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As filed with the Securities and Exchange Commission on October 2, 2000
Registration Statement No. 333-45266
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1 TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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drugstore.com, inc.
(Exact name of Registrant as specified in its charter)
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Delaware 04-3416255
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
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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)
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Peter M. Neupert
Chairman of the Board, 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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Copy to:
William H. Hinman, Jr., Esq.
Simpson Thacher & Bartlett
3373 Hillview Avenue, Suite 250
Palo Alto, California 94304
(650) 251-5000
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Approximate date of commencement of proposed sale to the public: From time
to time after the Registration Statement becomes effective as determined by
market conditions and other facts.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
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, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box: [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please 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 delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act or until this Registration Statement shall
become effective on such date as the Securities and Exchange Commission,
acting pursuant to said Section 8(a), may determine.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+Information contained herein is subject to completion or amendment. A +
+registration statement relating to these securities has been filed with the +
+Securities and Exchange Commission. These securities may not be sold nor may +
+offers to buy be accepted prior to the time the registration statement +
+becomes effective. This prospectus shall not constitute an offer to sell or +
+the solicitation of an offer to buy nor shall there be any sale of these +
+securities in any State in which such offer, solicitation or sale would be +
+unlawful prior to registration or qualification under the securities laws of +
+any such State. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS
Subject to Completion, Dated October 2, 2000
13,411,407 Shares
[LOGO OF DRUGSTORE.COM]
COMMON STOCK
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This prospectus relates to up to 13,411,407 shares of our common stock that the
selling stockholders named in this prospectus may offer from time to time. Of
the 13,411,407 shares of our common stock, par value $.0001, that we are
registering:
. 8,101,264 are shares we agreed to register pursuant to a common stock
purchase agreement dated July 30, 2000;
. 4,593,989 are shares we agreed to register upon conversion of 45,939.89
shares of Series 1 preferred stock pursuant to a preferred stock purchase
agreement dated July 30, 2000; and
. 716,154 are shares we are registering in connection with our February 2000
acquisition of Beauty.com, Inc.
The registration of the shares does not necessarily mean that any of the
selling stockholders will offer or sell their shares.
We are not offering or selling any shares of our common stock pursuant to this
prospectus. We will not receive any of the proceeds from the sale by the
selling stockholders of the shares of common stock. We will bear the expenses
of the offering of the common stock, except that the selling stockholders will
pay any applicable underwriting discounts, brokerage fees or commissions and
transfer taxes, as well as the fees and disbursements of their counsel and
advisers.
Our common stock is listed on the Nasdaq National Market under the symbol
"DSCM". On September 29, 2000, the last reported sale price of our common stock
on the Nasdaq National Market was $3.38 per share.
Investing in our common stock involves a high degree of risk. See "Risk
Factors" beginning on page 2.
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These securities have not been approved by the Securities and Exchange
Commission or by any state securities commission, nor have those organizations
determined if this prospectus is truthful or complete. Any representation to
the contrary is a criminal offense.
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TABLE OF CONTENTS
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Page
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The Company............................................................. 1
Risk Factors............................................................ 2
Special Note Regarding Forward-Looking Statements....................... 16
Use of Proceeds......................................................... 17
Selling Stockholders.................................................... 17
Selling Stockholders Table.............................................. 18
Relationships with Selling
Stockholders........................................................... 21
Plan of Distribution.................................................... 22
Description of Capital Stock............................................ 24
Legal Matters........................................................... 28
Experts................................................................. 28
Where You Can Find Information.......................................... 28
Incorporation by Reference.............................................. 29
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THE COMPANY
You should read the following information together with the more detailed
information regarding our company and the common stock being sold in this
offering appearing elsewhere in this prospectus and in the documents
incorporated into this prospectus by reference.
drugstore.com is a leading online drugstore: a retail store and information
site offering A Very Healthy Way to Shop(TM) for health, beauty, wellness,
personal care and pharmacy products. We also sell prestige beauty products
through Beauty.com, an online retailer of prestige beauty products that we
acquired in February 2000. As of July 2, 2000, we had sold our products to
approximately 1,222,000 customers. We incorporated in Delaware in April 1998
and commercially launched our Web site on February 24, 1999. 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, seven days a week from
anywhere that a consumer has Internet access. We believe 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.
Our objective is to become one of the world's leading retailers of health,
beauty, wellness, personal care and pharmacy products. Key elements of our
strategy include: strengthening the drugstore.com brand, continuously improving
our Web store and service, taking advantage of repeat purchasing patterns,
developing technologies to enhance our offerings and capitalize on the benefits
of the Internet, improving the efficiency of our distribution activities and
developing strategic relationships. In addition, we will also continue to make
significant investments in technology and distribution.
We face many risks and challenges in our business. Some consumers may prefer
to shop at traditional retail stores, especially consumers who do not have easy
access to the Internet or who need products immediately. As part of our
relationship with Rite Aid, we have agreed not to operate physical stores. An
investment in our common stock involves risks and uncertainties, including the
fact that we are an early stage company in a new market and that we expect
continuing losses for the foreseeable future. See "Risk Factors" below for
further information.
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 and the World Wide Website
for Beauty.com is www.Beauty.com. The information contained on these Web sites
is not part of this prospectus.
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RISK FACTORS
You should carefully consider the risks described below, together with all
of the other information included in this prospectus or incorporated by
reference before deciding to invest in shares of our common stock. If any of
the following risks actually occurs, our business, financial condition or
operating results could be materially adversely affected. In such case, the
trading price of our common stock could decline, and you may lose all or part
of your investment.
Risks Related to Our Business
We Are an Early Stage Company in a New and Rapidly Evolving Market, Which
Makes It Difficult for Investors to Determine Whether We Will Accomplish
Our Objectives
Because drugstore.com was founded in April 1998 and we only began selling
products in February 1999, we have a limited operating history on which
investors can base an evaluation of our business strategy. We have limited
insight into trends that may emerge and affect our business. An investor in
our common stock must consider the risks and difficulties frequently
encountered by early stage companies, as well as the risks we face due to our
participation in a new and rapidly-evolving market. These challenges include
our:
. Need to increase our brand awareness;
. Need to attract and retain customers at a reasonable cost;
. Dependence on Web site and transaction processing performance and
reliability;
. Need to compete effectively;
. Need to establish ourselves as an important participant in the evolving
market for healthcare products and services on the Internet; and
. Need to establish and develop relationships in the healthcare industry,
particularly in the areas of reimbursement and managed care.
Consumers of Health, Beauty, Wellness, Personal Care and Pharmacy Products
May Not Accept Our Solution, Which Would Harm Our Revenues and Prevent Us
From Becoming Profitable
If we do not attract and retain a high volume of online customers to our
store at a reasonable cost, we will not be able to increase our revenues or
achieve profitability. We may not be able to convert a large number of
customers from traditional shopping methods to online shopping for health,
beauty, wellness, personal care and pharmacy products. Even if we are
successful at attracting online customers, we expect it will take several
years to build a critical mass of these customers. Specific factors that would
prevent widespread customer acceptance include:
. Shipping charges, which do not apply to shopping at traditional
drugstores;
. Delivery time associated with Internet orders, as compared to the
immediate receipt of products at a physical store;
. Pricing that does not meet customer expectations of "finding the lowest
price on the Internet";
. Additional steps and delays in ensuring insurance coverage for
prescription products;
. Lack of coverage of customer prescriptions by some insurance carriers;
. Lack of consumer awareness of our online pharmacy;
. Customer concerns about the security of online transactions and the
privacy of their personal health information;
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. Product damage from shipping or shipments of wrong or expired products
from us or 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 Expect Significant Increases in Our Operating Expenses and Continuing
Losses for the Next Several Years
We incurred net losses of $228 million for the period from inception
through July 2, 2000. We have not achieved profitability. We only began
selling products in February 1999 and cannot be certain that we will obtain
enough customer traffic or a high enough volume of purchases to generate
sufficient revenues and achieve profitability. We believe that we will
continue to incur operating and net losses for at least the next four years
and possibly longer. We intend to increase our operating expenses
substantially as we:
. Increase our sales and marketing activities, particularly advertising
efforts;
. Provide our customers with promotional benefits, such as selling
selected products or offering shipping below our actual costs;
. Increase our general and administrative functions to support our growing
operations;
. Expand our customer and pharmacist support organizations to better serve
customer needs;
. Develop enhanced technologies and features to improve our Web site;
. Enhance our distribution fulfillment processes; and
. Refine the operation of our distribution facility and possibly buy or
build additional distribution facilities.
Because we will spend these amounts before we receive any incremental
revenues from these efforts, our losses will be greater than the losses we
would incur if we developed our business more slowly. In addition, we may find
that these efforts are more expensive than we currently anticipate, which
would further increase our losses.
We May Need Additional Capital in the Future to Support Our Growth, and
Such Additional Financing May Not Be Available To Us
Although we believe that our available funds will provide adequate
liquidity to fund our operations and meet our other cash requirements for at
least the next twelve months, unanticipated developments in the short-term may
require additional financing. We may seek to raise additional funds through
public or private debt or equity financings in order to:
. Take advantage of favorable business opportunities, including
acquisitions of complementary businesses or technologies;
. Develop and upgrade our technology infrastructure;
. Enhance and increase our distribution capacity;
. Develop new product and service offerings; and
. Respond to competitive pressures.
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We cannot assure you that any additional financing we may need will be
available on terms favorable to us, or at all.
We May Not Succeed in Establishing the drugstore.com Brand, Which Would
Adversely Affect Customer Acceptance and Our Revenues
Due to the early stage and competitive nature of the online market for
drugstore products, if we do not establish our brand quickly, we may lose the
opportunity to build a critical mass of customers. Promoting and positioning
our brand will depend largely on the success of our marketing efforts and our
ability to provide consistent, high quality customer experiences. To promote
our brand, we have incurred and expect to continue to incur substantial
expense in our advertising efforts on major Internet destinations such as
Amazon.com, America Online and Yahoo! and other Web sites our customers are
likely to visit, as well as other forms of media such as television and
magazines. We will also need to spend money to attract and train customer
service personnel. If these brand promotion activities do not yield increased
revenues, we will incur additional losses. Even if our efforts are successful,
adverse publicity about our strategic partners could damage our brand and
negatively affect customer acceptance of our site.
We Expect Our Quarterly Financial Results to Fluctuate And Our Early Stage
of Development Limits Our Ability to Predict Revenues and Expenses
Precisely
Historical trends and quarter-to-quarter comparisons of our operating
results are not a good indicator of our future performance. It is likely that
in some future quarter our operating results may be below the expectations of
public market analysts and investors. In this event, the price of our common
stock may fall. Our revenues and operating results are expected to vary
significantly from quarter to quarter due to a number of factors, including:
. Demand for our products;
. Our ability to attract visitors to our Web store and convert those
visitors into customers;
. The frequency of repeat purchases by customers;
. Shifts in the nature and amount of publicity about us or our
competitors;
. Changes in the growth rate of Internet usage;
. Average order size;
. The mix of products sold;
. Our ability to enhance our technology to accommodate any future growth
in our operations or customers;
. Our ability to manage inventory levels and ensure sufficient product
supply;
. Changes in our pricing policies or the pricing policies of our
competitors;
. Changes in government regulation;
. The availability of reimbursement for pharmacy products; and
. Costs related to potential acquisitions of technology or businesses.
Our operating expenses are largely based on anticipated revenue trends and
a high percentage of our expenses are fixed in the short term. As a result, a
delay in generating or recognizing revenue for any reason could result in
substantial additional operating losses. The volume and timing of orders of
health, beauty, wellness, personal care and pharmacy products on our Web store
are difficult to predict because the online market for such products is in its
infancy. Due to the limited operating history of our Web store, we do not yet
have sufficient historical data on which to predict future business from
repeat customers. Accordingly, we may have difficulty forecasting revenue from
regular customers or overall anticipated revenue trends.
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A portion of our revenues may also be seasonal in nature, especially with
respect to the sale of certain beauty products, which depend to some extent on
seasonal product changes and seasonal purchasing patterns. Consumer "fads" and
other changes in consumer trends may cause shifts in purchasing patterns,
resulting in significant fluctuations in our operating results from one
quarter to the next. Our limited operating history makes it difficult to fully
assess the impact of these factors.
If We Are Unable to Obtain Insurance Reimbursement Coverage for Our
Customers, Our Ability to Sell Pharmacy Products Online Could Decrease,
Which Would Harm Our Revenues
To obtain reimbursement on behalf of our customers for the prescription
products that they purchase on our Web site, we must maintain relationships
with insurance companies and PBMs, either directly or through our relationship
with Rite Aid. We currently rely on relationships with a limited number of key
partners that are insurance companies and PBMs, including PCS and WellPoint,
and the extension of these relationships to cover prescriptions processed by
us. Sales billed through these relationships currently represent a significant
percentage of our pharmacy sales. To the extent we or Rite Aid are unable to
maintain these relationships, or if these relationships do not extend to cover
the prescriptions we process, our ability to obtain reimbursement coverage for
our customers would be reduced. This would reduce the number of customers that
fill prescriptions through our Web site, which would reduce our revenues.
Our Ability to Enter Into Direct Relationships with Insurance Companies and
PBMs, or Retain our Existing Relationships for an Extended Period of Time,
is Uncertain for the Following Reasons:
. Many of these companies are in the early stages of evaluating the impact
of the Internet and online pharmacies on their businesses. These
companies may delay their decisions to contract with online pharmacies
or may decide to develop their own Internet capabilities that may
compete with us.
. Many insurance companies have existing contracts with chain drugstores
and PBMs that have announced their intentions to establish online
pharmacies.
. Some insurance companies and PBMs will likely contract with only one or
a limited number of online pharmacies. If our online competitors obtain
these contracts and we do not, we would be at a competitive
disadvantage.
Many of our agreements with insurance companies and PBMs are short-term,
may be terminated with less than 30 days' prior notice, and are subject to
amendment by such insurance companies and PBMs. Our contract with PCS is a 10-
year agreement that could terminate earlier if our agreement with Rite Aid is
terminated. In addition, we must process each insurance application
individually, which may raise the costs of processing prescription orders and
delay our order processing time. Customers may not initially embrace our
online insurance coverage procedure.
We Depend on a Limited Number of Distribution Partners; If They Do Not
Perform, We Will Not Be Able to Effectively Ship Orders
We are obligated to purchase all of our pharmaceutical products from Rite
Aid unless we are able to obtain better overall terms from another vendor. Our
business could be significantly disrupted if Rite Aid was to breach its
contract or suffer adverse developments that affect its ability to supply
products to us. If for any reason Rite Aid 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. For a discussion of certain potentially adverse
developments at Rite Aid, see "Our Relationship with Rite Aid Involves Many
Risks and May Restrict Our Ability to Promote, Contract With, or Operate
Traditional Retail Stores."
We also rely on third-party carriers for shipments to and from our
distribution center and to customers. We are therefore subject to the risks,
including employee strikes and inclement weather, associated with our
distribution partners and of our carriers' ability to provide product
fulfillment and delivery services to meet our
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distribution and shipping needs. Failure to deliver products to our customers
in a timely and accurate manner would harm our reputation, the drugstore.com
brand and our results of operations.
We Operate Only One Distribution Center and Operating Our Own Distribution
Center Requires Significant Investments in Management Resources
Prior to June 2000, we relied primarily on third parties to fulfill our
orders. We began operating our own 290,000 square foot distribution center to
achieve greater control over the distribution process and to ensure adequate
supplies of products to our customers. As of June 2000, all of our orders
delivered by mail are processed from our distribution center. If we do not
successfully operate our distribution center to accommodate peak volumes, or if
the distribution center fails to operate properly, it could significantly limit
our ability to meet customer demand.
Operating our distribution center requires that we:
. Effectively manage our product purchasing function and our inventory
levels to avoid product shortages or markdowns due to unpopular or
expired inventory; and
. Control product damage and shrinkage through effective security measures
and inventory management practices.
We have limited experience processing customer order fulfillment through our
distribution center and managing significant levels of inventory, and issues
arising with respect to the operation of our distribution center could divert
management attention from other aspects of our business. In addition, we may be
unable to obtain products on terms as favorable as those of our former
distribution partners. In connection with the opening of our distribution
center, we also expanded our pharmacy operations through our arrangement with
Rite Aid. Our pharmacy operations will subject us to additional regulatory
requirements and related costs.
We believe that our new distribution center will provide us with sufficient
distribution capacity for the foreseeable future. However, we may need to
increase our distribution capacity sooner than anticipated, and any further
expansion would require additional financing that may not be available to us on
favorable terms when required, or at all.
Any Errors in the Filling or Packaging of the Prescription Drugs We Dispense
May Expose Us to Liability and Negative Publicity
Pharmacy errors relating to prescriptions, dosage and other aspects of the
medication dispensing process can produce liability for us that our insurance
may not cover. For example, a study of community pharmacies appearing in the
December 1995 issue of American Pharmacy found that 24% of prescriptions
contained dispensing errors and 4% of prescriptions contained errors that were
clinically significant. Because we distribute pharmaceutical products directly
to the consumer, we are the most visible participant in the medication
distribution chain and therefore have more exposure to liability claims.
Our pharmacists are required by law to offer counseling, without additional
charge, to our customers about medication, dosage, delivery systems, common
side effects and other information deemed significant by the pharmacists. Our
pharmacists may have a duty to warn customers regarding any potential adverse
effects of a prescription drug if the warning could reduce or negate such
effects. This counseling is in part accomplished through e-mail and inserts
included with the prescription, which may increase the risk of miscommunication
because the customer is not personally present or may not have been provided
all relevant information. We also post product information on our Web store.
Providing information on pharmaceutical and other products creates the
potential for claims to be made against us for negligence, personal injury,
wrongful death, product liability, malpractice, invasion of privacy or other
legal theories based on our product or service offerings. Our general
liability, product liability and professional liability insurance may not cover
potential claims of this type or may not be adequate to protect us from all
liability that may be imposed.
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Pharmacy errors either by drugstore.com or our competitors may also 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 and online pharmacies, 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 will be able to operate without error. We believe
customer acceptance of our online shopping experience is based in large part
on consumer trust, and negative publicity could erode such trust, or prevent
it from growing. This could result in an immediate reduction in the amount of
orders we receive and adversely affect our revenue growth.
We Face the Risk of Systems Interruptions and Capacity Constraints on Our
Web Site, Possibly Resulting in Adverse Publicity, Revenue Losses and
Erosion of Customer Trust
The satisfactory performance, reliability and availability of our Web site,
transaction processing systems and network infrastructure are critical to our
reputation and our ability to attract and retain customers and to maintain
adequate customer service levels. Any future systems interruptions that result
in the unavailability of our Web site or reduced order fulfillment performance
could result in negative publicity and reduce the volume of goods sold and the
attractiveness of our Web store, which could negatively affect our revenues.
From time to time, we have experienced temporary system interruptions for a
variety of reasons, including power failures, software bugs and an
overwhelming number of visitors trying to reach our Web site. We may not be
able to correct any problem in a timely manner. Because we outsource certain
aspects of our system and because some of the reasons for a systems
interruption may be outside of our control, we also may not be able to
exercise sufficient control to remedy the problem quickly or at all.
We opened our site for customers in February 1999 and to the extent that
customer traffic grows substantially, we will need to expand the capacity of
our systems to accommodate a larger number of visitors. Any inability to scale
our systems may cause unanticipated system disruptions, slower response times,
degradation in levels of customer service, impaired quality and speed of order
fulfillment, or delays in reporting accurate financial information. We are not
certain that we will be able to project the rate or timing of increases, if
any, in the use of our Web site accurately or in a timely manner to permit us
to effectively upgrade and expand our transaction-processing systems or to
integrate smoothly any newly developed or purchased modules with our existing
systems.
We Have Grown Very Rapidly, and We Need to Manage Changing and Expanding
Operations
We have rapidly and significantly expanded our operations, and anticipate
that we will continue to expand. Our number of employees has grown from 85 on
December 31, 1998 to 658 on July 2, 2000. This growth has placed, and our
anticipated future operations will continue to place, a significant strain on
our management systems and resources. We will not be able to implement our
business strategy in a rapidly evolving market without an effective planning
and management process. We will not be able to increase revenues unless we
continue to improve our transaction-processing, operational, financial and
managerial controls and reporting systems and procedures, expand, train and
manage our work force and manage multiple relationships with third parties.
Many of our senior management have no prior senior management experience at
public companies, and none of our executive officers have prior management
experience in the healthcare or retail drugstore industry.
Expanding the Breadth and Depth of Our Product and Service Offerings Is
Expensive and Difficult, and We May Receive No Benefit From Our Expansion
We intend to expand the breadth and depth of our product and service
offerings by promoting new or complementary products or sales formats. We
cannot be certain that these new offerings will generate sufficient revenues
for the costs involved. Expansion of our offerings in this manner could
require significant additional
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expenditures and could strain our management, financial and operational
resources. For example, we may need to incur significant marketing expenses,
develop relationships with new fulfillment partners or manufacturers, or
comply with new regulations. We cannot be certain that we will be able to
expand our product and service offerings in a cost-effective or timely manner.
Furthermore, any new product or service offering or sales format that is not
favorably received by consumers could damage the reputation of our brand. The
lack of market acceptance of such efforts or our inability to generate
satisfactory revenues from such expanded offerings to offset their cost could
harm our business. Finally, our agreement with Amazon.com contains
prohibitions that limit our ability to work with other companies in markets
for products and services that are competitive with those offered by
Amazon.com, although we are able to sell products and services in these
markets ourselves. See "Our Relationship With Amazon.com May Restrict Some of
Our Activities."
Our Relationship With Amazon.com May Restrict Some of Our Activities
Our 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. In addition, in January 2000 we entered into a
three-year agreement with Amazon.com to integrate various shopping features of
our Web sites and create a persistent drugstore.com shopping presence on the
Amazon.com Web site. Amazon.com is currently our largest stockholder and
Jeffrey P. Bezos, Amazon.com's chairman of the board and chief executive
officer, is a member of our board of directors. Our relationship with
Amazon.com has received significant media attention, but the parties'
obligations to provide support to each other are limited.
Pursuant to these agreements, each party has committed to providing the
other with advertising on our respective Web sites. The agreement we entered
into in January 2000 contains provisions restricting the percentage of total
revenues we can obtain from the sale on our Web site of products or services
other than health, beauty, wellness, personal care and pharmaceutical
products. We may not assign this agreement without Amazon.com's consent. Under
the technology license and advertising agreement, we are restricted from
promoting on our Web site any company that sells products or services
competitive with those that Amazon.com offers or is preparing to produce or
market. If we were acquired by a competitor of Amazon.com and Amazon.com did
not vote in favor of the transaction, we would lose our rights to advertise on
Amazon.com's Web site and to use Amazon.com's technology (if we are then using
any). In addition, we have agreed not to sell advertising on our Web site to
any company that sells products or services competitive with those offered by
Amazon.com, although the sale of advertising on our Web site is not presently,
and is not expected to be, part of our business strategy.
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 Related Transactions.
Our Relationship with Rite Aid Involves Many Risks and May Restrict Our
Ability to Promote, Contract With, or Operate Traditional Retail Stores
In June 1999, we entered into a series of agreements with Rite Aid. These
agreements involve many aspects of our businesses and the operation of our
respective Web sites, the fulfillment of orders and the extension of Rite
Aid's insurance relationships to cover prescriptions processed by us. This
type of arrangement is complex and requires a great deal of effort to operate
successfully. As a result, there are many risks related to these arrangements,
including some that we may not have foreseen. It is difficult to assess the
likelihood of occurrence of these risks, including the lack of success of the
overall arrangement to meet the parties' objectives. In the event that we do
not realize the intended benefits of these relationships, we will have
expended a great deal of time and effort that could have been directed to more
beneficial activities. In addition, customer perceptions and our business may
be adversely impacted if these relationships are not successful.
While Rite Aid has committed to promoting drugstore.com in its stores and
in its advertising, we do not control the choice of ads that will feature us
and this form of advertising may not result in additional
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drugstore.com customers. While the Rite Aid relationship substantially
broadens our ability to provide prescription medications to consumers with
insurance reimbursement plans, it may not allow all of our potential customers
to purchase these medications from drugstore.com and receive insurance
reimbursement, which could adversely affect consumer perceptions and our
revenues. We have agreed not to promote any other traditional chain drugstore
or operate one ourselves. We have also agreed not to contract with another
traditional retail store to fill pharmacy product orders we receive unless a
Rite Aid store is not conveniently located. These restrictions could limit our
flexibility and ability to grow our business if our relationship with Rite Aid
does not develop successfully.
Rite Aid has received significant negative publicity regarding its
financial situation following its announcements regarding the restructuring
and extension of its banking facilities, including amendments to financial
covenants, the restatements of its 1999 and 1998 financial statements and the
resignation of its independent auditors in November 1999. Rite Aid has since
engaged new auditors and made significant changes to its senior management
team. Our relationship with Rite Aid is important to us, particularly in our
pharmacy fulfillment operations and in our ability to obtain insurance
reimbursement coverage for our customers. If Rite Aid's financial condition
were to worsen, it may be unable to continue to fulfill its obligations to us
under our agreements, and this would have an adverse effect on our business.
In addition, negative publicity regarding Rite Aid could negatively affect the
drugstore.com brand and our stock price.
Our relationship with PCS was established at the same time as, and in
connection with, our relationship with Rite Aid. Rite Aid recently entered
into a definitive agreement to sell PCS to Advanced Paradigm. Advanced
Paradigm may not demonstrate the same level of commitment to our relationship
with PCS as Rite Aid.
Rite Aid currently owns approximately 14.2% of our outstanding common stock
assuming that each share of our Series 1 preferred stock has been converted
into 100 shares of our common stock. As a result, Rite Aid will continue to be
able to significantly influence all matters requiring approval by our
stockholders, including the election of directors and the approval of mergers
or other business combination transactions.
We Are Dependent on Our Strategic Relationships to Help Promote Our Web
Site and Expand Our Product Offerings; If We Fail to Maintain or Enhance
These Relationships, Our Development Could Be Hindered
We believe that our strategic relationships with Amazon.com, Rite Aid, PCS
and GNC as well as portals and third party distributors are critical to
attract customers, facilitate broad market acceptance of our products and the
drugstore.com brand and enhance our sales and marketing capabilities. If we
are unable to develop or maintain key relationships, our ability to attract
customers would suffer and our business would be adversely affected. In
addition, we are subject to many risks beyond our control that influence the
success or failure of our strategic partners. Our business could be harmed if
any of our key strategic partners were to experience financial or operational
difficulties or if other corporate developments adversely affect their
performance under our agreements.
We Face Uncertainty Related to Pharmaceutical Costs and Pricing, Which
Could Affect Our Revenues and Profitability
We expect that pharmacy sales will account for a significant percentage of
our total sales. Sales of our products will depend in part on the availability
of reimbursement from third-party payors such as government health
administration authorities, private health insurers, health maintenance
organizations (HMOs), PBMs and 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
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profitability from sales of prescription drugs. Our revenues from prescription
drug sales may also be affected by health care reform initiatives of federal
and state governments, including proposals designed to significantly reduce
spending on Medicare, Medicaid and other government programs, changes in
programs providing for reimbursement for the cost of prescription drugs by
third-party payors and regulatory changes related to the approval process for
prescription drugs. Such initiatives could lead to the enactment of federal and
state regulations that may adversely impact our prescription drug sales.
We cannot be certain that our products or services will be considered cost
effective or that adequate third-party reimbursement will be available to
enable us to maintain price levels sufficient to realize a profit.
Competition From Both Traditional and Online Retailers May Result in Price
Reductions and Decreased Demand for Our Products and Services
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) mail service pharmacies; and (3)
existing drugstores. Most of these drugstores, which include national, regional
and local drugstore chains, discount drugstores, supermarkets, combination food
and drugstores, discount general merchandise stores, mass market retailers,
independent drugstores and local merchants, have existed for a longer period,
have greater financial resources, have established marketing relationships with
leading manufacturers and advertisers, and have secured greater presence in
distribution channels. Some of these companies may also commence or expand
their presence on the Internet. We also compete with hospitals, HMOs and mail
order prescription drug providers, all of whom are or may begin offering
products and services over the Internet. Finally, we are aware of numerous
other smaller entrepreneurial companies that are focusing significant resources
on developing and marketing products and services that will compete directly
with those offered at drugstore.com.
We believe that there may be a significant advantage in establishing a large
customer base before our competitors do so. If we fail to attract and retain a
large customer base and our competitors establish a more prominent market
position relative to ours, this could inhibit our ability to grow.
We also believe we may face a significant competitive challenge from our
competitors forming alliances with each other. Our direct online competitors
may form partnerships with PBMs, HMOs or chain drugstores. For example,
PlanetRx, an online pharmacy, has formed an alliance with Express Scripts, a
PBM. 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.
Acquisitions Could Result in Dilution, Operating Difficulties and Other
Harmful Consequences
If appropriate opportunities present themselves, we intend to acquire
complementary or strategic businesses, technologies, services or products. For
example, we recently acquired Beauty.com, an online
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retailer of prestige beauty products. The process of integrating an acquired
business, technology, service or product into our business and operations may
result in unforeseen operating difficulties and expenditures. Integration of
an acquired company may also require significant management resources that
would otherwise be available for ongoing development of our business.
Moreover, the anticipated benefits of any acquisition may not be realized or
may depend on the continued service of acquired personnel who could choose to
leave. We currently do not have any understandings, commitments or agreements
with respect to any other acquisition and no other material acquisition is
currently being pursued. Future acquisitions could also result in potentially
dilutive issuances of equity securities, the incurrence of debt, contingent
liabilities or amortization expenses related to goodwill and other intangible
assets, any of which could harm our business.
Our Systems, Operations, and Our Distribution Center, 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 all losses that may occur. Our distribution center
in New Jersey also faces these risks.
We depend on the efficient operation of Internet connections from customers
to our systems. These connections, in turn, depend on the efficient operation
of Web browsers, Internet service providers and Internet backbone service
providers, all of which have had periodic operational problems or experienced
outages. Any system delays, failures or loss of data, whatever the cause,
could reduce customer satisfaction with our applications and services and harm
our sales.
We retain confidential customer and patient information in our processing
centers. Therefore, it is critical that our facilities and infrastructure
remain secure and that our facilities and infrastructure are perceived by the
marketplace to be secure. A material security breach could damage our
reputation or result in liability to us.
Governmental Regulation of Our Business Could Require Significant Expenses,
and Failure to Comply With Certain Regulations Could Result in Civil and
Criminal Penalties
Our business is subject to extensive federal, state and local regulations.
In particular, entities engaging in the practice of pharmacy are subject to
federal and state regulatory and licensing requirements. Regulations in this
area often require subjective interpretation, and we cannot be certain that
our attempts to comply with these regulations will be deemed sufficient by the
appropriate regulatory agencies. Violations of any regulations could result in
various civil and criminal penalties, including suspension or revocation of
our licenses or registrations, seizure of our inventory, or monetary fines,
which could adversely affect our operations.
We are also subject to laws and regulations regarding homeopathic drugs,
and we may face enforcement actions, lawsuits or claims asserting that we have
not complied with these laws and regulations. As we expand our product and
service offerings, more of our products and services will likely be subject to
regulation by the FDA, which regulates drug advertising and promotion.
Complying with FDA regulations is time consuming, burdensome and expensive,
and could delay our introduction of new products or services.
The U.S. House of Representatives Committee on Commerce and the General
Accounting Office are conducting a review of online pharmacies, including the
current laws that govern pharmacy operations, and the potential for abuses by
some online sites, focusing on those that do not require the submission of a
valid prescription issued by the customer's physician. In addition, in
December 1999 the Clinton administration announced a proposal to eliminate
illegal sales of prescription drugs over the Internet by unlicensed Web site
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operators. If approved by Congress, the proposal would, among other things,
establish new federal requirements for Internet pharmacies to ensure that they
comply with state and federal laws, create new civil penalties for the illegal
sale of pharmaceuticals, and authorize additional federal enforcement powers.
We believe that any regulations resulting from these investigations or the
Clinton administration's proposal will likely result in increased reporting
and monitoring requirements, which could be burdensome and increase our
expenses. Other legislation and regulations currently being considered at the
federal and state level could affect our business, including legislation or
regulations relating to confidentiality of patient records, including
electronic access and storage of such records, as well as the inclusion of
prescription drugs as a Medicare benefit. In addition, various state
legislatures are considering new legislation related to the regulation of
nonresident pharmacies. Compliance with new laws or regulations could increase
our expenses.
The Health Insurance Portability and Accountability Act of 1996 mandates
the use of standard transactions, standard identifiers, security and other
provisions by the year 2000. Regulations have been proposed to implement these
requirements, and we are designing our applications to comply with the
proposed regulations. However, until these regulations become final, possible
changes in these regulations could cause us to use additional resources and
lead to delays as we revise our Web site and operations.
Until recently, Health Care Financing Administration guidelines prohibited
transmission of Medicare eligibility information over the Internet. We are
also subject to extensive regulation relating to the confidentiality and
release of patient records. Additional legislation governing the distribution
of medical records exists or has been proposed at both the state and federal
level. It may be expensive to implement security or other measures designed to
comply with any new legislation. Moreover, we may be restricted or prevented
from delivering patient records electronically. This could have an adverse
impact on our ability to gain and retain customers.
Failure to Attract and Retain Experienced Personnel and Senior Management
Could Hurt Our Ability to Grow Our Business
We intend to continue to hire a significant number of additional sales,
support and marketing personnel, as well as pharmacists, software developers
and personnel to staff our recently established distribution facility.
Competition for these individuals is intense, and we may not be able to
attract, assimilate or retain additional highly qualified personnel in the
future. Our future success also depends upon the continued service of our
executive officers and senior management. None of our employees is bound by an
employment agreement for any specific term. We do not have "key person" life
insurance policies covering any of our employees. In addition, none of the
members of our senior management team have prior experience in the healthcare
industry or in drugstore operations.
We Cannot Be Certain That We Will Be Able to Protect Our Intellectual
Property, and We May Be Found to Infringe Proprietary Rights of Others,
Which Could Harm Our Business
We rely or may in the future rely on a combination of patent, trademark,
trade secret and copyright law and contractual restrictions to protect our
intellectual property. These afford only limited protection. 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, such as the technology used to operate our Web site,
our content and our trademarks.
We have filed applications for U.S. trademark registrations for
"drugstore.com" and twelve other trademarks. We may be unable to secure these
registrations. 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 or our other trademark applications. Any claims or customer
confusion related to our trademarks, or our failure to obtain any trademark
registration, could negatively affect our business.
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Litigation or proceedings before the U.S. Patent and Trademark Office 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. 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.
Third parties may also 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 May Not Be Able to Protect Our Domain Names In All Countries or Against
All Infringers, Which Could Decrease the Value of Our Brand Name and
Proprietary Rights
We currently hold the Internet domain name "drugstore.com," as well as
various other related names. Domain names generally are regulated by Internet
regulatory bodies. The regulation of domain names in the United States and in
foreign countries is subject to change. Regulatory bodies could establish
additional top-level domains, appoint additional domain name registrars or
modify the requirements for holding domain names. As a result, we may not
acquire or maintain the "drugstore.com" domain name in all of the countries in
which we conduct business.
The relationship between regulations governing domain names and laws
protecting trademarks and similar proprietary rights is unclear. Therefore, we
could be unable to prevent third parties from acquiring domain names that
infringe or otherwise decrease the value of our brand name, trademarks and
other proprietary rights.
We May Face Liability for Content on Our Web Site
Because we post product information and other content on our Web site, we
face potential liability for negligence, copyright, patent, trademark,
defamation, indecency and other claims based on the nature and content of the
materials that we post. Such claims have been brought, and sometimes
successfully pressed, against Internet content distributors. In addition, we
could be exposed to liability with respect to the unauthorized duplication of
content or unauthorized use of other parties' proprietary technology. Although
we maintain general liability insurance, our insurance may not cover potential
claims of this type or may not be adequate to indemnify us for all liability
that may be imposed. Any imposition of liability that is not covered by
insurance or is in excess of insurance coverage could harm our business.
Our Officers, Directors and Certain Existing Stockholders Control the
Majority of Our Common Stock, Which Could Discourage an Acquisition of Us
or Make Removal of Incumbent Management More Difficult
Executive officers, directors and entities affiliated with them, in the
aggregate, beneficially own approximately 62% of our outstanding common stock.
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, Amazon.com beneficially owns
approximately 22.7% and Rite Aid beneficially owns 14.2% of our outstanding
common stock. In each case, the percentage is calculated assuming that each
outstanding share of our Series 1 preferred stock has been converted into 100
shares of our common stock. Therefore, Amazon.com and Rite Aid can each
significantly influence all matters requiring approval by our stockholders,
including the election of directors and the approval of mergers or other
business combination transactions. Amazon.com's substantial equity stake in
drugstore.com could also make us a much less attractive acquisition candidate
to potential acquirors, because Amazon.com alone could have sufficient votes
to prevent the tax-free treatment of an acquisition.
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Our Net Sales Would Be Harmed if We Experience Significant Credit Card
Fraud
A failure to adequately control fraudulent credit card transactions would
harm our net sales and results of operations because we do not carry insurance
against this risk. Under current credit card practices, we are liable for
fraudulent credit card transactions because we do not obtain a cardholder's
signature.
Certain Antitakeover Provisions and Significant Equity Ownership by
Amazon.com and Rite Aid Could Preclude an Acquisition
Provisions of our certificate of incorporation, bylaws, Washington law and
Delaware law could make it more difficult for a third party to acquire us,
even if doing so would be beneficial to our stockholders. Further, because
Amazon.com and Rite Aid each own a significant percentage of our capital
stock, a competitor of Amazon.com or Rite Aid as well as other potential
acquirors could determine not to merge with or acquire us. In addition, if we
were acquired by an Amazon.com competitor and Amazon.com did not vote in favor
of the transaction, we would lose our rights to promotional placements on
Amazon.com's Web site, and to use Amazon.com's technology (if we are then
using any). The potential loss of these rights could inhibit offers to acquire
us.
Risks Related to Internet Commerce
We Depend on Continued Use of the Internet and Growth of the Online
Drugstore Market
Our future revenues and profits, if any, substantially depend upon the
widespread acceptance and use of the Internet as an effective medium of
business and communication by our target customers. Rapid growth in the use of
and interest in the Internet has occurred only recently. As a result,
acceptance and use may not continue to develop at historical rates, and a
sufficiently broad base of consumers may not adopt, and continue to use, the
Internet and other online services as a medium of commerce.
In addition, the Internet may not be accepted as a viable long-term
commercial marketplace for a number of reasons, including potentially
inadequate development of the necessary network infrastructure or delayed
development of enabling technologies and performance improvements. Our success
will depend, in large part, upon third parties maintaining the Internet
infrastructure to provide a reliable network backbone with the speed, data
capacity, security and hardware necessary for reliable Internet access and
services.
Further, the online market for drugstore products is in its infancy. The
market is significantly less developed than the online market for books,
auctions, music, software and numerous other consumer products. Even if use of
the Internet and electronic commerce continues to increase, the rate of
growth, if any, of the online drugstore market could be significantly less
than the online market for other products. Our rate of revenue growth could
therefore be significantly less than other online merchants.
If We Are Required To Collect Taxes In Additional Jurisdictions On The
Products We Sell, We May Be Subject To Liability For Past Sales And Our
Future Sales May Decrease
In accordance with current industry practice, we do not currently collect
sales taxes or other taxes with respect to shipments of goods into states
other than Washington. Our new distribution center, and any future
distribution centers, along with other aspects of our evolving business, may
result in additional sales and other tax obligations. One or more states or
the federal government may seek to impose sales or other tax collection
obligations on out-of-jurisdiction companies which engage in electronic
commerce as we do. Moreover, one or more states or the federal government
could begin to impose sales taxes on sales of prescription products (which are
not generally taxed at this time). If so, customers who order prescriptions at
our Web site and pick them up at a Rite Aid store would be required to pay
sales tax. A successful assertion by one or more states or the federal
government that we should collect sales or other taxes on the sale of our
products could result in substantial tax liabilities for past sales, decrease
our ability to compete with traditional retailers and otherwise harm our
business.
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Recent federal legislation limits the imposition of U.S. state and local
taxes on Internet-related sales. In 1998, Congress passed the Internet Tax
Freedom Act, which places a three-year moratorium on state and local taxes on
Internet access, unless such tax was already imposed prior to October 1, 1998,
and on discriminatory taxes on electronic commerce. There is a possibility
that Congress may not renew this legislation in 2001. If Congress chooses not
to renew this legislation, U.S. state and local governments would be free to
impose new taxes on electronically purchased goods. The imposition of taxes on
goods sold over the Internet by U.S. states and local government would create
administration burdens for us and decrease our future sales.
If We Do Not Respond to Rapid Technological Changes, Our Services Could
Become Obsolete and Our Business Would Be Seriously Harmed
As the Internet and online commerce industry evolve, we must license
leading technologies useful in our business, enhance our existing services,
develop new services and technology that address the increasingly
sophisticated and varied needs of our prospective customers and respond to
technological advances and emerging industry standards and practices on a
cost-effective and timely basis. We may not be able to successfully implement
new technologies or adapt our Web store, proprietary technology and
transaction-processing systems to customer requirements or emerging industry
standards. If we are unable to do so, it could adversely impact our ability to
build the drugstore.com brand and attract and retain customers.
Governmental Regulation of the Internet and Data Transmission Over the
Internet Could Affect Our Business
Laws and regulations directly applicable to communications or commerce over
the Internet are becoming more prevalent. The most recent session of the U.S.
Congress resulted in Internet laws regarding children's privacy, copyrights,
taxation and the transmission of sexually explicit material. The European
Union recently enacted its own privacy regulations. In particular, many
government agencies and consumers are focused on the privacy and security of
medical and pharmaceutical records. The law of the Internet, however, remains
largely unsettled, even in areas where there has been some legislative action.
It may take years to determine whether and how existing laws such as those
governing privacy, libel and taxation apply to Internet stores such as ours.
The rapid growth and development of the market for online commerce may prompt
calls for more stringent consumer protection laws, both in the United States
and abroad, that may impose additional burdens on companies conducting
business online and in particular companies that fill prescriptions or
maintain medical or pharmaceutical records. The adoption or modification of
laws or regulations relating to Internet businesses could adversely affect our
ability to attract and serve customers.
Risks Related to Our Stock Price
Our Stock Price is Likely to Continue to Fluctuate, Which Could Result in
Substantial Losses for Investors
The market price of our common stock has been and is likely to continue to
be extremely volatile. Our stock price could be subject to wide fluctuations
in response to a number of factors, some of which are beyond our control, and
these fluctuations could result in substantial losses for investors. Factors
that could cause our stock price to fluctuate include:
. Quarterly variations in operating results;
. Changes in financial estimates by securities analysts;
. Announcements by us or our competitors concerning new products,
significant contracts, acquisitions or strategic relationships;
. Publicity about our company, our products and services, our strategic
partners, our competitors, the online pharmacy industry, or e-commerce
in general;
. Additions or departures of key personnel;
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. Any future sales of our common stock or other securities; and
. Stock market price and volume fluctuations of publicly-traded companies
in general and Internet-related companies in particular.
The trading prices of Internet-related companies and e-commerce companies in
particular have been especially volatile and many are at or near historical
highs. Investors may be unable to resell their shares of our common stock at or
above the offering price. In the past, securities class action litigation has
often been brought against a company following periods of volatility in the
market price of its securities. We may be the target of similar litigation in
the future. Securities litigation could result in substantial costs and divert
management's attention and resources, which could seriously harm our business
and operating results.
The Registration of 13,411,407 Shares of Our Common Stock Hereby, and
Subsequent Sales of the Common Stock We Are Registering Could Adversely
Affect Our Stock Price and Our Ability To Raise Funds in New Equity
Offerings
We are registering 13,411,407 shares, or approximately 20%, of our common
stock outstanding (assuming conversion of our Series 1 preferred stock),
pursuant to the registration statement of which this prospectus is a part.
Although 5,606,646 shares of the common stock we are registering cannot be sold
pursuant to lock-up agreements for a period starting on July 30, 2000 and
ending 180 days after the effective date of the registration statement of which
this prospectus is a part, the availability for sale, and future sales, of
substantial amounts of our common stock by existing stockholders could
adversely affect prevailing market price for our common stock and could
materially impair our future ability to raise capital through an offering of
equity securities.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus, and the documents incorporated by reference into this
prospectus, contain forward-looking statements that involve risks and
uncertainties. These statements relate to future events or our future financial
performance and include, but are not limited to, statements concerning:
. The anticipated benefits and risks of our key strategic partnerships,
business relationships and acquisitions;
. Our ability to attract and retain customers;
. The anticipated benefits and risks associated with our business
strategy, including those relating to our distribution and fulfillment
strategy and our current and future product and service offerings;
. Our future operating results and the future value of our common stock;
. The anticipated size or trends of the market segments in which we
compete and the anticipated competition in those markets;
. Potential government regulation; and
. Our future capital requirements and our ability to satisfy our capital
needs.
Furthermore, in some cases, you can identify forward-looking statements by
terminology such as may, will, could, 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
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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.
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of the common stock
offered by the selling stockholders.
SELLING STOCKHOLDERS
Of the 13,411,407 shares registered under the prospectus that is part of
this registration statement, 5,606,646 shares, or approximately 42% of the
shares we are registering, may not be sold for a period starting on July 30,
2000 and ending 180 days after the effective date of this registration
statement pursuant to lock-up agreements we entered into with some of our
shareholders in connection with our recent private placement. For a more
detailed description of the lock-up agreements, see "Plan of Distribution"
below.
July 30, 2000 Private Placement. We issued 12,695,253 of the shares
registered under the prospectus that is part of this registration statement to
the selling stockholders in a private placement exempt from the registration
requirements of the Securities Act under Section 4(2). We issued 8,101,264
shares of common stock pursuant to a stock purchase agreement dated July 30,
2000. An additional 4,593,989 of these shares are issuable upon conversion of
the 45,939.89 shares of Series 1 preferred stock pursuant to a preferred stock
purchase agreement dated July 30, 2000. The stock purchase agreements are
attached to the registration statement of which this prospectus is a part as
Exhibits 10.1 and 10.2. Each share of the Series 1 preferred stock will
automatically convert into 100 shares of our common stock immediately upon
stockholder approval, subject to adjustment for stock splits, stock dividends,
recapitalization or other similar circumstances. See "Description of Capital
Stock" for a more detailed description of the Series 1 preferred stock.
Pursuant to obligations under the stock purchase agreements, we agreed to
file a registration statement covering the resale of the common stock
originally issued under the stock purchase agreement and the common stock
issued through the conversion of the Series 1 preferred stock, by filing a
Registration Statement on Form S-3 and a related prospectus with the SEC. We
agreed to keep the registration statement effective until the earlier of the
date that all of the common stock covered by the registration statement has
been sold or the date that is 18 months after the effective date of the
registration statement. We will extend the time that this prospectus is
effective if during this 18-month period we suspend the use of this prospectus.
We are filing this prospectus, and the registration statement of which it is
part, because of our obligations under the stock purchase agreements.
Beauty.com. We issued 716,154 shares registered under the registration
statement of which this prospectus is a part to the selling stockholders in
connection with our acquisition of Beauty.com, Inc. on February 2, 2000. We
agreed to permit these selling stockholders to register their shares under this
registration statement.
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SELLING STOCKHOLDERS TABLE
The following table sets forth the name of each selling stockholder and the
number of shares owned by each stockholder that may be offered pursuant to this
prospectus. This information has been obtained from the selling stockholders.
The selling stockholders may offer all, some or none of the common stock listed
below. Because the selling stockholders may offer all, some or none of the
common stock, no estimate can be given as to the amount or percentage of the
common stock that will be held by the selling stockholders upon termination of
any of the sales. None of the selling stockholders has, or in the past three
years has had, any position, office, or other material relationship with us
except as indicated in the footnotes below and in "Relationships with Selling
Stockholders."
<TABLE>
<CAPTION>
Number of Shares Number of Shares of
Common Stock Common Stock
Registered for Beneficially Percentage of Common
Name(1) Sale Hereby(2) Owned(3) Stock Outstanding(3)
------- ---------------- ------------------- --------------------
<S> <C> <C> <C>
Amazon.com, Inc.(4)..... 607,594 15,463,339 22.7%
L. John Doerr(5)........ 1,012,658 11,083,903 16.9%
Kleiner Perkins Caufield
& Byers(6)............. 3,037,974 10,071,245 15.3%
Baron Asset Fund(7)..... 3,037,974 3,037,974 4.6%
Integral Capital
Partners(8)............ 3,037,975 3,037,975 4.6%
Vulcan Ventures
Incorporated(9)........ 543,357 2,809,646 4.3%
Hearst Communications,
Inc.(10)............... 1,012,658 1,012,658 1.5%
Maveron Equity Partners,
L.P.(11)............... 405,063 1,592,246 2.4%
Roger L. Barnett(12).... 570,000 1,079,655 1.6%
Elie L. Abouzakhm(13)... 50,040 55,754 *
Kevyn Aucoin(14)........ 47,056 52,430 *
Hara Glick(15).......... 28,169 30,671 *
Bernadette Selim
Abouzakhm(16).......... 6,255 6,969 *
Ari Goldberger(17)...... 6,255 6,969 *
KPE Inc.(18)............ 4,342 4,838 *
Fabien Baron(19)........ 2,712 3,022 *
Iman Abdulmajid(20)..... 679 757 *
Eric Sakas(21).......... 425 474 *
Marc Landis(22)......... 221 246 *
</TABLE>
--------
* less than 1%
(1) The name of the selling stockholders and the number of securities held by
the selling stockholders may be amended subsequent hereto pursuant to
Rule 424(b) of the Securities Act of 1933, as amended. Shares to be
registered held by affiliated persons and entities have been added
together for purposes of this chart, except the shares of Series 1
preferred stock held individually by L. John Doerr, a general partner of
KPCB VIII Associates and KPCB VII Associates, L.P.
(2) Consists of the number of shares of common stock issued to the selling
stockholder that are registered for sale hereby. Includes the number of
shares of common stock that will be issued to selling stockholders who
hold Series 1 preferred stock upon conversion of the Series 1 preferred
stock. It assumes a conversion ratio of one share of Series 1 preferred
stock to 100 shares of common stock. This conversion ratio is subject to
adjustment. See "Description of Capital Stock" for a description of the
Series 1 preferred stock and possible adjustments to the conversion
ratio.
(3) Percentage ownership is based on 65,763,196 shares of our common stock,
representing 61,169,207 total shares of our common stock outstanding as
of August 31, 2000 plus the 4,593,989 shares of common stock that we may
issue upon conversion of the Series 1 preferred stock assuming a
conversion ratio of 100 shares of common stock to one share of Series 1
preferred stock. 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
18
<PAGE>
exercisable within 60 days after August 31, 2000 are deemed outstanding,
while such shares are not deemed outstanding for purposes of computing
percentage ownership of any other person. We have included the shares of
common stock that we may issue to a person upon conversion of the Series 1
preferred stock owned by that person because we believe that the Series 1
preferred stock will become convertible into common stock within 60 days
after August 31, 2000. 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.
(4) Shares registered for sale hereby consist of 607,594 shares of common
stock held by Amazon.com NV Investment Holdings, Inc., a wholly-owned
subsidiary of Amazon.com. Shares beneficially owned consist of 12,355,745
shares of common stock held by Amazon.com, Inc., 607,594 shares of common
stock held by Amazon.com NV Investment Holdings, Inc., and 2,500,000
shares of common stock subject to a warrant exercisable within 60 days of
August 31, 2000 issued to Amazon.com, Inc. All shares registered for sale
are subject to the lock-up agreement described above until 180 days after
the date of the effectiveness of the registration statement. Jeffrey P.
Bezos is a director of drugstore.com and is the Chairman of the Board and
Chief Executive Officer of Amazon.com, Inc.
(5) Shares registered for sale hereby consist of 1,012,658 shares of common
stock issuable upon conversion of 10,126.58 shares of Series 1 preferred
stock. Shares beneficially owned consist of 6,313,633 shares of common
stock held by Kleiner Perkins Caufield & Byers VIII, L.P. (KPCB VIII),
365,600 shares of common stock held by KPCB VIII Founders Fund, L.P.,
351,538 shares of common stock held by KPCB Life Sciences Zaibatsu Fund
II, L.P. and 2,500 shares of common stock held by KPCB IX Associates,
L.P. Shares beneficially owned also include 3,037,974 shares of common
stock issuable upon conversion of 28,715.70 shares of Series 1 preferred
stock held by KPCB VIII and 1,664.04 shares of Series 1 preferred stock
held by KPCB VIII Founders Fund, 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. All shares registered for sale are subject to the lock-
up agreement described above until 180 days after the date of
effectiveness of the registration statement. L. John Doerr is a general
partner of KPCB VIII and KPCB VII Associates, L.P., and is also a
director of drugstore.com. Mr. Doerr disclaims beneficial ownership of
the shares held by the KPCB entities except to the extent of his
pecuniary interest in those shares.
(6) Shares registered for sale hereby consist of 3,037,974 shares of common
stock issuable upon conversion of 28,715.70 shares of Series 1 preferred
stock held by KPCB VIII and 1,664.04 shares of Series 1 preferred stock
held by KPCB VIII Founders Fund, L.P. Shares beneficially owned consist
of 6,313,633 shares of common stock held by KPCB VIII, 365,600 shares of
common stock held by KPCB VIII Founders Fund, L.P., 351,538 shares of
common stock held by KPCB Life Sciences Zaibatsu Fund II, L.P. and
2,500 shares of common stock held by KPCB IX Associates, L.P.. Shares
beneficially owned also include 3,037,974 shares of common stock issuable
upon conversion of 28,715.70 shares of Series 1 preferred stock held by
KPCB VIII and 1,664.04 shares of Series 1 preferred stock held by KPCB
VIII Founders Fund, 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.
All shares registered for sale are subject to the lock-up agreement
described above until 180 days after the date of effectiveness of the
registration statement. 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.
(7) Shares registered for sale and shares beneficially owned consist of
405,063 shares of common stock held by Baron Asset Fund on behalf of the
Baron iOpportunity Fund series, 2,227,848 shares of common stock held by
Baron Asset Fund on behalf of the Baron Growth Fund series and 405,063
shares of common stock held by Baron Capital Funds Trust on behalf of the
Baron Capital Asset Fund series.
(8) Shares registered for sale hereby and shares beneficially owned consist
of 2,151,028 shares of common stock held by Integral Capital Partners IV,
L.P., 10,160 shares of common stock held by Integral Capital Partners IV
MS Side Fund, L.P., 866,444 shares of common stock held by Integral
Capital Partners V, L.P. and 10,343 shares of common stock held by
Integral Capital Partners V Side Fund, L.P.
19
<PAGE>
(9) Shares registered for sale and shares beneficially owned include 543,357
shares of common stock issuable upon conversion of 5,433.57 shares of
Series 1 preferred stock. All shares registered for sale are subject to
the lock-up agreement described above until 180 days after the date of
the effectiveness of the registration statement. William D. Savoy is a
director of drugstore.com and is the president of Vulcan Ventures, a
venture capital firm wholly-owned by Paul Allen. Mr. Savoy disclaims
beneficial ownership of shares held by Vulcan Ventures except to the
extent of his pecuniary interest in those shares.
(10) William R. Hearst III, a director of the Hearst Corporation, the parent
of Hearst Communications, Inc., is a partner in Kleiner Perkins Caufield
& Byers, one of the selling stockholders pursuant to the registration
statement of which this prospectus is a part and a holder of
approximately 15.3% of drugstore.com's outstanding common stock, as
described in the table above.
(11) All shares registered for sale are subject to the lock-up agreement
described above until 180 days after the date of effectiveness of the
registration statement. 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 Maveron
LLC's affiliated venture capital fund, Maveron Equity Partners, L.P. Mr.
Schultz disclaims beneficial ownership of shares held by these entities
except to the extent of his pecuniary interest in those shares.
(12) Shares beneficially owned include 110,652 shares of common stock held in
escrow by us pursuant to agreements in connection with our acquisition of
Beauty.com. Roger L. Barnett was the Chief Executive Officer of
Beauty.com at the time we acquired it in February 2000.
(13) Shares beneficially owned include 5,714 shares of common stock held in
escrow by us pursuant to agreements entered into in connection with our
acquisition of Beauty.com.
(14) Shares beneficially owned include 5,374 shares of common stock held in
escrow by us pursuant to agreements entered into in connection with our
acquisition of Beauty.com.
(15) Shares beneficially owned include 2,502 shares of common stock held in
escrow by us pursuant to agreements entered into in connection with our
acquisition of Beauty.com.
(16) Shares beneficially owned include 714 shares of common stock held in
escrow by us pursuant to agreements entered into in connection with our
acquisition of Beauty.com.
(17) Shares beneficially owned include 714 shares of common stock held in
escrow by us pursuant to agreements entered into in connection with our
acquisition of Beauty.com.
(18) Shares beneficially owned include 496 shares of common stock held in
escrow by us pursuant to agreements entered into in connection with our
acquisition of Beauty.com.
(19) Shares beneficially owned include 310 shares of common stock held in
escrow by us pursuant to agreements entered into in connection with our
acquisition of Beauty.com.
(20) Shares beneficially owned include 78 shares of common stock held in
escrow by us pursuant to agreements entered into in connection with our
acquisition of Beauty.com.
(21) Shares beneficially owned include 49 shares of common stock held in
escrow by us pursuant to agreements entered into in connection with our
acquisition of Beauty.com.
(22) Shares beneficially owned include 25 shares of common stock held in
escrow by us pursuant to agreements entered into in connection with our
acquisition of Beauty.com.
20
<PAGE>
RELATIONSHIPS
WITH SELLING STOCKHOLDERS
Amazon.com. We have a strategic relationship with Amazon.com whereby
Amazon.com advertises our Web services. We believe that the benefits of our
relationship with Amazon.com include their advertising our Web site and the
beneficial aspects of our being associated with one of the premier e-commerce
companies. Amazon.com is our largest stockholder, and Jeffrey P. Bezos,
Amazon.com's chairman of the board and chief executive officer, is a member of
our board of directors. As part of our relationship with Amazon.com, we
entered into a technology license and advertising agreement. This agreement
extends for ten years and can be terminated for breach or in the event that we
are acquired by a competitor of Amazon.com. This agreement contains provisions
generally relating to the sharing of technology and technical support;
however, we have decided to develop our own technology and there has been no
exchange of technology by either party to date. Specifically, this agreement
provides for the license of substantially all of each company's technology to
the other for use within their respective businesses that may be developed
through August 10, 2008. Neither company may use the other's technology to
compete against the other. Each party has committed to providing the other
with advertising on our respective Web sites through the term of the agreement
as mutually agreed upon. In addition, we agreed not to place advertisements
competitive to Amazon.com's business on our site. We have also agreed not to
sell advertising on our Web site to, link our Web site to, or promote on our
Web site any company that sells products or services competitive with those
that Amazon.com offers or that Amazon.com is preparing to produce or market.
We are currently restricted with respect to books, music, videos, electronics,
toys, home improvement products, software, gift centers, cards, auctions and
third party marketplace services through which third parties may advertise and
sell products or services. If Amazon.com expands into other areas this may
further limit the companies we can promote on our Web site. If we are acquired
by an Amazon.com competitor and Amazon.com does not vote in favor of the
transaction, we would lose our rights to advertise on Amazon.com's Web site,
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).
On January 24, 2000, we entered into an agreement with Amazon.com to
integrate various shopping features of our Web site and to create a
drugstore.com shopping presence on Amazon.com's Web site. Amazon.com has
agreed to promote the drugstore.com health and beauty product section of its
Web site to its customer base in a manner similar to its efforts with respect
to its other product sections. Under the agreement, the parties will also work
to implement additional features on the Amazon.com Web site designed to
improve customer shopping experiences, including integrated search and browse
capabilities and a shared shopping basket. The agreement also contains
exclusivity provisions restricting (1) the percentage of total revenues we can
obtain from the sale on our Web site of products or services other than
health, beauty (including cosmetics, fragrance, bathing and hair and skin care
products), wellness, personal care and prescription drug products, and (2) the
percentage of revenues Amazon.com or any other Amazon.com marketing partner
can receive from the sale of these types of products on its Web site other
than through its relationship with us. Under the original agreement, we agreed
to pay Amazon.com a total of $105.0 million over the three-year term of the
agreement. Concurrently with this agreement, we sold Amazon.com
1,066,667 shares of our common stock in a private placement transaction for
$28.125 per share, or approximately $30 million in the aggregate. In June
2000, we agreed with Amazon.com to restructure the payments to decrease the
payments in the second and third year of the contract to $15.0 million each
year and to include performance-based payments. Amazon.com also received a
warrant to purchase 2,500,000 shares of drugstore.com stock at $4.9375 per
share. The agreement may be terminated for breach or in certain other events.
Vulcan Ventures. In May 1999, we issued a convertible promissory note
convertible into 2,266,289 shares of Series D preferred stock to Vulcan
Ventures in exchange for $40 million in cash and an obligation to provide
cable television advertising valued at $5 million. The note was converted into
2,266,289 shares of Series D preferred stock in June 1999.
21
<PAGE>
PLAN OF DISTRIBUTION
Shares of our common stock held by the selling stockholders and covered by
this prospectus and, if applicable, any prospectus supplement, may be offered
and sold from time to time by the selling stockholders in one or more
transactions. These transactions may involve crosses or block transactions. The
selling stockholders will act independently of us in making decisions with
respect to the timing, manner and size of each sale. The selling stockholders,
which term includes their transferees, pledgees or donees or their successors,
may sell the shares being offered here as follows:
. on any of the United States securities exchanges or quotation services
where the common stock is listed or quoted at the time of the sale,
including the Nasdaq National Market where our common stock is listed;
. in transactions otherwise than on the exchanges or services described
above;
. in the over-the-counter market;
. in negotiated transactions or otherwise, including an underwritten
offering;
. in connection with short sales of our shares;
. by pledge or by grant of a security interest in the shares to secure
debts and other obligations;
. through the writing of options, whether the options are listed on an
option exchange or otherwise;
. in connection with the writing of non-traded and exchange-traded call
options or put options, in hedge transactions and in settlement of other
transactions in standardized or over-the-counter options;
. through the distribution of the shares by any selling stockholder to its
partners, members or stockholders; or
. in a combination of any of the above transactions.
In connection with the sale of the common stock or otherwise, the selling
stockholders may enter into hedging transactions with broker-dealers or other
financial institutions. These broker-dealers or other financial institutions
may in turn engage in short sales of the common stock and deliver these
securities to close out these short positions. They also may loan or pledge the
common stock to broker-dealers that in turn may sell the common stock.
The selling stockholders may sell their shares at market prices prevailing
at the time of the sale, at prices related to the prevailing market prices, at
negotiated prices or at fixed prices. The selling stockholders will receive the
proceeds from the sale of their shares, less discounts, commissions and other
expenses. We will not receive any proceeds from any sales of the common stock
by the selling stockholders. Each of the selling stockholders reserves the
right to accept and, together with their agents from time to time, to reject,
in whole or in part, any proposed purchase of the common stock to be made
directly through agents.
The selling stockholders may sell their shares directly to purchasers or may
use underwriters, broker-dealers or agents to sell their shares. Underwriters,
broker-dealers or agents who sell the shares may receive compensation in the
form of discounts, concessions, or commissions from the selling stockholders or
they may receive compensation from the purchasers of the shares for whom they
acted as agents or to whom they sold the shares as principal, or both. The
selling stockholders and any underwriters, broker-dealers or agents that
participate in the sale of their common stock may be deemed to be
"underwriters" within the meaning of the Securities Act. Any discounts,
commissions, concessions or profits received by these underwriters, broker-
dealers or agents on any resale of the shares may be underwriting discounts and
commissions under the Securities Act. Selling stockholders, who are
"underwriters" within the meaning of the Securities Act, will be subject to the
prospectus delivery requirements of the Securities Act.
Contemporaneously with the execution of the common stock purchase agreement
and the preferred stock purchase agreement on July 30, 2000, most of our
directors, officers, and some of our stockholders entered into
22
<PAGE>
lock-up agreements with us. The lock-up agreements generally provide that the
persons or entities signing the lock-up agreement 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 or otherwise transfer the risk of ownership of our Common
Stock, subject to various exclusions including transactions related to shares
acquired in the open market and specific transfers to related entities,
affiliates or immediate family members, for a period starting on July 30, 2000
and ending 180 days after the effective date of the registration statement of
which this prospectus is a part. Pursuant to the common stock purchase
agreement, we agreed not to waive the lock-up agreements with any holders of
our common stock without having obtained the consent of the holders of sixty-
seven percent of the common stock issued pursuant to the common stock purchase
agreement. We also agreed not to waive any lock-up agreement with respect to a
particular person without waiving the lock-up agreements with respect to all
covered persons. 46,331,017 shares, including 2,500,000 shares which can be
purchased by Amazon.com pursuant to a warrant we granted to them and various
other vested options exercisable within 60 days of August 31, 2000 and
representing approximately 68% of our common stock outstanding, are subject to
lock-up agreements and cannot be sold until the lock-up agreements expire or
are waived by us in accordance with the provisions of the common stock purchase
agreement.
The selling stockholders have acknowledged that they understand their
obligations to comply with the provisions of the Securities Exchange Act of
1934, as amended, and the rules thereunder relating to stock manipulation,
particularly Regulation M, and have agreed that they will not engage in any
transaction in violation of the Exchange Act.
We will pay all fees and expenses incurred in connection with preparing and
filing this prospectus and any prospectus supplement and the registration
statement and any amendment thereto. The selling stockholders will pay any
underwriting discounts, brokerage commissions and similar selling expenses, if
any, in connection with the sale of the shares of common stock, including stock
transfer taxes due or payable in connection with the sale of the shares.
We have agreed to keep the registration statement, of which this prospectus
and any subsequent prospectus supplements constitute a part, effective for the
earlier of the date that all shares of common stock covered by this prospectus
are sold by the selling stockholders or 18 months from the date that this
registration statement is declared effective by the SEC. We will extend the
time that this prospectus is effective if during this 18-month period we
suspend the use of this prospectus. There can be no assurance that the selling
stockholders will sell all or any of the shares of common stock covered by this
prospectus.
Under the securities laws of some states, the shares of the common stock
covered by this prospectus may be sold in such states only through registered
or licensed brokers or dealers.
Selling stockholders may also resell all or a portion of their common stock
in open market transactions in reliance upon Rule 144 under the Securities Act.
However, to do so, they must meet the criteria and conform to the requirements
of the Rule. In addition, any securities covered by this prospectus that
qualify for sale pursuant to Rule 144A of the Securities Act, as amended, may
be sold under Rule 144A rather than pursuant to this prospectus.
We have entered into registration rights agreements, contained in the stock
purchase agreements attached to this registration statement as Exhibits 10.1
and 10.2 and the Fourth Amended and Restated Investors' Rights Agreement as
amended by addenda and incorporated herein by reference, to allow the selling
stockholders to register the common stock covered by this prospectus under
applicable federal and state securities laws from time to time. Pursuant to
these agreements, we have agreed to indemnify the selling stockholders, and the
selling stockholders have agreed to indemnify us, and each of us has agreed to
indemnify other persons named and/or described in the stock purchase
agreements, in each case against various liabilities, including some
liabilities arising under the Securities Act in connection with the offer and
sale of the common stock by the selling stockholders.
23
<PAGE>
DESCRIPTION OF CAPITAL STOCK
As of August 31, 2000, there were 61,169,207 shares of common stock
outstanding and 45,939.89 shares of Series 1 preferred stock outstanding. We
are authorized to issue 250,000,000 shares of common stock, $.000l par value,
and 10,000,000 shares of preferred stock, $.000l par value, 100,000 shares of
which have been designated by our board of directors as Series 1 preferred
stock.
The following summary description of our capital stock is not complete and
is qualified in its entirety by our certificate of incorporation, bylaws, and
the certificate of designation of the Series 1 Preferred Stock that have been
filed, or are incorporated by reference, as exhibits to the registration
statement on Form S-3 of which this prospectus forms a part. This description
is also qualified 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 our 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.
Preferred Stock
Our board of directors has 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. Except for
the potential issuance of an additional 54,060.11 shares of Series 1 preferred
stock, drugstore.com has no present plans to issue any shares of preferred
stock.
Series 1 Preferred Stock
On August 4, 2000, we issued and sold 45,939.89 shares of our Series 1
preferred stock concurrently with the issuance and sale of 8,101,264 shares of
our common stock, par value $.0001. The Series 1 preferred stock was issued
pursuant to a preferred stock purchase agreement, attached to the registration
statement of which this prospectus is a part as Exhibit 10.2.
Voting Rights. The holders of our Series 1 preferred stock have no voting
rights except as may be required by law.
Distributions, Reorganization and Liquidation. Holders of our Series 1
preferred stock are not entitled to receive dividends unless dividends are
declared on our common stock. If dividends are declared on our common stock,
each share of our Series 1 preferred stock will receive the same amount of
dividends, on an as-converted basis, as is received by each share of our common
stock. In the event of a liquidation, dissolution or winding up of
drugstore.com, the holders of our Series 1 preferred stock, subject to the
rights of other holders
24
<PAGE>
of our preferred stock, are entitled to receive a liquidation preference,
currently $5.00 per share, and following payment of the liquidation preference,
are entitled to share ratably on an as-converted basis in all of our remaining
assets. The sale of all or substantially all of our assets is treated as a
liquidation, unless approved by holders of 67% of the Series 1 preferred stock.
Upon mergers or reorganizations involving a change of control of us, holders of
Series 1 preferred stock shall receive the same consideration, on an as-
converted basis, from such transaction as is received by holders of our common
stock.
Conversion and Repurchase. If our stockholders approve conversion of the
Series 1 preferred stock by May 1, 2001, each share of the Series 1 preferred
stock will immediately be converted into 100 shares of our common stock,
subject to adjustment for stock splits, stock dividends, recapitalization or
other similar events. If our stockholders have not approved conversion of the
Series 1 preferred stock by May 1, 2001, drugstore.com must repurchase for
cash, at the then current market price of our common stock, each share of
Series 1 preferred stock, on an as-converted basis.
The Series 1 preferred stock has no preemptive or other subscription rights.
There are no redemption or sinking fund provisions applicable to the Series 1
preferred stock.
Amazon.com Warrant
Under a warrant agreement dated July 30, 2000, we granted Amazon.com a
warrant to purchase 2,500,000 shares of our common stock. The exercise price is
$4.9375 per share, subject to adjustment for stock dividends, stock splits,
recapitalizations, mergers, reorganizations or other similar circumstances. The
warrant can be exercised before July 30, 2002.
Tel-Drug Warrant
Under a warrant agreement dated June 26, 2000, we granted Tel-Drug, Inc. a
warrant to purchase 500,000 shares of our common stock. The exercise price is
$7.76 per share, subject to adjustment for stock dividends, stock splits,
recapitalizations, mergers, reorganizations or other similar events. The
warrant can be exercised on or before June 26, 2005.
Registration Rights
A provision of the stock purchase agreement and preferred stock purchase
agreement, both dated July 30, 2000, under which we issued 8,101,264 shares of
our common stock and 45,939.89 shares of the Series 1 preferred stock, require
us to file a registration statement covering the resale of the 8,101,264 shares
originally issued as common stock and the shares of common stock issued if the
Series 1 preferred stock is converted. We filed the registration statement of
which this prospectus is a part because of our obligations under the common
stock purchase agreement and the preferred stock purchase agreement. We agreed
to keep the registration statement effective until the earlier of the date that
the 12,695,253 shares of our common stock we agreed to register under the
common and preferred stock purchase agreements has been sold or until the date
that is 18 months after the effective date of the registration statement. We
will extend the time that this prospectus is effective if during this 18-month
period we suspend the use of this prospectus.
The holders of 36,207,722 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 pursuant to the
terms of an investors' rights agreement between drugstore.com and the holders
of the registrable securities. Under these registration rights, holders of at
least 33% of the then-outstanding registrable securities may require on three
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 million. 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 statement,
provided we are eligible to use Form S-3 or similar short-form registration
statement and provided further that the value of the securities to be
registered is at least $500,000. Furthermore,
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<PAGE>
the holders of registrable securities are entitled to include their shares of
common stock in this registration and in any future registration of shares of
our common stock for purposes of effecting any public offering, 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.
The registration rights of all holders other than Rite Aid and GNC will
terminate 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. The registration rights of Rite Aid and
GNC terminate ten years after the date of our initial public offering.
In addition, subject to various limitations, including the release of such
shares from escrow arrangements, the holders of 732,130 shares of common stock
issued in connection with our acquisition of Beauty.com are entitled to include
their shares in any registration we initiate covering the sale by us of shares
of our common stock, on the same terms and subject to the same conditions as
the holders of the registrable securities except that the rights of the holders
of the shares are subordinate to the rights of the holders of our other
registrable securities. Holders of 716,154 shares of our common stock issued in
connection with the acquisition of Beauty.com are registering their shares in
the registration statement of which this prospectus is a part.
We also granted registration rights in 750,000 shares of our common stock to
WellPoint Health Networks, Inc. or WellPoint, which we issued in connection
with our June 23, 2000 agreement with WellPoint. Under this agreement, subject
to limitations including a prohibition against selling more than 325,000 shares
during any 90-day period, WellPoint is entitled, subordinate to the rights of
the holders of our other registrable securities, to include their shares in any
registration initiated by us.
A provision of the investors' rights agreement between drugstore.com and
some of our stockholders precludes Kleiner Perkins Caufield & Byers,
Amazon.com, Maveron Equity Partners, Rite Aid and GNC from purchasing
additional shares of our common stock without our prior approval if the
purchase would cause them to hold more than 40% of our outstanding common stock
(calculated on a fully-diluted basis to include outstanding options and shares
reserved under our stock plans). This restriction lasts until August 2002.
Delaware and Washington 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
26
<PAGE>
officers and shares in employee stock plans in which the participants
have no right to determine confidentially whether shares held subject to
the plan will be tendered in a tender or exchange offer; or
. on or subsequent to such date the business combination is approved by
the board of directors and authorized by 66 2/3% vote at an annual or
special meeting of stockholders.
A business combination generally includes a merger, asset or stock sale, or
other transaction resulting in a financial benefit to the interested
stockholder. In general, an "interested stockholder" is a person who, together
with affiliates and associates, owns, or within three years prior to the
determination of interested stockholder status, did own, 15% or more of a
corporation's voting stock.
The laws of the State of Washington, where our principal executive offices
are located, also impose restrictions on certain transactions between certain
foreign corporations and significant stockholders. Chapter 23B.19 of the
Washington Business Corporation Act (the WBCA) prohibits a "target
corporation," with certain exceptions, from engaging in certain "significant
business transactions" with a person or group of persons who beneficially own
10% or more of the voting securities of the target corporation (an "acquiring
person") for a period of five years after such acquisition, unless the
transaction or acquisition of such shares is approved by a majority of the
members of the target corporation board of directors prior to the time of
acquisition. Such prohibited transactions include, among other things, a merger
or consolidation with, disposition of assets to, or issuance or redemption of
stock to or from, the acquiring person, termination of 5% or more of the
employees of the target corporation as a result of the acquiring person's
acquisition of 10% or more of the shares or allowing the acquiring person to
receive disproportionate benefit as a stockholder. After the five-year period,
a significant business transaction may take place as long as it complies with
certain fair price provisions of the statute.
A "target corporation" includes a foreign corporation if (1) the corporation
has a class of voting stock registered pursuant to Section 12 or 15 of the
Exchange Act, (2) the corporation's principal executive office is located in
Washington, (3) any of (a) more than 10% of the corporation's stockholders of
record are Washington residents, (b) more than 10% of its shares are owned of
record by Washington residents, or (c) 1,000 or more of its stockholders of
record are Washington residents, (4) a majority of the corporations employees
are Washington residents or more than 1,000 Washington residents are employees
of the corporation, and (5) a majority of the corporation's tangible assets are
located in Washington or the corporation has more than $50.0 million of
tangible assets located in Washington. A corporation may not "opt out" of this
statute and, therefore, we anticipate that this statute will apply to us.
Depending upon whether we meet the definition of a target corporation,
Chapter 23B.l9 of the WBCA may have the effect of delaying, deferring or
preventing a change in control of us.
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.
Dividend Policy
We have never declared or paid cash dividend 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 near future.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is ChaseMellon
Shareholder Services LLC.
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<PAGE>
LEGAL MATTERS
Certain legal matters relating to the validity of the common stock we are
registering hereby are being passed upon for drugstore.com by Simpson Thacher &
Bartlett, Palo Alto, California.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements and schedule included in our annual report on form 10-K/A for the
year ended January 2, 2000, as set forth in their report, which is incorporated
by reference in this prospectus and elsewhere in the registration statement of
which this prospectus is a part. Our financial statements and schedule are
incorporated by reference in reliance on Ernst & Young LLP's report, given on
their authority as experts in accounting and auditing.
WHERE YOU CAN FIND INFORMATION
We have filed with the SEC a registration statement on Form S-3 to register
the common stock offered by this prospectus. However, this prospectus does not
contain all of the information contained in the registration statement and the
exhibits and schedules to the registration statement. We strongly encourage you
to carefully read the registration statement and the exhibits and schedules to
the registration statement.
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any materials on file with the
SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W., Judiciary
Plaza, Washington, D.C. 20549, as well as at the SEC's regional offices at 500
West Madison Street, Suite 1400, Chicago, Il 60661 and 7 World Trade Center,
Suite 1300, New York, NY 10048. Our filings are available to the public over
the Internet at the SEC's website at http://www.sec.gov. Please call the SEC at
1-800-SEC-0330 for further information on the Public Reference Room.
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<PAGE>
INCORPORATION BY REFERENCE
The SEC allows us to "incorporate by reference" the information we file with
them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
an important part of this prospectus, and information that we file later with
the SEC will automatically update and supersede this information. We
incorporate by reference the documents listed below and any future filings made
with the SEC under Sections 13(a), 13(c), 14, or 15(d) of the Securities
Exchange Act of 1934 until the earlier of the date that the selling
stockholders sell all of the common stock or 18 months following the effective
date of the registration statement:
. Our Annual Report on Form 10-K for the fiscal year ended January 2,
2000, as amended;
. Our Quarterly Reports on Form 10-Q for the quarters ended April 2, 2000
and July 2, 2000;
. The description of our capital stock, and related exhibits, contained in
our Registration Statements on Form S-1, as amended, filed with the
commission on May 19, 1999 and February 9, 2000; and
. Our Report on Form 8-K filed on August 7, 2000.
You can get a free copy of any of the documents incorporated by reference by
making an oral or written request directed to:
Investor Relations
drugstore.com, inc.
13920 Southeast Eastgate Way, Suite 300
Bellevue, Washington 98005
Telephone (425) 372-3200
You should rely only on the information contained or incorporated in this
prospectus or any supplement. We have not authorized anyone else to provide you
with different information. You should not rely on any other representations.
Our affairs may change after this prospectus or any supplement is distributed.
You should not assume that the information in this prospectus or any supplement
is accurate as of any date other than the date on the front of those documents.
You should read all information supplementing this prospectus.
29
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses Of Issuance And Distribution
The following is an itemization of all fees and expenses incurred or
expected to be incurred by the Registrant in connection with the issuance and
distribution of the securities being registered hereby, other than underwriting
discounts and commissions. All but the Securities and Exchange Commission
registration fee are estimates and remain subject to future contingencies.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............. $ 20,748
Legal fees and expenses......................................... $ 70,000
Accounting fees and expenses.................................... $ 50,000
Printing and engraving fees..................................... $ 8,000
Miscellaneous expenses.......................................... $ 252
--------
Total......................................................... $149,000
========
</TABLE>
Item 15. Indemnification Of Directors And Officers
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's board of directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933, as amended (the Act).
Article XIII of registrant's certificate of incorporation and sections 6.1 and
6.2 of Article VI of registrant's bylaws provide for indemnification of its
directors, officers, employees and other agents to the maximum extent permitted
by the Delaware General Corporation Law. In addition, registrant has entered
into indemnification agreements with its directors and officers. The
indemnification agreements may require registrant, among other things, to
indemnify its directors against certain liabilities that may arise by reason of
their status or service as directors (other than liabilities arising from
willful misconduct of culpable nature), to advance their expenses incurred as a
result of any proceeding against them as to which they could be indemnified,
and to obtain directors' insurance if available on reasonable terms. The stock
purchase agreements (Exhibits 10.1 and 10.2 hereto) also provide for cross
indemnification among drugstore.com and the selling stockholders with respect
to various matters, including matters arising under the Act.
Item 16. Exhibits
The following exhibits are filed as part of this registration statement:
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
4.1 Form of drugstore.com's common stock certificate.
4.2 Certificate of Designation of Series 1 Preferred Stock (Incorporated
by reference to exhibit number 3.1a to drugstore.com's quarterly
report on Form 10-Q for the quarterly period ended July 2, 2000 (file
number 000-26137), filed August 11, 2000).*
4.3 Amazon.com Warrant, dated July 30, 2000.*
4.4 Tel-Drug Agreement, dated June 26, 2000.*
5.1 Opinion of Simpson Thacher & Bartlett.
10.1 Common Stock Purchase Agreement dated July 30, 2000.*
10.2 Series 1 Preferred Stock Purchase Agreement dated July 30, 2000.*
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
10.3 Amendment No. 1, dated July 29, 2000, to the Agreement between
Amazon.com Commerce Services, Inc. and the Registrant dated January
24, 2000.*+
10.4 Agreement between drugstore.com, inc. and WellPoint Health Networks
Inc. dated June 23, 2000.*
10.5 Fourth Amended and Restated Investors' Rights Agreement dated May 19,
1999 (Incorporated by reference to Exhibit 10.12 to drugstore.com's
registration statement on Form S-1, file number 333-78813, filed May
19, 1999).*
10.6 Third Addendum to Fourth Amended and Restated Investors' Rights
Agreement dated January 24, 2000 (Incorporated by reference to exhibit
10.38 to drugstore.com's registration statement on Form S-1, file
number 333-96441, filed February 9, 2000).*
10.7 Fourth Addendum to Fourth Amended and Restated Investors' Rights
Agreement dated September 29, 2000.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Simpson Thacher & Bartlett (included in Exhibit 5.1).
24.1 Power of Attorney (included on the signature page).
</TABLE>
--------
* Previously filed.
+ Confidential treatment requested.
Item 17. Undertakings
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change
in the maximum aggregate offering price set forth in the "Calculation
of Registration Fee" table in the effective Registration Statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration
Statement;
provided, however, that paragraphs (a)(1)(i) and (1)(ii) do not apply if
the information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed with or furnished
to the Commission by the registrant pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-2
<PAGE>
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Exchange Act, (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Exchange Act) that is
incorporated by reference in the registration statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by a registrant of expenses incurred or
paid by a director, officer or controlling person of such registrant in the
successful defense of any action suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
[The rest of this page is intentionally left blank.]
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Bellevue, the second day of October, 2000.
drugstore.com, inc.
/s/ Peter M. Neupert
By: _________________________________
Peter M. Neupert
Chairman of the Board, President
and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears
below (the "Signatory") constitutes and appoints Peter M. Neupert and David E.
Rostov, and each of them individually, (the "Agent") as his true and lawful
attorney-in-fact, agent and proxy, with full power of substitution and
resubstitution, for and in his name, place and stead, in any and all
capacities, to (i) act on, sign and file with the Securities and Exchange
Commission any and all amendments (including post-effective amendments) to this
Registration Statement together with all schedules and exhibits thereto, (ii)
act on and file any supplement to any prospectus included in this Registration
Statement or any such registration statement or amended and (iii) take any and
all actions which may be necessary or appropriate in connection therewith, and
that each Signatory hereby ratifies and confirms all that said attorneys-in-
fact, or their substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities indicated and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Peter M. Neupert Chairman of the Board, September 5, 2000
______________________________________ President, Chief
(Peter M. Neupert) Executive Officer and
Director
/s/ David Rostov Vice President, Chief September 5, 2000
______________________________________ Financial Officer and
(David Rostov) Treasurer (Principal
Financial and Principal
Accounting Officer)
/s/ Jeffery P. Bezos Director September 29, 2000
______________________________________
(Jeffrey P. Bezos)
/s/ Brook H. Byers Director September 5, 2000
______________________________________
(Brook H. Byers)
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ L. John Doerr Director September 5, 2000
______________________________________
(L. John Doerr)
/s/ Melinda French Gates Director September 5, 2000
______________________________________
(Melinda French Gates)
/s/ Mary Sammons Director September 5, 2000
______________________________________
(Mary Sammons)
/s/ William D. Savoy Director September 5, 2000
______________________________________
(William D. Savoy)
/s/ Howard Schultz Director September 5, 2000
______________________________________
(Howard Schultz)
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
4.1 Form of drugstore.com's common stock certificate.
4.2 Certificate of Designation of Series 1 Preferred Stock (Incorporated
by reference to exhibit number 3.1a to drugstore.com's quarterly
report on Form 10-Q for the quarterly period ended July 2, 2000 (file
number 000-26137), filed August 11, 2000).*
4.3 Amazon.com Warrant, dated July 30, 2000.*
4.4 Tel-Drug Agreement, dated June 26, 2000.*
5.1 Opinion of Simpson Thacher & Bartlett.
10.1 Common Stock Purchase Agreement dated July 30, 2000.*
10.2 Series 1 Preferred Stock Purchase Agreement dated July 30, 2000.*
10.3 Amendment No. 1, dated July 29, 2000, to the Agreement between
Amazon.com Commerce Services, Inc. and the Registrant dated January
24, 2000.*+
10.4 Agreement between drugstore.com, inc. and WellPoint Health Networks
Inc. dated June 23, 2000.*
10.5 Fourth Amended and Restated Investors' Rights Agreement dated May 19,
1999 (Incorporated by reference to Exhibit 10.12 to drugstore.com's
registration statement on Form S-1, file number 333-78813, filed May
19, 1999).*
10.6 Third Addendum to Fourth Amended and Restated Investors' Rights
Agreement dated January 24, 2000 (Incorporated by reference to exhibit
10.38 to drugstore.com's registration statement on Form S-1, file
number 333-96441, filed February 9, 2000).*
10.7 Fourth Addendum to Fourth Amended and Restated Investors' Rights
Agreement dated September 29, 2000.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Simpson Thacher & Bartlett (included in Exhibit 5.1).
24.1 Power of Attorney (included on the signature page).
</TABLE>
--------
* Previously filed.
+ Confidential treatment requested.
