<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended April 2, 2000
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-78813
DRUGSTORE.COM, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 04-3416255
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
</TABLE>
13920 Southeast Eastgate Way, Suite 300
Bellevue, Washington 98005
(Address of principal executive offices)
(425) 372-3200
(Registrant's telephone number)
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes X No
The number of shares of common stock, $.0001 par value, outstanding on May 1,
2000 was 52,170,645 .
----------------
<PAGE>
DRUGSTORE.COM, INC.
CONTENTS
PART I -- FINANCIAL INFORMATION
<TABLE>
<C> <S> <C>
Item 1. Financial Statements............................................ 1
Condensed Consolidated Balance Sheets as of April 2, 2000 and
January 2, 2000................................................. 1
Condensed Consolidated Statements of Operations for the Three
Months Ended April 2, 2000 and April 4, 1999................... 2
Condensed Consolidated Statement of Stockholders' Equity for the
Three Months Ended April 2, 2000............................... 3
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended April 2, 2000 and April 4, 1999................... 4
Notes to Condensed Consolidated Financial Statements............ 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 12
PART II -- OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds....................... 13
Item 6. Exhibits and Reports on Form 8-K................................ 13
SIGNATURES............................................................... 14
</TABLE>
i
<PAGE>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
DRUGSTORE.COM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
April 2, January 2,
2000 2000
----------- ----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (including restricted cash of
$11,865 as of April 2, 2000).......................... $ 136,022 $ 26,526
Marketable securities.................................. 38,710 106,228
Accounts receivable, less allowance for doubtful
accounts and sales returns of $361 and $251........... 4,903 4,273
Inventories............................................ 7,158 2,862
Prepaid marketing expenses............................. 37,301 8,010
Other current assets................................... 2,812 1,333
--------- ---------
Total current assets.................................. 226,906 149,232
Fixed assets, net of accumulated depreciation of $4,483
and $3,179............................................. 40,947 25,208
Intangible assets, net of accumulated amortization of
$17,895 and $10,673.................................... 228,082 200,742
Prepaid marketing expenses.............................. 18,893 19,465
Note receivable from officer............................ 273 269
Deposits and other assets............................... 4,734 792
--------- ---------
Total assets............................................ $ 519,835 $ 395,708
========= =========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................... $ 32,876 $ 25,788
Accrued compensation................................... 3,987 4,231
Accrued marketing expenses............................. 15,882 8,520
Other current liabilities.............................. 1,862 1,245
Current portion of capital lease obligations........... 2,824 2,488
--------- ---------
Total current liabilities............................. 57,431 42,272
Capital lease obligations, less current portion......... 2,253 2,687
Stockholders' equity:
Preferred stock, $.0001 par value:
Authorized shares--10,000,000
Issued and outstanding shares--none.................. -- --
Common stock, $.0001 par value, stated at amounts paid
in:
Authorized shares--250,000,000
Issued and outstanding shares--52,112,769 and
43,508,808 as of April 2, 2000 and January 2, 2000,
respectively........................................ 655,114 485,377
Deferred stock-based compensation...................... (21,623) (10,770)
Accumulated deficit.................................... (173,340) (123,858)
--------- ---------
Total stockholders' equity............................ 460,151 350,749
--------- ---------
Total liabilities and stockholders' equity.............. $ 519,835 $ 395,708
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
1
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DRUGSTORE.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
--------------------
April 2, April 4,
2000 1999
---------- --------
<S> <C> <C>
Net sales............................................... $ 22,738 $ 652
Costs and expenses:
Cost of sales.......................................... 21,596 672
Marketing and sales (1)................................ 29,917 5,189
Technology and content (2)............................. 6,941 2,713
General and administrative (3)......................... 4,806 1,713
Amortization of intangible assets...................... 7,222 18
Amortization of stock-based compensation............... 3,343 1,257
---------- --------
Total costs and expenses.............................. 73,825 11,562
---------- --------
Operating loss.......................................... (51,087) (10,910)
Interest income, net.................................... 1,605 318
---------- --------
Net loss................................................ $ (49,482) $(10,592)
========== ========
Basic and diluted net loss per share.................... $ (1.09) $ (10.89)
========== ========
Weighted average shares outstanding used to compute
basic and diluted net loss per share................... 45,229,624 972,614
========== ========
</TABLE>
- --------
(1) Excludes amortization of stock-based compensation of $488 and $391 for the
three months ended April 2, 2000 and April 4, 1999, respectively.
(2) Excludes amortization of stock-based compensation of $694 and $463 for the
three months ended April 2, 2000 and April 4, 1999, respectively.
(3) Excludes amortization of stock based compensation of $2,161 and $403 for
the three months ended April 2, 2000 and April 4, 1999, respectively.
See accompanying notes to condensed consolidated financial statements.
2
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DRUGSTORE.COM, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
Convertible
Preferred
Stock Common Stock Deferred
------------- ------------------- Stock-based Accumulated
Shares Amount Shares Amount Compensation Deficit Total
------ ------ ---------- -------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 2,
2000................... -- $-- 43,508,808 $485,377 $(10,770) $(123,858) $350,749
Issuance of common stock
for cash in secondary
public offering, net of
offering costs of
$6,400................. -- -- 6,000,000 101,600 -- -- 101,600
Private placement of
common stock........... -- -- 1,066,667 30,000 -- -- 30,000
Acquisition of
Beauty.com............. -- -- 1,266,289 37,448 (15,037) -- 22,411
Exercise of common stock
options................ -- -- 180,654 150 -- -- 150
Employee stock purchase
plan................... -- -- 87,719 1,380 -- -- 1,380
Deferred stock-based
compensation, net of
cancellations.......... -- -- 2,632 (841) 841 -- --
Amortization of stock-
based compensation..... -- -- -- -- 3,343 -- 3,343
Net loss and
comprehensive loss..... -- -- -- -- -- (49,482) (49,482)
--- --- ---------- -------- -------- --------- --------
Balance at April 2,
2000................... -- $-- 52,112,769 $655,114 $(21,623) $(173,340) $460,151
=== === ========== ======== ======== ========= ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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DRUGSTORE.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months
Ended
------------------
April 2, April 4,
2000 1999
-------- --------
<S> <C> <C>
Operating Activities:
Net loss.................................................. $(49,482) $(10,592)
Adjustments to reconcile net loss to net cash used in
operating activities:
Non-cash expenses:
Depreciation........................................... 1,881 311
Marketing and sales.................................... 572 1,007
Amortization of intangible assets...................... 7,222 18
Amortization of stock-based compensation............... 3,343 1,257
Changes in:
Accounts receivable.................................... (583) (112)
Inventories............................................ (3,349) (1,323)
Prepaid marketing expenses............................. (2,291) (469)
Other current assets................................... (1,426) (106)
Deposits and other assets.............................. (3,942) (1,301)
Accounts payable and accrued expenses.................. (3,690) 1,519
Other.................................................. (4) (6)
-------- --------
Net cash used in operating activities..................... (51,749) (9,797)
Investing Activities:
Purchases of marketable securities........................ 84,815 --
Sales of marketable securities............................ (17,297) --
Purchase of fixed assets.................................. (8,545) (1,530)
Purchase of intangible assets............................. (29) (10)
Business acquisition, net of cash received................ (335) --
-------- --------
Net cash provided by (used in) investing activities....... 58,609 (1,540)
Financing Activities:
Proceeds from sale of common stock........................ 101,600 --
Proceeds from exercise of stock options and employee stock
purchase plan............................................ 1,530 --
Proceeds from sale of preferred stock..................... -- 34,981
Principal payments on capital lease obligations........... (494) (45)
-------- --------
Net cash provided by financing activities................. 102,636 34,936
-------- --------
Net increase in cash and cash equivalents................. 109,496 23,599
Cash and cash equivalents at beginning of period.......... 26,526 14,408
-------- --------
Cash and cash equivalents at end of period................ $136,022 $ 38,007
======== ========
Supplemental Cash Flow Information:
Cash paid for interest.................................... $ 51 $ 8
Equipment acquired in capital lease agreements............ $ 395 $ --
Issuance of common stock in connection with business
acquisition.............................................. $ 37,448 $ --
Issuance of common stock in exchange for prepaid
advertising and software................................. $ 30,000 $ --
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
DRUGSTORE.COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in conformity with generally accepted accounting principles for
interim financial information and with the instructions for Form 10-Q and
Article 10 of Regulation S-X. Accordingly, certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed, or omitted,
pursuant to the rules and regulations of the Securities and Exchange
Commission. In our opinion, the statements include all adjustments necessary
(which are of a normal and recurring nature) for the fair presentation of the
results of the interim periods presented. These condensed consolidated
financial statements should be read in conjunction with our audited
consolidated financial statements, and accompanying notes, included in the
Company's Annual Report on Form 10-K for the year ended January 2, 2000, filed
with the Securities and Exchange Commission on March 16, 2000. Our results of
operations for any interim period are not necessarily indicative of the results
of operations for any other interim period or for a full fiscal year.
Reclassifications. Certain prior period amounts have been reclassified to
conform with the current period presentation.
Restricted cash and cash equivalents. At April 2, 2000, approximately $11.9
million of cash and cash equivalents held by the Company were not available to
fund any of the cash needs of our business, as it represents collateral for
letters of credit for leases and certain other operating agreements.
2. Net Loss Per Share
Net loss per share is computed using the weighted average number of shares
of common stock outstanding less the number of shares subject to repurchase or
contingently issuable pursuant to contractual terms. Shares associated with
stock options, warrants and the convertible preferred stock are not included in
the calculation of diluted net loss per share because they are antidilutive.
The following table sets forth the computation of basic and diluted net loss
per share for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended
------------------------
April 2, April 4,
2000 1999
----------- -----------
(in thousands,
except share
and per share data)
<S> <C> <C>
Net loss......................................... $ (49,482) $ (10,592)
=========== ===========
Weighted average shares outstanding.............. 46,392,445 2,323,000
Less weighted average shares subject to
repurchase or contingently issuable pursuant to
contract terms.................................. (1,162,821) (1,350,386)
----------- -----------
Shares used in computation of basic and diluted
net loss per share.............................. 45,229,624 972,614
=========== ===========
Basic and diluted net loss per share............. $ (1.09) $ (10.89)
=========== ===========
</TABLE>
At April 2, 2000 there were 7,182,576 stock options outstanding that were
excluded from the computation of diluted net loss per share as their effect was
antidilutive. If the Company had reported net income, the calculation of these
per share amounts would have included the dilutive effect of these common stock
equivalents using the treasury stock method.
5
<PAGE>
3. Business Acquisition and Strategic Agreements
In January 2000, the Company reached an agreement with Amazon.com to provide
certain advertising services over a three-year term for $105.0 million.
Concurrently, Amazon.com agreed to purchase 1,066,667 shares of the Company's
common stock for $28.125 per share or approximately $30.0 million in a private
placement transaction.
In February 2000, the Company acquired Beauty.com, Inc. ("Beauty.com"), an
online retailer of prestige beauty products, in exchange for 1.3 million shares
of drugstore.com common stock. The total purchase price was determined to be
approximately $37.4 million, based on the average closing stock price on the
four days surrounding January 12, 2000, the date the transaction was announced.
Of the 1.3 million shares issued, approximately 587,000 shares are contingently
issuable pursuant to a two-year employment agreement with the founder of
Beauty.com as well as certain other contractual terms. Of the 587,000
contingently issuable shares, approximately 69,000 shares are to be issued to
shareholders other than the founder of Beauty.com. The value of these shares
will be recognized as an adjustment to goodwill when the contractual terms of
the agreement have been met, based on the fair value of the Company's common
stock at that time. The acquisition has been accounted for as a purchase, and
in accordance with APB Opinion No. 16 all identifiable assets were assigned a
portion of the purchase price on the basis of their respective fair values. In
connection with the acquisition, the Company recognized approximately $34.5
million of intangible assets which were allocated to domain names, customer
lists and goodwill based on an independent valuation. The Company will amortize
such intangible assets over their estimated useful lives of three years. The
Company also recognized approximately $15.0 million in deferred stock-based
compensation as a result of the employment agreement with the founder of
Beauty.com, which will be amortized over the two-year term of the employment
agreement. The pro forma consolidated financial information for the three-month
periods ended April 2, 2000 and April 4, 1999, determined as if the acquisition
had occurred on January 1, 1999, would have resulted in net sales of $22.9
million and $0.7 million, net loss of $54.4 million and $15.8 million, and
basic and diluted net loss per share of $1.19 and $9.67, respectively. This
unaudited pro forma information is presented for illustrative purposes only and
is not necessarily indicative of the results that would have been achieved had
the Company and Beauty.com been combined during the specified periods.
In February 2000, the Company entered into a five-year definitive agreement
with Medibuy.com, Inc. ("Medibuy"), an e-commerce solution for healthcare
supply procurement, to develop a co-branded e-commerce marketplace targeted at
the home healthcare market. Pursuant to this agreement, the Company is required
to pay transaction fees to Medibuy for goods it sells on the co-branded Web
site as well as new customer referral fees. Medibuy is required to pay
drugstore.com a percentage of transaction fees generated on the co-branded Web
site from sellers other than drugstore.com. Medibuy is also required to spend
at least $10.0 million over the five-year term to promote the co-branded Web
site. The agreement may be terminated early by either party if certain
performance requirements are not met. As of April 2, 2000, no revenues or
expenses had been recorded as a result of this transaction. In connection with
this agreement the Company has received warrants to purchase 700,000 shares of
Medibuy common stock. As Medibuy is a privately owned company, the Company
could not determine the fair value of the warrants; accordingly, such amounts
are not reflected on the Company's condensed consolidated balance sheet as of
April 2, 2000.
4. Stockholder's Equity
On March 15, 2000, the Company completed the sale of 6,020,000 shares of its
common stock at $18.00 per share. Of the 6,020,000 shares offered, 6,000,000
were offered by the Company and 20,000 were offered by an existing shareholder.
Net proceeds to the Company aggregated approximately $101.6 million.
6
<PAGE>
5. Stock Options
The following table summarizes activity under the Company's stock plans:
<TABLE>
<CAPTION>
Outstanding Options
---------------------------
Weighted-Average
Shares Available Number of Exercise Price
for Grant Shares Per Share
---------------- --------- ----------------
<S> <C> <C> <C>
Outstanding at January 2,
2000........................ 4,939,089 5,850,658 $16.49
Beauty.com plan adjustment.. 32,404 -- --
Options granted............. (1,898,768) 1,898,768 24.12
Options exercised........... -- (180,654) .83
Options canceled............ 386,446 (386,196) 12.93
---------- ---------
Outstanding at April 2,
2000........................ 3,459,171 7,182,576 $19.09
========== =========
</TABLE>
As of April 2, 2000, of the total options outstanding, 572,479 were
exercisable with a weighted-average exercise price of $6.29 per share.
On May 4, 2000, the Company's board of directors granted options to purchase
an aggregate of 3,275,700 shares of its common stock to certain of its existing
employees at an exercise price of $7.00 per share. The options were granted
under the Company's 1998 stock plan and will vest over a four-year period at
the rate of one-fourth of the total number of shares subject to the options six
months after the grant date, with the remaining shares vesting in equal
installments at the end of each six-month period thereafter. On May 4, 2000 the
closing price of the Company's common stock was $8.625 per share. Accordingly,
in the second quarter of 2000 the Company will record deferred stock-based
compensation of approximately $5.3 million, which will be amortized over the
vesting period of the options.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Special Note Regarding Forward-Looking Statements
This discussion contains forward-looking statements that involve risks and
uncertainties. These statements relate to future events or our future financial
performance. In some cases, you can identify forward-looking statements by
terminology such as may, will, should, expect, plan, intend, anticipate,
believe, estimate, predict, potential or continue, the negative of such terms
or other comparable terminology. These statements are only predictions. Actual
events or results may differ materially. In evaluating these statements, you
should consider various factors, including the risks outlined in the Factors
That May Affect Our Business section of our Form 10-K, filed with the
Securities and Exchange Commission (SEC) on March 16, 2000 and, from time to
time, in other reports we file with the SEC. These factors may cause our actual
results to differ materially from any forward-looking statement.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of the forward-
looking statements. We are under no duty to update any of the forward-looking
statements after the date of this Quarterly Report on Form 10-Q to conform such
statements to actual results or to changes in our expectations.
Overview
drugstore.com is a leading online drugstore and information site offering a
Very Healthy Way to Shop(TM) for health, beauty, wellness, personal care and
pharmacy products. As of April 2, 2000, we have sold our products to over
990,000 customers. We were incorporated 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 health and beauty products. We believe that our online
store provides a customer with a superior shopping experience.
Results of Operations
Because we commenced commercial operations on February 24, 1999, and have a
short operating history, we believe that period-to-period comparisons are less
meaningful than an analysis of recent quarterly operating results. Accordingly,
we are providing a discussion and analysis of our results of operations that
compares the quarter ended April 2, 2000 to the quarter ended January 2, 2000.
8
<PAGE>
The following table sets forth unaudited quarterly statement of operations
data for the five quarters ended April 2, 2000. This unaudited quarterly
information has been derived from our unaudited financial statements and, in
the opinion of management, includes all adjustments, consisting only of normal
recurring adjustments necessary for a fair presentation of such information in
accordance with generally accepted accounting principles. The operating results
for any quarter are not necessarily indicative of the operating results for any
future period.
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------------
Apr. 4, July 4, Oct. 3 Jan. 2, Apr. 2,
1999 1999 1999 2000 2000
-------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Net sales.................... $ 652 $ 3,550 $ 12,158 $ 18,488 $ 22,738
Costs and expenses:
Cost of sales............... 672 4,879 14,066 18,823 21,596
Marketing and sales......... 5,189 11,328 16,471 28,504 29,917
Technology and content...... 2,713 3,229 4,232 4,744 6,941
General and administrative.. 1,713 2,204 3,120 4,089 4,806
Charitable contributions.... -- -- 3,600 -- --
Amortization of intangible
assets..................... 18 20 5,300 5,302 7,222
Amortization of stock-based
compensation............... 1,257 2,326 9,267 2,525 3,343
-------- -------- -------- -------- --------
Total costs and expenses... 11,562 23,986 56,056 63,987 73,825
-------- -------- -------- -------- --------
Operating loss............... (10,910) (20,436) (43,898) (45,499) (51,087)
Interest income, net......... 318 675 1,925 1,994 1,605
Net loss..................... $(10,592) $(19,761) $(41,973) $(43,505) $(49,482)
======== ======== ======== ======== ========
</TABLE>
Net Sales and Cost of Sales. Net sales includes product sales and charges to
customers for shipping and handling less any allowances for product returns,
promotional discounts and coupons. Cost of sales includes related cost of
products shipped to customers and outbound and inbound shipping costs.
Net sales for the first quarter of 2000 were $22.7 million, a 23% increase
over net sales for the fourth quarter of 1999 of $18.5 million. Our cumulative
customer accounts increased to 990,000 at the end of the first quarter of 2000
from 695,000 customer accounts at the end of fourth quarter 1999, an increase
of 295,000 customers, or 42%. Orders from repeat customers also increased
during the first quarter to 50% of total orders compared to 44% in the fourth
quarter of 1999. Pharmaceutical product sales were 53% of net sales in the
first quarter of 2000, compared to 57% of net sales in the fourth quarter of
1999. The increase in net sales was a result of an increase in our customer
base and an increase in our repeat orders as a percentage of total orders. In
the future, the level of our net sales will depend on a number of factors
including, but not limited to, the following:
. The number of customers we are able to obtain;
. The frequency of our customers' purchases;
. The quantity and mix of products our customers purchase;
. The quantity of the types of products we are able to offer for sale;
. The price we charge for our products;
. The amount we charge for shipping;
. The extent of sales price incentives, including coupons and discounts we
offer;
. The extent of reimbursement available from third-party payors;
. The level of customer returns we experience; and
. The seasonality that we may experience in our business.
9
<PAGE>
Cost of sales as a percentage of net sales improved to 95% during the first
quarter of 2000 from 102% during the fourth quarter of 1999. This improvement
is attributable to a decrease in the number of customer orders placed using
promotional discounts as a percentage of total customer orders, favorable
adjustments to our prices and product mix as well as payments received from
vendors in connection with joint merchandising activities performed in the
first quarter of 2000. These payments, net of related costs, were netted
against cost of sales. Cost of sales as a percentage of net sales will
fluctuate based on a number of factors, including, but not limited to, the
following:
. The cost of our products, including the extent of promotional
allowances, payments for joint merchandising activities and purchase
volume discounts that we are able to obtain from suppliers;
. Our pricing strategy relative to the cost of our products, including the
extent to which we offer coupons or promotional discounts;
. The mix of products our customers purchase;
. The mix of consignment service fees vs. product sales;
. The mix of cash payments vs. insurance reimbursement for our pharmacy
products;
. Our shipping pricing strategy relative to the cost of shipping; and
. The extent to which we are able to control product damage, shrinkage and
expiration through inventory management practices.
Marketing and Sales. Marketing and sales expenses consist primarily of
advertising and promotional expenditures, distribution expenses, including
order processing and fulfillment charges, equipment and supplies, and payroll
and related expenses for personnel engaged in marketing, merchandising,
customer service and distribution and fulfillment activities. Marketing and
sales expenses increased to $29.9 million in the first quarter of 2000 from
$28.5 million in the fourth quarter of 1999. The increase was primarily due to
expenses associated with the addition of marketing and sales personnel, an
increase in advertising media and promotional costs and increased distribution
expenses related to the increase in order volume. To the extent that our sales
volume increases in future periods, we expect fulfillment and order processing
expenses to increase in absolute dollars as we expand the accompanying
distribution and fulfillment activities. We intend to continue to pursue an
aggressive branding and marketing campaign and, therefore, we expect customer
acquisition and marketing expenses to increase in absolute dollars.
Additionally in April 2000, we launched our shopping "tab" at Amazon.com.
Accordingly, we will begin to recognize expense associated with such
arrangement in the second quarter of 2000. --See "Liquidity and Capital
Resources." Customer acquisition and marketing expenses may vary considerably
from quarter to quarter, depending on the timing of our advertising and
promotional campaigns.
Technology and Content. Technology and content expenses consist primarily of
payroll and related expenses for personnel engaged in maintaining and making
minor upgrades and enhancements to our Web site and content. These expenses
also include payroll and related expenses for information technology personnel,
Internet access and hosting charges and Web site content and design expenses.
Technology and content expenses increased to $6.9 million in the first quarter
of 2000 from $4.7 million in the fourth quarter of 1999, primarily due to
increased expenses associated with the addition of information technology
personnel, additional use of consultants and contract labor and the integration
of Beauty.com. Over the next several months, we expect that our technology and
content expenses will increase as we continue to make minor upgrades and
enhancements to our Web site and maintain our Web site product listings and
content.
General and Administrative. General and administrative expenses consist of
payroll and related expenses for executive and administrative personnel,
corporate facility expenses, professional services expenses and other general
corporate expenses. General and administrative expenses increased to
$4.8 million in the first quarter of 2000 from $4.1 million in the fourth
quarter of 1999. The increase was primarily due to increased expenses
associated with the addition of general and administrative personnel,
recruiting and relocation expenses, the
10
<PAGE>
cost of corporate facilities and Beauty.com integration expenses. We expect
general and administrative expenses to increase in absolute dollars as we
expand our staff and incur additional costs related to the anticipated growth
of our business.
Amortization of Intangible Assets. Amortization of intangible assets
increased to $7.2 million in the first quarter of 2000 from $5.3 million in the
fourth quarter of 1999, primarily due to the amortization of intangible assets
received in connection with the acquisition of Beauty.com.
Amortization of Stock-based Compensation. Amortization of stock-based
compensation increased to $3.3 million in the first quarter of 2000 from $2.5
million in the fourth quarter of 1999. The increase was primarily due to
additional deferred stock-based compensation recognized as a result of the
acquisition of Beauty.com.
On May 4, 2000, our board of directors granted options to purchase an
aggregate of 3,275,700 shares of our common stock to certain of our existing
employees at an exercise price of $7.00 per share. The options were granted
under our 1998 stock plan and will vest over a four-year period at the rate of
one-fourth of the total number of shares subject to the options six months
after the grant date, with the remaining shares vesting in equal installments
at the end of each six-month period thereafter. On May 4, 2000 the closing
price of our common stock was $8.625 per share. Accordingly, in the second
quarter of 2000 we will record deferred stock-based compensation of
approximately $5.3 million, which will be amortized over the vesting period of
the options.
Deferred stock-based compensation related to stock options and restricted
stock issued to our employees, including the options granted on May 4, 2000, is
expected to be recognized as expense for the remainder of fiscal year 2000 and
each of the next four fiscal years as follows:
<TABLE>
<CAPTION>
Fiscal Year Amount
----------- --------------
(in thousands)
<S> <C>
Q2-Q4 2000........................ $13,084
2001.............................. 10,303
2002.............................. 2,636
2003.............................. 775
2004.............................. 148
</TABLE>
Interest Income, net. Interest income represents earnings on our cash and
cash equivalents net of interest expense associated with capital lease
obligations. Interest income was $1.6 million in the first quarter of fiscal
2000 and $2.0 million in the fourth quarter of fiscal 1999. The decrease is due
to a lower average outstanding balance of cash, cash equivalents and marketable
securities earning interest in the first quarter.
Liquidity and Capital Resources
On March 15, 2000 we completed the sale of 6,020,000 shares of our common
stock at $18.00 per share. Of the 6,020,000 shares sold, 6,000,000 shares were
offered by us and 20,000 shares were offered by an existing shareholder. Net
proceeds from the sale to us aggregated approximately $101.6 million. As of
April 2, 2000 we had $174.7 million of cash, cash equivalents and marketable
securities.
We have incurred net losses of $173.3 million from inception to April 2,
2000. We believe that we will continue to incur net losses for the foreseeable
future and that the rate at which we will incur such losses will increase
significantly from current levels.
Net cash used in operating activities was $51.7 million for the first three
months of fiscal 2000. This was attributable to the net loss for the quarter of
$49.5 million and changes in operating assets and liabilities partially offset
by non-cash expenses.
11
<PAGE>
Net cash provided by investing activities was $58.6 million for the first
three months of fiscal 2000. Net cash provided by investing activities for this
period primarily consisted of net sales of marketable securities partially
offset by leasehold improvements and purchases of equipment and systems,
including computer equipment, warehouse handling equipment and furniture and
fixtures.
Net cash provided by financing activities was $102.6 million for the first
three months of fiscal 2000. Net cash provided by financing activities during
the first three months of fiscal 2000 primarily resulted from $101.6 million in
net proceeds from the sale of common stock.
As April 2, 2000, our principal commitments consisted of obligations
outstanding under capital and operating leases and marketing agreements with
certain Web portals, including Yahoo!, MSNBC, and Discovery Channel,
aggregating approximately $78.5 million through 2012. Additionally, in January
2000, we entered into a strategic agreement with Amazon.com to integrate
various shopping features of our Web sites and create a drugstore.com shopping
"tab" at Amazon.com. Under the terms of the agreement, we agreed to pay
Amazon.com a total of $105.0 million over a three year period, of which $30.0
million was paid at the time the agreement was executed. The remaining $75.0
million is payable to Amazon.com in quarterly installments commencing in July
2001. In addition, in January, we provided letters of credit totaling
$16.0 million as security for leases and certain other operating agreements.
These letters of credit must fully be collaterized by an equivalent amount of
our cash. As of April 2, 2000, $11.9 million of this cash collateral was
classified as current and included in cash and cash equivalents and $4.1
million was classified as long term and included in deposits and other assets.
If our combined cash, cash equivalents and marketable securities balance falls
below $25.0 million we are contractually obligated to increase these letters of
credit and related cash collateral to $20.2 million.
We believe that our existing cash, cash equivalents and marketable
securities will be sufficient to meet our anticipated needs for working capital
and capital expenditures into the first half of 2001. However, any projections
of future cash needs and cash flows are subject to substantial uncertainty. If
current cash, cash equivalents and marketable securities are insufficient to
satisfy our liquidity requirements, we may seek to sell additional equity or
debt securities, or to obtain credit facilities from lenders. We cannot be
certain that additional financing will be available to us on acceptable terms
when required, or at all.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We have assessed our vulnerability to certain market risks, including
interest rate risk associated with financial instruments included in cash, cash
equivalents and marketable securities. Due to the short-term nature of these
investments and our investment policies and procedures, we have determined that
the risk associated with interest rate fluctuations related to these financial
instruments does not pose a material risk to our company.
12
<PAGE>
PART II--OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(c) Sales of Unregistered Securities During the Quarter
In January 2000, we issued 1,066,667 shares of our common stock to
Amazon.com, Inc. in exchange for $30.0 million in cash. In January 2000, we
acquired Beauty.com. Based on an exchange ratio of approximately 0.1550 shares
of drugstore.com common stock for each share of Beauty.com capital stock, we
issued an aggregate of 1,266,289 shares of our common stock in exchange for all
outstanding shares of Beauty.com capital stock. As part of the Beauty.com
transaction we entered into an employment agreement with its founder. These
securities were issued in private placement transactions under Section 4(2) of
the Securities Act, on the basis that the transactions did not involve any
public offering.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index.
(b) Reports on Form 8-K
Current report on Form 8-K, filed February 9, 2000, including Selected
Financial Data and Management's Discussion and Analysis of Financial Condition
and Results of Operations for the fiscal year ended January 2, 2000.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DRUGSTORE.COM, INC.
(Registrant)
By /s/ David E. Rostov
---------------------------------------
David E. Rostov
Vice President, Chief Financial
Officer and Treasurer (principal
financial and chief
accounting officer)
Date: May 12, 2000
14
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
3.1 Amended and Restated Certificate of Incorporation of drugstore.com
(Incorporated by reference to exhibit number 3.2 to
drugstore.com's registration statement on Form S-1 (file number
333-78813), filed May 19, 1999).
3.2 Bylaws of drugstore.com, as amended (Incorporated by reference to
exhibit number 3.3 to drugstore.com's registration statement on
Form S-1 (file number 333-78813), filed May 19, 1999).
10.35 Agreement dated January 24, 2000 between Amazon.com Commerce
Services, Inc. and drugstore.com, inc. (Incorporated by reference
to exhibit number 10.35 to drugstore.com's registration statement
on Form S-1 (file number 333-96441) filed February 9, 2000).
10.36 Performance Guarantee dated January 24, 2000 by Amazon.com, Inc.
of Amazon.com Commerce Services, Inc.'s obligations under the
Agreement dated January 24, 2000 between Amazon.com Commerce
Services, Inc. and drugstore.com, inc. (Incorporated by reference
to exhibit 10.36 to drugstore.com's registration statement on Form
S-1 (file number 333-96441) filed February 9, 2000).
10.37 Stock Purchase Letter Agreement dated January 24, 2000 between
drugstore.com, inc. and Amazon.com Commerce Services, Inc.
(Incorporated by reference to exhibit number 10.37 to
drugstore.com's registration statement on Form S-2 (file number
333-96441) filed February 9, 2000).
27.1 Financial Data Schedule.
</TABLE>
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> APR-02-2000
<CASH> 136,022
<SECURITIES> 38,710
<RECEIVABLES> 4,903
<ALLOWANCES> 361
<INVENTORY> 7,158
<CURRENT-ASSETS> 226,906
<PP&E> 45,430
<DEPRECIATION> 4,483
<TOTAL-ASSETS> 519,835
<CURRENT-LIABILITIES> 57,431
<BONDS> 0
0
0
<COMMON> 655,114
<OTHER-SE> (194,963)
<TOTAL-LIABILITY-AND-EQUITY> 519,835
<SALES> 22,738
<TOTAL-REVENUES> 22,738
<CGS> 21,596
<TOTAL-COSTS> 21,596
<OTHER-EXPENSES> 52,229
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 225
<INCOME-PRETAX> (49,482)
<INCOME-TAX> 0
<INCOME-CONTINUING> (49,482)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (49,482)
<EPS-BASIC> (1.09)
<EPS-DILUTED> (1.09)
</TABLE>
