regulations or laws applicable to the installation, operation or
maintenance of any satellite dish or antenna. Upon termination or expiration of
the Lease, Tenant agrees to remove any antenna or satellite dish and all
equipment related thereto, and to repair any damage to the Building caused by
such removal.
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EXHIBIT D
TO
SUNSET CORPORATE CAMPUS II
OFFICE LEASE AGREEMENT
CERTIFICATE OF LEASE INFORMATION
Landlord and Tenant acknowledge and certify to one another the following as
of the Commencement Date of the Lease between them dated September __, 1997 for
Premises located at Sunset Corporate Campus Building II, with an address of
13920 Southeast Eastgate Way, Bellevue, Washington 98005:
Commencement Date: ________________________
Termination Date: ________________________
Usable Area of the Premises: ________________________
Rentable Area of the Premises: ________________________
Rent per year for the Premises:
Years 1 - 3: ________________________
Years 4 & 5: ________________________
Years 6 & 7: ________________________
Tenant's pro rata share: ________________________
[insert other variables that will be known at the Commencement Date]
The Premises are accepted by Tenant in their present condition.
DATED: _______________, 1998.
LANDLORD: OBAYASHI CORPORATION,
a Japan corporation
By:_________________________
Its:________________________
TENANT: THE BOEING COMPANY,
a Delaware corporation
By:_________________________
Its:________________________
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EXHIBIT E
Addendum to Lease Between
OBAYASHI CORPORATION
and
JANITORIAL SPECIFICATIONS
Services shall include, but not be limited to, the following:
I. Office & Common Areas
---------------------
A. Nightly:
1. Empty and clean (if necessary) all waste receptacles, and remove
waste paper and rubbish from the Premises.
2. Vacuum all traffic lanes, reception areas (include underneath
reception desks), and common areas completely. Spot vacuum
offices and work areas as needed.
3. Dust and damp wipe all desks, credenzas, and work and reception
counters (do not move papers).
4. Dust and damp wipe all sills and coffee and side tables.
5. Remove all finger marks and smudges from all vertical surfaces,
including doors, door frames, around light switches, private
entrance glass, relites, partitions, pictures and wall
decorations.
6. Sweep all wood/tile floors employing dust control techniques and
damp mop for any spillage.
7. Clean all lunchroom/eating areas:
a. Wash and wipe tables and counter tops.
b. Clean sinks.
c. Sweep and damp mop floors.
8. Spot/report carpet spots.
9. Spot clean relite glass.
10. Remove black heel/scuff marks from tile floors.
11. Arrange chairs at desks and conference tables neatly, turn off
lights, lock and deadbolt doors.
12. Police stairways for trash and cigarette butts.
13. Clean equipment and empty vacuum bags, noting any repairs needed.
14. Clean slop sinks and maintain break room in a clean, neat and
orderly condition.
15. Maintain neat and orderly janitor supply closet.
16. Leave notice advising property management of any irregularities.
---
17. Restrooms - follow contractors restroom schedule.
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B. Weekly:
1. Dust bookshelves (push books back).
2. Dust file cabinets - high and low.
3. Sweep/dust chair pads.
4. Dust partition tops
5. Dust elevator doors.
6. Dust mini-blinds.
7. Vacuum complete - under desks, between desks and file cabinets,
under chairs (do 1/5 of run each night).
8. Damp wipe all telephones.
9. Wash and polish all drinking fountains.
10. Dust picture frames.
11. Dust chair bases and arms.
C. Monthly:
1. Edge all carpeted areas.
2. Dust all baseboards.
3. Dust all wood panel surfaces.
D. Quarterly:
1. Dust all lights, diffusers and vents.
2. Vacuum/brush upholstered furniture.
3. Strip and reseal tile floors.
4. Wax and buff tile floors.
II. Restrooms
---------
A. Nightly:
1. Clean all mirrors, bright work and enameled surfaces.
2. Clean all counter surfaces.
3. Wash and disinfect all basins, urinals and bowls using
nonabrasive cleaners to remove stains and clean undersides of rim
on urinals and bowls .
4. Wash and disinfect toilet seats.
5. Scrub floor beneath urinals with hand brush
6. Wet mop and disinfect floor.
7. Damp wipe all partitions and tile walls for smudges and outside
surfaces of all dispensers and receptacles.
8. Empty and sanitize all trash receptacles and sanitary disposals.
9. Fill toilet tissue, seat cover, soap, towel and sanitary napkin
dispensers.
10. Clean flushometers, piping, toilet seat hinges and other metal.
11. Report leaking fixtures, lights out, damage to partitions or
fixtures, etc. to property management.
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B. Weekly:
1. Dust mirror light.
2. Dust door, door frame and closure.
3. Dust partitions and ledges.
4. Spot wash partitions and wall tile.
5. Dust baseboards.
C. Monthly:
1. Thoroughly wash all partitions, tile walls, dispensers and
receptacles from trim to floor.
2. Vacuum all ventilating grills and dust light fixtures.
3. Wash trash liner.
D. Quarterly:
1. Machine scrub floors.
III. Main Lobby and Public Areas
---------------------------
A. Nightly:
1. Sweep and damp mop all floors.
2. Vacuum all carpeted areas.
3. Vacuum elevator carpets.
4. Edge all elevators.
5. Spot carpeted areas.
6. Wipe elevator doors, horizontal surfaces, wood paneling,
directories, and benches.
7. Spot clean entry door glass.
8. Clean and polish elevator call buttons.
9. Clean elevator door tracks.
10. Spot clean glass relites.
11. Empty and polish all trash receptacles and ash urns.
12. Spot mirrors.
13. Sweep or vacuum all stairways and landings.
14. Wash, disinfect & polish drinking fountains.
15. Report burned out lights.
16. Dust and polish bright work.
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B. Weekly:
1. Damp clean paper boxes.
2. Clean all thresholds.
3. Vacuum revolving door mats.
4. Thoroughly wash transoms high and low.
5. Clean lobby runners & elevator carpets.
6. Thoroughly clean all wails, handrails, and doors.
7. Dust and vacuum all closet areas.
8. Machine scrub main lobby floor.
9. Thoroughly wash interior of trash receptacles.
10. Dust fire extinguishers and cabinets.
C. Quarterly:
1. Damp dust all ceiling air conditioning diffusers, wall grills,
registers and other ventilation louvers.
IV. Other
-----
A. Nightly:
1. Police and spot sweep garage for trash and cigarette butts.
2. Continuing survey of public areas to ensure security.
B. Weekly:
1. Pressure wash sidewalk areas (1/2 each week).
2. Gas vacuum garage (one level per week).
3. Wash and/or shampoo mats and/or blotters as necessary.
V. Dayperson
---------
Dayperson will report to the property's Chief Engineer, and will provide
cleaning and miscellaneous services as directed by the property management
office.
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EXHIBIT F
SUNSET CORPORATE CAMPUS
BUILDING-MOUNTED EXTERIOR SIGNAGE POLICY
General
The components of all signs including size, design, and color and materials
shall be approved by Landlord and shall conform to the specific requirements
identified below. Tenant shall submit to the Landlord a preliminary drawing
showing the sign located on the building's entire elevation and a dimensioned
drawing of the entire sign describing the size and character of the proposed
letters together with samples of all colors and materials prior to entering into
a final contract with a sign company. In no case shall a sign be fabricated or
installed without Tenant receiving the Landlord's approval and obtaining
Landlord's signature on a shop drawing(s) prior to fabrication.
Building Signage Criteria
1. Shop drawings shall be fully dimensioned and indicate location, type of
lettering, illumination (if applicable), all colors and materials, and
specifications for the entire assembly, including details describing how
the sign will be mounted to the building.
2. The sign shall consist of the Tenant's trade name and/or logo, if logo is a
part of Tenant's common trademark. The wording shall not include the
product or service sold except as part of the trade name.
3. The letter style and color may be proposed by the individual tenants.
4. Signs shall be internally illuminated and constructed of individual
letters/numerals with a translucent face and opaque back.
5. Maximum height shall be 24" for letters and logos.
6. Signage is limited to a maximum length of 16 lineal feet of signage,
including letter characters and symbols.
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7. All portions of any sign must be within the 2'0" x 16'0" area centered
horizontally between specified columns. The lower edge of the letters shall
all align 3" above the lower edge of the panel. See Schedule 1.
8. No moving, flashing, or audible signs will be permitted.
9. The sign, including its raceway and letters, shall not project more than
13" from the face of the panel to which it is mounted (8" for the raceway
and 5" for the letter).
10. There shall be no over hanging signs or signage perpendicular to the
building.
11. No signs shall be attached to the building in other than the designated
area.
12. There will be no exposed labels bearing the name of the sign contractor,
fabricator, or underwriter's approval.
13. All costs associated with the design, fabrication, installation, and
maintenance shall be paid by the Tenant.
14. Signs shall comply with all governing building and electrical codes and
regulations and shall bear the UL label. Cost of obtaining all permits,
approvals, etc. required for installation shall be the responsibility of
the Tenant.
15. Electrical service to approved illuminated sign shall originate from the
Tenant's electrical panel.
16. Tenant shall pay the additional electrical cost.
17. Tenant's sign shall be subject to the prior selection of one of the
locations shown on Schedule 1 by US West Dex, Inc.
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SCHEDULE 1
EXTERIOR SIGN
[PLAN APPEARS HERE]
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EXHIBIT G
OPERATIONS POLICIES
1. Washington State Law now prohibits smoking in office buildings. Please
refrain from smoking within the building and parking garage. Individuals
who do smoke may do so in the designated area north of the east surface
parking lot or at the loading dock. Please report violators to Labor and
Industries, phone 206/281-5470.
2. Individuals other than Sunset Corporate Campus staff are not permitted to
make adjustments to temperature control thermostats within the building.
The Property Management Office is glad to assist should you find your
offices require adjustment. Any damage occurring as a result of tampering
will be repaired at the tenant's expense.
3. Do not obstruct sidewalks, doorways, corridors, elevators, lobbies or
stairways with furniture, trash or deliveries of any type. These areas
require a full, free traffic flow at all times.
4. Corridor doors, when not in use, must be kept closed, per Bellevue Fire
Code.
5. Nails, screws or other attachments to the doors must be installed by the
Property Management staff.
6. All signs, advertisements, graphics or notices visible in or from public
corridors, lobby areas or the building exterior are subject to prior
written approval from the Property Management Office.
7. Please lock all doors leading to corridors and turn out all lights at the
close of the work day.
8. No pets or animals of any kind are permitted on or in the premises.
9. Improper or excessive noise which interferes with tenants or other persons
conducting business within the building is not permitted.
10. Canvassing, peddling, soliciting and distribution of handbills of any kind
in the building is not permitted.
11. Installation of food, soft drink or other vendor machines within a suite
must be approved by and coordinated with the Property Management Office.
12. The Property Management Office reserves the right to prescribe the weight
and position of safes and other heavy equipment. Damage occurring as a
result of such items will be repaired at the tenant's expense.
G-1
<PAGE>
13. Heavy machinery of any kind may not be operated within the building without
prior written consent from the Property Management Office. Gasoline,
kerosene and other flammable liquids are not permitted to be used or stored
in the building. Noxious gas or other substances may not be used or kept on
the premises.
14. All contractors and technicians rendering installation or service work of
any kind must be referred to the Property Management Office prior to
performing such services. We will review with them our building policies
and standards for performing work at Sunset Corporate Campus and provide
necessary access to service areas, telephone closets, etc. We require all
service persons to check in and out with the Property Management Office any
time they are performing work in the building.
15. Installation and/or placement of items or fixtures which affect the outside
appearance of the building such as non-standard window signage, drapes or
lighting is not permitted, except with written approval from Building
Management.
16. Proposed plans for alterations affecting any physical portion of your suite
require prior written consent from the Property Management Office. All such
alterations must be coordinated through the Property Management Office.
This includes all installations affecting floors, walls, woodwork, windows
and ceiling.
17. The Property Management Office reserves the right to reasonably rescind any
of these Rules and Regulations and to make future rules and regulations, as
required for the safety, protection and maintenance of the building, the
operation thereof and the protection and comfort of the tenants and their
employees and visitors.
G-2
<PAGE>
EXHIBIT B
TO
SUBLEASE AGREEMENT
FLOOR PLANS SHOWING SUBLEASED PREMISES
Page 23 of 38
<PAGE>
[PLAN APPEARS HERE]
<PAGE>
[PLAN APPEARS HERE]
<PAGE>
EXHIBIT C-1
TO
SUBLEASE AGREEMENT
Sublessor agrees to provide the following improvements in the Subleased Premises
at its sole cost and expense:
1. Completed Public and/or Core Areas as outlined in Exhibit A (including any
telephone closets), finished in accordance with all applicable codes, including
the Americans with Disabilities Act, and the plans and specifications for the
Building.
1.1 Plumbing and Fixtures: Men's restrooms, women's restrooms and
---------------------
drinking fountains installed in accordance with the plans and specifications for
the Building.
1.2 Electrical: Total electrical service for each floor shall include
----------
two electrical closets, each with 38, 20-ampere, single-pole, 120 volt circuits.
1.3 Security System: A card key access system with control points at the
---------------
garage parking entrance, the Building's front entry and in the three elevator
cabs, with an ability for Sublessee to monitor after-hours use and which is
expandable to include monitoring of Tenant's entry and interior doors.
2. Tenant's Unimproved Area as outlined in Exhibit A to be completed as
outlined below:
2.1 Walls: Core walls pre-taped to be finished under tenant improvements.
-----
Columns and perimeter walls covered with gypsum wallboard ready for tape and
paint.
2.2 Floor: Prepared to receive carpet. Sublessor and Sublessee agree
-----
that the poured concrete floor is prepared to receive carpet as of the date of
this Sublease Agreement. Notwithstanding the foregoing, Sublessor shall provide
to Sublessee an allowance of up to $10,000 to be applied to the cost of
additional work that Sublessee may elect to do to prepare the poured concrete
floor to receive carpet. Floor loading capacities: 80 pounds per square foot
miscellaneous live load; 20 pounds per square foot movable partition load, for a
total of 100 pounds per square foot live load.
2.3 Mechanical: Primary System - includes cooling duct distribution loop
----------
installed through terminal VAV boxes and thermostats in ceiling plenum for
building standard layout and quantities. In addition to those installed as of
January 1, 1999, Sublessor shall provide four VAV boxes on the floor (but to be
installed by Sublessee as
Page 24 of 38
<PAGE>
a part of Sublease's Improvements). The building standard mechanical system is
designed to accommodate heating loads generated by lights (1.2 watts per square
foot) and electrical equipment (4.9 watts per square foot) up to 6.1 watts per
square foot. if Sublessee's design or use of the Premises results in
concentrated electrical loads in excess of 6.1 watts per square foot (e.g., data
processing areas, conference rooms and machine rooms) and/or Sublessee's design
or use of the premises extends beyond Normal Business Hours, then the cost of
any additional engineering design and installation of mechanical equipment
and/or controls required to handle such excess shall be part of the cost borne
by Sublessee.
2.4 Mechanical: Secondary System - Supplemental cooling capacity is
----------
available in the main VAV units and can be assessed by Sublessee for a fee. The
system is sized at 20 tons per floor.
2.5 Plumbing: Three waste and vent risers to accommodate waste from
--------
sinks and dishwashers.
2.6 Fire Sprinklers: Primary distribution loop with turned-down
---------------
finished heads per code, minimum number required to get shell and core signoff.
2.7 Electrical: Electrical conduit and junction boxes distributed
----------
throughout using building standard layout and quantities.
2.8 Ceiling: Building standard suspended ceiling grid system installed
-------
in a 4' x 4' pattern.
2.9 Window Coverings: Levelor blinds installed at all exterior windows.
----------------
The items to be completed in Sublessee Unimproved Area do not include
light fixtures.
Page 25 of 38
<PAGE>
EXHIBIT C-2
TO
SUBLEASE AGREEMENT
SUBLESSEE IMPROVEMENTS
1. SUBLESSEE IMPROVEMENTS AND SUBLESSOR'S ALLOWANCE
1.1 Design and construction of all tenant improvements in the Subleased
Premises shall be provided at Sublessee's cost and shall include, but not be
limited to: the common corridor on the Building's fourth floor, architectural
and engineering design, partitions, doors, door frames, hardware, paint, wall
coverings, base, ceilings, lights, mechanical distribution, diffusers,
thermostats, sprinkler distribution, sprinkler heads, emergency speakers, fire
extinguishers and cabinets, telephone and electrical outlets, light switches,
floor coverings, and all applicable permit fees and sales tax; provided,
however, that with respect to the multi-tenant corridor on the fourth floor of
the Building shown on Exhibit B, Sublessee shall be responsible only for its pro
rata share of the cost of the corridor. For purposes of this paragraph 1.1 of
this Exhibit C-2, Sublease's pro rata share shall be a fraction, the numerator
of which is the rentable square footage of the Subleased Premises that is
located on the fourth floor, and the denominator of which is the total rentable
square footage of the fourth floor of the Building.
1.2 Sublessor shall provide Sublessee an allowance of up to the sum of
Twenty-Three Dollars ($23.00) per rentable square foot of the Subleased Premises
("SUBLESSOR'S ALLOWANCE") to be credited against the cost of improvements
provided pursuant to this EXHIBIT C-2. Sublessor's Allowance will be provided by
crediting the amount of the Allowance against the payments due from Sublessee in
accordance with SECTION 3.2 of this EXHIBIT C-2.
2. DESIGN OF SUBLESSEE IMPROVEMENTS
Sublessee shall retain the services of a qualified office planner, approved
by Sublessor, to prepare the necessary drawings for Basic Plans and to supply
the information necessary to complete the Working Drawings and Engineering
Drawings referred to in SECTION 2.2 of this EXHIBIT C-2. Upon completion of
Sublesee improvements, Sublessor shall reimburse to Sublessee the fees of
Sublease's space planner up to a maximum amount of $3,000, which is in addition
to the allowances described above. All of Sublessee's plans shall be subject to
approval by Landlord in accordance with SECTION 2.3 of this EXHIBIT C-2.
Sublessor approves the plans attached to this Exhibit C-2. Notwithstanding that
any Working Drawings are reviewed by Landlord or Sublessor or their respective
construction professionals, and notwithstanding any advice or assistance that
may be rendered to Sublessee by Landlord or by Sublessor
Page 26 of 38
<PAGE>
or any of their respective construction professionals, neither Landlord nor
Sublessor shall have any liability or be responsible for any omissions or errors
contained in the Working Drawings.
Sublessee's office planner shall ensure that the work shown on Sublessee's
plans is compatible with the basic Building plans. Subject to Sublessor's
obligations under Exhibit C-1, all spaces are leased "as is" and Sublessor shall
not have responsibility to verify existing conditions.
On or before the indicated dates, Sublessee shall supply Sublessor with one
(1) reproducible copy and five (5) black line prints of the following Sublessee
Plans:
2.1 BASIC PLANS DELIVERY DATE: _______________
The Basic Plans due on this date shall be signed by Sublessee and shall
include:
Architectural Floor Plans: These shall be fully dimensioned floor plans
showing partition layout and identifying each room with a number and each door
with a number. The Basic Plans must clearly identify and locate equipment
requiring plumbing or other special mechanical systems, area(s) subject to
above-normal floor loads, special openings in the floor, and other major or
special features.
2.2 WORKING DRAWINGS DELIVERY DATE: _______________
On this date, Sublessee's office planner shall produce four (4) sets of
Full Working Drawings for construction from the Basic Plans using the Pin Bar
System. The four (4) sets of Working Drawings due on this date shall be signed
by the Sublessee and include all items in the Basic Plans referenced in Section
2.1 above plus the following additional information:
2.2.1 Electrical and Telephone Outlets: Locate all power and
telephone requirements. Dimension the position from a corner and give height
above concrete slab for all critically located outlets. Identify all dedicated
circuits and identify all power outlets greater than 120 volts. For the
equipment used in these outlets that require dedicated circuits and/or that
require greater than 120 volts, identify the type of equipment, the
manufacturer's name and the manufacturer's model number, and submit a brochure
for each piece of equipment. Also identify the manufacturer's name of the
telephone system to be used and the power requirements, size, and location of
its processing equipment.
2.2.2 Reflected Ceiling Plan: Lighting layout showing location and
type of all Building Standard and special lighting fixtures.
Page 27 of 38
<PAGE>
2.2.3 Furniture Layout: Layout showing furniture location so that
Sublessor's engineer can review the location of all light fixtures.
Landlord's HVAC engineers, Holaday Parks, shall prepare air conditioning
plans ("ENGINEERING DRAWINGS") for Sublessee's improvements, and at Sublease's
expense, based on the signed Working Drawings. Landlord's electrical engineer,
Coffman Engineers, shall review the electrical design after the general
contractor and electrical subcontractor are selected at Sublease's expense.
Sublessor's Allowance may be applied against this expense at Sublessee's
election.
2.3 FINAL PLANS REVIEW DATE: _______________
On this date, Sublessee's office planner shall deliver to Sublessor and
Sublessee for review and approval four (4) complete sets of Final Plans, which
will incorporate the Working Drawings referenced in SECTION 2.2 above, plus the
following additional information:
2.3.1 Millwork Details: These drawings shall be in final form with
Sublessee's office planner's title block in the lower right-hand corner of the
drawing, and shall include construction details of all cabinets, paneling, trim,
bookcases, and door and jamb details for non-building Standard doors and jambs.
2.3.2 Keying Schedules and Hardware Information: This information
shall be in final form and include a Keying Schedule indicating which doors are
locked and which key(s) open each lock, plus an "X" on the side of the door
where the key will be inserted if a keyed door. Complete specifications for all
non-Building Standard hardware will also be provided.
2.3.3 Room Finish and Color Schedule: This information shall be in
final form and include locations and specifications for all wall finishes, floor
covering and base for each room.
2.3.4 Construction Notes and Specifications: Complete
specifications for every item included except those specified by the Successor.
2.4 FINAL PLANS DELIVERY DATE: _______________
The four (4) sets of Final Plans approved by Sublessor and Sublessee and
due on this date shall include all the Final Plans referenced in SECTION 2.3
above. Final Plans are to be signed by Sublessee and delivered to Sublessor by
the Final Plans Delivery Date. Sublessor shall return one (1) signed set to
Sublessee for Sublessee's records. Sublessor will incorporate Engineering
Drawings with Sublessee's Final Plans for transmittal to the general contractor.
Page 28 of 38
<PAGE>
Sublessee shall be responsible for delays and additional costs in
completion of Sublessee's work caused by changes made to any of Sublessee's
Plans after the specified Plan Delivery Date or by delays in delivery of special
materials requiring long lead times; provided that Sublessor, exercising
reasonable discretion, shall have notified Sublessee prior to placing an order
for such special materials that Sublessor anticipates that delivery will require
a long lead time, and shall have offered to Sublessee the reasonable opportunity
to substitute other materials in their place.
2.5 BID PERIOD DELIVER DATE: _______________ (4 weeks)
2.5.1 Sublessor shall be responsible for conducting competitive
bidding amongst pre-qualified general contractors. Sublessor shall present bid
results to Sublessee and coordinate with Sublessee to select successful
contractor subject, however, to Landlord's approval.
2.5.2 In the event Sublessee has a preferred contractor that is
not on the Sublessor's pre-selected list, Sublessor shall use all best efforts
to qualify the contractor to work in the building. Sublessor reserves the right
to reject any contractor it deems inappropriate.
2.5.3 Sublessor shall enter into construction contract, or cause
the Landlord to enter into a construction contract, with the selected contractor
for construction of Sublessee improvements.
2.6 BUILDING PERMIT DELIVERY DATE: _______________
Sublessor shall apply for building and mechanical permits upon receipt of
Final Plans. Building permit issuance is at the governing jurisdiction's
discretion. Sublessor cannot warrant issuance within anticipated time frame but
will employ all commercially reasonable efforts to secure a building and
mechanical permit in a timely fashion. The electrical subcontractor will be
responsible for securing the electrical permit.
3. CONSTRUCTION OF SUBLESSEE IMPROVEMENTS
3.1 AUTHORIZATION TO PROCEED: Upon completion of Sublessee's Final Plans
and at the request of Sublessee, Sublessor shall provide to Sublessee written
notice of the price for Sublease's improvements. Within five (5) business days
of receipt of that notice, Sublessee shall give Sublessor written authorization
to complete the Subleased Premises in accordance with the Final Plans. Sublessee
may in its authorization delete any or all items of extra costs; however, if
Sublessor deems these changes to be extensive, at its option, Sublessor may
refuse to accept the authorization to proceed until all changes have been
incorporated in the Final Plans signed by Sublessee and written acceptance of
the revised price has been received by Sublessor from Sublessee. In the absence
of written authorization to proceed that Sublessor has accepted, Sublessor shall
not be
Page 29 of 38
<PAGE>
obligated to commence work on the Subleased Premises and Sublessee shall be
responsible for any costs due to any resulting delay in completion of the
Subleased Premises.
3.2 PAYMENTS: Sublessor's contractor shall complete Sublessee's
improvements in accordance with Sublessee's approved Final Plans. Within ten
(10) days after receipt of monthly progress statements from Sublessor, Sublessee
shall pay the full amount of the progress billings for all improvement costs
which in the aggregate exceed Sublessor's Allowance In addition to all other
costs and charges payable by Sublessee, Sublessee shall pay, within ten (10)
days after invoice, for project management services, a sum equal to 4% of the
amount by which the cost of Sublease's Improvements exceeds $30 per rentable
square foot of the Subleased Premises. Sublessee shall pay the cost of all
change orders which result in construction costs exceeding Sublessor's
Allowance.
3.3 FINAL PLANS AND MODIFICATIONS: if Sublessee shall request any change
(including without limitation any additions or deletions) ("CHANGES"), its
request shall be given in writing to Sublessor and shall be accompanied by all
plans and specifications necessary to show and explain Changes from the approved
Final Plans. After receiving this information, Sublessor shall give Sublessee a
written price for the cost of engineering and design services to incorporate the
Changes in Sublessee's Final Plans. if Sublessee approves the price in writing,
Sublessor shall have the Changes made and Sublessee shall pay Sublessor for this
cost within ten (10) days of receipt of Sublessor's invoice. Promptly upon
completion of the Changes in the Final Plans, Sublessor shall notify Sublessee
in writing of the costs, if any, that shall be chargeable or credited to
Sublessee for the Changes. The cost for the Changes, whether chargeable or
credited to Sublessee, shall include a Sublessor coordination fee equal to
fifteen percent (15%) of the amount of the Changes. In the absence of Sublease's
written notice to proceed with the Changes, Sublessor shall proceed in
accordance with the previously approved Final Plans before the Changes, were
requested. Sublessee shall be responsible for any delay in completion of the
Subleased Premises resulting from a request for Changes. Sublessee shall also be
responsible for any demolition work required as a result of any Changes.
3.4 IMPROVEMENTS CONSTRUCTED BY SUBLESSEE: if any work is to be performed
in connection with Sublessee improvements or alterations on the Subleased
Premises by Sublessee or Sublessee's contractor:
3.4.1 Such work shall proceed upon Sublessor's written approval of
(i) Sublessee's contractor, (ii) public liability and property damage insurance
carried by Sublessee's contractor (such insurance shall be in combined single
limits not less than Three Million Dollars ($3,000,000) per occurrence and shall
name Landlord, Sublessor, Landlord's property manager, and Landlord's project
manager as additional insureds), (iii) detailed plans and specifications for
such work, and (iv) amount of general
Page 30 of 38
<PAGE>
conditions to be paid by Sublessee to Sublessor for the services still to be
provided by Sublessor's contractor.
3.4.2 All work shall be done in conformity with a valid building
permit when required, a copy of which shall be furnished for Sublessor before
such work is commenced, and in any case, all such work shall be performed in
accordance with all applicable governmental regulations. Notwithstanding any
failure by Sublessor to object to any such work, Sublessor shall have no
responsibility for Sublessee's failure to meet all applicable regulations.
3.4.3 if required by Landlord, all work by Sublessee or
Sublessee's contractor shall be done with union labor in accordance with all
union labor agreements applicable to the trades being employed. Sublessor shall
promptly notify Sublessee if Sublessor receives notice from Landlord concerning
Landlord's requirements under this subparagraph 3.4.3.
3.4.4 All work by Sublessee or Sublessee's contractor shall be
scheduled through Sublessor and Sublessee shall have reasonable access to the
Building and the Subleased Premises in order to perform its work.
3.4.5 Sublessee or Sublessee's contractor shall arrange for
necessary utility, hoisting and elevator service with Sublessor's contractor and
shall pay such reasonable charges for such services as may be charged by
Sublessor's contractor.
3.4.6 Sublessee shall promptly reimburse Sublessor for costs
incurred by Sublessor due to faulty work done by Sublessee or its contractors,
or by reason of any delays caused by such work, or by reason of inadequate
clean-up.
3.4.7 Prior to commencement of any work on the Subleased Premises
by Sublessee or Sublessee's contractor, Sublessee or Sublessee's contractor
shall enter into an indemnity agreement and a lien priority agreement
satisfactory to Landlord and to Sublessor indemnifying and holding harmless
Landlord, Sublessor and Landlord's and Sublessor's contractors for any
liability, losses or damages directly or indirectly from lien claims affecting
the land, the Building or the Subleased Premises arising out of Sublessee's or
Sublessee's contractor's work or that of subcontractors or suppliers, and
subordinating any such liens to the liens of construction and permanent
financing for the Building.
3.4.8 Landlord and Sublessor shall each have the right to post a
notice or notices in conspicuous places in or about the Subleased Premises
announcing its non-responsibility for the work being performed.
3.4.9 Such work shall be performed in accordance with EXHIBIT C-3.
Page 31 of 38
<PAGE>
3.5 SUBLESSEE'S ENTRY TO SUBLEASED PREMISES: Sublessee's entry to the
Subleased Premises for any purpose, including without limitation, inspection or
performance of construction by Sublessee's agents, prior to the Commencement
Date specified in the Sublease Agreement shall be scheduled in advance with
Sublessor and shall be subject to all the terms and conditions of the Lease,
except the payment of Rent. Sublessee's entry shall mean entry by Sublessee, its
officers, contractors, office planner, licensees, agents, servants, employees,
guests, invitees, or visitors.
3.6 SUBLESSEE'S TELEPHONE: Sublessee is responsible for Sublessee's
telephone service. Sublessee shall select Sublease's telephone system and shall
coordinate its installation with Sublessor.
Page 32 of 38
<PAGE>
EXHIBIT C-3
TO
SUBLEASE AGREEMENT
Indemnity and Insurance Terms Applicable to Contractors, Subcontractors &
Suppliers
1. RESPONSIBILITY FOR DAMAGES
a. Indemnification, Negligence of Contractor or Subcontractor.
----------------------------------------------------------
Contractor shall defend, indemnify, and hold harmless The Boeing
Company, its subsidiaries, the Landlord and their respective directors,
officers, employees, agents, and assigns (hereinafter referred to as
"Indemnitees") from and against all actions, causes of action, liabilities,
claims, suits, judgments, liens, awards, and damages, of any kind and nature
whatsoever, for property damage, personal injury, or death (including without
limitation injury to, or death of, employees of Contractor or any Subcontractor)
and expenses, costs of litigation and counsel fees related thereto, or incident
to establishing the right to indemnification, arising out of or in any way
related to the construction contract, the performance thereof by Contractor,
Subcontractor, or other third parties, including without limitation the
provision of services, personnel, facilities, equipment, support, supervision,
or review. The foregoing indemnity shall apply only to the extent of the
Contractor's or any Subcontractor's negligence. In no event shall Contractor's
obligations hereunder be limited to the extent of any insurance available to or
provided by the Contractor or any Subcontractor.
Contractor expressly waives any immunity under industrial insurance, whether
arising from Title 51.04.010 et seq. of the Revised Code of Washington or any
other statute or source, to the extent of the indemnity set forth in this
Paragraph 1.a.
b. Indemnification, Performance of Contractor or Subcontractor.
-----------------------------------------------------------
Contractor shall defend, indemnify, and hold harmless the Indemnitees
from and against all actions, causes of action, liabilities, claims, liens,
suits, judgments, awards, fines, penalties, and damages, of any kind and nature
whatsoever, brought or claimed by Boeing or any other party, and expenses and
costs of litigation and counsel fees related thereto or incident to establishing
the right to indemnification, arising out of or in any way related to
Contractor's faulty performance of or failure to perform any of its obligations
under the construction contract, or any Subcontractor's faulty performance of or
failure to perform any requirement under the Contract or its subcontract.
Page 33 of 38
<PAGE>
c. Subcontractor Indemnification.
-----------------------------
Contractor shall require each Subcontractor to provide an indemnity,
enforceable by and for the benefit of the Indemnitees, to the same extent
required of Contractor under paragraph a, "Indemnification, Negligence of
Contractor, or Subcontractor".
2. INSURANCE.
a. Commercial General Liability.
----------------------------
Throughout the period when Work is performed and until final
acceptance by Sublessee, Contractor shall carry and maintain Commercial General
Liability insurance with available limits of not less than Three Million Dollars
($3,000,000) per occurrence for bodily injury, including death, and property
damage combined. Contractor shall ensure that all Subcontractors carry and
maintain Commercial General Liability insurance with available limits of not
less than One Million Dollars ($1,000,000) per occurrence for bodily injury,
including death, and property damage combined. Such per occurrence limits of
insurance may be satisfied through a combination of "primary" and "umbrella" or
"excess" policies. Such insurance shall be in an occurrence form, with insurers
reasonably acceptable to Boeing, and contain coverage for all premises and
operations, broad form property damage, contractual liability (including without
limitation, that specifically assumed under Paragraph 1.a herein), and products
and completed operations coverage with limits of not less than One Million
Dollars ($1,000,000) per occurrence. Such insurance shall not exclude explosion,
collapse, or underground excavation (XCU). Such insurance shall not be
maintained on a per project basis unless the respective Contractor or
Subcontractor does not otherwise maintain blanket coverage. Any policy which
provides the insurance required under this Paragraph a shall (i) be endorsed to
name "The Boeing Company, its subsidiaries, Bellevue Goldwell Associates LLC and
their respective directors, officers, agents, and employees" as additional
insured (hereinafter "ADDITIONAL INSURED") with respect to liability arising out
of work performed by Contractor, or Subcontractor, as applicable (ISO 20 10 Form
B, or equivalent, without limitation, reservation, or qualification); (ii) be
endorsed to be primary to and noncontributory with any insurance maintained by
The Boeing Company or Bellevue Goldwell Associates LLC; (iii) provide a waiver
of any rights of subrogation against the Additional Insured; and (iv) contain a
severability of interest provision in favor of the Additional Insured.
b. Automobile Liability.
--------------------
If licensed vehicles will be used in connection with the performance
of the Work, Contractor shall carry and maintain, and ensure that any
Subcontractor who uses a licensed vehicle in connection with the performance of
the Work carries and maintains,
Page 34 of 38
<PAGE>
throughout the period when Work is performed and until final acceptance by
Boeing, Business Automobile Liability insurance covering all vehicles, whether
owned, hired, rented, borrowed, or otherwise, with limits of liability of not
less than One Million Dollars ($1,000,000) per occurrence combined single limit
for bodily injury, death, and property damage. Any policy which provides such
insurance shall contain a waiver of rights of subrogation against The Boeing
Company, its subsidiaries and their directors, officers, and employees.
c. Workers' Compensation.
---------------------
Throughout the period when Work is performed and until final
acceptance by Boeing, Contractor shall, and ensure that all Subcontractors
shall, cover or maintain insurance in accordance with the applicable laws
relating to workers' compensation with respect to all of their respective
employees working on or about the Site, regardless of whether such coverage or
insurance is mandatory or merely elective under the law. Throughout the period
when Work is performed and until final acceptance by Sublessee, Contractor shall
carry and maintain, and ensure that all Subcontractors carry and maintain,
Employers Liability coverage with limits of not less that One Million Dollars
($1,000,000) per accident. To the extent permitted by law, any policy which
provides the insurance required by this Paragraph c shall contain a waiver of
rights of subrogation against The Boeing Company, its subsidiaries, and their
respective directors, officers, and employees. If the construction contract
involves maritime work, Contractor shall provide, and ensure that all
Subcontractors provide, if required by law, insurance to meet the requirements
of the Federal Longshoreman and Harborworkers Act or Federal Maritime Employers
Liability Law (Jones Act). If Sublessor or Landlord is required by any
applicable law to pay any workers' compensation premiums with respect to an
employee of Contractor or any Subcontractor, Contractor shall reimburse the
payor for such payment.
d. Certificates of Insurance.
-------------------------
(1) Within ten (10) days after notice of award but not later than
five (5) days prior to the commencement of the Work, Contractor shall provide
for Boeing's review and approval Certificates of Insurance reflecting full
compliance with the requirements set forth in Paragraphs a (Commercial General
Liability); b (Automobile Liability); and c (Workers' Compensation). Such
certificates shall be kept current and in compliance throughout the period when
Work is being performed and until final acceptance of the Work by Boeing, and
shall provide for thirty (30) days advance written notice to Boeing in the event
of cancellation or material change adversely affecting compliance with the
foregoing requirements. Any policy or policies providing any of the insurance
required under this Exhibit D may be inspected by Boeing upon request. Conformed
copies of specific policy endorsements required under this Exhibit D shall be
provided to Boeing upon request. Failure of Contractor or any Subcontractor
thereof to furnish Certificates of Insurance, or to procure and maintain the
insurance required
Page 35 of 38
<PAGE>
herein, or failure of Boeing to request such certificates, endorsements, or
other proof of coverage, shall not constitute a waiver of the respective
Contractor's or Subcontractor's obligations hereunder.
(2) In jurisdictions requiring mandatory participation in a
monopolistic state workers' compensation fund, or if Contractor or Subcontractor
self insures, the insurance certificate requirements for the coverage required
under Paragraph C (Workers' Compensation) will be satisfied by a letter from the
appropriate state agency confirming participation in accordance with statutory
requirements.
e. Self-Assumption.
---------------
Any self insured retention, deductibles, and exclusions in coverage in
the policies required under this Exhibit D shall be assumed by, for the account
of, and at the sole risk of Contractor or the Subcontractor which provides the
insurance and, to the extent applicable, shall be paid by such Contractor or
Subcontractor. In no event shall the liability of Contractor or any
Subcontractor be limited to the extent of any of the minimum limits of insurance
required under this Contract.
Page 36 of 38
<PAGE>
EXHIBIT D
TO
SUBLEASE AGREEMENT
LANDLORD CONSENT
----------------
The undersigned Landlord under the Lease Agreement dated as of September 30,
1997, hereby consents, as contemplated in paragraph 18 of such Lease Agreement,
to the foregoing Sublease Agreement (all of the defined terms of which are used
herein with the same meaning as they are given there) and all of the terms and
conditions contained therein on the express condition that The Boeing Company
remains fully liable under the Lease Agreement to perform all of the obligations
of the Lessee. Landlord expressly acknowledges that the Lease Agreement is in
full force and effect and that Landlord is not aware of any default by the
Tenant or the Landlord thereunder. This Consent shall apply only to this
Sublease Agreement and shall not be deemed to be either (a) a consent to any
other sublease or assignment or (b) a release from or waiver of the obligation
to obtain Landlord's consent in the event of any future sublease or assignment.
Subject to Landlord's review of Sublessee's plans and specifications pursuant to
Exhibits C-l and C-2 of the foregoing Sublease Agreement, Landlord hereby
consents to the performance of Sublessee's Work and agrees that Sublessee shall
not be required to remove Sublessee's Work upon termination of the Lease
Agreement and/or Sublease Agreement, except that Landlord expressly reserves the
right to require removal of improvements that are unique to Sublessee's use or
are not likely to be usable by any future office tenant.
Landlord further agrees to the following:
1. Landlord shall not exercise any termination or partial termination
rights it may have under Article 18.1 of the Lease Agreement as a result of a
Permitted Transfer (as that term is defined in Paragraph 12 of the foregoing
Sublease Agreement), and
2. If Landlord elects to require Sublessor or Sublessee to remove any
improvements from the Subleased Premises, it shall give notice of its election
to Sublessor at the time its approval of the improvements is granted.
3. At the time Landlord approves any work to be performed by Sublessee or
Sublessee's contractor, Landlord will notify Sublessor in writing whether it
will require that work performed by Sublessee or Sublessee's contractor be done
with union labor.
BELLEVUE GOLDWELL ASSOCIATES LLC,
A DELAWARE LIMITED LIABILITY COMPANY
By: /s/ W.A. Cunningham
-------------------
Title: OC Real Estate Management, LLC, Member, Sr. V.P.
-----------------------------------------------
Date: February 1, 1999
----------------
Page 37 of 38
<PAGE>
EXHIBIT E
TO
SUBLEASE AGREEMENT
___________________________
LOGO drugstore.com.
HEALTH . BEAUTY. WELLNESS
LOGO
Page 38 of 38
<PAGE>
SUBLEASE AGREEMENT
This Sublease Agreement is entered as of January 29, 1999 between The Boeing
Company, a Delaware corporation ("Sublessor") and Drugstore.com, a Delaware
corporation ("Sublessee").
RECITALS
A. Sublessor and Bellevue Goldwell Associates LLC ("Landlord"), successor
in interest to Obayashi Corporation, a Japan corporation, are parties to a Lease
Agreement dated as of September 30, 1997 (the "Lease Agreement"). Pursuant to
the Lease Agreement, Sublessor leases 93,539 rentable square feet of office
space (the "Leased Premises") from Landlord at Sunset Corporate Campus Building
II, 13920 Southeast Eastgate Way, Bellevue, Washington 98005 (the "Building").
The Leased Premises and the Building are more fully described in the Lease
Agreement attached as Exhibit A to this Sublease Agreement and incorporated into
it by this reference.
B. Sublessee wishes to acquire from Sublessor the right to occupy
approximately 53,349 rentable square feet of office space of the Leased Premises
located on the 3rd and 4th floors of the Building. The premises so subleased to
Sublessee are referred to in this Agreement as the "Subleased Premises." An
illustration of the Subleased Premises is attached as Exhibit B to this Sublease
Agreement.
AGREEMENTS
In consideration of the mutual promises of the parties and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties agree as follows:
1. Sublease of Subleased Premises. Sublessor subleases to Sublessee, and
------------------------------
Sublessee subleases from Sublessor, the Subleased Premises, subject and pursuant
to the terms and conditions of this Sublease Agreement. Sublessor shall confirm
the measurement of the rentable area of the Subleased Premises in writing after
the commencement of the Sublease Term using the services of a licensed architect
and applying the standard known as ANSI/BOMA Z65.1.1996. Tenant shall be
permitted to have its architect present at the measuring of the physical
Subleased Premises and/or to review the measurements and calculations of
Sublessor's architect. Any dispute about measurement or calculation of the
rentable area of the Subleased Premises shall be submitted to an independent,
disinterested architect for resolution.
Page 1 of 38
<PAGE>
Sublessee shall have the right to use four (4) automobile parking
stalls per 1,000 usable square feet in the Subleased Premises in the manner and
on the allocation and payment terms described in the Lease Agreement.
Sublessee's right shall be subject to all rules and regulations imposed by
Landlord under the Lease Agreement, and all rights of Landlord with respect to
parking, including but not limited to Landlord's right to impose and adjust
charges for parking. Parking shall be allocated and charged as described in the
Lease Agreement. Without limiting the generality of the foregoing, parking
charges shall be applicable on the date Landlord is entitled to impose parking
charges under the Lease Agreement .
In addition to the foregoing, to the extent, if any, that Sublessor
has any right under the Lease Agreement to use common areas and facilities
within the project in which the Building is located, such as, for example,
conference rooms, child care facilities and health and fitness/workout rooms,
Sublessee shall have a non-exclusive right to use those facilities in common
with other tenants and subtenants in the project.
2. Term of Sublease.
----------------
2.1 Sublease Term. The term of the Sublease ("Sublease Term") shall
-------------
commence on substantial completion of Sublessee's initial tenant improvements
("Sublessee Improvements") pursuant to Exhibit C-2, but no later than March 12,
1999, and shall terminate at 5 p.m. on July 30, 2005.
2.2 Request for Landlord's Agreement. Upon commencement of
--------------------------------
Sublessee's obligation to pay Base Rent under this Sublease Agreement and final
determination of the actual rentable square footage of the Subleased Premises,
Sublessor shall request Landlord's agreement to the following:
a. A right of Sublessee to lease the Subleased Premises
directly from Landlord for one or more extension terms after expiration of the
Term of this Sublease Agreement upon the terms and conditions set forth in this
Sublease Agreement except for Rent; and
b. A right of Sublessee to receive from Landlord a redecorating
allowance at the end of the fifth year of the Term of this Sublease Agreement,
provided Sublessee is not then in default, and has not previously been in
default, of any of its obligations under this Sublease Agreement.
Sublessor makes no representations whatsoever concerning whether Landlord
will grant either or both of such rights, or on what terms any of those rights
may be granted. Sublessor and Sublessee acknowledge and agree that this
Sublease Agreement shall be binding upon them and shall remain in full force and
effect whether or not Landlord shall agree to either or both of the foregoing
rights, and regardless of the terms that Landlord might impose as a condition of
granting either or both of them.
Page 2 of 38
<PAGE>
2.3 Substantial Completion of Sublessee's Improvements.
--------------------------------------------------
Notwithstanding anything in this Sublease to the contrary, provided this
Sublease Agreement is fully executed, acknowledged and delivered by Sublessee no
later than February 1, 1999, then: (A) if construction of Sublessee's
Improvements is not complete, as determined by Landlord's architect, except for
minor punchlist items ("Substantially Complete") by April 30, 1999 (as that date
is extended as a result of Sublessee change orders or other Sublessee delay),
and if Sublessee is not then occupying the Subleased Premises for their intended
use, then Base Rent and Additional Rent shall abate until Sublessee's
Improvements are Substantially Complete; and (B) if construction of Sublessee's
Improvements is not Substantially Complete by June 5, 1999, (as that date is
extended as a result of events beyond the control of Landlord or Sublessor,
including, but not limited to, acts of God, war, civil commotion, labor
disputes, strikes, fire, flood or other casualty, shortage of material,
government regulation or restriction and weather conditions, and including any
delay attributable to Sublessee) and Sublessee is not then occupying the
Subleased Premises for their intended use, then Sublessee may terminate this
Sublease Agreement upon written notice to Sublessor given within three (3)
business days thereafter; and (C) if construction of Sublessee's Improvements is
not Substantially Complete by August 31, 1999 for any reason whatsoever and
Sublessee is not then occupying the Subleased Premises for their intended use,
then either Sublessor or Sublessee may terminate this Sublease Agreement upon
written notice to the other given within three (3) business days thereafter,
except that if the fact that Sublessee's Improvements are not Substantially
Complete is directly attributable to the act(s) or omission(s) of one of the
parties to this Sublease Agreement, then that party may not exercise its
termination right under this subparagraph (C); and (D) if construction of
Sublessee's Improvements is not Substantially Complete by December 31, 1999 for
any reason whatsoever and Sublessee is not then occupying the Subleased Premises
for their intended use, then this Sublease Agreement shall terminate without
notice and shall have no further force or effect. Notwithstanding the
foregoing, if Landlord's consent to this Sublease Agreement is not received by
February 1, 1999, then each of the dates mentioned in (A), (B), (C) and (D)
above shall be extended one day for each day after February 1 that Landlord's
consent is not received, up to a maximum of fifteen (15) days; and if the
building permit for construction of Sublessee's Improvements is not issued by
February 1, 1999, then each of the dates mentioned in (A), (B), (C) and (D)
above shall be extended one day for each day after February 1 that the building
permit is not issued, up to a maximum of fifteen (15) days.
The determination of Landlord's architect that Sublessee's Improvements are
Substantially Complete may be reviewed at Sublessee's discretion by Sublessee's
architect. Any dispute concerning whether Sublessee's Improvements are
Substantially Complete shall be submitted to a neutral and independent architect
who is mutually agreeable to Sublessor and Sublessee, and the decision of the
architect so chosen shall be binding.
Page 3 of 38
<PAGE>
2.4 Issuance of Building Permit. In addition, if the building permit
---------------------------
for construction of Sublessee's Improvements is not issued by February 15, 1999,
then either Sublessor or Sublessee may terminate this Sublease Agreement upon
written notice to the other given within three (3) business days thereafter,
except that if the fact that the building permit for construction of Sublessee's
Improvements is not issued is directly attributable to the act(s) or omission(s)
of one of the parties to this Sublease Agreement, then that party may not
exercise its termination right under this subparagraph 2.4.
2.5 Termination. If this Sublease Agreement is terminated pursuant to
-----------
this paragraph, then any Base Rent or Security Deposit previously delivered to
Sublessor shall be promptly refunded by Sublessor to Sublessee, but Sublessee
shall be responsible for all costs incurred for Sublessee's Improvements to the
extent those costs exceed Sublessor's Allowance.
3. Base Rent and Additional Rent. Rent to be paid under this Sublease
-----------------------------
Agreement shall include Base Rent and Additional Rent as described in this
paragraph 3, and all other sums that may be owing from Sublessee to Sublessor
under the terms of this Sublease Agreement.
3.1 Base Rent. Base Rent during the Sublease Term shall be as
---------
follows:
<TABLE>
<CAPTION>
BASE RENT
(DOLLARS PER RENTABLE
DATES S.F. PER YEAR)
-------------------------------------------- ---------------------
<S> <C>
Term Commencement through November 30, 2000 $24.00
December 1, 2000 through November 30, 2002 $24.50
December 1, 2002 through July 30, 2005 $26.50
</TABLE>
Each installment of Base Rent shall be due and payable in advance on the
first day of each month during the Sublease Term.
3.2 Additional Rent. Commencing January 1, 2000, Sublessee shall pay
---------------
as Additional Rent Sublessee's Share of the amounts owed by Sublessor under the
terms of the Lease Agreement for increases in Operating Costs and Taxes over
actual Operating Costs and Taxes (as those terms are defined in the Lease
Agreement) for the calendar year 1999. Sublessee's Share shall be a fraction,
the numerator of which is the number of rentable square feet in the Subleased
Premises as determined pursuant to paragraph 1 above, and the denominator of
which is 93,539. Sublessee shall pay Sublessee's Share of estimated Operating
Costs, as determined pursuant to Article 11.3 of the Lease, together with Base
Rent, on the first day of each month during the Sublease Term. Sublessee shall
be responsible for payment of Sublessee's Share of any additional amounts
payable by Sublessor under Articles 11.3 or 11.4 of
Page 4 of 38
<PAGE>
the Lease Agreement and shall be entitled to receive Sublessee's Share of any
amounts payable to Sublessor pursuant to Articles 11.3 and 11.4 of the Lease
Agreement.
3.3 Manner and Method of Payment. All rental payments shall be made
----------------------------
in United States Dollars, without deduction or offset, and delivered to
Sublessor at the address set forth in paragraph 14 of this Sublease Agreement.
Base Rent and Additional Rent for any partial month shall be prorated in
proportion to the number of days in that month.
3.4 Security Deposit. Prior to commencement of the Sublease Term,
----------------
Sublessee shall deposit with Sublessor a security deposit in the amount of
$640,188 (the "Deposit Amount"). The security deposit may be applied, at
Sublessor's discretion, against any obligation incurred by Sublessee in
connection with this Sublease Agreement that is not timely paid or performed (as
the case may be), including the payment of Base Rent and Additional Rent, the
repair of any damage that is Sublessee's responsibility, and all other
obligations of Sublessee under this Sublease Agreement. If Sublessor debits the
security deposit, Sublessor shall notify Sublessee of the occurrence and amount
of the debit, and Sublessee shall promptly pay to Sublessor the amount necessary
to restore the security deposit to the full Deposit Amount.
Sublessor shall accept, in lieu of the security deposit, an unconditional
and irrevocable letter of credit in the amount of the Deposit Amount issued by a
commercial bank acceptable to Sublessor and having a teller window for the
transaction of business in King County, Washington. The letter of credit shall
provide for the unconditional right of Sublessor to withdraw up to the Deposit
Amount without prior notice to Sublessee upon presentation of Sublesssor's
certificate stating that it is entitled to do so, and shall be otherwise in form
and content acceptable to Sublessor. From time to time throughout the term of
this Sublease, Sublessee may replace and/or renew the Letter of Credit then
acting as the Security Deposit pursuant to this section, provided that: (i)
such replacement Letter of Credit or renewal shall be delivered to Sublessor on
or before the thirtieth (30th) day prior to the expiration of the Letter of
Credit then held by Sublessor as the Security Deposit under this Section; and
(ii) such replacement Letter of Credit or renewal shall otherwise comply with
all terms and conditions of this paragraph pertaining to the original Letter of
Credit. Failure to deliver such a replacement Letter of Credit and/or renewal
within thirty (30) days prior to the expiration of the Letter of Credit then
held as the Security Deposit (except where the term of this Sublease shall
expire prior to or simultaneously with the expiration of the Letter of Credit)
shall constitute a Default under this Sublease (as that term is defined in
paragraph 21 below).
Sublessor shall have the right, but not the obligation, to accept another
form of security for Sublessee's obligations under this Sublease Agreement.
Provided Sublessee has not been in Default (as that term is defined in paragraph
21 below) beyond the applicable cure period at any time during the first twenty-
four full calendar months of the Sublease Term, and that Sublessor has not given
more than four
Page 5 of 38
<PAGE>
(4) notices of Default to Sublessee during that period, and provided further
that no Default occurs during the second twenty-four full calendar months of the
Sublease Term, then commencing on the first day of the twenty-seventh (27th)
full calendar month of the Sublease Term and on the first day of each fourth
month thereafter the Deposit Amount shall be reduced by the sum of $106,698,
except that the Deposit Amount shall not be less than $106,698 until the first
day of the forty-ninth (49th) full calendar month of the Sublease Term.
If any event of Default occurs during the second twenty-four full calendar
months of the Sublease Term, then the Deposit Amount shall be restored to the
sum of $640,188 and shall remain that amount for the balance of the Sublease
Term.
4. Return of Subleased Premises. At the expiration or earlier termination
----------------------------
of the Sublease Term, Sublessee shall return the Subleased Premises to the
Sublessor in the same condition as at the commencement of the Sublease Term,
except for normal wear and tear. At Sublessor's option, Sublessor may require
Sublessee to remove any fixtures or alterations installed by Sublessee after
completion of Sublessee Improvements, and to repair any damage occasioned by
that removal.
5. Additional Obligations of Sublessee.
-----------------------------------
5.1 In addition to the payment of rent, Sublessee agrees, for the
benefit of the Sublessor and Landlord, that during the term of this Sublease
Sublessee shall perform each and every one of the obligations of the tenant
under the Lease Agreement that is expressly incorporated herein. The following
terms, covenants, and conditions of the Lease Agreement shall be incorporated
into this Sublease Agreement with the same force and effect as if the Sublessor
were the landlord under the Lease Agreement and the Sublessee were the tenant
under the Lease Agreement, except that each reference in such incorporated
provisions to "Lease" shall be deemed a reference to this "Sublease Agreement"
and each reference to "Premises" shall be deemed a reference to the "Subleased
Premises," and, except as is otherwise expressly provided in this Sublease
Agreement, each party shall be expressly bound to perform its obligations
thereunder for the benefit of the other: Articles 9, 10.1, 10.2, 10.3, 12
(except the second-to-last sentence thereof, provided that Sublessee shall pay
Sublessor any amount owed to Landlord in connection with Alterations and Changes
undertaken by Sublessee), the last two sentences of 14.1, 14.2, 20.2, 22, 24,
25, 27, 33, 34 (provided that the reference to Landlord's title to Buildings I
and II shall be deemed a reference to Sublessor's interest in the Leased
Premises and the reference to other tenants in the Building shall be deemed a
reference to other subtenants in the Leased Premises), 37, 38.1, 38.2, 38.4-
38.9, and 38.13. Notwithstanding the foregoing, Sublessee shall obtain the
insurance required by Article 17 of the Lease Agreement and shall name
Sublessor, its officers, directors, employees, agents, attorneys and assigns as
additional insureds thereunder (in addition to
Page 6 of 38
<PAGE>
the parties required to be named as additional insured pursuant to Article 17 of
the Lease Agreement).
5.2 This Sublease Agreement is subject and subordinate to the Lease
Agreement. Sublessee has no authority, and shall not attempt, to exercise any
of Sublessor's options (if any exist) to extend or terminate the Lease Agreement
or to add or remove space from the Leased Premises. Provided that Sublessee has
not been in Default beyond the applicable cure period at any time during the
Sublease Term and that Sublessor has not given more than four (4) notices of
Default to Sublessee, and provided further that Sublessee is not then in Default
of any of its obligations under this Sublease Agreement, Sublessor shall not
exercise its right to terminate the Lease Agreement under Article 41 of the
Lease Agreement without the prior written consent of Sublessee.
5.3 Sublessee acknowledges that Sublessor does not have control
of the Building or the Building systems, and that Sublessor will not provide
utilities, maintenance or other Building services. Subject to the terms of this
paragraph 5.3, Sublessee will look solely to Landlord for performance of the
services to which Sublessor is entitled under Articles 9, 10 and 12 of the Lease
Agreement. The nature of such services, the hours during which they will be
provided, the charges for services in addition to those deemed building
standard, and the remedy with respect to interruption of services shall be as
set forth in Article 10 of the Lease Agreement.
Sublessor, upon receipt of written notice from Sublessee, shall
make demand upon Landlord to take all appropriate action for the correction of
any defect, inadequacy or insufficiency in Landlord's performance under the
Lease Agreement. If, after receipt of written request from Sublessor, Landlord
shall fill or refuse to perform its obligations under the Lease Agreement,
Sublessee shall have the right to take such action in its own name, and for that
purpose and only to such extent, all the rights of Sublessor under the Lease
Agreement shall be conferred upon and assigned to Sublessee, and Sublessee shall
be subrogated to such rights to the extent that the same shall apply to the
Subleased Premises. In addition, if Sublessee is unable to use the Premises
because of Landlord's failure or refusal to perform its obligations under the
Lease Agreement, then Base Rent shall be abated under this Sublease Agreement to
the extent, but only to the extent, that Sublessor's obligation to pay Rent with
respect to the Subleased Premises has abated under the Lease Agreement.
Notwithstanding the foregoing, Sublessee shall obtain the insurance required by
Article 17 of the Lease Agreement and shall name Sublessor, its officers,
directors, employees, agents, attorneys and assigns, and the parties required to
be named as additional insureds pursuant to Article 17 of the Lease Agreement,
as additional insureds thereunder.
5.4 Sublessee shall neither do nor permit anything to be done which
would cause the Lease Agreement to be terminated or forfeited by reason of any
right of termination or forfeiture or default reserved or vested in the Landlord
under the Lease Agreement, and
Page 7 of 38
<PAGE>
Sublessee shall indemnify and hold Sublessor harmless from and against all
claims of any kind whatsoever arising out of Sublessee's non-monetary breach of
the foregoing covenant by reason of which the Lease Agreement may be terminated
or forfeited.
Except to the extent of any breach or default caused by Sublessee,
Sublessor shall comply with each and every one of its obligations under the
Lease Agreement during the term of this Sublease.
5.5 Sublessee shall use the Subleased Premises for office purposes in
connection with its business, including, but not limited to, operation and
maintenance of high capacity computer servers and workstations, on-line and
telephone sales, temporary storage and incidental shipping and receiving, and
for no other purpose. Sublessee shall not use the Subleased Premises for any
unlawful purpose.
5.6 Sublessee agrees to forward to Sublessor, immediately upon
receipt thereof, copies of any notices relating to Sublessee's occupancy or use
of the Subleased Premises received by Sublessee from Landlord or from any
governmental authority.
6. Indemnity and Insurance.
-----------------------
6.1 Sublessee shall indemnify and hold Sublessor, its officers,
directors, agents, employees, attorneys, and assigns (the "Indemnified Parties")
harmless from and against any and all claims or liability for bodily injury to
or death of any person or loss of or damage to any property arising out of
Sublessee's use of the Subleased Premises or property of which it is a part, or
from the conduct of Sublessee's business, or from any activity, work, or thing
done, permitted, or suffered by Sublessee, its employees, agents, contractors,
or invitees in or about the Subleased Premises except:
(1) claims and liabilities to the extent caused by any negligence
on the part of the Sublessor, its agents, employees, contractors, or invitees,
or
(2) claims and liabilities for property damage addressed in
paragraph 6.3.
In the absence of any negligence on the part of the Indemnified Parties,
such indemnity shall include all reasonable costs, attorneys' fees, and expenses
incurred in the defense of any such claim or any action or proceeding brought
thereon. In the event any action or proceeding is brought against Sublessor by
reason of any claim falling within the scope of the foregoing indemnity, and in
the absence of any claim by the plaintiff in such action of any negligence on
the part of the Sublessor, Sublessee shall defend the same at Sublessee's
expense by counsel reasonably satisfactory to Sublessor.
Page 8 of 38
<PAGE>
The foregoing indemnity is conditioned upon Sublessor providing notice
to Sublessee within sixty days after Sublessor receives notice of any claim or
occurrence that is likely to give rise to a claim that will fall within the
scope of the foregoing indemnity and cooperating with Sublessee in any defense
or settlement of such claim or liability.
6.2 Sublessee, at Sublessee's own cost and expense, will provide and
keep in full force and effect during the term of this Sublease Agreement, public
liability insurance with limits of not less than Three Million Dollars
($3,000,000.00) covering bodily injury to any person, including death, and loss
of or damage to real and personal property. Such insurance may be provided
under Sublessee's blanket comprehensive liability insurance policy. During the
Sublease Term, Sublessor and each of the Indemnified Parties shall be named as
an additional insured under such insurance to the extent of Sublessee's
undertaking set forth in paragraph 6.1. Sublessee shall cause the insurer
issuing such insurance policy to waive all rights of subrogation against the
Indemnified Parties to the extent of Sublessee's undertaking set forth in
paragraph 6.1. A certificate evidencing such insurance coverage and the
coverage required by this paragraph 6.2 shall be delivered to Sublessor prior to
the commencement date of the Sublease Term. Such certificate of insurance will
provide for not less than fifteen days advance notice in the event of
cancellation or material alteration of such insurance.
6.3 Sublessor and Sublessee each herewith and hereby release and
relieve the other, and waive their entire claim of recovery for loss or damage
to property arising out of or incident to fire, lightning, or any other perils
normally included in a standard "All Risk" physical damage insurance policy
containing an extended coverage and special extended coverage endorsement, when
such property constitutes the Subleased Premises, whether or not such loss or
damage is due to the negligence of Sublessor, Sublessee, or their respective
agents, employees, guests, licensees, invitees, or contractors.
6.4 Each of Sublessor and Sublessee shall cause its insurance
carriers to waive all rights of subrogation against the other party hereto to
the extent of Sublessor's and Sublessee's respective undertakings set forth in
paragraph 6.3.
7. Obligations of the Sublessor. Sublessor covenants, so long as
----------------------------
Sublessee is not in default of its obligations under this Sublease Agreement,
that Sublessee shall have the right to quietly enjoy the Subleased Premises
without hindrance by any person claiming by or through Sublessor. Sublessor
shall make all payments required to be made to Landlord pursuant to the Lease
Agreement and shall forward to Sublessee, promptly upon receipt, copies of any
notices relating to the Subleased Premises or this Sublease Agreement from
Landlord or from any governmental authority. Sublessor warrants that the copy
of the Lease Agreement set forth in Exhibit A is a true and correct copy of the
Lease Agreement as amended, that the Lease Agreement is in full force and effect
in accordance with its terms, and that Sublessor is not aware of any event of
default thereunder.
Page 9 of 38
<PAGE>
8. Walk Through and Inventory. Prior to the commencement of the Sublease
--------------------------
Term, representatives of Sublessor and Sublessee shall conduct a walk-through of
the Subleased Premises and shall note, in writing, any damage or defects in the
Subleased Premises. At the termination of the Sublease Term, representatives of
Sublessor and Sublessee shall conduct a similar walk-through and shall note, in
writing, any damage to the Subleased Premises occurring during the Sublease
Term.
9. Acceptance of Premises; Alterations.
-----------------------------------
9.1 Sublessee hereby confirms that it has examined and inspected the
Subleased Premises, and subject to paragraph 9.2 below, accepts them in their
"AS IS" condition; provided, however, that Sublessor warrants that the Building
systems shall be in good working order on the Commencement Date. Except as
expressly provided in the foregoing sentence, Sublessor makes no warranty of any
kind concerning the Subleased Premises, the Building or the corporate park of
which they are a part, including any warranty concerning latent defects, any
warranty of fitness for use, and any other express or implied warranty
(including any warranty of MERCHANTIBILITY).
9.2 Sublessor shall cause to be constructed in accordance with the
requirements of the Lease Agreement, and subject to approval by Sublessor,
Sublessee's Improvements as described on, and subject to the terms of, Exhibit C
(including Exhibits C-1, C-2 and C-3) to this Sublease Agreement and the plans
attached to Exhibit C-2. Sublessee acknowledges that Sublessor is obligated to
surrender the Subleased Premises to Landlord on July 31, 2005.
10. Holding Over. If Sublessee remains in possession of the Subleased
------------
Premises after July 30, 2005, Sublessor may be treated by Landlord as being in
breach of the Lease Agreement. Sublessor may be obligated to pay damages to
Landlord, including consequential damages which are presently difficult or
impossible to calculate. Sublessee agrees to indemnify, defend and hold
harmless Sublessor from any and all losses, costs, and damages which may arise
out of or be in any way connected with any holding over by Sublessee following
the termination of the Sublease Term.
11.Environmental Matters.
---------------------
11.1.Compliance with Laws and Requirements. Sublessee shall comply
-------------------------------------
with Article 35 of the Lease Agreement, and with any and all Environmental Laws
and Requirements, and shall not cause, permit or allow the presence of and shall
not generate, release, store, or deposit any Hazardous Substances on or about
the Subleased Premises (and shall not cause the presence of and shall not
generate, release, store, or deposit any Hazardous Substances on or about the
Leased Premises) in violation of any Environmental Laws and Requirements, or in
a
Page 10 of 38
<PAGE>
manner which may give rise to liability for environmental cleanup, damage to
property, or personal injury to Landlord, Sublessor, or any other person.
Sublessee shall not release any Hazardous Substances into the soil, water
(including groundwater) or air of the Leased Premises or onto any other
adjoining property in violation of Environmental Laws and Requirements, or in a
manner which may give rise to liability for environmental cleanup, damage to
property, or personal injury to Landlord, Sublessor, or any other person.
11.2 Definitions:
-----------
11.2.1 As used herein, the term "Hazardous Substance" means any
hazardous, toxic, chemical, or dangerous substance, pollutant, contaminant,
waste or material which is regulated under any and all federal, state, or local
statute, ordinance, rule, regulation, or common law relating to environmental
protection, contamination, or cleanup including, without limitation, the
Comprehensive Environmental Response, Compensation, and Liability Act of 1980 as
amended (42 U.S.C. (S) 9601 et seq.), the Resource Conservation and Recovery Act
as amended (42 U.S.C. (S) 6901 et seq.) or any other Federal, state, county, or
city law, or any other ordinance or regulation existing or which may exist.
11.2.2 As used herein the term "Environmental Laws and
Requirements" means any and all federal, state, local laws, statutes (including
without limitation the statutes referred to in paragraph 11.2.1, above),
ordinances, rules, regulations and/or common law relating to environmental
protection, contamination, the release, generation, production, transport,
treatment, processing, use, disposal, or storage of Hazardous Substances, and
the regulations promulgated by regulatory agencies pursuant to these laws, and
any federal, state, and/or local regulatory agency-initiated orders,
requirements, obligations, directives, notices, approvals, licenses, or permits
for the reporting, investigation, cleaning, or remediation of any Hazardous
Substances on the Leased Premises.
11.3 Remediation. Should Sublessee fail to perform any of its
-----------
obligations pursuant to this agreement or to any and all Environmental Laws and
Requirements, Sublessee shall at its own expense remove or remediate any unsafe
condition and clean up or remediate any Hazardous Substance which Sublessee has
caused to occur on the Leased Premises, and hold Sublessor harmless from any
losses, including claims of third parties, resulting from such condition or such
Hazardous Substances. Should Sublessee fail so to do, Sublessor shall have the
right, but not the duty, to enter the property personally or through its agents,
consultants, or contractors to perform the same.
11.4 Right to Inspect. If Sublessor at any time should have any
----------------
cause to believe that any Hazardous Substances are or at any time during the
term of this Lease have been released on the Leased Premises without strict
compliance with all Environmental Laws and Requirements or in a manner which may
give rise to liability for environmental cleanup, damage to property, or
personal injury to Landlord, Sublessor, or any other person, Sublessor shall
have
Page 11 of 38
<PAGE>
the right at its discretion, but not the duty, to enter, at any reasonable
time, and conduct an inspection of the Subleased Premises including invasive
tests to determine whether Sublessee is complying with the terms of this
Agreement, including compliance with any and all Environmental Laws and
Requirements. Sublessee hereby grants to Sublessor, and its employees, agents,
employees, consultants, and contractors the right to enter the property upon
reasonable notice to Sublessee and to perform such tests on the property as are
reasonably necessary in the opinion of Sublessor to conduct such investigations.
Sublessor may retain any independent qualified professional consultant to enter
the property to conduct such an inspection and such consultant's reasonable fee
shall be payable by Sublessee if such consultant determines that Sublessee's
activities constitute a material violation of Environmental Laws and
Requirements or have resulted in the release of Hazardous Substances into the
environment which may give rise to liability for environmental cleanup, damage
to property, or personal injury to Landlord, Sublessor, or any other person, and
otherwise such fee shall be payable by Sublessor.
11.5 Indemnification. Sublessee shall indemnify, hold harmless, and
---------------
defend Sublessor, and its directors, officers, employees, agents, assigns, and
attorneys from any and all claims, losses, damages, response costs, and expenses
arising out of or in any way relating to the generation, release, storage,
deposit or disposal of Hazardous Substances to the extent caused by Sublessee,
its agents, employees and invitees at any time during the term of the Lease,
including but not limited to: (1) claims of third parties, including
governmental agencies, for damages (including personal injury and/or property
damage), response costs, injunctive or other relief; (2) the cost, expense, or
loss to Sublessor of any injunctive relief, including preliminary or temporary
injunctive relief, applicable to the Sublessor or the Leased Premises; and (3)
the expense of reporting the existence of Hazardous Substances to any agency of
any state government or the United States as required by applicable laws or
regulations, before and after any trial or appeal therefrom whether or not
taxable as costs; all of which shall be paid by Sublessee when accrued.
12. No Assignment or Sublease. Sublessee shall not assign its interest in
-------------------------
this Sublease Agreement or sub-sublease all or any portion of the Subleased
Premises without the prior written consent of Sublessor (which shall not be
unreasonably withheld) and of Landlord, subject to all of Landlord's rights
under the Lease Agreement. Sublessor shall have the absolute right to withhold
its consent to any assignment for collateral purposes, and to any assignment or
sub-sublease if Landlord proposes to terminate the Lease Agreement with respect
to all or any part of the Leased Premises as a result of Sublessee's request.
Notwithstanding anything to the contrary contained herein, Sublessee may assign
its interest under this Sublease or sublet all or any portion of the Subleased
Premises to a corporation, partnership, limited liability company, or other
legal entity that controls, is controlled by or is under common control with
Sublessee, or to any successor to Sublessee by purchase, merger, consolidation
or reorganization (hereinafter, collectively, referred to as "Permitted
Transfer") without the consent of Sublessor or Landlord, provided: (i)
Sublessee is not in default under this Sublease beyond applicable cure periods;
(ii) if such proposed transferee is a successor to Sublessee by purchase,
merger, consolidation or reorganization, the continuing or surviving entity
shall own all or substantially all of the assets of
Page 12 of 38
<PAGE>
Sublessee and shall have a net worth which is at least equal to the greater of
Sublessee's net worth at the date of this Sublessee or Sublessee's net worth at
the date of the Transfer; (iii) such proposed transferee assumes in writing all
of Sublessee's obligations under this Sublease Agreement with respect to the
portion of the Subleased Premises that are the subject of the assignment or
sublease and uses the Subleased Premises for the purposes permitted under this
Sublease and no other purpose; and (iv) in no event shall any transfer release
or relieve Sublessee from any of its obligations under this Sublease Agreement.
Sublessee shall give Sublessor written notice of any such Permitted Transfer. As
used herein the term "control" shall mean ownership of at least fifty-one
percent (51%) of the voting equity of an entity.
In the event of any assignment or sub-sublease, Sublessee shall remain
fully liable to perform the obligations of Sublessee under this Sublease
Agreement. Consent to any assignment or sub-sublease shall not operate as a
waiver of the necessity for consent to any subsequent assignment or sub-
sublease. Whenever consent is granted, Sublessee shall promptly provide to
Sublessor a copy of the executed assignment or sub-sublease document, as the
case may be. Any sub-sublease or assignment made in violation of this paragraph
12 shall be void.
In connection with each request made by Sublessee for consent to an
assignment or sub-sublease, Sublessee shall pay $1000 upon demand of Sublessor
for the cost of processing its request. Except with respect to an assignment or
sublease that is a Permitted Transfer to an entity that files consolidated tax
returns with Sublessee, Sublessor shall be entitled to receive as Additional
Rent under this Sublease Agreement, as and when the same are paid to Sublessee,
and without affecting or reducing any other obligations of Sublessee hereunder,
one hundred percent (100%) of any sums or other economic consideration received
by Sublessee as a result of an assignment or sub-sublease, however denominated
under the assignment or sub-sublease, which exceed, in the aggregate, (i) the
Base Rent and Additional Rent that Sublessee is obligated to pay to Sublessor
under this Sublease over the same period (prorated to reflect obligations
allocable to any portion of the Subleased Premises that are sub-subleased), plus
(ii) any customary real estate brokerage commissions or fees paid by Sublessee
to an unrelated licensed broker or agent to procure such assignment or sub-
sublease, plus (iii) if Sublessee has previously entered into a sub-sublease
that is not a Permitted Transfer in accordance with this paragraph 12 at a base
rent rate that is lower than the Base Rent due under this Sublease Agreement,
the difference between the base rent received by Sublessee under that sub-
sublease and the Base Rent due hereunder, but only to the extent such difference
has not been previously applied as an offset under this provision.
As a condition to Sublessor's consent to any assignment, any potential
assignee shall assume in writing all obligations of Sublessee under this
Sublease Agreement and shall be jointly and severally liable with Sublessee for
the payment of rental and other payments, and performance of all terms,
covenants and conditions of this Sublease Agreement. As a condition to
Sublessee's consent to any sub-sublease, the sub-sublessee shall assume all
obligations of Sublessee as to that portion of the Subleased Premises that is
sub-subleased, and shall be jointly and severally liable with Sublessee for
rental and
Page 13 of 38
<PAGE>
other payments, and performance of all terms, covenants and
conditions of this Sublease Agreement, except that with respect to payment of
rents and other amounts, the sub-sublessee's obligation shall not exceed its
obligations under the sub-sublease.
13. Condition Precedent. Sublessee acknowledges that the Sublessor's
-------------------
right to sublease the Subleased Premises is subject to obtaining the prior
written consent of the Lessor. If such consent is not obtained in the form
attached as Exhibit D within fifteen (15) days of the date of this Sublease
Agreement, then either party may, at its option, terminate this Sublease
Agreement by written notice given within three (3) business days of the
expiration of the fifteen-day period. If this Sublease is terminated in
accordance with the foregoing sentence, and if Sublessee shall have paid any
Base Rent or Security Deposit to Sublessor, the Sublessor shall promptly refund
to Sublessee any Base Rent and/or Security Deposit so paid.
14. Notices. Any notice or demand which either party may or must give
-------
pursuant to or in connection with this Sublease Agreement shall be in writing,
delivered personally, sent by prepaid courier, by first class mail, postage
prepaid, or by facsimile transmission as follows:
To Sublessor:
Boeing Realty Corporation
P.O. Box 3707, MC 7A-PE
Seattle, Washington 98124-2207
Attn: Corporate Real Estate Manager
(For overnight delivery:
15600 N.E. 8th Street, Suite B1177
Bellevue, WA 8008-3917
Attn: Corporate Real Estate Manager)
If to Sublessee:
Drugstore.com
(At the Subleased Premises)
Attn: Chief Financial Officer
Either party may, by notice in writing, direct that future notices or demands be
sent to a different address. Notices will be deemed delivered when received.
Sublessee shall provide a copy of any notice it may give to Sublessor of a
default by Sublessor under this Sublease Agreement to Landlord c/o the Voit
Companies, 13810 S.E. Eastgate Way, Suite 180, Bellevue, WA 98005.
Page 14 of 38
<PAGE>
15. Entire Agreement. This Sublease Agreement represents the entire
----------------
agreement of the Sublessor and Sublessee with respect to this subject matter and
supersedes all prior oral and written understandings and agreements of the
parties, all of which are merged within this Sublease Agreement. The Exhibits
attached hereto are part of this Sublease Agreement. This Sublease Agreement
may not be amended, modified, or supplemented in any manner other than by the
written agreement of the parties signed by the authorized representatives of the
parties.
16. No Recording. Neither party shall record this Sublease Agreement.
------------
17. Successors and Assigns; Survival of Obligations. The covenants and
-----------------------------------------------
agreements in this Sublease Agreement shall bind and inure to the benefit of
Sublessor, Sublessee and their respective successors and permitted assigns. The
obligations of Sublessee under paragraph 6 (Indemnity and Insurance) and
paragraph 11 (Environmental Matters) shall survive the end of the Sublease Term
with respect to events occurring during the Sublease Term or while Sublessee is
in possession of the Subleased Premises.
18. Confidentiality. Sublessee agrees that neither it nor its employees
---------------
will disclose to any third party or to anyone not directly involved in the
negotiation of this transaction any of the terms and conditions of this Sublease
Agreement, including without limitation the rent payable by Sublessee hereunder;
provided, however, that nothing in this paragraph shall limit or impair
Sublessee's right to make such disclosures of the terms of this Sublease as may
be required by law and for purposes of preparation and distribution of its
financial statements.
19. Access/Inspection. Sublessee will allow and does hereby grant to
-----------------
Sublessor and its agents the right to enter into and upon the Subleased Premises
at all reasonable times and upon twenty-four (24) hours' prior notice for the
purpose of inspecting or of making repairs, additions, or alterations to the
Subleased Premises, the Leased Premises, and any property owned by or under the
control of Landlord that is subject to the provisions of the Lease Agreement;
provided, however, that Sublessor may enter onto the Subleased Premises without
notice in the event of an emergency. Upon twenty-four (24) hours' prior notice
Sublessor shall have the right to enter upon the Subleased Premises for the
purposes of showing the Subleased Premises to prospective tenants within nine
(9) months prior to the expiration or earlier termination of the term of this
Sublease Agreement. Sublessee further acknowledges and agrees to Landlord's
access rights reserved under the Lease Agreement and acknowledges and agrees
that those rights apply to the Subleased Premises and that Landlord has no
obligation to give notice to Sublessee of its intent to enter. Sublessor shall
make commercially reasonable efforts to advise Sublessee promptly if and when
Sublessor receives notice that Landlord intends to enter upon the Subleased
Premises.
Page 15 of 38
<PAGE>
20. Attorneys' Fees. In the event suit is brought for the recovery of
---------------
rent due under the provisions of this Sublease Agreement, or for breach by
either party of any other conditions or covenants contained in this Sublease
Agreement, the prevailing party shall be paid by the nonprevailing party the
reasonable fees and disbursements of the prevailing party's attorneys.
21. Sublessee's Default. If Sublessee fails to perform any obligation of
-------------------
Sublessee under this Sublease Agreement ("Default"), and if after written notice
from Sublessor specifying such Default and permitting Sublessee five (5) days to
cure a monetary default or thirty (30) days to remedy a nonmonetary Default,
Sublessee shall have failed to remedy such Default, then Sublessor may at its
option cancel this Sublease Agreement, upon giving any notice required by law,
and may (whether or not Sublessor has terminated this Sublease Agreement) re-
enter the Subleased Premises. No reentry by Sublessor shall constitute a
termination of this Sublease Agreement unless Sublessor has given written notice
to Sublessee of such a termination. Notwithstanding such re-entry by Sublessor,
the liability of Sublessee for the rent provided in this Sublease Agreement
shall not be extinguished but shall continue for the balance of the Sublease
Term. Sublessee covenants and agrees to make good to Sublessor (a) any costs
incurred by Sublessor in re-entering the Subleased Premises and in reletting the
Subleased Premises; (b) during each month throughout the Sublease Term the
amount by which the rent payable by the Sublessee hereunder during each month
following Sublessor's re-entry exceeds the amount of rent received by the
Sublessor during such month; (c) the costs of any necessary repairs incurred by
Sublessor; and (d) the fees and disbursements of Sublessor's attorneys as
provided in paragraph 20. The amounts payable by Sublessee pursuant to clause
(b) shall be paid on the first day of each month throughout the Sublease Term;
the amounts payable by Sublessee pursuant to clauses (a), (c), and (d) shall be
payable on demand as they are incurred.
22. Liens. Sublessee shall not cause or allow the Subleased Premises to
-----
become subject to any liens, claims, charges, or encumbrances (each a "Lien").
If the Subleased Premises become subject to one or more Liens as the result of
Sublessee's acts or omissions or sufferance, Sublessee shall promptly, and in
any event within five (5) days, remove such Liens or obtain a release of such
Lien from the lienor. If the Sublessee fails to take timely action in this
regard, Sublessor shall have the right, but not the obligation, to take any
action reasonably necessary to remove and/or release such Liens. Such action
shall be taken at Sublessee's sole risk and expense.
23. Agents and Brokers. At the signing of this Agreement, Pacific Real
------------------
Estate Partners, Inc. represented solely the Sublessor and Colliers
International represented solely the Sublessee. Each party signing this
document confirms that prior oral and/or written disclosure of agency was
provided to him or her in this transaction. Sublessor shall be responsible for
payment of any commissions or fees due to the brokers pursuant to agreements
that are not a part of this Sublease Agreement. Each party represents to the
other that it has engaged no other agent broker or agent in connection with the
negotiation leading to this agreement, and shall hold the
Page 16 of 38
<PAGE>
other harmless from any claim or demand from any other agent or broker claiming
to have acted on behalf of the indemnifying party in connection with this
agreement or the purchase and sale transaction.
24. Estoppel Certificates. If requested by Sublessor or Landlord,
---------------------
Sublessee shall have the same obligation to execute an estoppel certificate with
respect to this Sublease Agreement as Sublessor has to execute an estoppel
certificate with respect to the Lease Agreement. Upon reasonable request made
from time to time by Sublessee, Sublessor shall execute and deliver to Sublessee
a written statement certifying the date this Sublease was executed; the date the
Sublease Term commenced and the date it expires; the amount of Base Rent and the
date to which it has been paid; and stating, to the extent it is true, that
Sublessee is not under default under this Sublease Agreement and that it is in
full force and effect.
25. Option to Expand. Provided that Sublessee has not been in Default of
----------------
any its obligations under this Sublease Agreement beyond the applicable cure
period and that Sublessor has not given more than four (4) notices of Default to
Sublessee prior to the date of the exercise of the option, and provided further
that Sublessee does not thereafter default under any of its obligations under
this Sublease Agreement, Sublessee shall have the option to sublease from
Sublessor the remaining portion of Sublessor's space on the 4th floor of the
Building, comprising approximately 10,000 rentable square feet of space ("Option
Space") effective January 31, 2002 ("Option Space Date") for the remainder of
the Sublease Term. This option shall be exercised by written notice given by
Sublessee to Sublessor no less than 180 days prior to the Option Space Date. If
Sublessee fails to exercise the option in that manner and by that date, the
option shall expire and have no further force or effect. If Sublessee timely
exercises the option in the manner just described, then the Option Space shall
become a part of the Subleased Premises on the Option Space Date, the monthly
installment of Base Rent due under this Sublease shall be increased on that date
by the number of rentable square feet of the Option Space multiplied by the
annual Base Rent then in effect (and shall be increased as and to the extent
that Base Rent is increased for the remaining Subleased Space from time to
time), and Sublessee's Share for purposes of calculating Additional Rent shall
be adjusted according to the formula set forth in paragraph 3.2.
Sublessee shall accept the Option Space "AS IS," in its then-existing
condition, and subject to the provisions of paragraph 9.1 of this Sublease
Agreement. If Sublessor has not previously constructed or caused to be
constructed tenant improvements in the Option Space, then Sublessor shall
provide to Sublessee an allowance for construction of tenant improvements equal
to $23.00 per rentable square foot of the Option Space on the same terms and
conditions as Sublessor's Allowance as described in Exhibit C concerning
Sublessee Improvements.
Sublessor agrees that if it subleases the Option Space to any other person
or entity ("Other Option Space Subtenant") for any period prior to the Option
Space Date, then
Page 17 of 38
<PAGE>
Sublessee shall have the right, at its election, to review the proposed space
plan for construction of tenant improvements to the Option Space for the benefit
of the Other Option Space Subtenant (collectively, "Space Plan"). Within ten
(10) days after receipt of a copy of the Space Plan, Sublessee shall have the
right to give written notice to Sublessor that it exercises its option to take
the Option Space early, in which case the Option Space shall become a part of
the Subleased Premises on the thirtieth day following its receipt of the Space
Plan. If Sublessee does not timely exercise its option to take the Option Space
early in the manner just described, then Sublessor shall have the right to
proceed with construction of tenant improvements to benefit the Other Option
Space Subtenant substantially in accordance with the Space Plan; provided,
however, that if Sublessor expends less than $23.00 per rentable square foot of
the Option Space for the construction of tenant improvements to the Option
Space, and if Sublessee properly exercises its option to lease the Option Space
thereafter, then upon exercise of its option Sublessee shall be entitled to have
the difference between $23.00 per rentable square foot of the Option Space and
the amount actually spent by Sublessor for construction of tenant improvements
to the Option Space as an allowance for construction of its improvements to the
Option Space on the same terms and conditions as Sublessor's Allowance described
in Exhibit C.
26. Sign. At Sublessee's sole cost and expense, and for so long as the
----
Sublessee named in this Sublease occupies at least 53,349 rentable square feet
of the Leased Premises (as that number may be adjusted by measurement pursuant
to paragraph 1 above), Sublessee may install and maintain a single sign on the
exterior of the Building facing Interstate 90 as described in, and subject to
the terms and conditions of, the Lease Agreement. The location, size and nature
of the sign shall be subject to the prior written approval of Landlord and
Sublessor, and to the terms of the Lease Agreement. Sublessor shall not
unreasonably withhold its approval, and shall not object to use of Sublessee's
logo shown on Exhibit E to this Sublease Agreement. For so long as the
Sublessee named in this Sublease occupies at least 53,349 rentable square feet
of the Leased Premises, Sublessor shall not grant its approval to any other
sublessee of the Leased Premises to install an exterior building monument sign
on or about the Building without Sublessee's prior consent. Sublessee shall
remove its sign at the expiration or earlier termination of the Sublease Term
and shall repair any damage to the Subleased Premises or to the Building caused
by that removal, all at Sublessee's sole cost and expense.
Page 18 of 38
<PAGE>
EXECUTED IN TRIPLICATE as of the date first written above.
THE BOEING COMPANY DRUGSTORE.COM
By: /s/ Philip W. Cyburt By: /s/ Peter M. Neupert
-------------------- --------------------
Its: Vice President Its: President and CEO
-------------- -------------------
Page 19 of 38
<PAGE>
State of California
County of Los Angeles
On January 29, 1999 before me, Dely De Leon, Notary Public, personally appeared
Philip W. Cyburt personally known to me to be the person whose name is
subscribed to the within instrument and acknowledged to me that he executed the
same in his authorized capacity, and that by his signature on the instrument the
person or the entity upon behalf of which the person acted, executed the
instrument.
WITNESS my hand and official seal
[STAMP APPEARS HERE]
/s/ Dely De Leon
----------------
Document: Sublease Agreement - Drugstore.com
<PAGE>
STATE OF CALIFORNIA )
) ss.
COUNTY OF ___________)
On this _____ day of ____________________, 1998, before me, the undersigned, a
Notary Public in and for the State of California, duly commissioned and sworn,
personally appeared ____________________________________________, to me known to
be the person who signed as ______________________________ of The Boeing
Company, the corporation that executed the within and foregoing instrument, and
acknowledged said instrument to be the free and voluntary act and deed of said
corporation for the uses and purposes therein mentioned, and on oath stated that
_______ was duly elected, qualified and acting as said officer of the
corporation, that _______ was authorized to execute said instrument and that the
seal affixed, if any, is the corporate seal of said corporation.
IN WITNESS WHEREOF I have hereunto set my hand and official seal the day and
year first above written.
--------------------------------------------
(Signature of Notary)
--------------------------------------------
(Print or stamp name of Notary)
NOTARY PUBLIC in and for the State
of California, residing at__________________.
My appointment expires:_____________________.
Page 20 of 38
<PAGE>
STATE OF WASHINGTON)
) ss.
COUNTY OF KING )
On this 28th day of January 1999, before me, the undersigned, a Notary Public in
and for the State of Washington, duly commissioned and sworn, personally
appeared Peter Neupert, to me known to be the person who signed as President and
CEO of Drugstore.com, the corporation that executed the within and foregoing
instrument, and acknowledged said instrument to be the free and voluntary act
and deed of said corporation for the uses and purposes therein mentioned, and on
oath stated that he was duly elected, qualified and acting as said officer of
the corporation, that he was authorized to execute said instrument and that the
seal affixed, if any, is the corporate seal of said corporation.
IN WITNESS WHEREOF I have hereunto set my hand and official seal the day and
year first above written.
/s/ Nancy J. Thygesen
---------------------
(Signature of Notary)
[STAMP APPEARS HERE]
NOTARY PUBLIC in and for the State
of Washington, residing at King County
-----------
My appointment expires:March 30, 2001
--------------
Page 21 of 38
<PAGE>
EXHIBIT A
TO
SUBLEASE AGREEMENT
TRUE COPY OF LEASE AGREEMENT
Page 22 of 38
<PAGE>
EXHIBIT 10.17
June 29, 1998
Peter Neupert
13121 NE 38th Place
Bellevue, WA 98005
Dear Peter:
On behalf of DrugStore.com (the "Company"), we are pleased to offer you the
position of President and Chief Executive Officer reporting directly to the
Company's Board of Directors. You will be elected to the Company's Board of
Directors promptly upon commencement of your employment with the Company. For
the duration of your employment with the Company, you will devote your full
time, skill and attention to your duties and responsibilities as the Company's
President and Chief Executive Officer and will perform them faithfully,
diligently and competently. You will be located at the Company's principal
executive offices which will be at the location in the Seattle metropolitan area
that you determine to be in the best interests of the Company.
You will receive a monthly salary of approximately $20,834 that is
equivalent to an annual salary of $250,000. Your salary will be paid bimonthly
in equal installments in accordance with the Company's standard payroll
policies. You will be eligible to receive up to a $125,000 bonus annually based
upon the Company's performance. The exact bonus formula will be determined by
mutual agreement with you. Your compensation package will be reviewed annually
by the Company's Board of Directors, the first review occurring one year from
your start date. You will also be entitled to the benefits that the Company
customarily makes available to its employees, and will be responsible for
establishing the Company's benefit plans as soon as practicable after
commencement of your employment. Until such time as the Company's benefit plans
are established, the Company will reimburse you for any COBRA payments that you
are required to make to maintain the benefits available to you upon termination
of your current employment (assuming you make timely and accurate election to
receive such benefits). In addition, you will be entitled to three weeks of paid
vacation each year.
In addition, subject to approval of the Company's Board of Directors, you
will have a one-time right to purchase up to 1,260,000 shares of the Company's
Common Stock (the "Shares") at a purchase price of $.04 per share. The Shares
will be subject to repurchase by the Company at your original purchase price
(the "Repurchase Right") within one year following termination of your
employment with the Company. Except as otherwise set forth below, the Repurchase
Right will lapse over the term of your employment: (i) with respect to 1/4th of
the Shares on the date of purchase; (ii) with respect to the balance of the
Shares, the repurchase right will lapse one (1) year after your start date at
the rate of 1/48th of the Shares per month at the close of each month while you
remain employed with the Company, over the remainder of the four (4) year
vesting term. If you prefer, all or a portion of the Shares can be provided in
the form of an incentive stock option (to the maximum extent permitted under the
Internal Revenue Code), subject to the same vesting provisions set forth above.
If during your employment with the Company (i) there is a Change of Control
(as defined below), and (ii) you are not offered a position with similar
responsibilities (at the same or greater base salary and bonus potential) by the
surviving corporation, the Company's Repurchase Right will immediately lapse
with respect to all of the Shares. We agree that managing the online division of
a major drugstore chain will not constitute a position with similar
responsibilities. With that exception, you agree that a position with similar
responsibilities will include any position in which you continue to run the
operations of the Company with full executive responsibility for strategic and
business planning, profit and loss, marketing, pricing and sales. You also agree
that you will not consider your responsibilities to be dissimilar solely because
the acquiring company combines and operates warehousing, distribution and other
similar operations. "Change of Control" shall mean the sale of all or
substantially all of the assets of the Company or the acquisition of the Company
by another entity by means of consolidation or merger after which the then
current stockholders of the Company hold less than 50% of the voting power of
the surviving corporation; provided that a reincorporation of the Company shall
not be a Change of Control.
<PAGE>
Peter Neupert
June 29, 1998
Page two
Alternatively, if your employment with the Company is involuntarily
terminated by the Company other than for Cause (as defined below), the
Repurchase Right will lapse with respect to an additional 236,250 of the Shares
(in addition to any Shares that already have vested over the time period between
your commencement of employment and the termination of your employment). "Cause"
means: (a) willful and repeated failure to comply with the lawful directions of
the Board of Directors; (b) gross negligence or willful misconduct in the
performance of your duties to the Company; (c) commission of any act of fraud
against, or the misappropriation of material property belonging to the Company;
or (d) conviction of a crime that is materially injurious to the business or
reputation of the Company, in each case as determined in good faith by the Board
of Directors.
As a shareholder of the Company, you will not have preemptive rights.
However, prior to the Company's initial public offering and for so long as you
remain an employee of the Company, whenever the Company issues stock in the
future in order to raise capital, the Company will use its best efforts to
permit you to purchase your pro rata share of the stock offered, provided that
doing so is consistent with the Company's best interests in receiving the
necessary funding.
The Company will acquire and maintain director and officer liability
insurance coverage in amounts that you, as Chief Executive Officer, deem
appropriate given the nature and size of the Company's business. In addition,
the Company will maintain general and product liability insurance coverage in
amounts you deem appropriate.
We hope that you and the Company will find mutual satisfaction with your
employment. All of us at the Company are very excited about you joining our team
and look forward to a beneficial and rewarding relationship. Nevertheless,
employees have the right to terminate their employment at any time with or
without cause or notice, and the Company reserves for itself an equal right. In
the event that your employment is terminated by the Company for any reason, you
will be entitled to continue to receive your then-current base salary and
benefits for a period equal to nine months following such termination. The
Company, at its sole discretion, may elect to accelerate such payments and pay
you in a lump sum. The foregoing severance benefits will be contingent upon your
entering into an appropriate agreement at the time of your termination releasing
the Company (and any successor, as the case may be) from any claims relating to
your employment.
The Company asks that you complete a standard form "Confidentiality,
Noncompetition and Invention Assignment Agreement" prior to commencing
employment. The terms of the agreement will be reasonably satisfactory to you.
In part, the agreement will request that you refrain for a period of time after
employment from competing with the Company or using or disclosing the Company's
Confidential Information (as defined in the agreement) or any confidential
information received during your prior employment in any manner which might be
detrimental to or conflict with the business interests of the Company or its
employees.
For purposes of federal immigration law, you must provide to the Company
documentary evidence of your identity and eligibility for employment in the
United States. Such documentation must be provided to the Company within three
business days of commencement of your employment with the Company.
This letter and the "Confidentiality, Noncompetition and Invention
Assignment Agreement" contain the entire agreement with respect to your
employment. The terms of this offer may only be changed by written agreement,
although the Company may from time to time, in its sole discretion, adjust the
salaries and benefits paid to you and its other employees.
Should you have any questions with regard to any of the items indicated
above, please call me. It is my understanding that your employment commencement
date will be as soon as practicable taking into account your existing
commitments. Kindly indicate your consent to the terms contained in this offer
letter by signing and returning a copy to us by July 2, 1998.
-2-
<PAGE>
Peter Neupert
June 29, 1998
Page three
Sincerely,
DrugStore.com, Inc.
/s/ Brook H. Byers
- ----------------------------
Brook H. Byers, Director
Agreed to and accepted:
/s/ Peter M. Neupert June 30, 1998
- -------------------- -------------
Peter Neupert Date
This offer is subject to withdrawal by DrugStore.com, Inc. prior to acceptance,
and expires if not accepted by July 2, 1998.
-3-
<PAGE>
EXHIBIT 10.18
DrugStore.com
July 28, 1998
Kal Raman
Kal,
We are delighted to extend you an offer to be VP of Information Technology and
Chief Information Officer. As you know, time is of the essence. The complete
dedication, devotion and energy that you have already exhibited will be crucial
to your success. You work with us will entail many duties including building the
business management and transaction systems to enable DrugStore.com to become a
leader in the ecommerce arena. You will be a key part of the management team and
will report to the CEO.
We are offering you a monthly salary of $14,583 that is equivalent to $175,000
per year, along with the Company's standard employee benefits. Your salary will
be paid bimonthly in accordance with the Company's standard payroll policies.
You will be eligible for an annual performance bonus of 0-15% of your salary. In
addition, you will receive a lump sum signing bonus of $100,000, payable on or
about your first day of employment. If you choose to leave DrugStore.com within
6 months of your employment, you must re-pay the signing bonus. Your
compensation package will be reviewed annually by the CEO.
You will be granted an option (the "Option") to purchase 150,000 shares of
DrugStore.com common stock ("Option Shares"). The exercise price will be equal
to $0.04 per share. The options will be subject to a vesting period over 4
years, 25% on the first anniversary and 12.5% at the end of each subsequent 6-
month period. No transfers allowed prior to vesting. No transfers permitted
during lockup period required by underwriters in connection with stock offerings
by the Company. Vesting will depend upon your continued employment with the
Company. The Option will be an incentive stock option to the extent permitted
under the Internal Revenue Code and will be subject to the terms of the
Company's 1998 Stock Option Plan and the related Stock Option Agreement between
you and DrugStore.com.
The company will agree to guarantee a loan from a bank in the amount of
$250,000, secured by your DrugStore.com options. You are completely responsible
for re-paying the principal and interest of this loan. In addition, we agree to
reimburse you for the amount of the interest you re-pay on this loan, until such
time as the value of your vested stock options exceeds $250,000, at which time
you will become solely responsible for these interest payments. You agree and
recognize that you have to pay any income and withholding taxes on this
reimbursement.
We will relocate you and your family to the Seattle area. We will pay all
reasonable relocation expenses, including travel costs (including a reasonable
number of house hunting trips), temporary living expenses, and reasonable moving
expenses. We will reimburse you for the $5000 earnest money you will lose on the
house in Florida.
Your start date will be no later than August 11, 1998. We ask that you complete
our standard form "Confidentiality and Inventions Agreement" prior to commencing
employment, a copy of which will be provided to you upon acceptance of this
letter. In part, the agreement requests that a departing employee refrain from
using or disclosing the Company's Confidential Information (as defined in the
agreement) or any confidential information received during your prior employment
in any manner which might be detrimental to or conflict with the business
interests of the Company or its employees. The agreement does not prevent a
former employee from using his or her general knowledge and experience -- no
matter when or how gained -- in any new field or position. If you have any
questions about the "Employee Confidential Information and Inventions
Agreement," please call us. In addition, employees have the right to terminate
their employment at any time with or without cause or notice, and the Company
reserves for itself the same right. Your employment at DrugStore.com may be
terminated by you or DrugStore.com at any time.
Kal, should you choose to come aboard, CONGRATULATIONS. I personally look
forward to working with you to build a great company. It's going to be an
exciting ride, and we believe you will make ecommerce history with this venture.
All of us are very excited that you're joining the team and look forward to a
beneficial and rewarding relationship.
You will be a major contributor to our success. We look forward to working with
you. Kindly indicate your consent to the terms in this offer letter by signing
and returning a copy to us by July 29, 1998.
Sincerely,
/s/ Peter M. Neupert
- -------------------------------
Agreed and accepted: /s/Srinivarsan Kalyaraman
-------------------------
Start Date: 08/24/98
--------
<PAGE>
EXHIBIT 10.19
December 4, 1998
Offer Letter
Mark L. Silverman
125 Pineview Lane
Menlo Park, CA 94025
Dear Mark:
On behalf of DrugStore.com, Inc. (the "Company"), I am pleased to offer you
the position of Vice President, General Counsel and Secretary at a monthly
salary of $14,585 that is equivalent to an annual salary of approximately
$175,000. You will report directly to the Company's Chief Executive Officer.
Your salary will be paid bimonthly in equal installments in accordance with the
Company's standard payroll policies. You will receive a $35,000 "signing" bonus
upon commencement of your employment with the Company which is intended to cover
your relocation and related expenses. In addition, you will receive bonuses in
the discretion of the Company's Chief Executive Officer and Board of Directors
commensurate with other officers of the Company. You will also be entitled to
the benefits that the Company customarily makes available to its officers. You
will be entitled to two weeks of paid vacation each year. For the duration of
your employment with the Company, you will devote your free time, skill and
attention to your duties and responsibilities as the Company's Vice President,
General Counsel and Secretary and will perform them faithfully, diligently and
competently. Your compensation package will be reviewed annually by the
Company's Chief Executive Officer and Board of Directors.
In addition, you will be granted an option (the "Option") to purchase
150,000 shares of the Company's Common Stock at an exercise price of $.45 per
share. The shares of Common Stock subject to such Option (the "Option Shares")
will vest over a four year period as follows: 25% of the shares will vest on
January 1, 2000, and the remaining shares will vest in six equal installments at
the end of each six month period thereafter (the "Vesting Period"). Vesting will
depend upon your continued employment with the Company. The Option will be an
incentive stock option to the maximum extent permitted under the Internal
Revenue Code and will be subject to the terms of the Company's 1998 Stock Option
Plan and the related Stock Option Agreement between you and the Company. If
during your employment with the Company (i) there is a Change of Control (as
defined below), and (ii) you are not offered a Comparable Position (as defined
below) by the surviving corporation, all of the Option Shares shall vest and
become exercisable immediately prior to the Change of Control. A "Comparable
Position" is a position with similar or greater responsibilities at your then
current base salary and bonus potential, and with the same for Cause termination
provisions set forth below. We agree that being offered the position of Vice
President and/or General Counsel of a division or subsidiary of a drugstore
chain, pharmaceutical benefit management company or pharmaceutical company will
not constitute a Comparable Position. With that exception, you agree that a
Comparable Position will include any position in which you continue to have full
executive responsibility over all of the surviving company's legal matters and
responsibility for substantial business development activities of the surviving
company. "Change of Control" shall mean the sale of all or substantially all of
the assets of the Company or the acquisition of the Company by another entity by
means of consolidation or merger after which the then current shareholders of
the Company hold less than 50% of the voting power of the surviving corporation;
provided that a reincorporation of the Company shall not be a Change of Control.
If your employment with the Company is involuntarily terminated by the
Company other than for Cause (as defined below), all of the Option Shares shall
vest and be immediately exercisable, and you shall have up to one year to
exercise the Option. "Cause" means: (a) willful and repeated failure to comply
with the lawful directions of the Chief Executive Officer or Board of Directors,
(b) gross negligence or willful misconduct in the performance of your duties to
the Company, (c) commission of any act of fraud against, or the misappropriation
of material property
<PAGE>
belonging to the Company, or (d) conviction of a crime that is materially
injurious to the business or reputation of the Company; in each case as
determined in good faith by the Board of Directors. For purposes of this letter,
your employment will be deemed involuntarily terminated other than for Cause if
your duties are reduced without Cause, your title as Vice President, General
Counsel or Secretary is reduced without Cause, your compensation is
involuntarily reduced, you no longer report to the Company's Chief Executive
Officer (without your consent), you die or become disabled, or if following a
Change of Control you are not offered a Comparable Position by the surviving
entity. For the purpose of this last sentence, compensation shall include base
salary, bonus plan and benefits, although the details of the bonus plan may
change from year to year.
We hope that you and the Company will find mutual satisfaction with your
employment. All of us at the Company are very excited about your joining our
team and look forward to a beneficial and rewarding relationship. Nevertheless,
employees have the right to terminate their employment at any time with or
without cause or notice, and the Company reserves for itself an equal right. In
the event that your employment is terminated by the Company without Cause, you
will be entitled to continue to receive your then-current base salary and
benefits (including medical benefits) for a period equal to 12 months following
such termination. The Company, at its sole discretion, may elect to accelerate
such payments and pay you in a lump sum. The foregoing severance benefits will
be contingent upon your entering into an appropriate agreement at the time of
your termination releasing the Company (and any successor, as the case may be)
from any claims relating to your employment.
The Company asks that you complete the form Confidentiality and Inventions
Agreement which is attached to this letter prior to commencement of employment
with the Company. In addition, for purposes of federal immigration law, you must
provide to the Company documentary evidence of your identity and eligibility for
employment in the United States. Such documentation must be provided to the
Company within three business days of commencement of your employment with the
Company.
-2-
<PAGE>
This letter and the Confidentiality and Inventions Agreement contain the
entire agreement with respect to your employment. The terms of this offer may
only be changed by written agreement. Should you have any with regard to any of
the items indicated above, please call me. It is my understanding that your
employment commencement date will be on January 1, 1999, or as soon thereafter
as is practical. Kindly indicate your consent to the terms contained in this
offer letter by signing and returning a copy to me by December 11, 1998.
Very truly yours,
/s/Peter M. Neupert
--------------------------------------
Peter Neupert, President and
Chief Executive Officer
ACCEPTED:
/s/Mark Silverman
- -----------------
Mark Silverman
12/11/98
- --------
Date
-3-
<PAGE>
EXHIBIT 10.20
DRUGSTORE.COM, INC.
2730 Sand Hill Road
Menlo Park, CA 94025
June 18, 1998
Jed Smith
c/o Kleiner Perkins Caufield & Byers
2759 Sand Hill Road
Menlo Park, CA 94025
Offer Letter
Dear Jed:
On behalf of DrugStore.com, Inc. (the "Company", I am pleased to confirm
in writing our offer to you of the position of Vice President of Strategy and
Business Development at a monthly salary of approximately $10,417 that is
equivalent to an annual salary of $125,000. Your salary will be paid bimonthly
in equal installments in accordance with the Company's standard payroll
policies. So long as you remain an employee of the Company and achieve certain
agreed upon milestones, you will receive a $25,000 bonus at the end of calendar
1998. You will also be entitled to the benefits that the Company customarily
makes available to its employees, including reimbursement for travel and
relocation expenses. You will be entitled to three weeks of paid vacation each
year. For the duration of your employment with the Company, you will devote your
full working time, skill and attention to your duties and responsibilities as
the Company's Vice President of Strategy and Business Development and will
perform them faithfully, diligently and competently. As we have discussed, you
will also serve as the Company's acting Chief Executive Officer and President
and will participate in the recruiting and hiring of the Company's permanent
Chief Executive Officer and President. Your compensation package will be
reviewed annually by the Company's Board of Directors beginning on January 1,
1999.
We hope that you and the Company will find mutual satisfaction with your
employment. All of us at the Company are very excited about your joining our
team and look forward to a beneficial and rewarding relationship. Nevertheless,
employees have the right to terminate their employment at any time with or
without cause or notice, and the Company reserves for itself an equal right. If
the Company terminates your employment other than for Cause (as defined below),
you will be entitled to continue to receive your then-current base salary and
benefits (including medical benefits) for a period equal to six months following
such termination. The Company, at its sole discretion, may elect to accelerate
such payments and pay you in a lump sum. The foregoing severance benefits will
be contingent upon your entering into an appropriate agreement at the time of
your termination releasing the Company (and any successor, as the case
<PAGE>
Jed Smith
June 18, 1998
Page 2
may be) from any claims relating to your employment, and pursuant to which you
may agree to provide a certain minimum number of hours of consulting services to
the Company during such six month period. The specific terms of the consulting
services are to be mutually agreed between you and the Company at the time of
your termination. In addition, if your employment with the Company is terminated
as a result of your disability or death, you or your estate will be entitled to
receive your then-current base salary and benefits (including medical benefits)
for a period equal to six months following such termination, either from the
Company or from the Company's benefit plans then in effect. For the purposes of
this letter, "Cause" means (1) gross negligence or willful misconduct in the
performance of duties to the Company which is demonstrably and materially
injurious to the business or reputation of the Company or its subsidiaries; (2)
commission of any act of fraud against, or the misappropriation of material
property belonging to, the Company; or (3) conviction of a felony or a crime
that is demonstrably and materially injurious to the business or reputation of
the Company, in each case as determined in good faith by the Company's Board of
Directors.
We both agree that any dispute arising with respect to your employment, the
termination of that employment or a breach of any covenant of good faith and
fair dealing related to your employment, shall be conclusively settled by
arbitration in accordance with the Voluntary Labor Arbitration Rules of the
American Arbitration Association (AAA) at the AAA office in San Francisco,
California.
The Company asks that you complete its standard form "Employee Information
and Inventions Agreement" prior to commencing employment, a copy of which will
be provided to you upon acceptance of this letter. In part, the agreement
requests that a departing employee refrain from using or disclosing the
Company's Confidential Information (as defined in the agreement) or any
confidential information received during your relationship with the Company in
any manner which might be detrimental to or conflict with the business interests
of the Company or its employees. The agreement does not prevent a former
employee from using his or her general knowledge and experience -- no matter
when or how gained -- in any new field or position. If you should have any
questions about the "Employee Confidential Information and Inventions
Agreement," please call me.
For purposes of federal immigration law, you must provide to the Company
documentary evidence of your identity and eligibility for employment in the
United States. Such documentation must be provided to the Company within three
business days of commencement of your employment with the Company.
This letter and the "Employee Confidential Information and Inventions
Agreement" contain the entire agreement with respect to your employment. The
terms of this offer may only be changed by written agreement, although the
Company may from time to time, in its sole
<PAGE>
Jed Smith
June 18, 1998
Page 3
discretion, adjust the salaries and benefits paid to you and its other
employees. The Company will reimburse you for the reasonable fees and expenses
of one legal counsel representing you in connection with the matters set forth
in this letter up to $3,000. Should you have any questions with regard to any of
the items indicated above, please call me. It is my understanding that your
employment commencement date on the terms set forth above was on or before April
1, 1998. Kindly indicate your consent to the terms contained in this offer
letter by signing and returning a copy to me by June 25, 1998.
Very truly yours,
DRUGSTORE.COM, INC.
By: /s/ Brook H. Byers
----------------------
Brook Byers, Director
ACCEPTED:
/s/Jed A Smith
- --------------
Jed Smith
June 22, 1998
- -------------
Date
<PAGE>
EXHIBIT 10.21
DRUGSTORE.COM, INC.
SECOND AMENDED AND RESTATED VOTING AGREEMENT
--------------------------------------------
This Second Amended and Restated Voting Agreement (the "Agreement") is made
as of May 19, 1999, by and among drugstore.com, inc., a Delaware corporation
(the "Company"), Jed Smith (the "Founder"), Peter Neupert ("Neupert") and the
holders of shares of Series A Preferred Stock and Series D Preferred Stock
listed on Exhibit A (collectively, the "Investors" and each individually, an
"Investor") and terminates and supersedes in all respects that certain Amended
and Restated Voting Agreement dated August 10, 1998, by and among the Company
and certain of the Investors (the "Prior Agreement").
RECITALS
--------
A. Vulcan Ventures Incorporated ("Vulcan") has executed a counterpart
signature page to the Series D Preferred Stock and Convertible Note Purchase
Agreement (the "Purchase Agreement") dated May 19, 1999 pursuant to which the
Company will sell to Vulcan and Vulcan will purchase from the Company Notes
convertible into shares of the Company's Series D Preferred Stock. In
connection with Vulcan's obligations under the Purchase Agreement, the Company,
the Founder, Neupert and the Investors have agreed to enter into this Agreement
for the purpose of setting forth the terms and conditions pursuant to which the
Investors, the Founder and Neupert shall vote their shares of the Company's
voting stock in favor of certain designees to the Company's Board of Directors
(the "Board"). The Company, the Investors, the Founder and Neupert each desire
to facilitate the voting arrangements set forth in this Agreement, and the sale
and purchase of shares of Series D Preferred Stock pursuant to the Purchase
Agreement, by agreeing to the terms and conditions set forth below.
B. Pursuant to Section 4.2 of the Prior Agreement, this Agreement is being
executed by the Company, the Founder, and holders of at least two-thirds (2/3)
of the Company's capital stock held by the Investors who were parties to the
Prior Agreement, thereby permitting the Prior Agreement to be terminated and
superseded by this Agreement.
AGREEMENT
---------
The parties agree as follows:
1. Election of Directors. The number of authorized directors of the
Company will initially be set at eight (8). At each annual meeting of the
stockholders of the Company, or at any meeting of the stockholders of the
Company at which members of the Board are to be elected, or whenever members of
the Board are to be elected by written consent, the Founder, Neupert and the
Investors agree to vote or act with respect to their shares so as to elect:
<PAGE>
(a) Two (2) persons designated by Kleiner Perkins Caufield & Byers
VIII ("KPCB"). One such designee may be made at KPCB's sole discretion and the
other such designee shall be reasonably acceptable to a majority of the
remaining Board members (excluding the KPCB designees). Such persons shall
initially be John Doerr and Brook Byers. Notwithstanding the foregoing, the
parties hereto shall not be obligated to vote or act to elect any representative
of KPCB if KPCB, together with all of its affiliates, does not hold at least
2,000,000 shares of Series A Preferred Stock (as adjusted for any future stock
splits, stock dividends, recapitalizations and the like);
(b) Two (2) persons designated by Amazon.com. One such designee may
be made at Amazon.com's sole discretion and the other such designee shall be
reasonably acceptable to a majority of the remaining Board members (excluding
the Amazon.com designees). Such persons shall initially be Jeffrey Bezos and
such other designee as may be named at any time by Amazon.com. Notwithstanding
the foregoing, the parties hereto shall not be obligated to vote or act to elect
any representative of Amazon.com if Amazon.com, together with all of its
affiliates, does not hold at least 2,000,000 shares of Series A Preferred Stock
(as adjusted for any future stock splits, stock dividends, recapitalizations and
the like);
(c) One (1) person designated by Vulcan. Such person shall initially
be William Savoy. Notwithstanding the foregoing, the parties hereto shall not
be obligated to vote or act to elect any representative of Vulcan (i) until that
certain convertible Promissory Note, dated May 19, 1999 is converted into shares
of the Company's equity securities and (ii) if Vulcan, together with all of its
affiliates, does not hold at least 2,000,000 shares of Series D Preferred Stock
(as adjusted for any future stock splits, stock dividends, recapitalizations and
the like after May 18, 1999);
(d) Jed Smith, unless the Board has determined by majority vote
(excluding Mr. Smith) that Mr. Smith is no longer a valuable contributor to the
Company and therefore should no longer continue to serve as a director; and
(e) Peter Neupert, unless the Board has determined by majority vote
(excluding Mr. Neupert) that Mr. Neupert is no longer a valuable contributor to
the Company and therefore should no longer continue to serve as a director.
Notwithstanding the provisions of paragraphs (a) and (b) above, at any
time after the date of this Agreement, either KPCB or Amazon.com may (by written
notice to the other party and the Company) withdraw its right to designate two
Board members. In such event, KPCB and Amazon.com shall each cause one of its
designees to resign from the Board; thereafter, KPCB and Amazon.com shall each
have the right to designate one Board member, selected in such party's sole
discretion.
In the event of any termination, removal or resignation of any
director (other than as provided in the previous paragraph), the parties hereto
shall take all actions necessary and appropriate to cause such vacancy to be
filled in the manner by which such director was elected pursuant to the terms of
this Agreement.
-2-
<PAGE>
2. Additional Representations and Covenants.
----------------------------------------
2.1 No Revocation. The voting agreements contained herein are coupled
with an interest and may not be revoked during the term of this Agreement.
2.2 Change in Number of Directors. The Founder and the Investors will not
vote for any amendment or change to the Company's Fifth Amended and Restated
Certificate of Incorporation or Bylaws providing for the election of more than
eight (8) directors, or any other amendment or change to the Certificate of
Incorporation or Bylaws inconsistent with the terms of this Agreement.
2.3 Legends. Each certificate representing shares of the Company's
capital stock held by the Founder or the Investors or any assignee of the
Founder or Investors shall bear the following legend:
"THE SHARES EVIDENCED HEREBY ARE SUBJECT TO A VOTING AGREEMENT BY AND
AMONG THE COMPANY AND CERTAIN STOCKHOLDERS OF THE COMPANY (A COPY OF
WHICH MAY BE OBTAINED FROM THE COMPANY), AND BY ACCEPTING ANY INTEREST
IN SUCH SHARES THE PERSON ACCEPTING SUCH INTEREST SHALL BE DEEMED TO
AGREE TO AND SHALL BECOME BOUND BY ALL THE PROVISIONS OF SAID VOTING
AGREEMENT."
2.4 Vulcan Director. The parties hereto agree to take reasonable steps to
fill the vacancy on the Board with the person nominated by Vulcan pursuant to
Section 1(c) as soon as practicable following the conversion of the Note into
equity securities of the Company.
3. Termination.
-----------
3.1 Termination Events. This Agreement shall terminate upon the earlier
------------------
of:
(a) consummation of an underwritten public offering by the Company of
shares of its Common Stock pursuant to a registration statement under the
Securities Act, which results in gross proceeds in excess of $15,000,000 and the
public offering price of which is at least $5.00 per share (appropriately
adjusted for any stock split, dividend, combination or other recapitalization);
or
(b) when the Company shall (A) sell, convey, or otherwise dispose of all or
substantially all of its property or business or merge or consolidate with any
other corporation (other than a wholly-owned subsidiary corporation) where the
stockholders of the Company own less than fifty percent (50%) of the voting
power of the surviving entity after such merger or consolidation or (B) effect
any other transaction or series of related transactions in which more than fifty
percent (50%) of the voting power of the Company is disposed of,
-3-
<PAGE>
provided that this subsection (b) shall not apply to a merger effected
exclusively for the purpose of changing the domicile of the Company.
3.2 Removal of Legend. At any time after the termination of this
Agreement in accordance with Section 3.1, any holder of a stock certificate
legended pursuant to Section 2.3 may surrender such certificate to the Company
for removal of the legend, and the Company will duly reissue a new certificate
without the legend.
4. Miscellaneous.
-------------
4.1 Successors and Assigns. The terms and conditions of this
Agreement shall inure to the benefit of and be binding upon the respective
successors and assigns of the parties. Nothing in this Agreement, express or
implied, is intended to confer upon any party other than the parties hereto or
their respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.
4.2 Amendments and Waivers. Any term hereof may be amended or waived
only with the written consent of the Company, the Founder, Neupert, and holders
of at least two-thirds (2/3) of the Company's capital stock held by the
Investors (including, in the case of Amazon.com, any wholly-owned subsidiary of
Amazon.com), provided, however, that any amendment to Section 1(c) or Section
2.4 shall require the consent of Vulcan. Any amendment or waiver effected in
accordance with this Section 4.2 shall be binding upon the Company, the
Investors, and any holder of the Founder's shares, and each of their respective
successors and assigns.
4.3 Notices. Any notice required or permitted by this Agreement
shall be in writing and shall be deemed sufficient on the date of delivery, when
delivered personally or by overnight courier or sent by telegram or fax, or
forty-eight (48) hours after being deposited in the U.S. mail, as certified or
registered mail, with postage prepaid, and addressed to the party to be notified
at such party's address or fax number as set forth on the signature page or on
Exhibit A hereto, or as subsequently modified by written notice.
4.4 Severability. If one or more provisions of this Agreement are
held to be unenforceable under applicable law, the parties agree to renegotiate
such provision in good faith. In the event that the parties cannot reach a
mutually agreeable and enforceable replacement for such provision, then (a) such
provision shall be excluded from this Agreement, (b) the balance of the
Agreement shall be interpreted as if such provision were so excluded and (c) the
balance of the Agreement shall be enforceable in accordance with its terms.
4.5 Governing Law. This Agreement and all acts and transactions
pursuant hereto and the rights and obligations of the parties hereto shall be
governed, construed and interpreted in accordance with the laws of the State of
Delaware, without giving effect to principles of conflicts of law.
-4-
<PAGE>
4.6 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.
4.7 Titles and Subtitles. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
4.8 Addition of Investors. Notwithstanding anything to the contrary
contained herein, if the Company shall issue additional shares of its Series A
Preferred Stock pursuant to the Purchase Agreement, any purchaser of such shares
of Series A Preferred Stock may become a party to this Agreement by executing
and delivering an additional counterpart signature page to this Agreement and
shall be deemed an "Investor" hereunder.
[Signature Page Follows]
-5-
<PAGE>
The parties hereto have executed this Second Amended and Restated Voting
Agreement as of the date first written above.
COMPANY: INVESTORS:
DRUGSTORE.COM, INC. /s/ Vulcan Ventures
---------------------------------
By: /s/ Peter Neupert Vulcan Ventures Incorporated
-----------------------------
Peter Neupert, President By:
-----------------------------
Fax Number: Name:
--------------------- ---------------------------
FOUNDER: (print)
/s/ Jed Smith Title:
- --------------------------------- --------------------------
Jed Smith Fax Number:
---------------------
Address:
------------------------
Kleiner Perkins Caufield &
------------------------ Byers VIII, L.P.
Fax Number: By: KPCB VIII Associates, L.P., its
--------------------- General Partner
By: /s/ KPCB VIII Associates
-----------------------------
a General Partner
Address: 2750 Sand Hill Road
Menlo Park, CA 94025
KPCB VIII Founders Fund, L.P.
By: KPCB VIII Associates, L.P.,
its General Partner
By: /s/ KPCB VIII Associates
-----------------------------
a General Partner
Address: 2750 Sand Hill Road
Menlo Park, CA 94025
SIGNATURE PAGE TO
SECOND AMENDED AND RESTATED VOTING AGREEMENT
<PAGE>
KPCB Life Sciences Zaibatsu Fund II, L.P.
By: KPCB VIII Associates, L.P.,
its General Partner
By: /s/ KPCB VIII Associates
-----------------------------
a General Partner
Address: 2750 Sand Hill Road
Menlo Park, CA 94025
Amazon.com, Inc.
By: /s/ Amazon.com, Inc.
-----------------------------
Name:
---------------------------
Title:
--------------------------
Address: 1516 2nd Avenue
Seattle, WA 98101
NEUPERT:
By: /s/ Peter Neupert
-----------------------------
Peter Neupert
Address: 1603 Evergreen Point Road
Bellevue, WA 98004
SIGNATURE PAGE TO
SECOND AMENDED AND RESTATED VOTING AGREEMENT
<PAGE>
EXHIBIT A
---------
INVESTORS
---------
Name and Address
----------------
Kleiner Perkins Caufield & Byers VIII
2750 Sand Hill Road
Menlo Park, CA 94025
KPCB VIII Founders Fund, L.P.
2750 Sand Hill Road
Menlo Park, CA 94025
KPCB Information Sciences Zaibatsu Fund II, L.P.
2750 Sand Hill Road
Menlo Park, CA 94025
Amazon.com, Inc.
1516 2nd Avenue
Seattle, WA 98101
Attn: General Counsel
David Whorton
c/o Kleiner Perkins Caufield & Byers
2750 Sand Hill Road
Menlo Park, CA 94025
Vulcan Ventures Incorporated
110 110th Avenue Northeast, Suite 550
Bellevue, Washington 98004
<PAGE>
EXHIBIT 10.22
May 19, 1999
Amazon.com, Inc.
1516 2nd Avenue
Seattle, WA 98101
Investment in drugstore.com, inc.
This letter will confirm our agreements with regard to certain matters
relating to the purchase by you ("Amazon.com") of shares of Preferred Stock of
drugstore.com, inc. (the "Company"). This letter amends and restates the side
letter dated as of August 10, 1998 between the Company, Amazon.com and Kleiner
Perkins Caufield & Byers VIII.
1. Potential Participation in Next Round of Financing.
(a) Amazon.com has a right of first offer (the "Right of First Offer")
with regard to certain future issuances of the Company's securities pursuant to
Section 2.3 of the Amended and Restated Investors' Rights Agreement between the
Company and Amazon.com dated August 10, 1998 (the "Investors' Rights
Agreement"). In the Company's next offering to which the Right of First Offer
applies and in which Amazon.com has exercised its Right of First Offer in full,
the Company shall also offer to Amazon.com (in accordance with the procedures
set forth in Section 2.3 of the Investors' Rights Agreement) such number of
additional securities (at the same price and on the same terms as offered to
other investors) as would raise Amazon.com's total equity ownership in the
Company to its permitted "Threshold Percentage", as defined under Section 3.1 of
the Investors' Rights Agreement. Amazon.com's rights under this paragraph shall
not be assignable by Amazon.com, except to a wholly-owned subsidiary of
Amazon.com.
(b) The rights described in paragraph (a) above are waived with
respect to all rights to purchase shares of the Company's Series D Preferred
Stock and shall terminate and be of no further force or effect upon such time as
Amazon.com's total equity ownership in the Company has reached its permitted
Threshold Percentage.
2. Potential Participation in IPO.
(a) Subject to paragraph (b) below and to the extent permissible under
the federal securities laws, the rules and regulations of the National
Association of Securities Dealers, Inc. (the "NASD"), and all other applicable
laws, rules and regulations, the Company hereby agrees that in connection with
the Company's initial public offering of Common Stock
<PAGE>
pursuant to a registration statement filed under the Securities Act of 1933, as
amended (other than a registration statement on Form S-4, S-8 or any successor
thereto) (the "IPO"), (i) with respect to an IPO declared effective on or prior
to November 30, 1999, it shall use reasonable efforts to cause the managing
underwriter or underwriters for such IPO to allow the Company to offer directly
to Amazon.com as part of the IPO the right to purchase up to $10,000,000 of the
shares of the Company's Common Stock to be sold in the IPO (the "IPO Shares")
and in the event the managing underwriter or underwriters do not permit the
Company to offer Amazon.com such IPO Shares, the Company shall sell, and
Amazon.com agrees to purchase, $10,000,000 shares of Common Stock pursuant to a
private placement at a price per share equal to the price to the public for the
IPO with a closing concurrent with and dependent on the IPO closing; and (ii)
with respect to an IPO that is declared effective after November 30, 1999, it
shall use reasonable efforts to cause the managing underwriter or underwriters
for such IPO to offer to Amazon.com the right to purchase the lesser of (A) 9.9%
of the total number of shares of the Company's Common Stock to be sold in the
IPO or (B) such number of IPO Shares sufficient to raise Amazon.com's total
equity ownership in the Company upon consummation of the IPO to its Permitted
Threshold Percentage. The IPO Shares shall be offered to Amazon.com on the same
terms and at the same price at which they are being offered to the public. If
Amazon.com wishes to purchase the IPO Shares, it shall promptly respond to such
offer within the time frame reasonably requested by the Company and the managing
underwriter(s). The foregoing provisions are not intended to be, and shall not
be construed as, an offer by the Company to sell the IPO Shares. Any such offer
will be made pursuant to applicable requirements of the federal securities laws,
the rules and regulations of the NASD, and all other applicable laws, rules and
regulations, as well as the provisions of this Section 2.
(b) Notwithstanding paragraph (a) and except in the event of the
potential private placement described in paragraph (a)(i), if the managing
underwriter(s) of the IPO determine in their sole discretion that Amazon.com's
purchase of IPO Shares in the amount otherwise specified in paragraph (a) is not
compatible with the success of the IPO, then the managing underwriter(s) may
exclude Amazon.com from purchasing any IPO Shares or may allow Amazon.com to
purchase only that number of IPO Shares that the managing underwriter(s)
determine in their sole discretion will not jeopardize the success of the IPO."
3. Private Placement at time of IPO. In the event that the IPO is
declared effective after November 30, 1999 and the managing underwriter(s) of
the IPO exclude Amazon.com from purchasing shares in the IPO pursuant to Section
2(b), the Company shall sell and issue to Amazon.com, and Amazon.com may, but
shall not be required to, purchase from the Company, in a private placement
transaction such number of shares of the Company's Common Stock sufficient to
raise Amazon.com's total equity ownership in the Company (including, without
limitation, any IPO Shares purchased) to its permitted Threshold Percentage upon
consummation of the IPO. The price per share paid by Amazon.com for such shares
by Amazon.com shall be the price at which the IPO Shares are offered to the
public. The purchase of such shares shall be contingent upon the closing of the
IPO. The foregoing provisions are not intended to be, and
<PAGE>
shall not be construed as, an offer by the Company to sell such shares. Any such
offer will be made pursuant to applicable requirements of the federal securities
laws, the rules and regulations of the NASD, and all other applicable laws,
rules and regulations, as well as the provisions of this Section 3.
4. Confidentiality. The Company and Amazon.com agree that the existing
Nondisclosure Agreement between the Company and Amazon.com dated August 10, 1998
shall remain in full force and effect and (in the case of Amazon.com) shall
supersede in all respects the obligations contained in Section 6.15 of the
Series A Preferred Stock Purchase Agreement that would otherwise be binding upon
Amazon.com.
5. Entire Agreement; Amendments and Waivers. This letter agreement
constitutes the full and entire understanding and agreement among the parties
with regard to the subject matter hereof. Any term of this letter agreement may
be amended or waived only with the written consent of the Company and
Amazon.com. Any amendment or waiver effected in accordance with this paragraph
shall be binding upon all of the parties to this letter agreement.
6. Miscellaneous. This letter agreement shall be governed in accordance
with the laws of the State of California, without giving effect to principles of
conflicts of laws. Any notice required or permitted hereunder shall be given in
the manner provided in the Investors' Rights Agreement. This letter agreement
may be executed in two or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same
instrument.
[Signature Page Follows.]
<PAGE>
Very truly yours,
drugstore.com, Inc.
/s/ drugstore.com
By:_________________________________
Title:______________________________
AGREED AND ACCEPTED:
Amazon.com, Inc.
/s/ Amazon.com
By:_________________________________
Title:______________________________
SIGNATURE PAGE TO LETTER AGREEMENT
BETWEEN DRUGSTORE.COM, INC., AMAZON.COM, INC. AND
KLEINER PERKINS CAUFIELD & BYERS VIII
<PAGE>
EXHIBIT 10.23
CABLE ADVERTISING AGREEMENT
This Cable Advertising Agreement (the "Agreement") is made effective as of
May 19, 1999 (the "Effective Date") between Vulcan Ventures Incorporated, a
Washington corporation ("Vulcan"), and drugstore.com, Inc., a
Delaware corporation ("Company").
Background
Concurrently with the signing of this Agreement, Vulcan has agreed to
purchase a Convertible Promissory Note of the Company in the amount of
$40,000,000.85 (the "Note"). As a condition to purchasing the Series D Preferred
Stock of the Company, Vulcan and the Company have agreed that Vulcan shall make
available to the Company free local cable advertising inventory from Vulcan's
affiliated cable company, Charter Communications Communications Holdings LLC or
its subsidiaries ("Charter").
In consideration of the mutual promises and covenants contained herein, and
other good and valuable consideration the receipt and sufficiency of which is
hereby acknowledged, Vulcan and Company hereby agree as follows:
1. Dollar Value
Vulcan shall, through Charter, provide $5,000,000, in the aggregate, of
Inventory (as defined below) distributed ratably over the term or as mutually
agreed by the Company, Vulcan and Charter.
2. Term
This Agreement will commence on the date first appearing above and will
continue in effect for three years unless earlier terminated pursuant to Section
3 of this Agreement.
3. Termination
The Company can terminate this Agreement if Vulcan materially breaches any
of its obligations under the Agreement and fails to cure such breach within 30
days after the Company gives Vulcan written notice of the breach.
Vulcan may stop performing under this Agreement if and for so long as the
Company is in default under the Note. This Agreement will automatically
terminate upon termination or repayment of the Note; provided however, that this
Agreement shall survive any conversion of the Notes into equity securities.
4. Advertising Plan, Local Markets and Specific Inventory
Vulcan and the Company will use reasonable efforts to facilitate
communication between the Company's and Charter's respective management to
establish an advertising plan within 90 days of the effective date of this
Agreement. Vulcan, Charter and the Company will mutually agree upon the local
markets in which the advertisements will be aired and the specific advertisement
inventory to
<PAGE>
be allocated to the Company under this Agreement. The advertising plan,
including agreement on the local markets in which the advertisements will be
aired and the specific advertising inventory to be allocated to the Company
under this Agreement will hereinafter be referred to as the "Inventory." Such
Inventory will be valued at the amount that it would be offered in a comparable,
arms-length transaction to a third party by Charter.
5. Liquidated Damages
In the event that Vulcan materially breaches any of its obligations under
this Agreement and the Company properly terminates the Agreement pursuant to
Section 3 of this Agreement, then Vulcan will, upon written notice from the
Company, pay to the Company as liquidated damages, an amount to be mutually
agreed by Vulcan and the Company, in full satisfaction of Vulcan's obligations
hereunder. Following execution of this Agreement, Vulcan and the Company will
enter into good faith negotiations with the objective of determining the amount
of such liquidated damages within 90 days after the effective date of this
Agreement.
6. Change of Control
If Vulcan's equity ownership in Charter is reduced below 50%, Vulcan shall
use its best efforts to ensure that the Company will receive the Inventory. If
Vulcan is unsuccessful, it shall pay to the Company the fair market value of the
Inventory not yet deployed on behalf of the Company.
7. Counterparts
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original and all of which together shall constitute one
instrument.
8. Entire Agreement
This Agreement and the documents referred to herein constitute the entire
agreement between the parties pertaining to the subject matter hereof, and any
and all other written or oral agreements relating to the subject matter hereof
existing between the parties hereto are expressly cancelled.
Signature page follows
-2-
<PAGE>
In witness whereof, the parties have duly entered into this Cable Advertising
Agreement as of the Effective Date.
VULCAN VENTURES INCORPORATED DRUGSTORE.COM, INC.
By:_________________________________ By:____________________________________
Name:_______________________________ Name:__________________________________
Title:______________________________ Title:_________________________________
-3-
<PAGE>
EXHIBIT 21.1
Subsidiaries
------------
DS Pharmacy, Inc.
<PAGE>
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Consolidated Financial Data," and "Experts" and to the use of our report dated
January 29, 1999, except for Note 7, as to which the date is May , 1999, in
the Registration Statement (Form S-1) and related Prospectus of drugstore.com,
inc. for the registration of shares of its common stock.
Seattle, Washington
May , 1999
- -------------------------------------------------------------------------------
The foregoing consent is in the form that will be signed upon the
completion of the increase in the number of authorized shares described in
Note 7 to the financial statements.
Ernst & Young LLP
Seattle, Washington
May 19, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> OTHER 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 JAN-02-2000
<PERIOD-START> APR-02-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 APR-04-1999
<CASH> 14,408 38,007
<SECURITIES> 0 0
<RECEIVABLES> 0 112
<ALLOWANCES> 0 0
<INVENTORY> 0 1,323
<CURRENT-ASSETS> 19,245 43,847
<PP&E> 2,682 4,534
<DEPRECIATION> 66 377
<TOTAL-ASSETS> 22,517 49,983
<CURRENT-LIABILITIES> 2,195 4,043
<BONDS> 975 923
0 0
26,223 61,204
<COMMON> 2 2
<OTHER-SE> (6,878) (16,189)
<TOTAL-LIABILITY-AND-EQUITY> 22,517 22,517
<SALES> 0 652
<TOTAL-REVENUES> 0 652
<CGS> 0 672
<TOTAL-COSTS> 0 672
<OTHER-EXPENSES> 7,664 10,517
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 3 14
<INCOME-PRETAX> (7,490) (10,219)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (7,490) (10,219)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (7,490) (10,219)
<EPS-PRIMARY> (14.82) (11.47)
<EPS-DILUTED> (14.82) (11.47)
</TABLE>
