<PAGE>
As filed with the Securities and Exchange Commission on February 9, 2000
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
DRUGSTORE.COM, INC.
(Exact name of Registrant as specified in its charter)
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<S> <C> <C>
Delaware 5912 04-3416255
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
13920 Southeast Eastgate Way, Suite 300
Bellevue, Washington 98005
(425) 372-3200
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
Peter M. Neupert
President and Chief Executive Officer
drugstore.com, inc.
13920 Southeast Eastgate Way, Suite 300
Bellevue, Washington 98005
(425) 372-3200
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
William H. Hinman, Jr. Neil Wolff
SHEARMAN & STERLING WILSON SONSINI GOODRICH & ROSATI
555 California Street Professional Corporation
San Francisco, California 94104 650 Page Mill Road
(415) 616-1100 Palo Alto, California 94304
(650) 493-9300
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, 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 this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] __________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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Title of Each Class of Number of Proposed Maximum Proposed Maximum
Securities to be Shares to be Offering Price Aggregate Amount of
Registered Registered(1) Per Share(2) Offering Price Registration Fee
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<S> <C> <C> <C> <C>
Common Stock, par value
$.0001 per share....... 6,923,000 $29.00 $200,767,000 $53,003
</TABLE>
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(1) Includes 903,000 shares which the Underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the registration fee
pursuant to Rule 457(c) of the Securities Act of 1933, as amended, and
based upon the average high and low sales prices on February 3, 2000, as
reported on the Nasdaq National Market.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell securities and we are not soliciting offers to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Subject to Completion)
Issued February 9, 2000
6,020,000 Shares
[LOGO OF drugstore.com(TM)]
COMMON STOCK
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drugstore.com, inc. is offering 4,500,000 shares of common stock and the
selling stockholders are offering 1,520,000 shares. drugstore.com will not
receive any of the proceeds from the sale of the shares by the selling
stockholders.
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drugstore.com, inc.'s common stock is listed on the Nasdaq National Market
under the symbol "DSCM." On February 7, 2000, the reported last sale price of
our common stock on the Nasdaq National Market was $29 5/16 per share.
-----------
Investing in our common stock involves risks. See "Risk Factors" beginning on
page 8.
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PRICE $ A SHARE
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Underwriting Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions drugstore.com Stockholders
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Per Share........................ $ $ $ $
Total............................ $ $ $ $
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drugstore.com, inc. and one of the selling stockholders have granted the
underwriters the right to purchase up to an aggregate of 903,000 additional
shares to cover over-allotments.
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
Morgan Stanley & Co. Incorporated expects to deliver the shares to purchasers
on , 2000.
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MORGAN STANLEY DEAN WITTER
DONALDSON, LUFKIN & JENRETTE
SALOMON SMITH BARNEY
THOMAS WEISEL PARTNERS LLC
, 2000
<PAGE>
The first page of the gatefold includes:
drugstore.com
[PICTURE OF DRUGSTORE.COM HOMEPAGE]
Lines pointing to specific items on the picture of the homepage connect to the
following text:
Five stores in one: health, beauty, Licensed pharmacy with home
wellness, personal care and pharmacy. delivery.
Personalized service, shopping lists Detailed product, topical and
and reminders. health information to make
purchase decisions.
Choose from thousands of products in A high-quality selection of
drugstore.com. brand-name and specialty products
organized in easy-to-shop
departments.
Shop for high-quality items in privacy.
The following text is placed to the left of the picture of the homepage:
CONVENIENCE AND PRIVACY
drugstore.com has created a leading online drugstore and information site where
customers can shop in privacy from the convenience of their home or office. More
than a buying experience, drugstore.com offers useful information to assist in
the thinking and buying process.
Our store is designed to make What Every Body Needs easier for our customers to
acquire. At drugstore.com, customers never have to park the car, stand in line
or bump into nosy neighbors.
FIVE STORES IN ONE
drugstore.com is five stores in one, offering health, beauty, wellness, personal
care and pharmacy products, which we believe offers a superior customer
experience not found at store-based retailers. Through the Internet,
drugstore.com offers:
. Convenient, personalized service
. Shopping 24 hours a day, seven days a week
. Helpful information to make purchase decisions
. Secure credit card payment
. Direct delivery to home or office
. Private shopping from home or work
. Licensed pharmacy
. Personal access to pharmacists to answer questions
. Specialized customer care
[LOGO] drugstore.com-TM-
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The second page of the gatefold includes:
drugstore.com
Five Stores in One
The following text is placed at the top left of the page:
A FAMILIAR, COMFORTABLE WAY TO SHOP
Our store is designed to be a familiar, comfortable place with product
categories organized like the aisles and shelves of a traditional drugstore,
beauty counter or wellness store. Customers can easily browse through the store
departments, quickly view promotions and featured products and select products
according to their brand or unique attributes.
[PICTURE OF THE BEAUTY PAGE]
[PICTURE OF THE HEALTH PAGE]
[PICTURE OF THE BOUTIQUE PAGE]
The following text appears under the picture of the Health page:
HEALTH
Along with browsing for health tips and information, customers can quickly
compare and purchase antacids, pain relievers, and family planning, first aid
and other health products.
The following text appears under the picture of the Beauty page:
BEAUTY
Customers can find their favorite beauty products, and our Ask Your Beauty
Expert feature answers their questions via e-mail.
The following text appears under the picture of the Boutique page:
BOUTIQUE
Combining the prestige of department-store beauty counters with online shopping
convenience, the boutique offers high-end cosmetics, fragrance and skin and spa
products.
[LOGO]
The following text appears on the same line as the logo and spans both the
second and third pages of the gatefold:
drugstore.com-TM-
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The third page of the gatefold includes:
[WATERMARK OF THE LOGO]
[PICTURE OF THE PERSONAL CARE PAGE]
The following text appears to the right of the picture of the Personal Care
page:
PERSONAL CARE
drugstore.com provides fast, convenient purchase of toothpaste, shampoo,
tampons, diapers, shaving needs and more.
[PICTURE OF THE WELLNESS PAGE]
[PICTURE OF THE PHARMACY PAGE]
[PICTURE OF THE DRUG INDEX PAGE]
The following text appears below the picture of the Wellness page:
WELLNESS
drugstore.com offers a wide, high-quality selection of wellness products,
including vitamins, supplements, herbs and homeopathy and other natural
products.
The following text appears below the picture of the Pharmacy page:
PHARMACY
Licensed pharmacists fill/refill prescriptions, which are then delivered to the
customer's door. Our pharmacists can provide personal guidance, by phone or e-
mail, about prescription usage.
The following text appears below the picture of the Drug Index page:
DRUG INDEX
In the pharmacy's Drug Index, customers can get easy access to information about
particular medications, including prices and usage.
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TABLE OF CONTENTS
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Page
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Prospectus Summary......................................................... 4
Risk Factors.............................................................. 8
Use of Proceeds............................................................ 24
Price Range of Common Stock................................................ 24
Dividend Policy............................................................ 24
Capitalization............................................................. 25
Dilution................................................................... 26
Selected Consolidated Financial Data....................................... 27
Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................... 28
Business................................................................... 39
Management................................................................. 57
Certain Relationships and Related Transactions............................. 66
Principal and Selling Stockholders......................................... 69
Description of Capital Stock............................................... 71
Shares Eligible for Future Sale............................................ 74
Underwriters............................................................... 76
Legal Matters.............................................................. 77
Experts.................................................................... 77
Where You Can Find More Information........................................ 77
Index to Consolidated Financial Statements................................. F-1
</TABLE>
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You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of the
prospectus or of any sale of the common stock.
3
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PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and the common stock being sold in this
offering and our Consolidated Financial Statements and Notes to Consolidated
Financial Statements appearing elsewhere in this prospectus.
drugstore.com is a leading online drugstore: a retail store and information
site for health, beauty, wellness, personal care and pharmacy products. As of
January 2, 2000 we had sold our products to approximately 695,000 customers. We
designed our store to provide a convenient, private and informative shopping
experience that encourages consumers to purchase products essential to healthy,
everyday living. We believe that our online store delivers a superior customer
experience, making buying What Every Body Needs(TM) less of a chore.
International Data Corporation estimates that worldwide business-to-consumer
sales over the Internet will increase from approximately $11 billion in 1998 to
approximately $93 billion by 2002. The Internet has also become an important
personal tool for accessing health and medical information. According to a
recent Forrester Research report, 32% of online consumers shop for healthcare
products online.
We believe there is a significant market opportunity for an online store
that can offer consumers an enhanced shopping experience for health, beauty,
wellness, personal care and pharmacy products. We seek to attract and retain
consumers by emphasizing the following key attributes:
. Convenience. We feature 24 hour a day access to our user-friendly Web
store, direct home or office delivery, a personalized shopping list and
confidential access to a personal medication profile.
. Selection. We believe we offer a significantly greater number of
products than are available in a typical traditional chain drugstore.
. Information. We have assembled a broad array of product information to
assist customers in making informed buying decisions. We offer full
product packaging information, extensive drug information, customer
reviews of products, and a Solutions area which includes buying guides,
reference information, interactive shopping advisors and articles on
beauty trends and products.
. Communication. We can communicate with customers on a regular basis
through the convenience of e-mail. We also offer our popular "Ask Your
Pharmacist" and "Ask Your Beauty Expert" features.
. Privacy. Consumers can shop in the privacy of their own homes or offices
and can obtain answers to questions that they might otherwise be
uncomfortable asking in public.
. Pharmacy. We employ licensed pharmacists and are able to ship
prescription products to all 50 U.S. states and we offer customers the
opportunity to order refills of their existing Rite Aid prescriptions on
our Web site for pick-up at conveniently located Rite Aid stores
nationwide.
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.
Consistent with our strategy, in June 1999 we entered into strategic
relationships with Rite Aid Corporation and General Nutrition Companies, Inc.
(GNC). Benefits of our Rite Aid relationship include additional revenue and
traffic generated by Rite Aid customers who visit our Web site, the pharmacy
benefit coverage provided by the insurance companies and pharmacy benefit
management companies (PBMs) with which Rite
4
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Aid has a relationship, including PCS Health Systems, Inc., the co-promotion
and co-branding activities that we have undertaken and our ability to offer
customers the opportunity to order refills of their existing Rite Aid
prescriptions on our Web site for pick up at Rite Aid stores nationwide or
delivery to the customer's home or office. The benefits of our GNC relationship
include the opportunity to be the exclusive online provider of GNC-branded
products and each party's co-promotion of products in traditional and online
marketing efforts.
We face many risks and challenges in our business. Some consumers may prefer
to shop at traditional retail stores, especially consumers who do not have 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.
Recent Developments
Operating Results for the Fourth Quarter of Fiscal 1999. For the quarter
ended January 2, 2000, our net sales were $18.5 million, a $6.3 million, or
51.6%, increase over the immediately preceding quarter, reflecting an increase
in sales of both pharmaceutical and non-pharmaceutical products. These
increases were due to an increase in new customers as well as an increase in
repeat orders. Total costs and expenses for the quarter ended January 2, 2000
were approximately $64.0 million, a $7.9 million, or 14.1%, increase over the
immediately preceding quarter. The increase in costs and expenses primarily
reflects increases in fulfillment-related expenses due to the increase in order
volume, as well as increases in other marketing and sales expenses relating to
our ongoing customer acquisition and corporate branding campaigns. Our net loss
for the quarter ended January 2, 2000 was $43.5 million, or $1.02 per share,
compared to $42.0 million, or $1.04 per share (on a pro forma basis to give
effect to the conversion of all of our preferred stock into common stock at the
time of our initial public offering as if such conversion occurred at the
beginning of the period), for the immediately preceding quarter.
Strategic Agreement with, and Investment by, Amazon.com. On January 24,
2000, we entered into an agreement with Amazon.com to integrate various
shopping features of our Web sites and to create a persistent drugstore.com
shopping presence as the exclusive health and beauty product section on
Amazon.com's Web site. This integration and shopping presence will enable
Amazon.com's significant customer base to access our Web site from the
Amazon.com Web site for purchases of health, beauty, wellness, personal care
and pharmaceutical products. The benefits of this agreement are expected to
include an increase in traffic and revenue generated by Amazon.com customers
who visit our Web site as well as various advertising and promotional
initiatives the parties have agreed to undertake. The parties will also work to
implement additional features on Amazon.com's Web site designed to improve
customer shopping experiences, including integrated search and browse
capabilities and a shared shopping basket. We agreed to pay Amazon.com a total
of $105 million over the three-year term of the agreement, of which $30 million
was paid at the time the agreement was executed. 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. All of the proceeds to us from this private placement
transaction were paid to Amazon.com to satisfy our initial payment obligations
under the commercial agreement, of which $27 million reflects a prepayment of
amounts due for the first year following the launch of the drugstore.com health
and beauty product section on Amazon.com's Web site.
Acquisition of Beauty.com. On February 2, 2000, we acquired Beauty.com,
Inc., a leading online retailer of prestige beauty products, and entered into
an agreement to retain the employment of its founder, Roger Barnett, for a
total of 1,266,289 shares of drugstore.com common stock (approximately $40.4
million based on the price of our common stock on January 12, 2000, the date
the transaction was announced). Beauty.com offers prestige brands, including
specialty lines exclusive to the site, and has ongoing relationships with a
team of industry experts. Roger Barnett, the founder of Beauty.com, will
continue as president of Beauty.com following the acquisition. We believe that
the acquisition of Beauty.com will accelerate the expansion of our product
5
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offerings in the prestige beauty market and enhance our ability to enter into
relationships with prestige beauty product vendors. We will account for the
acquisition as a purchase.
Distribution Center. In January 2000, we began limited operations at our own
290,000 square foot distribution center in New Jersey, and we are in the
process of transitioning our distribution capabilities for pharmaceutical and
non-pharmaceutical products from third party distributors to our center. We
continue to rely primarily on third party distributors to fill customer orders,
although we expect that the transition to our own distribution facility will be
completed by the end of the second quarter of 2000. We believe that operating
our own distribution center will allow us to achieve greater control over the
distribution process and help us to ensure adequate supplies of products to our
customers. In connection with opening our distribution center, we also opened
our own pharmacy as part of our arrangement with Rite Aid. Operating our own
distribution facility will require us to increase inventory levels
substantially and establish a significant number of direct relationships with
manufacturers in the near term.
THE OFFERING
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Common stock offered by drugstore.com...... 4,500,000 shares
Common stock offered by the selling
stockholders.............................. 1,520,000 shares
Common stock to be outstanding after the
offering.................................. 50,522,560 shares
Use of proceeds............................ We intend to use the proceeds for general
corporate purposes, including working
capital to fund anticipated operating
losses and purchases of inventory for our
new distribution center, and capital
expenditures. We will not receive any
proceeds from the sale of the shares of
common stock by the selling stockholders.
See "Use of Proceeds."
Nasdaq National Market symbol.............. DSCM
</TABLE>
The number of shares of our common stock to be outstanding immediately after
the offering is based on the number of shares outstanding at February 3, 2000,
which includes (1) 1,066,667 shares of our common stock issued on January 24,
2000 to Amazon.com in a private placement transaction and (2) 1,266,289 shares
of our common stock issued on February 2, 2000 in connection with our
acquisition of Beauty.com. This number does not include approximately
11,640,000 shares of our common stock subject to options outstanding or
reserved for issuance under our stock option and stock purchase plans at
February 3, 2000. Except as otherwise noted, all information in this prospectus
assumes no exercise of the underwriters' overallotment options.
DRUGSTORE.COM(TM), the drugstore.com logo, THE BOUTIQUE(TM), WHAT EVERY BODY
NEEDS(TM), WHERE EVERY BODY SHOPS(TM), WHAT YOUR BODY NEEDS(TM), HEALTH .
BEAUTY . WELLNESS(TM), WELLNESS CONNECTIONS(TM), LET THE DRUGSTORE COME TO
YOU(TM), QUICK LISTS(TM), TEST DRIVE(TM), ONE VERY HEALTHY ATTITUDE(TM) and
EPUNCHCARD(TM) are our trademarks. This prospectus also includes trade dress,
trade names, trademarks and service marks of other companies. Use or display by
drugstore.com of other parties' trademarks, trade dress or products is not
intended to and does not imply a relationship with, or endorsement or
sponsorship of drugstore.com by, the trademark or trade dress owners.
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We were incorporated in Delaware in April 1998. Our principal executive
offices are located at 13920 Southeast Eastgate Way, Suite 300, Bellevue,
Washington 98005, and our telephone number is (425) 372-3200. Our World Wide
Web site is www.drugstore.com. The information contained on our Web site is not
part of this prospectus.
6
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SUMMARY CONSOLIDATED FINANCIAL DATA
(in thousands, except share and per share data)
The balance sheet data displayed in the "Pro Forma" column is as of January
2, 2000, with adjustments to give effect to (1) our sale of 1,066,667 shares of
common stock to Amazon.com on January 24, 2000 in a private placement
transaction and the application of the net proceeds therefrom and (2) our
acquisition of Beauty.com on February 2, 2000. The data displayed in the "Pro
Forma As Adjusted" column gives further effect to the receipt of the estimated
proceeds from our sale of 4,500,000 shares of our common stock at an assumed
public offering price of $29.3125 per share, after deducting estimated
underwriting discounts and commissions and estimated offering expenses payable
by us. See "Use of Proceeds" for a description of how we intend to use the net
proceeds of this offering.
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Period from
April 2, 1998
(Inception) through Year Ended
December 31, January 2,
1998 2000
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(in thousands, except share
and per share data)
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Consolidated Statements of Operations Data:
Net sales...................................... $ -- $ 34,848
Total cost and expenses........................ 8,201 155,591
Operating loss................................. (8,201) (120,743)
Net loss....................................... (8,027) (115,831)
Basic and diluted net loss per share........... $(14.70) $ (6.13)
Weighted average shares used to compute basic
and diluted net loss per share................ 546,149 18,880,969
Pro forma basic and diluted net loss per share
(unaudited)(1)................................ $ (3.73)
Weighted average shares outstanding used to
compute pro forma basic and diluted net loss
per share (unaudited)(1)...................... 31,045,835
</TABLE>
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<CAPTION>
As of January 2, 2000
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Pro Forma
Actual Pro Forma As Adjusted
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(in thousands)
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Consolidated Balance Sheet Data:
Cash, cash equivalents and marketable
securities.................................... $132,754 $132,735 $257,346
Working capital................................ 106,960 115,844 240,455
Total assets................................... 395,708 460,549 585,160
Capital lease obligations, less current
portion....................................... 2,687 2,687 2,687
Total stockholders' equity..................... 350,749 403,954 528,565
</TABLE>
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(1) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the method used to compute pro forma basic and diluted net loss per
share.
7
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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, before making an
investment decision. If any of the following risks actually occurs, our
business, financial condition or operating results could be materially
adversely affected. In such case, the trading price of our common stock could
decline, and you may lose all or part of your investment.
Risks Related to Our Business
We Are an Early Stage Company in a New and Rapidly Evolving Market, Which
Makes It Difficult for Investors to Determine Whether We Will Accomplish
Our Objectives
Because drugstore.com was founded in April 1998 and we only began selling
products in February 1999, we have a limited operating history on which
investors can base an evaluation of our business strategy. We have limited
insight into trends that may emerge and affect our business. An investor in
our common stock must consider the risks and difficulties frequently
encountered by early stage companies, as well as the risks we face due to our
participation in a new and rapidly-evolving market. These challenges include
our:
. Need to increase our brand awareness;
. Need to attract and retain customers at a reasonable cost;
. Dependence on Web site and transaction processing performance and
reliability;
. Need to compete effectively;
. Need to establish ourselves as an important participant in the evolving
market for healthcare products and services on the Internet; and
. Need to establish and develop relationships in the healthcare industry,
particularly in the areas of reimbursement and managed care.
Consumers of Health, Beauty, Wellness, Personal Care and Pharmacy Products
May Not Accept Our Solution, Which Would 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 could
prevent widespread customer acceptance include:
. Shipping charges, which do not apply to shopping at traditional
drugstores;
. Delivery time associated with Internet orders, as compared to the
immediate receipt of products at a physical store;
. Pricing that does not meet customer expectations of "finding the lowest
price on the Internet;"
. Additional steps and delays in ensuring insurance coverage for
prescription products;
. Lack of coverage of customer prescriptions by some insurance carriers;
. Lack of consumer awareness of our online pharmacy;
. Customer concerns about the security of online transactions and the
privacy of their personal health information;
. Product damage from shipping or shipments of wrong or expired products
from 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;
8
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. 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 $123.9 million for the period from inception
through January 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) and that the rate at which we will incur such losses
will increase significantly from current levels. We intend to increase our
operating expenses substantially as we:
. Increase our sales and marketing activities, particularly advertising
efforts;
. Provide our customers with promotional benefits, such as selling
selected products or offering shipping below our actual costs;
. Increase our general and administrative functions to support our growing
operations;
. Expand our customer and pharmacist support organizations to better serve
customer needs;
. Develop enhanced technologies and features to improve our Web site;
. Enhance our distribution fulfillment processes; and
. Begin operating our own 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 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;
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. 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, including through our fulfillment partners, to manage
inventory levels and ensure sufficient product supply, particularly as
we transition customer order fulfillment to our own distribution
facility;
. 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.
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 primarily on Rite Aid's relationships with
insurance companies and PBMs, and the extension of these relationships to
cover prescriptions processed by us. To the extent Rite Aid is 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.
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. 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.
Other than our contract with PCS Health Systems, Inc., which is a 10-year
agreement, many of our agreements with insurance companies and PBMs are short-
term and may be terminated with less than 30 days' prior notice. 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 currently rely to a large extent on rapid distribution by third parties.
Since inception, we have purchased a substantial majority of our
pharmaceutical products from one vendor, RxAmerica L.L.C., and in connection
with operating our own distribution center, we will become obligated to
purchase all of our pharmaceutical products from Rite Aid unless we are able
to obtain better overall terms from another vendor. We also currently purchase
a substantial majority of our non-pharmaceutical products from one vendor,
Walsh Distribution, Inc., which accounted for 68% of our non-pharmaceutical
cost of sales from launch of our Web store to January 2, 2000. However, as we
transition customer order fulfillment to our own distribution center, we
intend to establish relationships directly with product manufacturers, and we
expect that order fulfillment through Walsh Distribution will cease by the end
of the second quarter of 2000. Our business could be significantly disrupted
if RxAmerica, Rite Aid or, in the near term, Walsh Distribution were to breach
their contracts or suffer adverse developments that affect their ability to
supply products to us. In addition, RxAmerica is a joint venture owned by
American Stores Company (which was recently acquired by Albertson's, Inc.) and
Longs Drugs, both of which are potential competitors of drugstore.com, and
actual competitors with Rite Aid, one of our principal stockholders and
business partners. If for any reason RxAmerica, Rite Aid or Walsh Distribution
is unable or unwilling to supply products to us in sufficient quantities and
in a timely manner, we may not be able to secure alternative fulfillment
partners on acceptable terms in a timely manner, or at all. 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."
Because we rely primarily on third parties to fulfill orders, we depend on
their systems for tracking inventory and financial data. If our distribution
partners' systems fail or are unable to scale or adapt to changing needs, or
if we cannot integrate information systems with any new distributors, we may
not have adequate, accurate or timely inventory or financial information.
We also rely on third-party carriers for shipments to and from distribution
facilities 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 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.
Opening and Operating Our Own Distribution Center Will Require Significant
Investments in Management Resources
We began limited operations at our own 290,000 square foot distribution
center in January 2000 to achieve greater control over the distribution
process and to ensure adequate supplies of products to our customers.
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Opening and operating this distribution center will require additional capital
investments in facilities and equipment and will require us to:
. Hire and train a significant number of new employees;
. Establish a significant number of direct relationships with
manufacturers in the near term;
. Substantially increase our inventory levels in the near term;
. 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 opening and 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 our
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 provided all relevant information. We also post product information on
our Web store. Providing information on pharmaceutical and other products
creates the potential for claims to be made against us for negligence,
personal injury, wrongful death, product liability, malpractice, invasion of
privacy or other legal theories based on our product or service offerings. Our
general liability, product liability and professional liability insurance may
not cover potential claims of this type or may not be adequate to protect us
from all liability that may be imposed.
Pharmacy errors 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
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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 interruption that results
in the unavailability of our Web site or reduced order fulfillment performance
could result in negative publicity and reduce the volume of goods sold and the
attractiveness of our Web store, which could negatively affect our revenues.
From time to time, we have experienced temporary system interruptions for a
variety of reasons, including power failures, software bugs and an
overwhelming number of visitors trying to reach our Web site. We may not be
able to correct any problem in a timely manner. Because we outsource certain
aspects of our system and because some of the reasons for a systems
interruption may be outside of our control, we also may not be able to
exercise sufficient control to remedy the problem quickly or at all.
We opened our site for customers in February 1999 and to the extent that
customer traffic grows substantially, we will need to expand the capacity of
our systems to accommodate a larger number of visitors. Any inability to scale
our systems may cause unanticipated system disruptions, slower response times,
degradation in levels of customer service, impaired quality and speed of order
fulfillment, or delays in reporting accurate financial information. We are not
certain that we will be able to project the rate or timing of increases, if
any, in the use of our Web site accurately or in a timely manner to permit us
to effectively upgrade and expand our transaction-processing systems or to
integrate smoothly any newly developed or purchased modules with our existing
systems.
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 408 on January 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 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
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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 "Business--Relationship with
Amazon.com." See also "Executive Officers and Directors" for background on
Jeffrey P. Bezos, "Certain Relationships and Related Transactions" for a
description of our agreements with Amazon.com and "Principal and Selling
Stockholders" for a description of Amazon.com's stock ownership relative to
other stockholders.
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 recently 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 planned restatements of its 1999, 1998 and 1997 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. 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.
Rite Aid is offering 1,500,000 shares of common stock in this offering,
although it will continue to own a significant percentage of our common stock
following this offering. 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.
For more information about our relationships with Rite Aid, see "Business--
Relationship with Rite Aid." See also "Certain Relationships and Related
Transactions" for a description of our agreements with Rite Aid and "Principal
and Selling Stockholders" for a description of Rite Aid's stock ownership
relative to other stockholders.
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 ability
to perform 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, recently 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 retailer of prestige
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beauty products. The process of integrating an acquired business, technology,
service or product into our business and operations may result in unforseen
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 and Operations, and Those of Our Distributors, Are Vulnerable
to Natural Disasters and Other Unexpected Problems
Substantially all of our computer and communications hardware is located at
our leased facility in Bellevue, Washington and our systems infrastructure is
hosted at an Exodus Communications facility in Tukwila, Washington. Our
systems and operations are vulnerable to damage or interruption from fire,
flood, power loss, telecommunications failure, earthquakes and similar events.
In addition, our servers are vulnerable to computer viruses, physical or
electronic break-ins and similar disruptions, which could lead to
interruptions, delays, loss of data or the inability to accept and fulfill
customer orders. We do not currently have redundant systems or a formal
disaster recovery plan and do not carry sufficient business interruption
insurance to compensate for all losses that may occur. The facilities of our
current fulfillment partners, Walsh and RxAmerica, which are located in Texas,
as well as our distribution facility in New Jersey, also face these risks. In
particular, RxAmerica only has a single location and no back-up facility.
We depend on the efficient operation of Internet connections from customers
to our systems. These connections, in turn, depend on the efficient operation
of Web browsers, Internet service providers and Internet backbone service
providers, all of which have had periodic operational problems or experienced
outages. Any system delays, failures or loss of data, whatever the cause,
could reduce customer satisfaction with our applications and services and harm
our sales.
We retain confidential customer and patient information in our processing
centers. Therefore, it is critical that our facilities and infrastructure
remain secure and that our facilities and infrastructure are perceived by the
marketplace to be secure. A material security breach could damage our
reputation or result in liability to us.
Governmental Regulation of 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. Please see
"Business--Governmental Regulation" for detailed information about these
regulations. Regulations in this area often require subjective interpretation,
and we cannot be certain that our attempts to comply with these regulations
will be deemed sufficient by the appropriate regulatory agencies. Violations
of any regulations could result in various civil and criminal penalties,
including suspension or revocation of our licenses or registrations, seizure
of our inventory, or monetary fines, which could adversely 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
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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 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
18
<PAGE>
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.
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 will, in the
aggregate, beneficially own approximately 64.7% of our outstanding common
stock following the completion of this offering. These stockholders, if acting
together, would be able to significantly influence all matters requiring
approval by our stockholders, including the election of directors and the
approval of mergers or other business combination transactions. In addition,
after this offering, Amazon.com will beneficially own approximately 24.5% and
Rite Aid will beneficially own 15.5% of our outstanding common stock.
Therefore, Amazon.com and Rite Aid will each be able to significantly
influence all matters requiring approval by our stockholders, including the
election
19
<PAGE>
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. See "Principal and Selling Stockholders"
for a description of Amazon.com's and Rite Aid's stock ownership relative to
other stockholders.
We May Need Additional Capital in the Future to Support Our Growth, and
Such Additional Financing May Not Be Available To Us
We do not expect the net proceeds from this offering to be sufficient to
meet all of our long-term business development requirements. Although we
believe that the net proceeds from this offering, together with our available
funds, will provide adequate liquidity to fund our operations and meet our
other cash requirements for at least twelve months following this offering,
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.
We cannot assure you that any additional financing we may need will be
available on terms favorable to us, or at all.
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.
20
<PAGE>
In addition, the Internet may not be accepted as a viable long-term
commercial marketplace for a number of reasons, including potentially
inadequate development of the necessary network infrastructure or delayed
development of enabling technologies and performance improvements. Our success
will depend, in large part, upon third parties maintaining the Internet
infrastructure to provide a reliable network backbone with the speed, data
capacity, security and hardware necessary for reliable Internet access and
services.
Further, the online market for drugstore products is in its infancy. The
market is significantly less developed than the online market for books,
auctions, music, software and numerous other consumer products. Even if use of
the Internet and electronic commerce continues to increase, the rate of
growth, if any, of the online drugstore market could be significantly less
than the online market for other products. Our rate of revenue growth could
therefore be significantly less than other online merchants.
Our Sales Could be Negatively Affected if We Are Required to Charge Taxes
on Sales
We do not collect sales or other similar taxes in respect of goods sold by
drugstore.com, except from purchasers located in the State of Washington.
However, one or more states or the federal government may seek to impose sales
tax collection obligations on out-of-state companies (such as drugstore.com)
that engage in or facilitate online commerce, and a number of proposals have
been made at the state and local level that would impose additional taxes on
the sale of goods and services through the Internet. Such proposals, if
adopted, could substantially impair the growth of electronic commerce, and
could adversely affect our opportunity to derive financial benefit from such
activities. Moreover, one or more states 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
local Rite Aid store would be required to pay state sales tax. A successful
assertion by one or more states or the federal government that we should
collect further sales or other taxes on the sales of products through
drugstore.com could negatively affect our revenues and business.
If We Do Not Respond to Rapid Technological Changes, Our Services Could
Become Obsolete and Our Business Would Be Seriously Harmed
As the Internet and online commerce industry evolve, we must license leading
technologies useful in our business, enhance our existing services, develop
new services and technology that address the increasingly sophisticated and
varied needs of our prospective customers and respond to technological
advances and emerging industry standards and practices on a cost-effective and
timely basis. We may not be able to successfully implement new technologies or
adapt our Web store, proprietary technology and transaction-processing systems
to customer requirements or emerging industry standards. If we are unable to
do so, it could adversely impact our ability to build the drugstore.com brand
and attract and retain customers.
Governmental Regulation of the Internet and Data Transmission Over the
Internet Could Affect Our Business
Laws and regulations directly applicable to communications or commerce over
the Internet are becoming more prevalent. The most recent session of the U.S.
Congress resulted in Internet laws regarding children's privacy, copyrights,
taxation and the transmission of sexually explicit material. The European
Union recently enacted its own privacy regulations. In particular, many
government agencies and consumers are focused on the privacy and security of
medical and pharmaceutical records. The law of the Internet, however, remains
largely unsettled, even in areas where there has been some legislative action.
It may take years to determine whether and how existing laws such as those
governing privacy, libel and taxation apply to Internet stores such as ours.
The rapid growth and development of the market for online commerce may prompt
calls for more stringent consumer protection laws, both in the United States
and abroad, that may impose additional burdens on companies conducting
business online and in particular companies that fill prescriptions 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.
21
<PAGE>
Risks Related to this Offering
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, of 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;
. Any future sales of our common stock or other securities; and
. Stock market price and volume fluctuations of publicly-traded companies
in general and Internet-related companies in particular.
The trading prices of Internet-related companies and e-commerce companies in
particular have been especially volatile and many are at or near historical
highs. Investors may be unable to resell their shares of our common stock at
or above the offering price. In the past, securities class action litigation
has often been brought against a company following periods of volatility in
the market price of its securities. We may be the target of similar litigation
in the future. Securities litigation could result in substantial costs and
divert management's attention and resources, which could seriously harm our
business and operating results.
Future Sales of Shares by Existing Stockholders Could Affect Our Stock
Price
If our stockholders sell substantial amounts of our common stock in the
public market, the market price of our common stock could fall, potentially
resulting in substantial losses to investors. Such sales also might make it
more difficult for us to sell equity or equity-related securities in the
future at a time and price that we deem appropriate. Based on shares
outstanding as of February 3, 2000, upon completion of this offering, we will
have outstanding 50,522,560 shares of common stock, assuming no exercise of
the underwriters' over-allotment option. Of these shares, the 6,020,000 shares
sold in this offering and the 5,750,000 shares sold in our initial public
offering will be freely tradeable unless held by our affiliates. Of the
remaining 38,752,560 shares, 35,972,222 shares will be subject to lock-up
agreements of at least 90 days with Morgan Stanley & Co. Incorporated, as
representative of the underwriters of this offering. After these agreements
expire, at the end of the lock-up period or earlier at the discretion of
Morgan Stanley & Co. Incorporated, as representative of the underwriters,
these shares will be generally freely tradeable, subject to the limitations of
Rule 144 under the Securities Act. The holders of 34,762,722 shares of our
common stock outstanding after this offering have the right, under certain
circumstances, to require us to register their shares of common stock for
public resale. See "Shares Eligible for Future Sale" for a further description
regarding shares that will become eligible for sale at future dates after this
offering.
New Stockholders Will Incur Substantial Dilution as a Result of This
Offering
The assumed public offering price of $29.3125 per share is substantially
higher than the book value per share of our outstanding common stock. As a
result, investors purchasing common stock in this offering will incur
immediate substantial dilution. In addition, we have issued options to acquire
common stock at prices significantly below the public offering price. To the
extent such outstanding options are ultimately exercised, there will be
further dilution to investors in this offering. See "Dilution" for a more
detailed description of how new stockholders will incur dilution.
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<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains 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 other
person assumes responsibility for the accuracy and completeness of the
forward-looking statements. We are under no duty to update any of the forward-
looking statements after the date of this prospectus to conform such
statements to actual results or to changes in our expectations.
23
<PAGE>
USE OF PROCEEDS
Net proceeds from the sale of the 4,500,000 shares of common stock offered
by drugstore.com hereby, at an assumed public offering price of $29.3125 per
share, are estimated to be approximately $124.6 million after deducting
estimated underwriting discounts and commissions and estimated offering
expenses payable by us. If the underwriters' over-allotment options are
exercised in full, we estimate that our net proceeds will be approximately
$146.4 million.
We intend to use the proceeds of this offering for general corporate
purposes, including working capital to fund anticipated operating losses and
purchases of inventory for our new distribution center, and capital
expenditures. We may also use a portion of the net proceeds to acquire
complementary technologies or businesses; however, we currently have no
commitments or agreements with respect to any such transactions. Pending use
of the net proceeds of this offering, we intend to invest the net proceeds in
interest-bearing, investment grade securities. We will not receive any
proceeds from the sale of the shares of common stock by the selling
stockholders.
PRICE RANGE OF COMMON STOCK
Our common stock has been quoted on the Nasdaq National Market under the
symbol "DSCM" since our initial public offering on July 27, 1999. Prior to
that time, there was no public market for our common stock. The following
table sets forth, for the periods indicated, the high and low reported
intraday sales prices per share of our common stock.
<TABLE>
<CAPTION>
Common Stock
Price
---------------
High Low
------- -------
<S> <C> <C>
Fiscal Year Ended January 2, 2000:
Third Quarter (from July 27, 1999)............................ $70 $32 1/2
Fourth Quarter................................................ $55 $27 1/8
Fiscal Year Ended December 31, 2000:
First Quarter (through February 7, 2000)...................... $39 3/8 $27
</TABLE>
On February 7, 2000, the reported last sale price of our common stock on the
Nasdaq National Market was $29.3125 per share. On February 3, 2000, there were
approximately 208 holders of record of our common stock.
DIVIDEND POLICY
We have never declared or paid cash dividends on our capital stock. We
currently intend to retain all available funds and any future earnings for use
in the operation and expansion of our business and do not anticipate paying
any cash dividends in the foreseeable future.
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<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of January 2, 2000 on
an actual, pro forma and pro forma as adjusted basis:
. The "Actual" column reflects our capitalization as of January 2, 2000,
without any adjustments for subsequent or anticipated events;
. The "Pro Forma" column reflects our capitalization as of January 2,
2000, with adjustments to give effect to (1) our sale of 1,066,667
shares of common stock to Amazon.com on January 24, 2000 in a private
placement transaction for approximately $30 million and the application
of the proceeds therefrom and (2) our acquisition of Beauty.com on
February 2, 2000; and
. The "Pro Forma As Adjusted" column reflects our pro forma
capitalization, with adjustments to give effect to the sale of the
4,500,000 shares of common stock offered by drugstore.com hereby at an
assumed public offering price of $29.3125 per share, and the application
of the proceeds therefrom after deducting estimated underwriting
discounts and commissions and estimated offering expenses payable by us.
This table should be read in conjunction with the consolidated financial
statements and related notes thereto included elsewhere in this prospectus.
<TABLE>
<CAPTION>
As of January 2, 2000
---------------------------------
Pro Forma
Actual Pro Forma As Adjusted
--------- --------- -----------
(in thousands, except share
data)
<S> <C> <C> <C>
Capital lease obligations, less current
portion...................................... $ 2,687 $ 2,687 $ 2,687
Stockholders' equity:
Preferred stock, $.0001 par value;
authorized 10,000,000 shares;
issued and outstanding: none actual, pro
forma and pro forma as adjusted............ -- -- --
Common stock, $.0001 par value; stated at
amounts paid in; authorized 250,000,000
shares; issued and outstanding:
43,508,808 shares actual, 45,841,764 pro
forma and 50,341,764 pro forma as
adjusted................................... 485,377 555,790 680,401
Deferred stock-based compensation............. (10,770) (27,978) (27,978)
Accumulated deficit........................... (123,858) (123,858) (123,858)
--------- -------- --------
Total stockholders' equity.................. 350,749 403,954 528,565
--------- -------- --------
Total capitalization........................ $ 353,436 $406,641 $531,252
========= ======== ========
</TABLE>
The number of issued and outstanding shares of common stock in the table
above excludes 11,289,747 shares of common stock reserved for issuance under
our stock option and stock purchase plans, of which 5,850,658 shares were
subject to outstanding options as of January 2, 2000 at a weighted average
exercise price of $16.4875 per share. On January 20, 2000, we granted options
to purchase 946,940 shares of common stock at an exercise price of $27.1875
per share. See "Management--Incentive Stock Plans" and Note 8 of Notes to
Consolidated Financial Statements.
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<PAGE>
DILUTION
The net tangible book value of drugstore.com as of January 2, 2000 was $150
million, or approximately $3.45 per share. Net tangible book value per share
is determined by dividing our net tangible book value (total tangible assets
minus total liabilities) by the number of shares of our common stock
outstanding. Dilution in net tangible book value per share represents the
difference between the amount per share paid by purchasers of shares of common
stock in this offering and the net tangible book value per share of common
stock immediately after the completion of this offering. After giving effect
to (1) our sale of the 4,500,000 shares of common stock in this offering at an
assumed public offering price of $29.3125 per share, and the application of
the net proceeds therefrom, after deducting estimated underwriting discounts
and commissions and estimated offering expenses payable by us, (2) our sale of
1,066,667 shares of common stock to Amazon.com for approximately $30 million
and the application of the proceeds therefrom, and (3) our acquisition of
Beauty.com, the net tangible book value of drugstore.com at January 2, 2000
would have been $296.1 million, or approximately $5.88 per share. This
represents an immediate increase in net tangible book value of $2.43 per share
to existing stockholders as of January 2, 2000 and an immediate dilution of
$23.43 per share to new investors of common stock in this offering. The
following table illustrates this dilution on a per share basis:
<TABLE>
<S> <C> <C>
Assumed public offering price per share................................ $29.31
Net tangible book value per share as of January 2, 2000......... 3.45
Increase per share attributable to Amazon.com................... .59
Decrease per share attributable to Beauty.com................... (.30)
Increase per share attributable to investors in this offering... 2.14
----
Pro forma net tangible book value per share after this offering........ 5.88
------
Dilution per share to new investors.................................... $23.43
======
</TABLE>
The table above excludes 11,289,747 shares of common stock reserved for
issuance under our stock option and stock purchase plans, of which 5,850,658
shares were subject to outstanding options as of January 2, 2000 at a weighted
average exercise price of $16.4875 per share. On January 20, 2000, we granted
options to purchase 946,940 shares of common stock at an exercise price of
$27.1875 per share. See "Management--Incentive Stock Plans" and Note 8 of
Notes to Consolidated Financial Statements.
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<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements of
drugstore.com and the Notes thereto included elsewhere in this prospectus. The
consolidated statement of operations data set forth below for the period from
April 2, 1998 (inception) to December 31, 1998 and for the fiscal year ended
January 2, 2000, and the selected consolidated balance sheet data as of
December 31, 1998 and January 2, 2000, have been derived from the audited
financial statements of drugstore.com included elsewhere in this prospectus,
which have been audited by Ernst & Young LLP, Independent Auditors. The
historical results are not necessarily indicative of results to be expected
for any future period. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
<TABLE>
<CAPTION>
Period from
April 2, 1998
(Inception) to Year Ended
December 31, 1998 January 2, 2000
----------------- ---------------
(in thousands, except share and
per share data)
<S> <C> <C>
Consolidated Statements of Operations Data:
Net sales.................................... $ -- $ 34,848
Cost and expenses:
Cost of sales.............................. -- 38,440
Marketing and sales........................ 3,092 61,492
Technology and content..................... 2,178 14,918
General and administrative................. 1,861 11,126
Charitable contribution.................... -- 3,600
Amortization of intangible assets.......... 33 10,640
Amortization of stock-based compensation... 1,037 15,375
------- ----------
Total cost and expenses.................. 8,201 155,591
------- ----------
Operating loss............................... (8,201) (120,743)
Other income (expense):
Interest income............................ 177 5,036
Interest expense........................... (3) (124)
------- ----------
Net loss..................................... $(8,027) $ (115,831)
======= ==========
Basic and diluted net loss per share......... $(14.70) $ (6.13)
======= ==========
Weighted average shares outstanding used to
compute
basic and diluted net loss per share....... 546,149 18,880,969
======= ==========
Pro forma basic and diluted net loss per
share (unaudited)(1)........................ $ (3.73)
==========
Weighted average shares outstanding used to
compute
pro forma basic and diluted net loss per
share (unaudited)(1)...................... 31,045,835
==========
<CAPTION>
December 31, 1998 January 2, 2000
----------------- ---------------
(in thousands)
<S> <C> <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents and marketable
securities.................................. $14,408 $ 132,754
Working capital.............................. 17,050 106,960
Total assets................................. 22,517 395,708
Capital lease obligations, less current
portion..................................... 975 2,687
Total stockholders' equity................... 19,347 350,749
</TABLE>
- --------
(1) See Note 1 of Notes to Consolidated Financial Statements for an
explanation of the determination of the number of weighted average shares
used to compute pro forma net loss per share amounts.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and the related Notes contained elsewhere in
this prospectus. The following discussion contains forward-looking statements
that involve risks and uncertainties. Our actual results could differ
materially from the results contemplated by these forward-looking statements
as a result of certain factors, including those discussed below and elsewhere
in this prospectus.
Overview
drugstore.com is a leading online drugstore: a retail store and information
site for health, beauty, wellness, personal care and pharmacy products and
information. We offer a larger selection of products than typical store-based
retailers at competitive prices, along with a wealth of health-related
information, buying guides and other tools designed to help consumers make
more educated purchasing decisions.
We were incorporated in April 1998 and commercially launched our Web site
on February 24, 1999. From the period from inception through the commercial
launch of our site, our primary activities consisted of:
. Developing our business model;
. Raising funds and developing strategic alliances;
. Designing and developing our Web site;
. Recruiting and training employees;
. Selecting our fulfillment partners and integrating their systems and
processes with ours;
. Negotiating advertising contracts with several of the major Web portals;
and
. Developing the drugstore.com brand.
Since the commercial launch of our site, we have continued these operating
activities and have also focused on acquiring and retaining customers,
expanding our product offerings, building vendor relationships, promoting our
brand name, improving the efficiency of our order fulfillment processes,
establishing customer service operations and developing our own distribution
capabilities.
All customer orders are processed through our Web store and can be either
shipped to the customer or, in the case of refills of existing Rite Aid
prescriptions, picked up by the customer at any Rite Aid store in the United
States. Orders are either billed to the customer's credit card or, in the case
of prescriptions covered by insurance, billed to third parties. Sales of
pharmaceutical products covered by third parties are recorded at the net
amount to be received. Generally, we collect cash from credit card sales in
two to five days from the date the order is shipped. Amounts billed to third
parties are, on average, collected in approximately 30 days; however, such
timing can vary depending on the payor. Sales billed to third party insurance
companies and PBMs through our relationships with Rite Aid and PCS currently
represent a significant percentage of our pharmacy sales. We expect that sales
billed to these third parties will continue to represent a significant
percentage of our pharmacy sales for the forseeable future.
We routinely offer discounts and coupons to customers. In addition, if a
customer is not satisfied with a particular product or the level of customer
service we provide, we generally refund all or a portion of the sale.
Allowances for refunds and sales price incentives, including discounts and
coupons, are netted against the related sales price in net sales. We may in
the future expand or increase the coupons and discounts we offer to our
customers.
In January 2000, we began limited operations at our own 290,000 square foot
distribution center, and we are in the process of transitioning our
distribution capabilities for pharmaceutical and non-pharmaceutical
28
<PAGE>
products from third party distributors to our center. In connection with
opening our distribution center, we also opened our own pharmacy as part of
our agreement with Rite Aid. Operating our own distribution facility will
require us, in the near term, to hire and train a significant number of new
employees, increase inventory levels substantially and establish a significant
number of direct relationships with manufacturers. In addition, as we
transition to our own distribution center, order fulfillment through multiple
channels and underutilization of our own distribution capacity could result in
cost and service level inefficiencies.
Currently, we purchase substantially all of our pharmaceutical products
from RxAmerica and more than half of our nonpharmaceutical products from
Walsh. We also purchase pharmaceutical products from Rite Aid. Products are
purchased from RxAmerica, Walsh and Rite Aid after the customer submits an
order, and we maintain an inventory of nonpharmaceutical products that are not
available from Walsh. As we transition customer order fulfillment to our own
distribution center, we intend to establish relationships directly with
product manufacturers, and we expect that order fulfillment through Walsh will
cease by the end of the second quarter of 2000. In addition, in connection
with establishing our own distribution center, we are obligated to buy our
pharmaceutical products from Rite Aid, unless we are able to obtain better
overall terms from other vendors. As the number of orders filled out of the
pharmacy operation in our distribution center increases, we expect that
purchases from Rite Aid will account for an increasingly significant portion
of our total pharmaceutical product purchases.
On February 2, 2000, we acquired Beauty.com, a Web store specializing in
prestige beauty products, and entered into an agreement to retain the
employment of its founder, Roger Barnett, for a total of 1,266,289 shares of
drugstore.com common stock (approximately $40.4 million based on the price of
our common stock on January 12, 2000, the date the transaction was announced).
Beauty.com maintains an inventory of all products that it sells and we expect
our inventory to increase significantly relative to our current levels as a
result of the acquisition. Beauty.com currently outsources its fulfillment
operations to Keystone Corporation and we expect to begin integrating
Beauty.com's fulfillment operations into our own while keeping the Beauty.com
Web store intact. A significant portion of the shares of common stock that we
issued under the acquisition agreement are subject to the terms of an escrow
agreement and will be forfeited by Mr. Barnett if he does not remain employed
at Beauty.com for the two year period following the acquisition. We will
account for the acquisition as a purchase.
We have incurred net losses of $123.9 million from inception to January 2,
2000. We believe that we will continue to incur net losses for at least the
next four years (and possibly longer) and that the rate at which we will incur
such losses will likely increase significantly from current levels. We have a
limited operating history on which to base an evaluation of our business and
prospects. Our prospects must be considered in light of the risks, expenses,
and difficulties encountered by companies in their early stage of development,
particularly companies in new and rapidly-evolving markets, such as e-
commerce. See "Risk Factors" for a more complete description of the many risks
we face.
In view of our limited operating history and the rapidly evolving nature of
our business, we believe that period-to-period comparisons of our operating
results are not meaningful and should not be relied upon as an indication of
future performance. It is likely that in some future quarter our operating
results may fall below the expectations of securities analysts and investors.
In this event, the trading price of our common stock may fall significantly.
The Securities and Exchange Commission and the Emerging Issues Task Force
of the Financial Accounting Standards Board are reviewing the financial
statement classification of, and accounting for, fulfillment and order
processing costs and other items by a number of e-commerce companies,
including drugstore.com. Our fulfillment and order processing costs include
distribution center equipment and packaging supplies, per-unit fulfillment
fees charged by third parties, and payroll and related expenses for personnel
engaged in customer service, purchasing, and distribution and fulfillment
activities, including pharmacists engaged in prescription verification
activities and warehouse personnel. These expenses also include rent expense
and depreciation related to our distribution center. We classify all of these
costs in marketing and sales expense. The SEC has
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advised us that it may decide to require that some or all of our fulfillment
and order processing costs be classified as costs of sales. In addition, the
SEC may require us to capitalize certain of these costs in inventory. We
currently expense these costs as incurred. We will adjust our accounting and
classification of fulfillment and order processing costs if required by the
SEC. Any such adjustments or reclassifications are not expected to have a
significant impact on our sales, operating profit or loss, net income or loss,
or cash flow, although such adjustments or reclassifications could result in
an increase in our cost of sales as a percentage of our net sales.
Net Sales. Net sales includes gross revenues from sales of products and
related shipping fees, net of discounts and provisions for sales returns,
third-party reimbursement and other allowances. We generally refund all or a
portion of the selling price, including related shipping fees, if applicable,
in the event the customer is not satisfied with the product purchased or the
quality of customer service provided. Sales returns and allowances have not
been significant to date.
Revenues from sales of products shipped to customers, and related shipping
fees, are recognized upon shipment. We arrange for shipment of products to
customers through various contractual relationships with third-party
fulfillment partners. Revenues from sales of certain pharmaceutical products
ordered through our Web store for delivery at a Rite Aid store are recognized
when the product is delivered to the customer.
Upon receiving and validating a customer's order for products that will be
purchased by us from a fulfillment partner, and subsequently shipped or
delivered to the customer by that fulfillment partner, we submit relevant
order information and, if applicable, shipping instructions to that
fulfillment partner for processing. We believe we act as a principal in
connection with orders shipped or delivered to customers by fulfillment
partners on our behalf because, among other things, we establish the retail
prices of our non-pharmaceutical and non-insured pharmaceutical products (and
accept contractual reimbursement amounts from third-party payors for insured
pharmaceutical products) and shipping fees; contractually take title to, and
assume risk of loss of, products prior to their shipment; bear credit and
collection risk from the customer or, in the case of certain pharmaceutical
sales, third-party payors; and bear the risk that the product will be
returned. Title to products ordered by customers and shipped or delivered by a
fulfillment partner passes to us at the fulfillment partners' distribution
center or, for certain pharmaceutical sales, when the pharmaceuticals are made
available for customer retrieval at a Rite Aid store.
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.
Cost of Sales. Cost of sales consists primarily of the cost of products
sold to our customers, including allowances for shrinkage and slow moving and
expired inventory, as well as outbound and inbound shipping costs. Payments
that we expect to receive from vendors in connection with joint merchandising
activities, net of related costs, will be netted against cost of sales in the
period in which the related inventory is sold. We expect
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<PAGE>
cost of sales to increase in absolute dollars to the extent that our sales
volume increases. 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 though inventory management practices.
Marketing and Sales. Marketing and sales expenses consist primarily of
fulfillment and order processing expenses and customer acquisition and
marketing expenses. Fulfillment and order processing expenses include
distribution center equipment and packaging supplies, per-unit fulfillment fees
charged by third parties, and payroll and related expenses for personnel
engaged in customer service, purchasing, and distribution and fulfillment
activities, including pharmacists engaged in prescription verification
activities and warehouse personnel. These expenses also include rent expense
and depreciation related to our distribution center. We expect fulfillment and
order processing expenses to increase during the next two quarters due to
duplicative costs that we will incur while we complete the transition of our
customer order fulfillment operations from third party distributors, including
those operated on behalf of Beauty.com, to our own distribution facilities.
Additionally, 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.
Customer acquisition and marketing expenses include advertising and
marketing expenses, promotional expenditures, credit card processing fees and
payroll and related expenses for personnel engaged in marketing and
merchandising activities. Promotional expenses include the cost of certain
items we give away to our customers in connection with our customer acquisition
and retention activities and our branding campaign. These items include sample
merchandise in sizes or quantities not normally sold on our Web site, certain
drugstore.com-branded products and the cost of products given away in our one
cent sales promotions. Advertising expenses include media, agency and
production costs associated with our branding campaign. We intend to continue
to pursue an aggressive branding and marketing campaign and, therefore, we
expect customer acquisition and marketing expenses to increase significantly in
absolute dollars. Customer acquisition and marketing expenses may also vary
considerably from quarter to quarter, depending on the timing of our
advertising campaigns. We currently intend to pursue an independent branding
and marketing strategy for the Beauty.com Web store. Accordingly, we expect
that customer acquisition and marketing expenses will increase after the
Beauty.com acquisition is consummated.
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.
Over the next several months, we expect that our technology and content
expenses will increase as we:
. Continue to make minor upgrades to improve our systems relating to in-
store prescription pickup at Rite Aid stores;
. Make minor enhancements to our Web site to display additional product
offerings; and
. Maintain our Web site product listings and content.
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We believe that continued investment in these areas is critical to attaining
our strategic objectives and, as a result, we expect technology and content
expenses to increase significantly in absolute dollars.
General and Administrative. General and administrative expenses consist of
payroll and related expenses for executive and administrative personnel,
corporate facility expenses, professional services expenses, travel and other
general corporate expenses. We expect general and administrative expenses to
increase in absolute dollars as we expand our staff and incur additional costs
related to the anticipated growth of our business and being a public company.
Amortization of Intangible Assets. In July 1999, we consummated a series of
agreements with Rite Aid and GNC to issue 12,282,599 shares of Series E
preferred stock in exchange for an aggregate of $10 million in cash and other
consideration, including access to insurance coverage, advertising
commitments, exclusivity agreements, a technology licensing agreement and
other obligations with an estimated fair value of $233.9 million. The $233.9
million non-cash portion of the consideration from the Rite Aid and GNC
agreements was allocated to the following components based on a valuation
obtained from an independent valuation expert (in millions):
<TABLE>
<S> <C>
Access to insurance coverage .................................... $182.0
Advertising commitments.......................................... 22.9
Vendor agreement................................................. 29.0
------
$233.9
======
</TABLE>
The access to insurance coverage and the vendor agreement have been
classified as intangible assets and the advertising commitments have been
classified within prepaid marketing expenses. All of the assets are being
amortized on a straight-line basis over their contractual lives of 10 years,
which is also their estimated useful lives. Amortization of the advertising
commitments is included in marketing and sales expense. As a result of our
acquisition of Beauty.com, we expect that amortization of intangible assets
will increase substantially from current levels. We intend to obtain an
independent valuation in order to allocate the purchase price to the net
assets acquired, including any goodwill. We expect that such valuation will be
completed in the first quarter of 2000.
Amortization of Stock-based Compensation. We have recorded total deferred
stock-based compensation of $27,596,000 in connection with stock options
granted and restricted stock issued to our employees. The deferred stock-based
compensation amounts represent the difference between the exercise price of
stock option grants and the deemed fair value of our common stock at the time
of such grants. In the case of restricted stock, the deferred stock-based
compensation represents the difference between the purchase price of the
restricted stock and the deemed fair value of our common stock on the date of
purchase. Such amounts are amortized to expense over the vesting periods of
the applicable agreements, resulting in amortization of stock-based
compensation totaling $1,037,000 for the period from April 2, 1998 (inception)
to December 31, 1998 and $15,375,000 for the fiscal year ended January 2,
2000. The amortization expense relates to options awarded to employees in all
operating expense categories. Deferred stock-based compensation as of January
2, 2000 for stock options and restricted stock issued to our employees will be
subsequently recognized as expense for each of the next five fiscal years as
follows:
<TABLE>
<CAPTION>
Fiscal Year Amount
----------- --------------
(in thousands)
<S> <C>
2000 $5,715
2001 2,976
2002 1,500
2003 468
2004 111
</TABLE>
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<PAGE>
We expect that a significant percentage of the consideration for the
Beauty.com acquisition will be deemed to be deferred stock-based compensation.
Any deferred stock-based compensation will be amortized over a two-year period
and, accordingly, we expect that amortization of stock-based compensation for
fiscal 2000 and 2001 will be significantly higher than the amounts in the
above table.
Interest Income and Expense. Interest income consists of earnings on our
cash and cash equivalents and interest expense consists of interest associated
with capital lease obligations.
Income Taxes. There was no provision or benefit for income taxes for any
period since inception due to our operating losses. As of January 2, 2000, we
had approximately $98.4 of net operating loss carryforwards for federal income
tax purposes, which expire beginning in 2018. In 1999, due to the issuance and
sale of Series D and Series E preferred stock, we incurred ownership changes
pursuant to applicable regulations in effect under the Internal Revenue Code
of 1986, as amended. Therefore, our use of losses incurred through the date of
these ownership changes will be limited during the carryforward period. We
estimate that the use of the approximately $53.9 million of net operating
losses incurred prior to the date of the ownership change would be limited to
approximately $6.6 million per year in order to offset future taxable income.
To the extent that any single-year loss is not utilized to the full amount of
the limitation, such unused loss is carried over to subsequent years until the
earlier of its utilization or the expiration of the relevant carryforward
period. Our initial public offering did not cause an additional ownership
change that would result in additional limitations on the utilization of net
operating loss carryforwards. We do not expect that this offering will cause
additional ownership changes. We have provided a full valuation allowance on
the deferred tax asset, consisting primarily of such net operating loss
carryforwards, because management has determined that it is more likely than
not that we will not earn income sufficient to realize the deferred tax assets
during the carryforward period. See Note 6 of Notes to Consolidated Financial
Statements.
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Quarterly Results of Operations
Because we were a development stage company prior to the launch of our Web
site in February 1999 and have a short operating history, we believe that
period-to-period comparisons for periods prior to 1999 are less meaningful
than an analysis of recent quarterly operating results. Accordingly, we are
providing a discussion and analysis of our results of operations that is
focused on the seven quarters ended January 2, 2000.
The following table sets forth unaudited quarterly statement of operations
data for the seven quarters ended January 2, 2000. This unaudited quarterly
information has been derived from our unaudited financial statements and, in
the opinion of management, include all adjustments, consisting only of normal
recurring adjustments necessary for a fair presentation of such information in
accordance with accounting principles generally accepted in the United States.
The operating results for any quarter are not necessarily indicative of the
operating results for any future period.
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------------------------------------
Sept. Dec.
June 30, 30, 31, April 4, July 4, Oct. 3, Jan. 2,
1998 1998 1998 1999 1999 1999 2000
-------- ------- ------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $ -- $ -- $ -- $ 652 $ 3,550 $ 12,158 $ 18,488
Cost and expenses:
Cost of sales......... -- -- -- 672 4,879 14,066 18,823
Marketing and sales... -- 313 2,779 5,189 11,328 16,471 28,504
Technology and
content.............. 104 522 1,552 2,713 3,229 4,232 4,744
General and
administrative....... 71 511 1,279 1,713 2,204 3,120 4,089
Charitable
contribution......... -- -- -- -- -- 3,600 --
Amortization of
intangible assets.... 8 10 15 18 20 5,300 5,302
Amortization of stock-
based compensation... 166 350 521 1,257 2,326 9,267 2,525
----- ------- ------- -------- -------- -------- --------
Total cost and
expenses............ 349 1,706 6,146 11,562 23,986 56,056 63,987
----- ------- ------- -------- -------- -------- --------
Operating loss.......... (349) (1,706) (6,146) (10,910) (20,436) (43,898) (45,499)
Other income (expense):
Interest income....... -- 36 141 332 701 1,958 2,045
Interest expense...... -- -- (3) (14) (26) (33) (51)
----- ------- ------- -------- -------- -------- --------
Net loss................ $(349) $(1,670) $(6,008) $(10,592) $(19,761) $(41,973) $(43,505)
===== ======= ======= ======== ======== ======== ========
</TABLE>
Quarterly Periods from Inception to April 4, 1999
Net Sales and Cost of Sales. We commercially launched our Web site on
February 24, 1999. There were no net sales or cost of sales prior to the
quarter ended April 4, 1999. Net sales approximated the cost of sales in the
quarter ended April 4, 1999 due to promotional sales discounts and coupons
associated with the commercial launch of the Web site.
Marketing and Sales. Marketing and sales expenses increased in each of the
four quarters ended April 4, 1999, primarily due to expenses associated with
the addition of marketing and merchandising personnel. We also increased our
advertising on major Web portals, including AOL, Excite and Yahoo!, in the
quarter ended April 4, 1999 in connection with the commercial launch of our
Web site. Additionally, we recognized $1,007,000 of non-cash advertising
expenses under our technology license and advertising agreement with
Amazon.com in the quarter ended April 4, 1999.
Technology and Content. Technology and content expenses increased in each
of the four quarters ended April 4, 1999, primarily due to increased expenses
associated with the addition of information technology personnel and
additional use of consultants and contract labor to help maintain the systems
supporting our Web site.
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<PAGE>
General and Administrative. General and administrative expenses increased
in each of the four quarters ended April 4, 1999, primarily due to increased
expenses associated with the addition of general and administrative personnel,
additional professional fees and the cost of corporate facilities.
Amortization of Intangible Assets. Amortization of intangible assets during
the four quarters ended April 4, 1999 primarily represented the amortization
of the technology license obtained from Amazon.com and certain domain names
owned by us.
Amortization of Stock-based Compensation. Amortization of stock-based
compensation increased in each of the four quarters ended April 4, 1999,
primarily due to the grant of stock options to new employees prior to our
initial public offering on July 27, 1999, as well as an increase in the
difference between the grant price and the deemed fair value of our common
stock, particularly in the quarter ended April 4, 1999.
Three Quarterly Periods Ended January 2, 2000
Net Sales and Cost of Sales. We have been operating our Web store for three
full fiscal quarters. The following table sets forth net sales for each of
these quarters by category:
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------
July 4, Oct. 3, Jan. 2,
1999 1999 2000
---------- ----------- -----------
Category Amount % Amount % Amount %
-------- ------ --- ------- --- ------- ---
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Pharmaceutical products................. $1,094 31% $ 7,107 58% $10,453 57%
Non-pharmaceutical products and other... 2,456 69 5,051 42 8,035 43
------ --- ------- --- ------- ---
Total................................. $3,550 100% $12,158 100% $18,488 100%
====== === ======= === ======= ===
New customers........................... 150,000 260,000 267,000
Orders from repeat customers as a
percentage of total orders............. 26% 33% 44%
</TABLE>
Our net sales in each category have increased in each quarter since we
commenced operations due to increases in new customers and increased repeat
orders. The substantial increase in pharmaceutical product sales as a percent
of total net sales in the quarter ended October 3, 1999 was primarily related
to the commencement of the Rite Aid in-store pickup service for prescription
refills. Consignment fees related to our agreement with GNC are included in
net sales of non-pharmaceutical products and other and were insignificant
relative to the total.
Cost of sales exceeded net sales in each of the three quarters ended
January 2, 2000. Such excess was primarily the result of a decrease in net
sales due to sales price incentives offered to customers, including
promotional coupons and discounts. We continue to offer promotional coupons
and discounts as a strategy to attract new customers, although such discounts
and coupons have decreased over time as a percentage of net sales. Promotional
coupons can only be used by customers to offset the price of non-
pharmaceutical products. Additionally, our shipping costs exceeded the amount
we charged our customers for shipping in each of the three quarters ended
January 2, 2000. We expect to continue to subsidize a portion of our shipping
costs for the foreseeable future as a strategy to attract and retain
customers.
Marketing and Sales. Marketing and sales expenses increased in each of the
three quarters ended January 2, 2000 due to increases in both fulfillment and
order processing expenses and customer acquisition and marketing expenses.
Fulfillment and order processing expenses increased in each of the three
quarters ended January 2, 2000 primarily due to the increases in order volume.
Volume-related expenses primarily responsible for the increased costs include
permanent and temporary labor required to validate prescriptions and fulfill
both pharmaceutical and non-pharmaceutical orders, per-unit fulfillment fees
charged by our fulfillment partners, depreciation expense related to
additional capital investments and packaging materials.
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<PAGE>
The increases in customer acquisition and marketing expenses are primarily
attributable to increased media, agency and production costs associated with
our branding campaign which commenced in the quarter ended July 4, 1999.
Additionally, the cost of promotional items given to new and existing
customers has increased in each quarter. We expect to continue to pursue an
aggressive branding and marketing campaign for the foreseeable future and
expect such expenditures to increase accordingly. Included in customer
acquisition and marketing expenses are $2,293,000, $1,074,000 and $573,000 of
non-cash advertising expenses incurred under our agreements with Amazon.com
and Rite Aid for the second, third and fourth quarters of fiscal 1999,
respectively.
Technology and Content. Technology and content expenses increased in each
of the three quarters ended January 2, 2000, primarily due to increased
expenses associated with the addition of information technology personnel and
additional use of consultants and contract labor. Such personnel assisted in
maintaining and making minor upgrades and enhancements to our Web store as
well as maintaining the systems supporting the Web site.
General and Administrative. General and administrative expenses increased
in each of the three quarters ended January 2, 2000 primarily due to increased
expenses associated with the addition of general and administrative personnel,
additional professional fees and the cost of corporate facilities.
Charitable Contribution. In the third quarter of fiscal 1999, we donated
200,000 shares of our common stock to a foundation established by us and
recognized an expense of $3,600,000 in that quarter based on the fair value of
the donated common stock.
Amortization of Intangible Assets. Amortization of intangible assets
increased significantly in the quarters ended October 3, 1999 and January 2,
2000, to $5,300,000 and $5,302,000, respectively, primarily due to the
amortization of intangible assets received in connection with the Rite Aid and
GNC transactions completed in July 1999.
Amortization of Stock-based Compensation. Amortization of stock-based
compensation increased in the third quarter of fiscal 1999, primarily due to a
separation agreement we entered into with our founder.
Liquidity and Capital Resources
In July 1999, we completed our initial public offering and issued 5,750,000
shares of our common stock at an initial public offering price of $18.00 per
share. Net cash proceeds to us from the initial public offering were
approximately $94.6 million. Concurrently with our initial public offering, we
received $10 million in cash from our private placement of 555,555 shares of
our common stock with Amazon.com. From our inception until our initial public
offering, we financed our operations primarily through private sales of
preferred stock which yielded net cash proceeds of $106.8 million.
We have incurred net losses of $123.9 million from inception to January 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
$56.8 million for the year ended January 2, 2000, and $6.3 million in the
period from April 2, 1998 (inception) to December 31, 1998. Net cash used in
operating activities for each of these periods primarily reflects our net
losses offset by a net source of funds from working capital.
Net cash used in investing activities was $120.0 million for the year ended
January 2, 2000, and $1.5 million in the period from April 2, 1998 (inception)
to December 31, 1998. Net cash used in investing activities for the year ended
January 2, 2000 was primarily related to the investment of the proceeds from
our initial public offering in marketable securities with an original maturity
greater than 90 days. Additionally, net cash used in investing activities for
both periods included leasehold improvements and purchases of equipment and
systems, including warehouse handling equipment, computer equipment and
fixtures and furniture.
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<PAGE>
For the year ended January 2, 2000, net cash provided by financing
activities was $188.9 million and consisted primarily of $104.6 million in net
proceeds from the issuance of common stock in our initial public offering and
the concurrent private placement, and $84.6 million in net proceeds from the
issuance of convertible preferred stock.
During the period from April 2, 1998 (inception) to December 31, 1998, net
cash provided by financing activities was $22.2 million, consisting primarily
of cash proceeds of $4.0 million from the issuance of 10,000,000 shares of
Series A preferred stock and cash proceeds of $18.2 million from the issuance
of 5,446,268 shares of Series B preferred stock.
As of January 2, 2000, we had $132.8 million of cash, cash equivalents and
marketable securities. As of that date, our principal commitments consisted of
obligations outstanding under capital and operating leases and marketing
agreements with certain Web portals, including America Online, MSNBC and
Discovery Channel, aggregating approximately $80.0 million through 2012.
Subsequent to January 2, 2000, we entered into a strategic agreement with
Amazon.com to integrate various shopping features of our Web sites and create
a persistent drugstore.com shopping presence on Amazon.com's Web site. Under
the terms of the agreement, we agreed to pay Amazon.com a total of $105
million over a three-year period, of which $30 million was paid at the time
the agreement was executed. In addition, in January 2000, we provided letters
of credit totaling $16.4 million as security for leases and certain other
operating agreements. These letters of credit must be fully collateralized by
an equivalent amount of our cash. If our cash balance falls below $25 million
we are contractually obligated to increase these letters of credit and related
cash collateral to $20.7 million. Although we have no material commitments for
capital expenditures, we anticipate a substantial increase in our capital
expenditures and lease commitments consistent with anticipated growth in
operations, infrastructure and personnel. We recently began limited operations
at our own distribution center to improve the customer experience by locating
closer to a greater percentage of our customers, exerting greater control over
the distribution process and ensuring adequate supplies of products to our
customers. We also expect to devote substantial resources to technology and
systems upgrades to support the new distribution center and our ability to
provide in-store prescription pick up at Rite Aid stores as well as to
advertising and promotional activities. During 2000, we expect to incur
approximately $15 million of additional costs for these technology and systems
upgrades and toward the new distribution center.
We currently anticipate that the net proceeds of this offering, together
with our available funds, will be sufficient to meet our anticipated needs for
working capital and capital expenditures for at least the next twelve months.
We may need to raise additional funds prior to the expiration of such period
if, for example, we pursue business or technology acquisitions or experience
operating losses that exceed our current expectations. If we raise additional
funds through the issuance of equity, equity-related or debt securities, such
securities may have rights, preferences or privileges senior to those of the
rights of our common stock and our stockholders may experience additional
dilution. We cannot be certain that additional financing will be available to
us on acceptable terms when required, or at all.
Year 2000
Many existing computer programs were designed and developed without
addressing the impact of the upcoming change in the century. If not corrected,
many computer software applications could fail or create erroneous results by,
at or beyond the year 2000. Prior to the end of 1999, we completed a review of
the year 2000 compliance of our internally developed proprietary software,
including testing to determine how our systems will function at and beyond the
year 2000. Based upon our assessment, we believe that our internally developed
proprietary software is year 2000 compliant. In addition, we assessed the year
2000 readiness of our third-party supplied software, computer technology and
other services, which include software for use in our accounting, database and
security systems, and implemented corrective actions that we believed were
necessary to address potential year 2000 issues in these areas. To date, we
have not experienced any year 2000-related problems with our internally
developed software or our third-party supplied software and computer systems,
and we are not aware of any failure by our third-party suppliers to be year
2000 compliant that could impact our
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<PAGE>
business or operations. In addition, to date, we are not aware of any failure
by Rite Aid, RxAmerica or Walsh Distribution to be year 2000 compliant that
could impact our business or operations. However, such problems or failures
could arise or become apparent in the future, and any such problems or
failures could have negative consequences for us. Such consequences could
include difficulties in operating our Web site effectively, taking customer
orders, making product deliveries or conducting other fundamental parts of our
business.
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 the Company.
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BUSINESS
Overview
drugstore.com is a leading online drugstore: a retail store and information
site for health, beauty, wellness, personal care and pharmacy products. As of
January 2, 2000, we have sold our products to approximately 695,000 customers.
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 provides a customer with a superior shopping
experience, making buying What Every Body Needs(TM) less of a chore.
Industry Background
The Growth of the Internet and Electronic Commerce
The Internet has become an important medium for communicating, finding
information and purchasing products and services. International Data
Corporation (IDC) estimates that there were approximately 51 million Web users
in the United States at the end of 1998 and, although we cannot be certain of
any future growth, IDC anticipates this number will grow to approximately 135
million users by the end of 2002. We believe this increased usage is due to a
number of factors including:
. The large installed base of personal computers in the workplace and
home;
. Advances in the performance and reductions in the cost of personal
computers and modems;
. Improvements in the ease of use and security of the Internet;
. The availability of a broader range of online products, information and
services; and
. Growing awareness among consumers and businesses of the benefits of
online shopping.
The Internet has unique and powerful characteristics that differentiate it
from traditional distribution channels and have facilitated its use as a
purchasing medium. IDC estimates that worldwide business-to-consumer sales
over the Internet will increase from approximately $11 billion in 1998 to
approximately $93 billion by 2002; however, we cannot be certain that such
projection will be achieved. We believe consumers using the Internet to
purchase goods expect a more information-intensive experience than when they
shop at a traditional retail store. We believe the ability to obtain relevant,
up-to-date information makes the consumer better prepared to make a purchase.
Accessing the Internet from a computer in the home or office allows a consumer
to easily scroll through and search articles, pages of product data and
related topics. This allows consumers to research and then purchase products
at their convenience.
Healthcare Trends on the Internet
Healthcare is one of the largest segments of the U.S. economy, representing
an annual expenditure of roughly $1 trillion, and health and medical
information is one of the fastest growing areas of interest on the Internet.
According to a recent Forrester Research report, 32% of online consumers shop
for healthcare products online. Cyber Dialogue estimates that the number of
adults in the United States searching online for health and medical
information will grow from approximately 17.1 million during the twelve month
period ended July 1998 to approximately 30.0 million during the twelve month
period ending July 2000; however, we cannot be certain that such projection
will be achieved.
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The drugstore.com Market
The market we address can be divided into five primary categories: health,
beauty, wellness, personal care and pharmacy. Many products in this market are
personal (being used on a person's skin or in a person's body) and essential,
and often are purchased repeatedly. In this market, vendors frequently
introduce new products, and consumers seek comprehensive product information.
Consumers currently shop for these products primarily in chain drugstores
(such as Walgreen's, CVS, Rite Aid and Eckerd), mass market retailers (such as
Wal-Mart, Kmart and Target), supermarkets, warehouse clubs and independent
drugstores. However, category-specific retailers and catalogs also serve each
of these categories. Overall, distribution of products in our primary market
categories is fragmented.
Key aspects of the primary categories of the drugstore.com market are as
follows:
Health. The health category includes over-the-counter remedies (such as
cough, cold, allergy and pain relief medications), first aid, medical devices
for home healthcare, contraceptives and other products related to the body's
health needs. Based on estimates from Information Resources, Inc. and Frost &
Sullivan, we believe that sales of health products in the U.S. we currently
offer grew from approximately $15.0 billion in 1996 to approximately $16.3
billion in 1998. We believe that the aging U.S. population, along with a
greater portion of prescription drugs becoming available as over-the-counter
medications, will contribute to growth in this market category. Consumers in
the health category often seek significant amounts of product information to
determine which products will meet their health needs. Consumers generally buy
health products from chain drugstores, mass market retailers, supermarkets,
and warehouse clubs as well as from locally-owned, independent drugstores and
convenience stores. Representative brands carried in our health product
category include Advil, Tylenol, Pepcid, Bausch & Lomb and Metamucil.
Beauty. The beauty category includes cosmetics, fragrances and a variety of
skin care products. Based on estimates from Information Resources, Inc. and
Frost & Sullivan, we believe that sales of beauty products in the U.S. we
currently offer grew from approximately $10.7 billion in 1996 to approximately
$12.8 billion in 1998. Some of the factors driving consumer demand for beauty
products include regular and seasonal new product introductions, as well as
changing fashion trends. Consumers often seek advice regarding these trends or
the functionality of new products. The beauty category can be broadly
classified into two subcategories: mass market and prestige products.
Consumers for mass market beauty products typically purchase such products in
mass market retailers, drugstores and supermarkets. Consumers for prestige
products generally shop in department stores (such as Nordstrom, Macys, May
and Dillard's), beauty specialty stores (such as Aveda or Sally's), or spas
and salons (such as Elizabeth Grady or Elizabeth Arden). Representative brands
carried in our beauty product category include Revlon, L'Oreal, Cover Girl and
Neutrogena.
Wellness. The wellness category includes vitamins, nutritional supplements,
herbs, homeopathy, and other natural products. Based on estimates from various
sources including Information Resources, Inc., Frost & Sullivan, Packaged
Facts and Beyond Data, we believe that sales of wellness products in the U.S.
we currently offer totaled approximately $9.0 billion in 1998 and is growing
at an annual rate of over 17%. We believe that increasing consumer interest in
nutritional and wellness products to improve physical and mental well-being
has contributed to growth in this category. We believe supplemental product
information is important to these consumers because they are interested in the
intended physiological effects of these products. Consumers can obtain these
products at chain drugstores, mass market retailers, supermarkets, warehouse
clubs, and specialty stores as well as through catalogs or online vitamin and
nutrition stores. Representative brands carried in our wellness product
category include Centrum, One-A-Day, Nature Made, Twinlab, Natrol and Nature's
Way. We are also the exclusive online retailer of GNC wellness products.
Personal Care. The personal care market category includes products related
to hair, body and eye care, shaving, oral hygiene and feminine needs. Based on
estimates from Information Resources, Inc. and Frost & Sullivan, we believe
that sales of personal care products in the U.S. we currently offer grew from
approximately $20.7 billion in 1996 to approximately $23.5 billion in 1998.
New product introductions drive most of the growth in this category. The
personal care category is comprised of a number of different product groups
that consumers
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typically shop for at mass market retailers, chain drugstores, supermarkets,
warehouse clubs and specialty stores. Representative brands carried in our
personal care product category include Gillette, Colgate, Johnson & Johnson,
Rogaine and Pampers.
Pharmacy. Based on estimates from various sources including Information
Resources, Inc., Frost & Sullivan, and the National Association of Chain Drug
Stores we believe that the pharmacy category in the U.S. we address totaled
approximately $103.0 billion in 1998 and is growing at an annual rate of
approximately 14.8%. This category consists of prescription medication for
chronic illnesses, such as high blood pressure, osteoporosis and depression,
which represents approximately 73% of the U.S. prescription drug market
according to Advanstar Communications. AC Nielsen and IMS Health estimate that
out of the $101.7 billion of prescription sales, over 75%, or $76.4 billion
are distributed through retail channels. The number of prescriptions written
for chronic illnesses is expected to continue to grow due to an aging
population and the increasing utilization of pharmaceuticals in medical
management. The principal source of pharmaceuticals for chronic illnesses has
been retail pharmacies. However, over the past ten years, mail order
pharmacies have become an increasingly important source of pharmaceuticals for
chronic illnesses. Forrester Research estimated in February 1999 that 13% of
HMO prescriptions would be filled by a mail-order pharmacy by the end of 1999.
Limitations on Traditional Channels of Distribution
Traditional channels of retail distribution for health, beauty, wellness,
personal care and pharmacy products have many limitations, including:
Inconvenience. Consumers often view shopping for many of these products as
a chore. Shopping at a physical store can be highly inconvenient. It generally
involves time-consuming activities such as making a trip to the store, finding
a parking space, searching for the desired products, and waiting in line to
fill a prescription or make a purchase. This process can be especially
difficult for customers with disabilities or parents with young children. To
increase convenience for consumers, traditional store-based retailers often
need to open new stores, which is time-consuming and expensive. Each new store
results in significant investments in inventory, real estate, building
improvements and the hiring and training of store personnel. The required
investment may limit the ability of traditional store-based retailers to serve
geographic areas that are not densely populated. Also, an existing store may
face substantial added costs if it attempts to build more parking spaces or
hire more clerks in order to reduce parking and waiting inconveniences.
Narrow Selection. Consumers value the opportunity to select items from a
broad range of products that best fit their needs. However, consumers must
often choose from a narrow product selection at traditional store-based
retailers. Stores may not carry a full range of products, especially prestige,
specialty or regional products, or carry a full assortment of sizes. Desired
items may be out of stock. Overcoming these difficulties can be prohibitively
expensive for traditional retail stores, usually due to shelf space
limitations, the cost of carrying inventory and the resulting need to allocate
inventory dollars to popular products. To the extent that mass market
retailers allocate physical store space to items such as alcohol, lawn
furniture, motor oil and snack foods, they may have to reduce the number of
health, beauty, wellness and personal care products that they offer. Product
selection in traditional store-based retailers cannot be tailored to
individual needs because it is driven by aggregate demand.
Limited Information and Communication. Consumers buying health, beauty,
wellness, personal care and pharmacy products often seek information and
knowledgeable advice to assist them in making purchasing decisions. Many
traditional store-based retailers do not provide consumers with access to
useful product information or readily-available on-site experts who can
provide helpful advice. Employees at traditional store-based retailers,
especially supermarkets and mass market retailers, may have limited if any
interaction with their customers. Often there is no direct contact, except at
the check-out line. Customers may also face difficulties following up with
questions after a purchase. While traditional store-based retailers could take
steps to increase the availability of customized information and on-site
experts, such steps would involve substantial investments in printing and
training. In addition, it is difficult for a traditional retail store to use
information about a particular consumer to personalize that consumer's
shopping experience.
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Lack of Privacy. Because many health, beauty, wellness, personal care and
pharmacy products are inherently personal, consumers often desire ways to
preserve the anonymity of their purchases and the confidentiality of the
information transferred in the buying process. Many consumers may feel
uncomfortable purchasing certain drugstore products, such as birth control
devices, feminine care products, and incontinence products, in a traditional
retail store. Many consumers have encountered the unpleasant experience of
placing such a product on a checkout stand's conveyor belt in front of store
clerks and other waiting customers. Consumers may hesitate to ask store
personnel questions about which product best meets a need, or how to use a
product, especially if either the question or the answer is embarrassing or
may be overheard by others. Overcoming this limitation is very difficult for
traditional retail stores because the consumer must visit a physical store
frequented by other customers and must interact in person with store
employees.
The markets for health, beauty, wellness, personal care and pharmacy
products have grown despite the lack of convenience, selection, information
and privacy associated with a trip to a traditional store-based retailer.
Consequently, we believe there is a significant market opportunity for an
online store that can offer consumers an enhanced shopping experience through
convenient and private access to detailed information about a broad range of
products, and an easy way to buy them.
The drugstore.com Solution
We are a leading online drugstore: a retail store and information site for
health, beauty, wellness, personal care and pharmacy products. We designed our
store to provide a convenient, private and informative shopping experience
that encourages consumers to purchase products essential to healthy, everyday
living. We believe our online store provides customers with a superior
shopping experience, making buying What Every Body Needs(TM) less of a chore.
We draw and retain consumers by emphasizing key attributes of our store:
Convenience. Our user-friendly Web store may be reached from wherever the
shopper has Internet access, such as the shopper's home or office. Further
convenience advantages at our store include:
. Shopping 24 hours a day, seven days a week;
. Direct delivery to the shopper's home or office, avoiding the need for a
trip to a physical store;
. The opportunity for customers to order refills of their existing Rite
Aid prescriptions on our Web site for pick up at a local Rite Aid store
or for delivery using one of our standard delivery options;
. A personal shopping list for every customer, allowing for quick and easy
reordering in future visits;
. Simplified searching for products and information using advanced search
technology;
. Confidential access by a customer to his or her individual medication
profiles at any time; and
. Ability to purchase and send products easily to others.
Selection. Because we do not have shelf-space limitations, we believe we
offer a significantly greater number of products than are available in a
traditional chain drugstore. Not only do we offer traditional chain drugstore
items (prescription drugs, over-the-counter medications and personal care), we
offer a broad selection of health, beauty and wellness products. Many
traditional chain drugstores do not carry a wide range of these products. We
believe that we offer one of the largest selections of drugstore products
available on the Internet. We are also the only online retailer that offers
GNC wellness products.
Information. Because the Web has become an increasingly important tool for
researching healthcare topics, we believe that providing useful information is
a critical aspect of enabling consumers to make informed purchasing decisions.
We have assembled a broad array of information on our Web site that can enable
our consumers to make informed purchasing decisions. This information is
focused on key aspects of our market segments and is produced in-house, by
third-party expert sources or submitted to our Web site's Test Drive
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feature by customers who test our products. Consumers can either access our
information directly, through a number of content features on our Web site, or
can get free help directly from our advisors and experts by contacting them
through e-mail. Our information services include:
. Full Product Packaging Information. Almost every product available on
our Web site can be viewed in an expanded format where all package
information, including ingredients, directions and warnings, can be read
next to an enlarged photograph of the product. We believe we are the
only online retailer to provide all the information that is normally
found on the products' packaging.
. Solutions. Our Solutions area provides an easy way for customers to find
the information they need to make an informed purchasing decision. It
includes buying guides, reference information, interactive shopping
advisors and articles on beauty trends and products.
. Easy Access to Drug Information and Personalized Pharmacy
Advice. Consumers can access our extensive drug information library
directly at our Web site, anytime at their own convenience. Patient
information and drugstore.com drug prices can be accessed via our drug
index. We provide information to help consumers understand generic drug
alternatives. We also provide health- and pharmacy-related editorial
content in our online Solutions area. Our pharmacists can provide
personal guidance by phone or e-mail to ensure that each customer
understands the correct usage, possible side effects and expected
beneficial outcomes of a prescription or an over-the-counter medication.
Communication. We can communicate with customers on a regular basis through
the convenience of e-mail. In addition to our Ask Your Pharmacist and Ask Your
Beauty Expert features, we offer the following means of communication with our
store:
. Reminders. We have the ability to e-mail a customer when a prescription
or non-prescription product is about to run out, reminding him or her to
order a replacement product or a prescription refill. Customers simply
tell us how often they need a product and we can send them a notice
before it is scheduled to run out.
. Specialized Customer Care. To ensure timely and high-quality customer
service, we have established specialty teams within the drugstore.com
customer care department. Our Web site, product and insurance
specialists respond to customer e-mails and calls that are related to
shopping orders, insurance, prices, and shipping. Once an order is made,
customers can view order-tracking information on our Web site.
. Personalized Communications. As customers use our Web site, they can
provide us with information about their buying preferences and habits.
We can use this information to develop personalized communications and
deliver useful newsletters, special offers and new product announcements
to our customers via e-mail and other means. In addition, we use e-mail
to alert customers to important developments and merchandising
initiatives.
Privacy. Customers can shop in the privacy of their own homes or offices.
When shopping at a physical store, many shoppers feel embarrassed or
uncomfortable buying items that may reveal personally-sensitive aspects of
their health or lifestyle to store personnel or other shoppers. Shoppers at
drugstore.com avoid these problems. Through features such as Ask Your
Pharmacist and Ask Your Beauty Expert, customers can obtain answers to
questions that they would otherwise be uncomfortable asking in public.
Pharmacy. We employ licensed pharmacists and are able to ship prescription
products to all 50 U.S. states, and we offer customers the opportunity to
order refills of their existing Rite Aid prescriptions on our Web site for
pick-up at a conveniently located Rite Aid store or for delivery using one of
our standard delivery options. Through our relationships with Rite Aid,
insurance companies and PBMs, we are able to obtain insurance reimbursement
coverage for many insured prescriptions. Customers can ask our pharmacists
about medications and receive other information about prescriptions drugs and
health-related products using the Ask Your Pharmacist feature of our Web site.
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Although we believe we offer significant advantages over traditional chain
drugstores, certain customers may feel that traditional chain drugstores offer
several advantages over our service, and we may not be able to meet the needs
of some customers. For example, we cannot serve emergency needs and we cannot
serve customers who do not have access to the Internet. Some customers may
also prefer to touch and see products in person, rather than view them on a
computer screen or prefer to talk to a pharmacist in person. Some customers
may also have general concerns about the privacy and security of information
transmitted over the Internet and will therefore prefer to shop in physical
stores. See "Risk Factors--Consumers of Health, Beauty, Wellness, Personal
Care and Pharmacy Products May Not Accept Our Solution, Which Would Harm Our
Revenues and Prevent Us From Becoming Profitable" for a further description of
the challenges we face in this area.
Business Strategy
Our objective is to become one of the world's leading retailers of health,
beauty, wellness, personal care and pharmacy products. To achieve our
objective, we intend to attract a growing base of customers and provide them a
superior shopping experience. Key elements of our strategy include:
Strengthen the drugstore.com Brand. We intend to establish drugstore.com as
the leading consumer brand for buying health, beauty, wellness, personal care
and pharmacy products. To date, we have promoted our Web site on major
Internet destinations such as Amazon.com, America Online and Yahoo!, as well
as on other sites our customers are likely to visit, including ThirdAge,
InteliHealth, OnHealth, Medscape and Women.com. To further strengthen our
brand, we intend to continue to cultivate a reputation for excellent quality
of service and continue to pursue an aggressive marketing strategy, both
through the Internet and traditional media, as well as through our
relationships with Rite Aid and GNC.
Continuously Improve Our Web Store and Service. We seek to combine wide
product selection and helpful information with the unique aspects of the
Internet to deliver a convenient and personalized shopping experience. We
strive to develop long-term relationships with our customers to build loyalty
and encourage repeat purchases. To improve our site, we intend to continue to
expand our product selection and enhance our existing offerings such as
shopping lists, individual medication profiles, e-mail reminders and targeted
special offers, as well as develop new personalization features as we learn
more about our customers and their needs. In addition, as part of our
relationship with Rite Aid, customers are able to order refills of their
existing Rite Aid prescriptions on our Web site for pick-up at a local Rite
Aid store or for delivery using one of our standard delivery options. We
intend to expand this service to enable our customers to order any
prescription on our Web site for pick-up at a Rite Aid store.
Take Advantage of Repeat Purchasing Patterns. We intend to maximize repeat
purchases by our customers. To achieve this objective, we have developed
personalized tools and features that are designed to allow consumers to
satisfy their replenishment purchasing needs easily. We believe that our focus
on prescriptions for chronic conditions and products that must be regularly
replenished will allow us to benefit from repeat purchase patterns. We also
plan to continue to expand the functionality of our Web site to further
facilitate repeat purchases.
Maintain Our Technology Focus and Expertise. We intend to use technology to
enhance our product and service offerings and take advantage of the benefits
of the Internet. We have developed a proprietary, scalable architecture
designed to support secure and reliable online shopping in an intuitive easy-
to-navigate format. We intend to seek ways to increase the efficiency of
pharmacy transaction processing and order fulfillment activities. For example,
we participate in a certification program to define guidelines for the receipt
of electronic prescriptions by online pharmacies. We also intend to develop
features to further personalize the consumer's shopping experience and enhance
the customer's ability to find products and useful information.
Ensure Quick and Efficient Distribution. We intend to continuously increase
the automation and efficiency of our fulfillment and distribution activities.
For example, we will seek ways to improve the efficiency of the prescription
fulfillment process in areas such as receiving prescriptions from doctors and
billing the customer or his or her insurance company. In addition, we intend
to continue to work with our distributors and vendors to find more ways to
ensure prompt deliveries to our customers. As part of this effort, we have
recently established
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our own 290,000 square foot distribution center, and we will continue to
review and formulate our long-term distribution strategy. Our goals in this
area include reducing shipping costs, ensuring adequate future capacity and
ensuring reliable and prompt deliveries to our customers.
Enhance and Form Key Relationships. We intend to enhance our existing
strategic relationships with leading product manufacturers, content providers
and insurance and pharmacy benefit management companies, as well as develop
new strategic relationships. We intend to continue to develop marketing
relationships with leading insurance and pharmacy benefit management
companies, including our relationships with PCS and ProVantage, to enhance
customer awareness of our Web site. We also believe having strong
relationships with product manufacturers will enable us to provide more and
better product information to our customers. In addition, as part of our long-
term distribution strategy, we will be required to develop direct manufacturer
relationships to ensure the availability of adequate volumes of products
ordered by our customers. We also intend to continue to pursue key
relationships with leading providers of health, beauty and wellness
information. We believe this strategy will enhance our product offerings and
allow us to serve more customers.
Shopping at drugstore.com
Shoppers at drugstore.com see a home page that highlights our five product
departments, as well as editorial content and promotions. A shopper can browse
through the store by clicking on the permanently displayed department names,
move directly to a department's home page and view promotions and featured
products. All product lists allow a shopper to select products based on brand
or unique attributes of the category, such as tartar control or whitening for
toothpaste, or color for lipstick or eye shadow. Shoppers can also search the
site by entering text in the search box at the top of any page.
A customer can select products to purchase by clicking on the "buy" button
in the product list. The products are then added to the customer's shopping
bag. If a customer needs more information to make a purchase, we supply
interactive tools and content to aid in the decision, such as:
. Solutions. Our Solutions area provides an easy way for customers to find
the information they need to make an informed purchasing decision. Some
of the components of the Solutions area include:
Shopping Advisors. Our shopping advisors consist of interactive
tools to help consumers find the right products for their needs. We
currently feature a cold and cough advisor, a skin care advisor and
a vitamin and supplement advisor. Through an easy-to-use interactive
format, a customer provides information about what he or she needs,
and the advisor provides information that enables the customer to
choose the appropriate product.
Buying Guides. Our buying guides help consumers make informed buying
decisions. We currently feature buying guides on condoms, birth
control pills, cold and cough medicine, toothpaste, shampoo and
sunscreen. The buying guides provide helpful information about the
key benefits and characteristics of each of these products.
. Your List. Returning customers can easily view their previous purchases
by consulting their personalized shopping lists through our Your List
feature. The shopping lists make buying regularly-replenished items even
easier to purchase because the customer can move products into their
shopping bag directly from their personalized shopping list, without
browsing the site. If requested by the customer, we also send e-mail
reminders to consumers when items on their lists are scheduled to run
out and need to be replenished.
. Quick Lists. Our Quick Lists feature provides customers a starting point
for finding frequently used products for different product categories,
such as a medicine cabinet, beauty essentials and a travel bag. Within
each product category, the customer can choose a specific product and
move the product into his or her shopping bag. The customer can then
move directly from his or her shopping bag back to the Quick Lists and
choose another product or list.
. Ask Your Pharmacist. Our Ask Your Pharmacist feature allows customers to
ask our pharmacists questions about over-the-counter and wellness
products as well as prescription drugs.
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. Ask Your Beauty Expert. Our Ask Your Beauty Expert feature allows
customers to ask our beauty experts questions about beauty needs. Our
beauty experts respond to questions via e-mail and seek to answer
questions within one business day.
. Getting Help. From every page of our Web site, a customer can click on a
"help" button to go to our customer care area. In this area, we assist
customers in searching for, shopping for, ordering and returning our
products. In addition, we provide customers with answers to the most
frequently asked questions and encourage our visitors to send us
feedback and suggestions via e-mail.
When the customer finishes selecting the desired products, he or she goes
to checkout. The only information required to checkout is an e-mail
identification, password (to protect account privacy), shipping address and a
valid credit card number. All of this information is maintained in a secure
format and remains available for the customer's future access.
Pharmacy Services
The pharmacy services at drugstore.com are provided by experienced clinical
professionals using advanced information technologies. We employ licensed
pharmacists who ensure private, personal customer service. We have received
Verified Internet Pharmacy Practice Sites (VIPPS) certification from the
National Association of Boards of Pharmacy. The VIPPS program sets standards
for Internet pharmacies and informs the public of those Web sites that have
agreed to comply with its standards. We are able to ship prescription products
to all 50 U.S. states, and through our arrangement with Rite Aid, customers
may also order refills of their existing Rite Aid prescriptions on our Web
site for pick-up at any of the over 3,800 Rite Aid stores in the United States
or for delivery using one of our standard delivery options. In connection with
opening our distribution center, we also expanded our pharmacy operations
through our arrangement with Rite Aid.
Services. We seek to provide a high level of responsiveness and customer
support. In addition to our extensive drug information, specialized customer
care features and refill reminders, our pharmacy services include:
. Ask Your Pharmacist. Our Ask Your Pharmacist feature allows customers to
ask our pharmacists questions about medication, dosage, delivery
systems, common side effects and other information about prescription
drugs and health-related products. Our pharmacists seek to provide an
initial answer via e-mail within one business day.
. Private Access to drugstore.com Prescription History. Customers who fill
their prescriptions at drugstore.com can access their secure, individual
medication profiles at any time. A written patient information document
accompanies all medications dispensed to drugstore.com customers. This
service enables customers to maintain a record of their prescription
purchases for clinical, insurance and tax reporting purposes.
Filling Prescriptions. We only accept prescriptions from licensed health
care providers. We do not prescribe medications or otherwise practice
medicine. We focus on dispensing medications used by consumers on a chronic
basis. Advanstar Communications, Inc. estimates that such medications
comprised approximately 73% of all prescription drugs taken in the United
States in 1998. For acute care needs, meaning when a customer has a single
episode of a short-term illness or an exacerbation of a chronic condition in
either case requiring immediate attention, we recommend that customers pick up
their prescriptions from a local pharmacy because the treatment of acute care
needs are extremely time sensitive and the delivery time required by online
purchases could be too slow for the customer's needs. Medications used for
acute care needs include antibiotics and pain medications. We also do not
dispense certain controlled substances known as Schedule II pharmaceuticals at
this time because there are increased risks associated with their
dispensation, such as fraud, illegal resale of prescription drugs, and special
storage shipping and handling requirements. Schedule II Pharmaceuticals are
drugs classified by the Controlled Substance Act of 1970 as having a high
potential for abuse, such as opiates (including morphine) and products that
contain oxycodone stimulants (including amphetamine and
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methylphenidate) and depressants (including secobarbital and amobarbital). We
accept, verify and cross-check prescriptions much like traditional retail and
mail service pharmacies:
. Accepting Prescriptions. For new prescriptions, customers can direct
their physicians to call or fax their prescriptions to us at 1-800-
DRUGSTORE, or request that we contact their physician directly to obtain
prescription information. For transfers, customers can direct their
pharmacy to transfer their prescriptions or request us to contact their
pharmacy to transfer the prescription to drugstore.com. For refills,
customers may order directly from our Web site or respond to one of our
e-mail refill reminders.
. Verifying Prescriptions. Our pharmacists verify the validity and
completeness of prescription drug orders utilizing the same methodology
as community-based pharmacists. The standard practice for verification
of prescription drug orders is that the pharmacist will contact the
physician's office by telephone or fax if there is any reason to
question the validity, accuracy or authenticity of any order. In
addition, our pharmacists call and verify the validity of prescription
drug orders for allowable controlled substances, i.e., Schedule III-V
drugs. In addition, our pharmacists verify that all legally required
information is recorded on the prescription drug order and utilize a
database to verify physician identifying information, if necessary.
. Drug Utilization Review. To use our prescription drug services, all
customers are asked to provide our pharmacists with information
regarding drug allergies, current medical conditions and current
medications. Our pharmacists use advanced technologies to cross-check
every prescription against the information we receive from the customer
for drug-, disease- and allergy-drug interactions.
Payment. Customers may pay for their prescriptions with cash, by credit
card or by entering insurance information that shows that they are covered by
a managed care organization, insurance plan or PBM with whom we have a
contract. To date, the majority of our prescriptions have been submitted by
customers with insurance coverage. As a result of our relationship with Rite
Aid, we are able to fill prescriptions for most customers with pharmacy
benefits covered by a plan accepted by Rite Aid. In addition, we participate
in substantially all of the current and future retail pharmacy networks
managed by PCS, one of the leading pharmacy benefit management companies in
the United States that claims to provide pharmacy benefit management services
for more than 50 million individuals in the United States.
Pharmacy Supply. Since inception, a substantial majority of our
pharmaceutical products have been supplied by RxAmerica. Upon the opening of
our own distribution center, we became obligated to purchase all of our
pharmaceutical products from Rite Aid, unless we are able to obtain better
overall terms from another vendor. We expect that Rite Aid will account for an
increasingly significant portion of our pharmaceutical product purchases. This
purchase commitment will continue for the term of the Rite Aid relationship.
Marketing and Promotion of Our Site
Our marketing and promotion strategy is designed to build brand
recognition, increase customer traffic to our store, add new customers, build
strong customer loyalty, maximize repeat purchases and develop incremental
revenue opportunities.
Our advertising campaigns target both online and traditional audiences and
are designed to promote an enhanced customer experience. Our online
advertising efforts have been focused on highly-visited Internet portals,
health-related Web sites and other highly-visited Web sites. We also have
strategic relationships with Amazon.com, Rite Aid and GNC, who all promote our
Web site. We believe that the marketing benefits of our relationship with
Amazon.com include the integration of various shopping features of our Web
sites, the creation of a persistent drugstore.com shopping presence on
Amazon.com's Web site, and the promotion of our site by one of the premier e-
commerce companies. In addition, Rite Aid has agreed to include drugstore.com
in a significant portion of Rite Aid's own advertisements, as well as on
shopping bags, prescription vial caps, in-store signs and permanent links from
its Web site. In addition, we advertise on America Online and Yahoo!, as well
on other sites where our customers are likely to visit, including ThirdAge,
InteliHealth, OnHealth, Medscape
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and Women.com. We also extend our market presence through our Associates
Program, which enables associated Web sites to make our products and services
available to their audiences through a link to our Web site. We intend to
continue to use the unique resources of the Internet as a means of marketing
in an effort to drive traffic and repeat purchases. For example, we recently
entered into a five-year agreement with ProVantage, a healthcare knowledge and
benefit management company, to co-develop and market Internet-based products
and programs. Under the agreement, the ProVantage Web site will act as a
portal to the drugstore.com site, enabling ProVantage members to fill
prescriptions and access new Internet-based programs and products.
We have also used traditional marketing and promotion efforts, including
special product promotions, print, television and radio advertising in
selected markets, promotional press releases and public appearances by our
executives. We intend to further intensify our advertising efforts through
traditional media channels to continue building our brand recognition.
Merchandising Strategy
We believe that the breadth and depth of our product selection, together
with the flexibility of our online store and our range of helpful and useful
shopping services, enables us to pursue a strong merchandising strategy.
Aspects of this strategy include:
Easy Access to a Wide Selection of Products. Our easy-to-use Web site and
robust search capabilities enable customers to browse our product selection by
brand, age, product and price, as well as combinations of these categories.
For example, a customer can easily search for all aspirin products or for
Tylenol for children without consulting store personnel or searching
traditional store shelves. Combination searching allows customers to find
desired items easily among our large selection of products.
Dynamic Product Offering. Our online store gives us flexibility to change
featured products or promotions without having to alter the physical layout of
a store. We are also able to dynamically adjust our product mix in response to
changing customer demand, new seasons or upcoming holidays and introduce
special promotions.
Specialty Stores. We are establishing specialty stores in each of our
product categories. Our first specialty store, the boutique, sells high-end
cosmetics. We have also established the GNC LiveWell Store, which is dedicated
to GNC nutritional products and other products typically sold in GNC stores.
We are the exclusive distributor of GNC brand products on the Internet subject
to our meeting performance parameters during the third and fifth years of the
relationship.
Extensive Product Information. A key component of our merchandising
strategy is the ability to use information as a tool for consumers. We combine
manufacturer information with editorial information or buying guides to allow
customers to make more informed buying decisions and to more easily comparison
shop for products. In addition, our Web site allows us to market products to
customers in many different ways, such as by product category or by product
characteristics, such as price or ingredients.
Targeted Promotions. We have the ability to offer products to individual
customers based on their affinities or conditions. In addition, we can present
merchandise to a customer tailored to personal interests and shopping
histories. We also cross-sell a brand across our departments to promote
impulse buying by customers. For example, we might promote mothers' products
in our Pregnancy and Infant Center.
Sampling. We have programs that allow us to provide samples of products to
customers as trials. We may also use sampling to work with manufacturers to
introduce new products.
Information Objectives
Our editorial strategy is to present helpful, value-added information to
consumers in a readable, user-friendly format. Our editors create, source and
maintain health, beauty, wellness, personal care and pharmacy
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related content for our Web site. Our editors assemble content to provide both
reference and product-related information. To date, we have established
relationships with several leading information providers who provide content
for our site. We will continue to direct our editorial efforts toward
enhancing existing features as well as sourcing new content to help our
customers. For example, we have launched a variety of health and special
interest content areas, such as our Pregnancy and Infant Center, Breast Health
Center, and Cold and Flu Center. Working in conjunction with our pharmacists,
we have created a searchable database of over 500 answers to frequently asked
health questions. We also have published over 260 product reviews by our
customers through a feature called Test Drive.
Delivery of Our Customer's Orders
In January 2000, we began limited operations at our own 290,000 square foot
distribution center in New Jersey, and we are in the process of transitioning
our distribution capabilities for pharmaceutical and non-pharmaceutical
products from third party distributors to our center. We currently outsource a
substantial majority of our distribution and fulfillment operations on a non-
exclusive basis through Walsh Distribution and RxAmerica, although we expect
that the transition to our own distribution facilities will be completed by
the end of the second quarter of 2000. We believe that operating our own
distribution center will allow us to achieve greater control over the
distribution process and help us to ensure adequate supplies of products to
our customers. In connection with opening our distribution center, we also
expanded our pharmacy operations through our arrangement with Rite Aid.
Operating our own distribution facility will require us, in the near term, to
hire and train a significant number of new employees, increase inventory
levels substantially and establish a significant number of direct
relationships with manufacturers. In addition, as we transition to our own
distribution center, order fulfillment through multiple channels and
underutilization of our own distribution capacity could result in cost and
service level inefficiencies.
For the period from inception to January 2, 2000, Walsh Distribution
accounted for 68% of our cost of sales for health, beauty, wellness and
personal care products. As we transition customer order fulfillment to our own
distribution center, we intend to establish relationships directly with
product manufacturers, and we expect that order fulfillment through Walsh
Distribution will cease by the end of the second quarter of 2000. At the Walsh
facility, our employees package for shipment all customer orders, including
drugstore.com inventory purchased directly from other vendors that Walsh holds
for us at their facility. We staff our own customer care specialists at the
Walsh facility to monitor quality control and order fulfillment. Walsh
provides inventory and services under a supply and services agreement that
expires on March 31, 2000. This agreement may be extended for three months at
our sole discretion and may be terminated earlier by us upon accelerated
payment of minimum fees that would not exceed approximately $1 million.
We currently purchase substantially all of our pharmaceutical products from
one vendor, RxAmerica, in accordance with a pharmacy services agreement. In
connection with establishing our own distribution center, we became obligated
to buy our pharmaceutical products from Rite Aid, unless we are able to obtain
better overall terms from other vendors. As the number of orders filled out of
the pharmacy operation in our distribution center increases, we expect that
purchases from Rite Aid will account for an increasingly significant portion
of our total pharmaceutical product purchases. We staff our own pharmacists,
pharmacy technicians and customer care specialists at the RxAmerica facility.
For prescriptions filled at the RxAmerica facility, our pharmacists perform
all aspects of the prescription fulfillment process and all aspects of
customer service, except for the physical filling and packaging of
prescription drugs, which is performed by RxAmerica pharmacists. For
prescriptions filled through the pharmacy we operate under our arrangement
with Rite Aid, our pharmacists perform all of these functions working together
with a Rite Aid "pharmacist in charge." drugstore.com and RxAmerica are
licensed and in good standing in each state where licensure is required by
law. The pharmacy services agreement with RxAmerica has a one-year term (to
February 2000) and has been extended to June 2000. The agreement is non-
exclusive and does not prevent us from using other vendors for pharmaceutical
products.
Our warehouse management system, which is integrated with RxAmerica's and
Walsh's information systems, provides us real-time data on inventory
receiving, shipping, inventory quantities and inventory location.
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This enables us to notify customers on a real-time basis if the product is in
stock. In addition, we offer an order tracking system for our customers on our
Web site.
The inventories of Rite Aid, RxAmerica and Walsh consist of items typically
found in traditional chain drugstores. We charge our customers a shipping
charge that covers all or a portion of our expenses of shipping. Walsh
purchases substantially all of its inventory directly from the manufacturers
of the products. Rite Aid and RxAmerica purchases their pharmaceutical
products from a variety of manufacturers as well as wholesalers.
We offer a variety of shipping options, including next-day delivery for
orders received during the business week. We ship to anywhere in the United
States served by the United Parcel Service or the U.S. Postal Service.
Priority orders are flagged and expedited through our fulfillment processes.
For non-prescription product orders received before 9:00 p.m. Central time
Monday through Friday or before 5:00 p.m. Central time on Saturday, our goal
is to ship the product the same day. For prescription products, our goal is to
ship the product as soon as the prescription has been verified and our
pharmacists have completed drug utilization review.
In addition, customers are able to order refills of their existing Rite Aid
prescriptions online at our Web site for pick-up at their choice of any one of
the over 3,800 Rite Aid stores or for delivery using one of our standard
delivery options. We intend to expand this service to enable our customers to
order any prescription on our Web site for pick-up at a Rite Aid store.
Customer Care
We believe that a high level of customer service and support is critical to
retaining and expanding our customer base. Our customer care specialists are
available 24 hours a day, 7 days a week to provide assistance via e-mail or
phone. We strive to answer all customer inquiries within 24 hours. Our
customer care specialists handle questions about orders and how to use our Web
site, assist customers in finding desired products and register customers'
credit card information over the telephone. Our customer care specialists are
a valuable source of feedback regarding user satisfaction. Our Web site also
contains a customer care page that outlines store policies and provides
answers to frequently asked questions. In addition, our pharmacists can
provide advice to our customers about medication, dosage, delivery systems,
common side effects and other information about prescription drugs.
Operations and Technology
We have implemented a broad array of services and systems for site
management, searching, customer interaction, transaction processing and
fulfillment. We use a set of software applications for:
. Accepting and validating customer orders;
. Organizing, placing and managing orders with vendors and fulfillment
partners;
. Receiving product and assigning it to customer orders; and
. Managing shipment of products to customers based on various ordering
criteria.
These services and systems use a combination of our own proprietary
technologies and commercially available, licensed technologies. We focus our
internal development efforts on creating and enhancing the specialized,
proprietary software that is unique to our business. To enhance the online and
offline experience for Rite Aid and drugstore.com customers, we have
integrated certain of our information and pharmacy systems with Rite Aid's.
Rite Aid has granted us a nonexclusive, fully-paid license to the Rite Aid
systems that are integrated with our systems, subject to third party rights to
such technology.
We also have a technology license and advertising agreement with Amazon.com
under which we mutually agreed to license certain existing and future
technology used in the operation of our Web sites as long as we do not use the
technology to compete with each other. We currently are not using any
Amazon.com technology but could do so in the future if it would benefit us.
See "--Relationship with Amazon.com" for a further description of our
agreements with Amazon.com.
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Our core merchandise catalog, customer interaction, order collection,
fulfillment and back-end systems are proprietary to drugstore.com, but are
available to Amazon.com under our agreement with them. Our software platform
and architecture are integrated with an Oracle database system. The systems
were designed to provide real-time connectivity to the distribution center
systems for pharmacy and the non-pharmacy products. These include an
inventory-tracking system, real-time order tracking system, executive
information system and replenishment system. Our Internet servers use Verisign
digital certificates to help conduct secure communications and transactions.
Our systems infrastructure is hosted at Exodus Communications in Tukwila,
Washington, which provides communication lines from multiple providers
including UUNet and AT&T, as well as 24 hour monitoring and engineering
support. Exodus has its own generators and multiple back up systems in
Tukwila.
We maintain customer care centers in our Bellevue, Washington office and in
our prescription distribution facilities in Texas and New Jersey, and use a
real time interactive voice response system with transfer capabilities between
our customer care centers in these locations. We also operate a toll-free
number, 1-800-DRUGSTORE, through which customers can place orders and receive
information. In addition, customers who choose not to transmit their credit
card information via the Internet have the option of submitting their credit
card information by telephone.
Competition
The online commerce market is new, rapidly evolving and intensely
competitive. In particular, the health, beauty, wellness, personal care and
pharmacy categories are intensely competitive and are also highly fragmented,
with no clear dominant leader in any of our market categories. Our competitors
can be divided into several groups: chain drugstores, such as Walgreen's, CVS
and Eckerd; mass market retailers such as Wal-Mart, Kmart and Target;
supermarkets, such as Safeway, Albertson's and Kroger; warehouse clubs; online
retailers of health, beauty, wellness, personal care and/or pharmaceutical
products such as PlanetRx.com, MotherNature.com, VitaminShoppe.com and
More.com; mail order pharmacies; prescription benefits managers, such as
Express Scripts and Merck-Medco; Internet-portals and online service providers
that feature shopping services such as America Online, Yahoo!, Excite and
Lycos; cosmetics departments at major department stores, such as Nordstrom,
Macys and Bloomingdale's; and hair salons. Each of these competitors operate
within one or more of the health, beauty, wellness, personal care and pharmacy
product categories. In addition, nearly all of our competitors have, or have
announced their intention to have, the capability to accept orders for
products online. In particular, Walgreen's, CVS, Albertson's and Wal-Mart
already are accepting prescription refill or other orders on their Web sites.
We believe that the following are principal competitive factors in our
market:
. Brand recognition;
. Selection;
. Convenience;
. Price;
. Web site performance and accessibility;
. Customer service;
. Quality of information services; and
. Reliability and speed of order shipment.
Many of our current and potential traditional store-based and online
competitors have longer operating histories, larger customer or user bases,
greater brand recognition and significantly greater financial, marketing and
other resources than we do. Many of these current and potential competitors
can devote substantially more
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resources to their Web site and systems development than we can. In addition,
larger, well-established and well-financed entities may acquire, invest in or
form joint ventures with online competitors or drugstore retailers as the use
of the Internet and other online services increases.
Some of our competitors may be able to secure products from vendors on more
favorable terms, fulfill customer orders more efficiently and adopt more
aggressive pricing or inventory availability policies than we can. Traditional
store-based retailers also enable customers to see and feel products in a
manner that is not possible over the Internet. Traditional store-based
retailers can also sell products to address immediate, acute care needs, which
we and other online sites cannot do. Some of our competitors such as
Walgreen's and Wal-mart have significantly greater experience in selling
drugstore products.
Relationship with Amazon.com
We have a strategic relationship with Amazon.com whereby Amazon.com
advertises our Web service. 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 shareholder, 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. In addition, each party has committed to providing the other with
advertising on our respective Web sites through the term of the agreement as
mutually agreed upon. In addition, we agreed not to place advertisements
competitive to Amazon.com's business on our site. We have also agreed not to
sell advertising on our Web site to, link our Web site to, or promote on our
Web site any company that sells products or services competitive with those
which Amazon.com offers or which Amazon.com is preparing to produce or market.
We are currently restricted with respect to books, music, 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 website, to
restrict Amazon.com's ability to compete in the online drugstore business, and
to use Amazon.com's technology (if we are then using any).
On January 24, 2000, we entered into an agreement with Amazon.com to
integrate various shopping features of our Web sites and to create a
persistent 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. We will
pay Amazon.com a total of $105 million over the three-year term of the
agreement. The agreement may be terminated for breach or in certain other
events. 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. See "Executive Officers and
Directors," "Certain Relationships and Related Transactions" and "Principal
and Selling Stockholders" for further background on Amazon's relationship with
us.
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Relationship With Rite Aid
In June 1999, we entered into a strategic relationship with Rite Aid. Under
the relationship, customers are able to order refills of their existing Rite
Aid prescriptions from us at our site and either use our standard delivery
options or pick up the prescriptions at the more than 3,800 Rite Aid stores
nationwide. We recognize revenues on all orders filled by us or picked up at
Rite Aid stores where our customer has used our Web site to order
prescriptions. In the case of orders from customers who have elected to pick
up their prescriptions in a Rite Aid store, we pay Rite Aid for the cost of
such products based on a contractually agreed upon price. In addition, Rite
Aid and drugstore.com have agreed to promote each other's services both online
and offline, including a link from Rite Aid's Web site to our Web site. We
believe that potential benefits of our relationship with Rite Aid include
additional revenue and traffic generated by customers who visit our Web site,
the pharmacy benefit coverage provided by the insurance companies and PBMs
with which Rite Aid has a relationship, including PCS, and the co-promotion
and co-branding activities both companies have undertaken. In connection with
this relationship, Rite Aid also became one of our largest stockholders, and
will hold approximately 15.5% of our outstanding common stock following this
offering (approximately 14.5% if the underwriters' over-allotment options are
exercised in full). In addition, Mary Sammons, Rite Aid's president and chief
operating officer, is a member of our board of directors.
As part of the relationship, both Rite Aid and drugstore.com agreed to
certain exclusivity provisions that limit drugstore.com's ability to promote
or affiliate with any other physical retail drugstore and from operating a
traditional physical drugstore, and preclude Rite Aid from offering or selling
products or services on the Internet other than through our Web site. In
addition, the agreement provides that if we establish our own distribution
center, we will be obligated to purchase all of our pharmaceutical
requirements from Rite Aid unless we are able to obtain better overall terms
from another vendor. The agreement contains additional provisions providing
for the licensing by Rite Aid to drugstore.com of information technology
systems and the integration of the information technology and pharmacy systems
of the two companies. This agreement extends for ten years, but can be
terminated for breach prior to such time. See "Executive Officers and
Directors," "Certain Relationships and Related Transactions" and "Principal
and Selling Stockholders" for further background on Rite Aid's relationship
with us.
Relationship With GNC
In June 1999, we entered into a relationship with General Nutrition
Companies, Inc. (GNC) whereby we are the exclusive online provider of GNC-
branded products. We have the exclusive right to sell GNC's nutrition products
over the Internet, including the PharmAssure brand of pharmacist recommended
vitamins and nutritional supplements, subject to our meeting performance
parameters based on traffic to our Web site and sales of GNC products in the
third and fifth year of the relationship. As long as we have the exclusive
right to distribute GNC's products over the Internet, we will not promote any
other retail health food store or operate a physical retail health food store.
If the exclusivity provisions of the agreement terminate, we have the non-
exclusive right to sell these products for the remaining term of the
agreement. As part of this relationship, we have created a separate part of
our Web site called the GNC LiveWell Store that is dedicated to selling on a
consignment basis GNC products. We are entitled to retain a percentage of the
gross revenues that we collect from sales of GNC products and will recognize
only the net amount retained as revenues. In connection with this
relationship, GNC acquired 2,947,853 shares of our Series E preferred stock
(all of which was converted into common stock, on a one-for-one basis, at the
closing of our initial public offering). GNC and drugstore.com also agreed to
co-promote each other's products and services in both their traditional and
online marketing efforts, including GNC's placement of a link to our Web site
on their Web site. The agreement extends for ten years, but can be terminated
for breach prior to such time. In August 1999, GNC was acquired by Royal
Numico N.V., a European maker of nutrition products. See "Certain
Relationships and Related Transactions" and "Principal and Selling
Stockholders" for further background on GNC's relationship with us.
Governmental Regulation
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. For example,
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pursuant to the Omnibus Budget Reconciliation Act of 1990 and related state
and local regulations, pharmacists are required to offer counseling, without
additional charge, to customers about medication, dosage, delivery systems,
common side effects, adverse effects or interactions and therapeutic
contraindications, proper storage, prescription refill, and other information
deemed significant. Entities that distribute "controlled substances" are also
subject to the Controlled Substances Act and regulations issued by the federal
Drug Enforcement Administration. Entities engaged in the practice of medicine
are also subject to state and local regulatory and licensing requirements.
We also sell dietary supplements, medical devices, cosmetics, conventional
foods, drug products (prescription, over-the-counter, and homeopathic), and
consumer products subject to regulation by the Food and Drug Administration
(FDA), Federal Trade Commission (FTC), Consumer Product Safety Commission
(CPSC), and state regulatory authorities. In addition to regulating the claims
made for specific types of products, the FDA and FTC may also attempt to
regulate the format of Web sites that offer products to consumers. As we
expand our product and service offerings, more of our products and services
will likely be subject to FDA, FTC, CPSC, and state regulation.
We have structured our business, and entered into arrangements with our
business partners, in order to comply with pharmacy regulatory and licensing
requirements, requirements applicable to distributors of controlled
substances, and requirements associated with the practice of medicine. We have
also structured our business in order to comply with FDA, FTC, CPSC, and state
regulatory requirements applicable to the sale of products to consumers.
Regulations in all of the above-mentioned areas often require subjective
interpretation, and we cannot be certain that our attempts to comply with the
above regulations will be deemed sufficient by the appropriate regulatory
agencies. Violations of any regulations could result in various civil and
criminal penalties, including but not limited to suspension or revocation of
any applicable licenses or registrations, seizure of our inventory, or
monetary fines that could adversely affect our operations.
Regulatory requirements to which we are subject may expand over time. For
example, the U.S. House of Representatives' Committee on Commerce recently
held a one-day hearing on the benefits and risks of online pharmacies,
especially focused on those sites that sell prescriptions based upon
information solicited in a brief questionnaire filled out by the customer
online. The U.S. General Accounting Office is conducting a review of online
pharmacies, including the current laws that govern pharmacy operations, and
the potential for abuses by some online sites, again focusing on those that do
not require the submission of a valid prescription issued by the customer's
physician. In addition, a federal interagency task force is preparing a report
on the effectiveness of current laws, and the availability of technology to
law enforcement, in addressing possible unlawful activity over the Internet,
including in connection with the sale of prescription drugs. In December 1999,
the Clinton Administration announced a proposal to eliminate the illegal sale
of prescription drugs over the Internet by unlicensed Web site 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 we are in compliance with existing federal and state requirements for
pharmacy licensing and registration, and with laws relating to dispensing of
prescription drugs, security, record-keeping and reporting of pharmacy sales.
Thus, we believe that our business would not be negatively affected by any
laws or regulations that result from this government oversight or the Clinton
Administration's proposal. However, we do believe that any resulting laws or
regulations will likely increase our reporting and monitoring requirements.
The National Association of Boards of Pharmacy (NABP), a coalition of state
pharmacy boards, has developed the Verified Internet Pharmacy Practice Sites
(VIPPS) program, a model for voluntary regulation for online pharmacies that
provides certification of compliance with all state laws and regulations and
other criteria established to ensure good pharmacy practice. We have received
VIPPS program certification.
Legislation and regulations currently being considered at the federal and
state level could affect our business, including legislation or regulations
relating to confidentiality of patient records, electronic access and storage.
In addition, various state legislatures are considering new legislation
related to the regulation of nonresident pharmacies.
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The inclusion of prescription drugs as a Medicare benefit has been the
subject of numerous bills in the U.S. Congress. Should legislation on
prescription drug coverage for Medicare recipients be enacted into law, we
would be subject to compliance with any corresponding rules and regulations.
For a description of the risks we face with regard to these government
regulations, please see "Risk Factors--Governmental Regulation of the Health
Care and Pharmacy Industries Could Affect Our Business."
Intellectual Property
We regard the protection of our copyrights, service marks, trademarks, trade
dress and trade secrets as critical to our future success and rely on a
combination of copyright, trademark, service mark and trade secret laws and
contractual restrictions to establish and protect our proprietary rights in
products and services. We have entered into confidentiality and invention
assignment agreements with our employees and contractors, and nondisclosure
agreements with our vendors, fulfillment partners and strategic partners to
limit access to and disclosure of our proprietary information. We cannot be
certain that these contractual arrangements or the other steps taken by us to
protect our intellectual property will prevent misappropriation of our
technology. We have licensed in the past, and expect that we may license in
the future, certain of our proprietary rights, such as trademarks or
copyrighted material, to third parties. For example, as noted above, we have
licensed our technology to Amazon.com and we have also granted nonexclusive
rights to our trademarks in connection with advertising and affiliate
relationships. While we attempt to ensure that the quality of the
drugstore.com products brand is maintained by such licensees, we cannot assure
that such licensees will not take actions that might hurt the value of our
proprietary rights or reputation. We also rely on technologies that we license
from third parties, such as Oracle and Microsoft, the suppliers of key
database technology, the operating system and specific hardware components for
our service. As part of our relationship with Rite Aid, we have also licensed
information technology systems from Rite Aid. We cannot be certain that these
third-party technology licenses will continue to be available to us on
commercially reasonable terms. The loss of such technology could require us to
obtain substitute technology of lower quality or performance standards or at
greater cost, which could harm our business.
We have filed applications for the registration of some of our trademarks
and service marks in the United States and in some other countries, including
for drugstore.com(TM), although we have not secured registration of any of our
marks to date. We may be unable to secure such registered marks. It is also
possible that our competitors or others will use marks similar to ours, which
could impede our ability to build brand identity and lead to customer
confusion. In addition, there could be potential trade name or trademark
infringement claims brought by owners of other registered trademarks or
trademarks that incorporate variations of the term drugstore.com(TM). Any
claims or customer confusion related to our trademark, or our failure to
obtain trademark registration, would negatively affect our business. In
addition, the laws of some foreign countries do not protect our proprietary
rights to the same extent as do the laws of the United States, and effective
copyright, trademark and trade secret protection may not be available in such
jurisdictions. Our efforts to protect our intellectual property rights may not
prevent misappropriation of our content. Our failure or inability to protect
our proprietary rights could substantially harm our business.
Professional Advisory Board
We have a professional advisory board with whom we consult on our programs,
strategies and overall store development, as well as product selection and
product presentation. Certain members contribute periodic editorial features
and have assisted in public relations efforts as well. The advisory board will
meet as a whole approximately once a year and individual members are consulted
as needed.
Our professional advisory board includes the following individuals:
. Martha Stewart, a media personality who specializes in applying creative
and practical principles in the home and garden;
. Kim Alexis, a well-known fashion model, actress and athlete;
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. Barry Sears, Ph.D., a scientist and author of several popular books on
health and dieting, including the New York Times best-seller, The Zone;
. Loraine Stern, M.D., an associate clinical professor of pediatrics at
the University of California at Los Angeles and spokesperson for
children's health issues;
. Jennifer Jacobs, M.D., M.P.H., a clinical assistant professor of
epidemiology at the University of Washington School of Public Health and
Community Medicine and the President-elect of the American Institute of
Homeopathy; and
. Peter Thomas Roth, a New York-based beauty industry executive and
namesake for a line of prestige clinical skin care products.
Employees
As of January 2, 2000, we had 408 full-time employees. None of our employees
is represented by a labor union. We have not experienced any work stoppages
and consider our employee relations to be good.
Facilities
Our principal executive offices are located in Bellevue, Washington, where
we lease approximately 55,000 square feet under a lease that expires in July
2005. In addition, we have entered into a lease for additional executive
office space of approximately 49,000 square feet in Bellevue, Washington that
we expect to occupy during the first quarter of 2000. We also lease an
approximately 18,750 square feet facility in Redmond, Washington, which we
vacated after moving to our new Bellevue facility, under a lease that expires
in September 2003. We have subleased the Redmond facility for a 12 month
period ending in May 2000 and currently intend to sublease such space
thereafter, if possible. We anticipate that we will require additional space
as more personnel are hired and as we establish other facilities. In addition,
our distribution facility is located in Bridgeport, New Jersey, where we lease
approximately 290,000 square feet for a five-year term, with options to renew
for two additional five-year periods, pursuant to a lease executed in
September 1999.
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MANAGEMENT
Executive Officers and Directors
The following table sets forth information with respect to our executive
officers and directors as of January 2, 2000:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Peter M. Neupert(1).... 43 Chairman of the Board of Directors, President and
Chief Executive Officer
Kal Raman.............. 31 Senior Vice President and Chief Operating Officer
David E. Rostov........ 34 Vice President, Chief Financial Officer and
Treasurer
Mark L. Silverman...... 35 Vice President, Business Development, General
Counsel and Secretary
Christopher G. Hauser.. 49 Vice President, Operations
Judith H. McGarry...... 39 Vice President, Strategic Relationships
Jeffrey P. Bezos....... 35 Director
Brook H. Byers(2)...... 54 Director
L. John Doerr.......... 48 Director
Melinda French Gates... 35 Director
Mary Sammons........... 53 Director
William D. Savoy(2).... 35 Director
Howard Schultz(1)...... 46 Director
</TABLE>
- --------
(1) Member of compensation committee
(2) Member of audit committee
Peter M. Neupert has served as a director and the President and Chief
Executive Officer of drugstore.com since July 1998 and as chairman of the
board of directors since July 1999. From March 1987 to July 1998, he worked
for Microsoft Corporation in several positions, most recently as Vice
President of News and Publishing for Microsoft's interactive media group. Mr.
Neupert holds an M.B.A. from the Amos Tuck School of Business at Dartmouth
College and a B.A. from Colorado College.
Kal Raman (formerly known as Kalyanaraman Srinivasan) has served as Senior
Vice President and Chief Operating Officer of drugstore.com since November
1999. He served as Vice President, Technology and Chief Information Officer of
drugstore.com from August 1998 to May 1999, as Vice President, Technology and
Operations and Chief Information Officer from March 1999 to May 1999 and as
Senior Vice President, Operations and Chief Information Officer from May 1999
to November 1999. From March 1998 to August 1998, Mr. Raman served as the
Chief Information Officer and Vice President of Nations Rent and from February
1997 to March 1998, he served as Senior Director, Information Systems of
Blockbuster Inc. From May 1992 to February 1997, Mr. Raman served as Director,
International Division of Wal-Mart Stores Inc.
David E. Rostov has served as Vice President and Chief Financial Officer of
drugstore.com since January 1999 and as Treasurer since July 1999. From
January 1996 to January 1999, he worked for Nextel International, Inc. as
Chief Financial Officer. From 1992 to 1995, he served in various capacities at
McCaw Cellular Communications, Inc. Mr. Rostov holds an M.B.A. and a Master's
in Public Policy from the University of Chicago Graduate School of Business
and a B.A. from Oberlin College.
Mark L. Silverman has served as Secretary of drugstore.com since our
inception in April 1998, as Vice President and General Counsel of
drugstore.com since January 1999, as Vice President, Health Services from
March 1999 to September 1999 and as Vice President, Business Development since
September 1999. From December 1995 to January 1999, he was a lawyer with the
Venture Law Group, A Professional Corporation, becoming a director in January
1998. Mr. Silverman was an attorney with Heller, Ehrman, White & McAuliffe
from December 1992 to November 1995. Mr. Silverman holds a J.D. from the
University of California, Los Angeles and a B.A. from the University of
California, Berkeley.
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<PAGE>
Christopher G. Hauser has served as Vice President, Operations of
drugstore.com since July 1999. Prior to that time, he was Senior Vice
President, Information Technologies and Operations for Multiple Zones
International. From 1994 to 1996, Mr. Hauser was Director of Distribution for
Fingerhut Companies, Inc., and from 1991 to 1994, he commanded the largest
distribution center in the U.S. Department of Defense. Mr. Hauser received an
M.S. in Logistics Operations and an M.B.A. from the United States Naval
Academy.
Judith H. McGarry has served as Vice President, Strategic Relationships of
drugstore.com since January 2000. From July 1994 to December 1999, she was a
partner with Stone Communications. Ms. McGarry holds an M.B.A. from the Amos
Tuck School of Business at Dartmouth College and a B.A. from Middlebury
College.
Jeffrey P. Bezos has served as a director of drugstore.com since August
1998. Mr. Bezos, a founder of Amazon.com, has served as Chairman of the Board
of Directors of Amazon.com since its inception in 1994, Chief Executive
Officer of Amazon.com since May 1996, President of Amazon.com from inception
to June 1999 and Treasurer and Secretary of Amazon.com from May 1996 to March
1997. From December 1990 to June 1994, Mr. Bezos was employed by D.E. Shaw &
Co., a Wall Street investment firm, becoming Senior Vice President in 1992.
From April 1988 to December 1990, Mr. Bezos was employed by Bankers Trust
Company, becoming Vice President in February 1990. Mr. Bezos received his B.S.
in Electrical Engineering and Computer Science from Princeton University.
Brook H. Byers has served as a director of drugstore.com since May 1998.
Mr. Byers is a partner of Kleiner Perkins Caufield & Byers, a private venture
capital firm, and has been a technology venture capital investor since 1972.
He has served on the Board of Directors of over twenty companies, and he is
currently a director of Chemdex.com and several private companies. He also
served as the founding President and Chairman of Idec Pharmaceuticals, Ligand
Pharmaceuticals, Athena Neurosciences and Insite Vision Opthalmics. Mr. Byers
serves on the boards of the California Healthcare Institute and the Foundation
of the University of California at San Francisco Medical Center. Mr. Byers
received a degree in Electrical Engineering from Georgia Institute of
Technology and an M.B.A. from the Stanford Graduate School of Business.
L. John Doerr has served as a director of drugstore.com since November
1998. Mr. Doerr has been a general partner of Kleiner Perkins Caufield &
Byers, a private venture capital firm, since September 1980. In 1974, he
joined Intel Corporation and held various engineering, marketing and
management assignments. Mr. Doerr is also a director of Amazon.com,
Excite@Home, Healtheon Corporation, Intuit, Inc., Platinum Software, Inc., and
SunMicrosystems, as well as several private companies. Mr. Doerr received his
M.E.E. and B.S.E.E. from Rice University and his M.B.A. from Harvard
University Graduate School of Business.
Melinda French Gates has served as a director of drugstore.com since August
1999. Mrs. Gates worked at Microsoft Corporation from 1987 to May 1996 in a
variety of positions, including serving as both product manager and general
manager for the development of several multi-media products and other software
programs. Since leaving Microsoft in 1996, Mrs. Gates has focused on
philanthropic work in the areas of global health and learning. She is a
founder of the Gates Library Foundation and is involved in the William H.
Gates Foundation. She is also a co-chair of the Governor of Washington's
Washington State Early Learning Commission and is on the advisory board of
Third Age Media. Mrs. Gates holds a B.A. from Duke University and an M.B.A.
from The Fuqua School of Business at Duke University, and is a member of the
Duke University Board of Trustees.
Mary Sammons has served as a director of drugstore.com since January 2000.
Ms. Sammons has been president and chief operating officer of Rite Aid
Corporation since December 1999. Previously, Ms. Sammons was president and
chief executive officer of Fred Meyer Stores, a food, drug and general
merchandise chain in the Pacific northwest, since January 1998, and had been
an Executive Vice President of Fred Meyer Stores prior thereto. She has served
Fred Meyer Stores in various capacities since 1973. Ms. Sammons received a
degree in French from Marylhurst College.
William D. Savoy has served as a director of drugstore.com since July 1999.
Mr. Savoy is President of Vulcan Northwest Inc., managing the personal
finances of Paul Allen, and Vice President of Vulcan Ventures Inc., a
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venture capital fund wholly owned by Paul Allen. From 1987 until November 1990,
Mr. Savoy was employed by Layered, Inc. and became its President in 1988. Mr.
Savoy serves on the Advisory Board of DreamWorks SKG and also serves as
director of CNET, Inc., Go2Net, Inc., Harbinger Corporation, High Speed Access
Corporation, Metricom, Inc., Telescan, Inc., Ticketmaster Online-CitySearch,
USA Networks, Inc. and Value America, Inc. Mr. Savoy holds a B.S. in Computer
Science, Accounting, and Finance from Atlantic Union College.
Howard Schultz has served as a director of drugstore.com since November
1998. Mr. Schultz, the founder of Starbucks Corporation, has served as Chairman
of the Board and Chief Executive Officer of Starbucks since its inception in
1985. From 1985 to June 1994, Mr. Schultz also served as President of
Starbucks. Mr. Schultz is one of two founding members of Maveron LLC, a company
providing advisory services to consumer-based businesses, and is one of two
members of a limited liability company that serves as a general partner of its
affiliated venture capital fund, Maveron Equity Partners, L.P. Mr. Schultz is a
governor on the National Association of Securities Dealers, Inc. Board of
Governors, and he is a director of Ebay, Inc. Mr. Schultz received his B.S.
degree from Northern Michigan University.
At any stockholder meeting involving the election of directors, Peter
Neupert, several of our major prior investors, and Jed Smith, one of our
founders who owned 950,000 shares of our common stock at January 2, 2000, have
agreed to vote their shares to elect one director designated by Amazon.com. The
major prior investors who are parties to this agreement are Kleiner Perkins
Caufield & Byers, Amazon.com, Vulcan Ventures, Rite Aid and GNC. The parties'
obligations to elect an Amazon.com designee terminate if Amazon.com owns less
than 5% of our voting stock.
Our board of directors currently consists of eight members. Each director is
elected for a period of one year at our annual meeting of stockholders and
serves until the next annual meeting or until his or her successor is duly
elected and qualified. The board of directors elects executive officers on an
annual basis. Executive officers serve until their successor has been duly
elected and qualified. There are no family relationships among any of the
directors, officers or key employees of drugstore.com.
Board Committees
The board of directors has a compensation committee, a stock option
subcommittee and an audit committee.
Compensation Committee. The compensation committee of the board of
directors, which is effective upon this offering, will review and make
recommendations to the board regarding all forms of compensation and benefits
provided to our officers. In addition, the compensation committee establishes
and reviews general policies relating to the compensation and benefits of all
of our employees. The current members of the compensation committee are Peter
M. Neupert and Howard Schultz. Since the current members of the compensation
committee do not meet the definition of "non-employee directors" for purposes
of SEC Rule 16b-3, the full board of directors will continue to approve stock
option grants for our officers in order to qualify the option grants for an
exemption from short-swing trading rules.
Stock Option Subcommittee. The stock option subcommittee of the compensation
committee has authority to grant stock options to optionees who are not
executive officers or directors of drugstore.com. Peter M. Neupert is the sole
member of the stock option subcommittee.
ESPP Subcommittee. The ESPP subcommittee of the compensation committee has
authority to administer our 1999 employee stock purchase plan. Peter M. Neupert
is the sole member of the ESPP subcommittee.
Audit Committee. The audit committee of the board of directors reviews and
monitors our internal accounting procedures, corporate financial reporting,
external and internal audits, the results and scope of the annual audit and
other services provided by our independent auditors, and our compliance with
legal matters that have a significant impact on our financial reports. Brook H.
Byers and William D. Savoy are the members of the audit committee.
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<PAGE>
Compensation Committee Interlocks and Insider Participation
The board of directors established its compensation committee in May 1999.
Prior to establishing the compensation committee, the board of directors as a
whole performed the functions delegated to the compensation committee. No
interlocking relationship exists between our board of directors or our
compensation committee and the board of directors or compensation committee of
any other company, and no interlocking relationship existed in the past.
Director Compensation
We currently do not provide any cash compensation to our directors for
their service as members of the board of directors, although we do reimburse
the directors for certain expenses in connection with attendance at board and
committee meetings. Under our 1998 stock plan, nonemployee directors are
eligible to receive stock option grants at the discretion of the board or any
other administrator of the plan. In September 1999, we granted to Melinda
French Gates, one of our nonemployee directors, options to purchase 25,000
shares of common stock at an exercise price of $53.875 per share. One-half of
these options vest one year after the date of grant and the remaining options
vest in two equal installments at the end of the next two six-month periods.
Executive Compensation
The following table sets forth the compensation received for services
rendered to drugstore.com for fiscal 1998 and 1999 by our chief executive
officer and the four other individuals who were the most highly compensated
executive officers in fiscal 1999 of those earning more than $100,000 in
salary and bonus.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Awards
Compensation Securities
Name and Principal ----------------- Underlying All Other
Position Year Salary Bonus Options (#) Compensation(1)
- ------------------ ---- -------- -------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Peter M. Neupert....... 1999 $249,184 $250,000 1,000,000 $ 397
President, Chief 1998 107,692 -- -- 170
Executive Officer
and Chairman of the
Board of Directors
Kal Raman.............. 1999 $174,171 $ 36,954 350,000 $ 278
Senior Vice President 1998 60,577 129,692(2) 150,000 5,895(3)
and Chief Operating
Officer
David E. Rostov........ 1999 $123,797 $ 21,615 275,000 $ 190
Vice President, Chief
Financial Officer
and Treasurer
Mark L. Silverman...... 1999 $171,564 $ 60,083(4) 275,000 $ 272
Vice President,
Business Development,
General Counsel and
Secretary
Suzan K. DelBene(5).... 1999 $135,092 $ 6,879 -- $ 214
Former Vice President,
Marketing 1998 44,217 5,255 150,000 101
and Store Development
</TABLE>
- --------
(1) Represents premium paid for term life insurance for the benefit of the
named executive officer.
(2) Includes a $120,000 signing bonus received by Mr. Raman in 1998.
(3) Includes a $5,400 reimbursement for relocation expenses.
(4) Includes a $35,000 signing bonus paid to Mr. Silverman in 1999.
(5) Ms. DelBene resigned as an officer of drugstore.com effective October 15,
1999.
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<PAGE>
Option Grants
The following table provides summary information regarding stock options
granted to the individuals named in the summary compensation table during the
year ended January 2, 2000.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Individual Grants
-------------------------
Potential Realizable
% of Total Value at Assumed
Number of Options Annual Rates of
Securities Granted to Stock Appreciation
Underlying Employees For Option Term (3)
Options in Fiscal Exercise Expiration -----------------------
Name Granted (1)(#) Year (2) Price Date 5% 10%
- ---- ------------- ---------- -------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Peter M. Neupert........ 1,000,000 20.5% $32.4375 12/28/09 $20,399,769 $51,697,021
Kal Raman............... 75,000 1.6 7.8300 4/26/09 1,611,758 2,914,302
275,000 5.6 35.1250 11/18/09 6,074,729 15,394,556
--------- ---- ----------- -----------
350,000 7.2% 7,686,487 18,308,858
David E. Rostov......... 150,000 3.1 0.4500 1/28/09 4,330,515 6,935,605
125,000 2.6 35.1250 11/18/09 2,761,241 6,997,525
--------- ---- ----------- -----------
275,000 5.7% 7,091,756 13,933,130
Mark L. Silverman....... 150,000 3.1 0.4500 1/18/09 4,330,515 6,935,605
125,000 2.6 35.1250 11/18/09 2,761,241 6,997,525
--------- ---- ----------- -----------
275,000 5.7% 7,091,756 13,933,130
Suzan K. DelBene(4)..... -- -- -- -- -- --
</TABLE>
- --------
(1) As long as the optionee maintains continuous employment with
drugstore.com, options granted to the individuals above vest as follows:
options granted to Mr. Neupert vest monthly over a ten-year period at an
annual rate of one-tenth of the total number of shares subject to the
option; options granted to Mr. Raman with an expiration date of April 26,
2009 vest over a five-year period at a rate of one-fourth of the total
number of shares subject to the option on the sixteen-month anniversary of
the date of grant with the remaining shares subject to the option vesting
in equal installments at the end of each six-month period thereafter;
options granted to Mr. Raman with an expiration date of November 18, 2009
vest over a five-year period at a rate of one-fourth the total number of
shares subject to the option on the first anniversary of the date of grant
with the remaining shares subject to the option vesting in equal
installments at the end of each six-month period thereafter; options
granted to Mr. Rostov and Mr. Silverman vest over a four-year period (with
respect to options with an expiration date in January 2009) or a five-year
period (with respect to options with an expiration date in November 2009)
at a rate of one-fourth the total number of shares subject to the option
on the first anniversary of the date of grant with the remaining shares
subject to the option vesting in equal installments at the end of each
six-month period thereafter.
(2) Based on an aggregate of 4,880,075 shares underlying options granted by
drugstore.com during the fiscal year ended January 2, 2000 to our
employees.
(3) Potential realizable values are computed by multiplying the number of
shares of common stock subject to a given option by the fair market value
of the common stock on the date of grant or, in the case of options
granted prior to our initial public offering, the initial public offering
price of $18.00 per share, assuming that the aggregate stock value derived
from that calculation compounds at the annual 5% or 10% rate shown in the
table for the entire ten-year term of the option and subtracting from that
result the aggregate option exercise price. The 5% and 10% assumed annual
rates of stock price appreciation are mandated by the rules of the
Securities and Exchange Commission and do not represent our estimate or
projection of future common stock prices.
(4) Suzan DelBene resigned as an officer of drugstore.com effective October
15, 1999.
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<PAGE>
Option Exercises and Holdings
The following table provides summary information concerning options
exercised during the year ended January 2, 2000, and exercisable and
unexercisable options held as of January 2, 2000, by the individuals named in
the summary compensation table above.
Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options at
Number of Fiscal Year-End (#) Fiscal Year-End (1)
Shares Acquired Value ------------------------- -------------------------
Name on Exercise Realized Unexercisable Exercisable Unexercisable Exercisable
- ---- --------------- ---------- ------------- ----------- ------------- ----------- ---
<S> <C> <C> <C> <C> <C> <C> <C>
Peter M. Neupert........ -- -- 958,334 41,666 $3,593,753 $ 156,248
Kal Raman............... 500 $ 14,230 462,500 37,000 6,485,594 1,337,458
David E. Rostov......... -- -- 275,000 -- 5,493,438 --
Mark L. Silverman....... -- -- 275,000 -- 5,493,438 --
Suzan K. DelBene(2)..... 57,500 2,182,700 92,500 -- 3,343,644 --
</TABLE>
- --------
(1) Based on a value of $36.1875 per share, the share price on January 2,
2000, minus the per share exercise price, multiplied by the number of
shares underlying the option.
(2) Suzan DelBene resigned as an officer of drugstore.com effective October
15, 1999.
Stock Plans
1998 Stock Plan. Our 1998 stock plan provides for the grant of incentive
stock options to employees and nonstatutory stock options and stock purchase
rights to employees, directors and consultants to acquire shares of common
stock. The purposes of the 1998 stock plan are to attract and retain the best
available personnel, to provide additional incentives to our employees and
consultants and to promote the success of our business. Our board of directors
originally adopted the 1998 stock plan in July 1998 and our stockholders
approved the plan in July 1998. The 1998 stock plan was amended, with the
approval of our stockholders, in January 1999, April 1999 and July 1999 to
increase the total number of shares of common stock reserved for issuance to
11,000,000 shares and to incorporate certain other changes. Unless terminated
earlier by the board of directors, the 1998 stock plan will terminate in July
2008. As of January 2, 2000, options to purchase 5,850,658 shares of common
stock were outstanding at a weighted average exercise price of $16.4875 per
share, 8,000 shares had been issued pursuant to restricted stock purchase
agreements, 202,253 shares had been issued upon exercise of outstanding
options, and 4,939,089 shares remained available for future grant. On January
20, 2000, we granted options to purchase 946,940 shares of common stock at an
exercise price of $27.1875 per share.
The 1998 stock plan may be administered by the board of directors, a
committee appointed by the board of directors or a combination of the board of
directors and a committee, as determined by the board of directors. The
administrator determines the terms of options granted under the 1998 stock
plan, including the number of shares subject to the option, exercise price,
term and exercisability. In no event, however, may an individual receive
option grants for more than 2,500,000 shares of common stock under the 1998
stock plan in any fiscal year. Incentive stock options granted under the 1998
stock plan must have an exercise price of at least 100% of the fair market
value of the common stock on the date of grant and at least 110% of such fair
market value in the case of an optionee who holds more than 10% of the total
voting power of all classes of our stock. Nonstatutory stock options granted
under the 1998 stock plan will have an exercise price as determined by the
administrator. Payment of the exercise price may be made in cash or such other
consideration as determined by the administrator.
The administrator determines the term of options, which may not exceed 10
years or 5 years in the case of an incentive stock option granted to a holder
of more than 10% of the total voting power of all classes of our stock. No
option may be transferred by the optionee other than by will or the laws of
descent or distribution, provided, however, that the administrator may in its
discretion provide for the transferability of nonstatutory
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stock options granted under the 1998 stock plan if the common stock is listed
or approved for listing on a national securities exchange or designated as a
national market system security by the National Association of Securities
Dealers, Inc. Each option may be exercised during the lifetime of the optionee
only by such optionee or permitted transferee. The administrator determines
when options become exercisable. Options granted under the 1998 stock plan
generally must be exercised within 3 months after the termination of the
optionee's status as an employee, director or consultant of drugstore.com, or
within 6 months if such termination is due to the death or within 12 months if
such termination is due to disability of the optionee, but in no event later
than the expiration of the option's term. Options granted under the 1998 stock
plan generally vest over a four-year or five-year period at a rate of one-
fourth of the total number of shares subject to the option twelve months after
the date of grant, with the remaining shares vesting in equal installments at
the end of each six month period thereafter.
In the event of our merger with or into another corporation, the successor
corporation may assume each option and outstanding stock purchase right or may
substitute an equivalent option or stock purchase right. However, if the
successor corporation does not agree to this assumption or substitution, the
option or stock purchase right will terminate. The board of directors has the
authority to amend or terminate the 1998 stock plan provided that no action
that impairs the rights of any holder of an outstanding option may be taken
without the holder's consent. In addition, we will obtain requisite
stockholder approval for any action requiring stockholder approval under the
applicable law.
In addition to stock options, the administrator may issue stock purchase
rights under the 1998 stock plan to employees, directors and consultants. The
administrator determines the number of shares, price, terms, conditions and
restrictions related to a grant of stock purchase rights and the purchase
price of a stock purchase right granted under the 1998 stock plan. The
administrator also determines the period during which the stock purchase right
is held open, but in no case shall such period exceed 30 days. Unless the
administrator determines otherwise, the recipient of a stock purchase right
must execute a restricted stock purchase agreement granting an option to
repurchase the unvested shares at cost upon termination of such recipient's
relationship with us.
1999 Employee Stock Purchase Plan. Our board of directors adopted the 1999
employee stock purchase plan in April 1999 and our stockholders approved the
employee stock purchase plan in July 1999. A total of 500,000 shares of common
stock has been reserved for issuance under the purchase plan plus an annual
increase on the first day of each of our fiscal years beginning in 2000, 2001,
2002, 2003 and 2004 equal to the lesser of the following:
. 500,000 shares;
. 3% of our shares outstanding on the last day of the immediate preceding
fiscal year; or
. such lesser number of shares as is determined by the board.
The purchase plan is intended to qualify under Section 423 of the Internal
Revenue Code. The initial offering period began on the date of the closing of
our initial public offering and will end on January 31, 2000. Each subsequent
offering period will have a duration of six months. Each offering period after
the first offering period will commence on February 1 and August 1 of each
year. The board of directors or a committee appointed by the board will
administer the purchase plan. Employees, including officers and employee
directors, of drugstore.com or of any majority-owned subsidiary designated by
the board, are eligible to participate in the purchase plan if they are
employed by drugstore.com or any such subsidiary for at least 20 hours per
week and more than 5 months per year. The purchase plan permits eligible
employees to purchase common stock through payroll deductions, which may not
exceed 20% of an employee's compensation, at a price equal to the lower of 85%
of the fair market value of our common stock at the beginning or end of the
offering period. Employees may end their participation in the offering at any
time during the offering period, and participation ends automatically on
termination of employment. If not terminated earlier, the purchase plan will
have a term of 10 years.
The purchase plan provides that in the event of our merger with or into
another corporation or a sale of all or substantially all of our assets, the
successor corporation will assume each right to purchase stock under the
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purchase plan or will substitute an equivalent right. If the successor
corporation does not agree to an assumption or substitution, the offering
period then in progress will be shortened so that employees' rights to
purchase stock under the purchase plan are exercised prior to the merger or
sale of assets. The board of directors has the power to amend or terminate the
purchase plan as long as that action does not adversely affect any outstanding
rights to purchase stock under the plan. We may, however, terminate the
purchase plan or an offering period if continuation of the purchase plan or
the offering period would cause us to incur adverse accounting charges.
401(k) Plan
Effective April 1999, we adopted the drugstore.com, inc. 401(k) plan
covering our full-time employees. The 401(k) plan is intended to qualify under
Section 401(k) of the Internal Revenue Code of 1986, as amended, so that
contributions to the 401(k) plan by employees or by drugstore.com, and the
investment earnings thereon, are not taxable to employees until withdrawn from
the 401(k) plan, and so that contributions by drugstore.com, if any, will be
deductible by drugstore.com when made. Under the 401(k) plan, employees may
elect to reduce their current compensation by up to the statutorily prescribed
annual limit ($10,000 in 1999) and to have the amount of such reduction
contributed to the 401(k) plan. The 401(k) plan permits, but does not require,
additional matching contributions to the 401(k) plan by drugstore.com on
behalf of all participants in the 401(k) plan. To date, we have not made any
matching contributions to the 401(k) plan.
Agreements with Named Executive Officers
Peter M. Neupert's employment offer letter provides for an initial annual
salary of $250,000 and an initial annual bonus of up to $125,000. We also
granted Mr. Neupert a one-time right to purchase 1,260,000 shares of our
common stock at a purchase price of $.04 per share. We have a lapsing right to
repurchase Mr. Neupert's unvested shares. As of February 3, 2000, our right to
repurchase has lapsed with respect to 498,750 shares of stock and will
continue to lapse with respect to 26,250 shares each month while he remains
employed, with all of these shares becoming fully vested on the 27th of the
month following his fourth anniversary of employment. If we are acquired by
another entity or sell substantially all our assets, and Mr. Neupert is not
offered a position with the surviving corporation with responsibilities
similar to those held at drugstore.com, our right of repurchase will lapse
with respect to all of these shares. Mr. Neupert's employment is for no
specified length of time, and either party has the right to terminate Mr.
Neupert's employment at any time for any reason. If we terminate Mr. Neupert's
employment other than for "cause" (which is defined in his agreement to mean
gross negligence or willful misconduct in the performance of his duties, the
failure to obey our board of directors, defrauding or stealing from
drugstore.com, or being convicted of a crime that harms the business or
reputation of drugstore.com), our right of repurchase will lapse on an
additional 236,250 shares of the then-unvested portion. The offer letter also
provides that in the event Mr. Neupert's employment is terminated for any
reason, he will continue to receive his then-current base salary and benefits
for a period of nine months.
Kal Raman's employment offer letter provides for an initial annual salary
of $175,000, a $100,000 signing bonus (which was grossed up to $120,000 to
negate the effect of applicable taxes), reimbursement of $5,000 for a lost
down payment on a house in Florida and an annual bonus of up to 15% of his
salary. We also offered Mr. Raman an option to purchase shares of common stock
under our 1998 stock plan. In the offer letter, we agreed to guarantee a loan
from a bank in the amount of $250,000. However, instead of guaranteeing a bank
loan, we and Mr. Raman agreed that we would loan $250,000 directly to Mr.
Raman. See "Certain Relationships and Related Transactions" for a description
of our loan arrangement with Mr. Raman. Mr. Raman's employment is for no
specified length of time, and either party has the right to terminate the
agreement at any time for any reason.
Mark L. Silverman's employment offer letter provides for an initial annual
base salary of $175,000, a $35,000 signing bonus and a bonus at the discretion
of the chief executive officer commensurate with other officers of
drugstore.com. We also offered Mr. Silverman an option to purchase shares of
our common stock under our 1998 stock plan. If we are acquired by another
entity or sell substantially all of our assets and Mr. Silverman is not
offered a position with the surviving corporation with responsibilities
similar to those held
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at drugstore.com or if his employment is terminated for other than "cause"
(which is defined in his agreement to mean gross negligence or willful
misconduct in the performance of his duties, the failure to obey our board of
directors or chief executive officer, defrauding or stealing from
drugstore.com, or being convicted of a crime that harms the business or
reputation of drugstore.com), the option with respect to all then-unvested
shares shall vest. Mr. Silverman's employment is for no specified length of
time, and either party has the right to terminate Mr. Silverman's employment
at any time for any reason. The offer letter also provides that, in the event
Mr. Silverman's employment is terminated without cause, he will continue to
receive his then-current base salary and benefits for a period of twelve
months.
Suzan K. DelBene resigned as Vice President, Marketing and Store
Development of drugstore.com effective as of October 15, 1999 pursuant to a
separation agreement and release. Under the terms of her agreement Ms. DelBene
will continue to receive her regular base salary and benefits until April 8,
2000. In addition, we accelerated the vesting of options to purchase 20,000
shares of our common stock to October 1, 1999.
Limitations on Directors' Liability and Indemnification
Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for:
. any breach of their duty of loyalty to the corporation or its
stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
. any transaction from which the director derived an improper personal
benefit.
This limitation of liability does not apply to liabilities arising under the
federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
Our certificate of incorporation and bylaws provide that drugstore.com
shall indemnify our directors and executive officers and may indemnify our
other officers and employees and other agents to the fullest extent permitted
by law. We believe that indemnification under our bylaws covers at least
negligence and gross negligence on the part of indemnified parties. Our bylaws
also permit us to secure insurance on behalf of any officer, director,
employee or other agent for any liability arising out of his or her actions in
such capacity, regardless of whether the bylaws would permit indemnification.
We have entered into agreements to indemnify our directors and officers, in
addition to indemnification provided for in our bylaws. These agreements,
among other things, provide for indemnification of our directors and officers
for expenses specified in the agreements, including attorneys' fees,
judgments, fines and settlement amounts incurred by any such person in any
action or proceeding arising out of such person's services as a director or
officer of drugstore.com, any subsidiary of drugstore.com or any other company
or enterprise to which the person provides services at the request of
drugstore.com. We believe that these provisions and agreements are necessary
to attract and retain qualified persons as directors and officers.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Prior to our initial public offering, we issued and sold shares of our
capital stock as follows: a total of 2,265,000 shares of common stock at a
price of $.04 per share in June, July and August 1998, a total of 10,000,000
shares of Series A preferred stock at a price of $.80 per share in June and
August 1998, a total of 5,446,268 shares of Series B preferred stock at a
price of $3.35 per share in October, November and December 1998, a total of
4,472,844 shares of Series C preferred stock at a price of $7.825 per share in
January and March 1999, a total of 2,266,289 shares of Series D preferred
stock at a price of $17.65 per share in June 1999, a total of 12,282,599
shares of Series E preferred stock in July 1999. All shares of our preferred
stock were converted into common stock on a 1-for-1 basis upon the closing of
our initial public offering. In addition, concurrently with our initial public
offering, we issued and sold 555,555 shares of our common stock to Amazon.com
in a private placement transaction at the initial public offering price of $18
per share, and on January 24, 2000, we issued and sold 1,066,667 shares of our
common stock to Amazon.com in a private placement transaction at a price of
$28.125 per share. The following table summarizes the shares of capital stock
purchased by executive officers, directors and five-percent stockholders and
their affiliates in these transactions:
<TABLE>
<CAPTION>
Series A Series B Series C Series D Series E
Common Preferred Preferred Preferred Preferred Preferred
Investor(1) Stock Stock Stock Stock Stock Stock
- ----------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Kleiner Perkins Caufield
& Byers(2)(3).......... -- 4,937,500 1,582,089 511,182 -- --
Amazon.com, Inc.(2)(4).. 1,622,222 5,000,000 3,177,612 2,555,911 -- --
Maveron Equity Partners,
L.P.(2)(5)............. -- -- 417,910 766,773 -- --
Peter M. Neupert(2)(6).. 1,260,000 -- 268,657 319,489 -- --
Vulcan Ventures
Incorporated(2)(7)..... -- -- -- -- 2,266,289 --
Rite Aid
Corporation(2)(8)...... -- -- -- -- -- 9,334,746
General Nutrition
Investment
Company (2)(9)......... -- -- -- -- -- 2,947,853
</TABLE>
- --------
(1) Shares held by affiliated persons and entities have been added together
for the purposes of this chart. See "Principal and Selling Stockholders"
for a chart of beneficial owners.
(2) Holder of 5% or more of a class of our capital stock.
(3) Includes shares held by Kleiner Perkins Caufield & Byers VIII, L.P. (KPCB
VIII), KPCB VIII Founders Fund, L.P., and KPCB Life Sciences Zaibatsu Fund
II, L.P. KPCB VIII and KPCB VIII Founders Fund, L.P. are wholly controlled
by KPCV VIII Associates, L.P. KPCB Life Sciences Zaibatsu Fund II, L.P. is
wholly controlled by KPCB VII Associates, L.P., Brook H. Byers and L. John
Doerr, each a general partner of KPCB VIII Associates and KPCB VII
Associates, L.P., are both directors of drugstore.com. Mr. Byers and Mr.
Doerr each disclaim beneficial ownership of shares held by these entities
except to the extent of their pecuniary interest therein. In November
1998, drugstore.com and Kleiner Perkins Caufield & Byers agreed to rescind
the purchase of 89,552 of such shares and refund the $299,999.20 purchase
price. As a result, after November 1998, Kleiner Perkins Caufield & Byers
held 1,582,089 shares of Series B preferred stock.
(4) In consideration of Amazon.com's obligations under a technology license
and advertising agreement, we issued Amazon.com 5,000,000 shares of our
Series A preferred stock. We issued these shares primarily in exchange for
Amazon.com's early marketing and support efforts in connection with and
after our launch. Jeffrey P. Bezos, chairman of the board and chief
executive officer of Amazon.com, became a director of drugstore.com upon
completion of the issuance.
(5) Howard Schultz, a director of drugstore.com, is one of the two founding
members of Maveron LLC, and is one of two members of a limited liability
company that serves as a general partner of its affiliated venture capital
fund, Maveron Equity Partners, L.P.
(6) Mr. Neupert's shares of preferred stock are held jointly by Mr. Neupert
and Sheryl Neupert.
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(7) 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. William D.
Savoy, vice president of Vulcan Ventures, became a director of
drugstore.com in July 1999.
(8) In July 1999, we issued Rite Aid 9,334,746 shares of Series E preferred
stock for $7.6 million in cash and additional consideration. Mary Sammons,
one of our directors, is the president and chief operating officer of Rite
Aid.
(9) In July 1999, we issued General Nutrition Investment Company, a wholly
owned subsidiary of GNC, 2,947,853 shares of Series E preferred stock for
$2.4 million in cash and additional consideration.
A provision of the investors' rights agreement dated May 19, 1999 between
drugstore.com and some of our stockholders precludes Kleiner Perkins Caufield
& Byers, Amazon.com and Maveron Equity Partners from purchasing additional
shares of our common stock without our prior approval if the purchase would
cause any of them to hold individually more than 40% of our outstanding common
stock (calculated on a fully diluted basis to include outstanding options and
shares reserved under our stock plans). This restriction lasts until August
2002. Pursuant to a June 17, 1999 addendum, Rite Aid and GNC were made parties
to this agreement and are subject to its provisions.
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 by Vulcan to provide cable
television advertising valued at $5 million based on comparable transactions
with unaffiliated third parties. The advertising is expected to be aired over
a three-year period and will be expensed in the period in which the airtime is
used. The note was converted into 2,266,289 shares of Series D preferred stock
in June 1999. William D. Savoy, vice president of Vulcan Ventures, became a
director of drugstore.com in July 1999.
On January 24, 2000, we entered into an agreement with Amazon.com to
integrate various shopping features of our Web sites and create a persistent
drugstore.com shopping presence on Amazon.com's Web site. The agreement also
covers various advertising and cross-promotion initiatives and obligates the
parties to undertake the development of additional features designed to
further integrate their Web sites, including with respect to search and browse
capabilities and a shared shopping basket. We agreed to pay Amazon.com a total
of $105 million over the three-year term of the agreement, of which $30
million was paid at the time the agreement was executed. See "Business--
Relationship with Amazon.com."
In June 1999, we entered into a strategic relationship with Rite Aid
whereby customers are able to refill prescriptions at our Web site and either
use our standard delivery options or pick up the prescriptions at Rite Aid
stores. In addition, Rite Aid and drugstore.com will promote each others'
services both online and offline, including a link from Rite Aid's Web site to
our Web site. In addition, we will participate in substantially all of the
current and future retail pharmacy networks managed by PCS Health Systems,
Inc., a wholly-owned subsidiary of Rite Aid, which claims to provide pharmacy
benefit management services for more than 50 million individuals in the United
States. We have a separate ten-year agreement with PCS. As part of the
relationship, both Rite Aid and drugstore.com agreed to certain exclusivity
provisions that limit our ability to promote or affiliate with any other
physical retail drugstore and from operating a traditional physical drugstore,
and will preclude Rite Aid from offering or selling products or services on
the Internet other than through our Web site. In addition, the agreement
provides that if we establish our own distribution center, we will purchase
all of our pharmaceutical requirements from Rite Aid. The agreement contains
additional provisions providing for the licensing by Rite Aid to drugstore.com
of information technology systems and the integration of the information
technology and pharmacy systems of the two companies. This agreement extends
for ten years, but can be terminated for breach prior to such time. In
connection with this relationship, Rite Aid acquired 9,334,746 shares of
Series E preferred stock (all of which was converted into common stock at the
time of our initial public offering) for $7.6 million in cash and additional
consideration. Under the terms of the Third Amended and Restated Voting
Agreement dated June 17, 1999, Rite Aid has the right to nominate one member
to our board of directors, and Mary Sammons, Rite Aid's president and chief
operating officer, is currently a member of our
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board of directors. Rite Aid is offering 1,500,000 shares of common stock in
this offering. Following this offering, Rite Aid will own approximately 15.5%
of our outstanding common stock (14.5% if the underwriters' over-allotment
options are exercised in full).
In June 1999, we entered into a relationship with GNC whereby we are the
exclusive online provider of GNC-branded products. We have the exclusive right
to sell GNC's nutrition products over the Internet, including the PharmAssure
brand of pharmacist recommended vitamins and nutritional supplements, subject
to our meeting performance parameters based on traffic to our Web site and
sales of GNC's products over the Internet in the third and fifth year of the
relationship. As long as we have the exclusive right to distribute GNC's
products over the Internet, we will not promote any other retail health food
store or operate a physical retail health food store. If the exclusivity
provisions of the agreement terminate, we have the non-exclusive right to sell
these products for the remaining term of the agreement. As part of this
relationship, we have created a separate part of our Web site called the GNC
LiveWell Store which is dedicated to selling on a consignment basis GNC
products. In connection with this relationship, GNC acquired 2,947,853 shares
of our Series E preferred stock (all of which was converted into common stock
at the time of our initial public offering). As part of our relationship with
GNC, GNC and drugstore.com agreed to co-promote each other's products and
services in both their traditional and online marketing efforts, including GNC
putting a link to our Web site on their Web site. The agreement extends for
ten years, but can be terminated for breach prior to such time.
We have entered into offer letters with several of our executive officers.
See "Management--Agreements With Named Executive Officers" for a description
of the offer letters.
On December 3, 1998, we loaned $250,000 to Kal Raman, our Senior Vice
President, Technology and Operations. In our offer letter to Mr. Raman, we
agreed to guarantee a loan for $250,000, and, in connection with this
obligation, chose to provide the loan directly to Mr. Raman. The loan is with
full recourse and bears interest at 7% and is further secured by the shares
issuable upon exercise of Mr. Raman's stock option. All principal and accrued
interest under the loan remains outstanding and is due and payable on the
earlier of December 3, 1999, or within 15 days after ceasing to provide
substantial services to drugstore.com. The board of directors has approved the
extension of the term of this loan, and all principal and interest under the
loan remains outstanding and is due and payable on the earlier of December 31,
2000, or within 15 days after Mr. Raman ceases to provide substantial services
to drugstore.com. The highest aggregate amount of principal and interest
outstanding under this loan since December 3, 1998 and through January 2, 2000
was approximately $268,938.
All future transactions, including any loans from us to our officers,
directors, principal stockholders or affiliates, will be approved by a
majority of our board of directors, including a majority of the independent
and disinterested members of the board, and if required by law, a majority of
disinterested stockholders.
In the event that drugstore.com merges or is acquired by another company
and Peter M. Neupert is not offered a similar position with similar
responsibilities by the surviving entity, or if the surviving entity's
principal office is located more than 50 miles from his residence, all of Mr.
Neupert's unvested shares will be released from our option to repurchase these
shares.
drugstore.com Foundation
In July 1999, we donated 200,000 shares of our common stock to
drugstore.com Foundation, a foundation established by us. The foundation will
make grants to charitable organizations. We intend to involve our employees in
determining the charitable purposes for this foundation. The drugstore.com
Foundation is offering 20,000 shares of common stock in this offering.
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of February 3, 2000, and as adjusted to
reflect the sale of common stock offered hereby, by:
. each stockholder known by us to own beneficially more than 5% of our
common stock;
. each director;
. each individual named in the summary compensation table;
. all directors and executive officers as a group; and
. each selling stockholder.
As of February 3, 2000, we had 46,022,560 shares of common stock
outstanding and 208 stockholders of record. Beneficial ownership is determined
in accordance with the rules of the SEC. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of common stock subject to options or warrants held by that person that
are currently exercisable or will become exercisable within 60 days after
February 3, 2000 are deemed outstanding, while such shares are not deemed
outstanding for purposes of computing percentage ownership of any other
person. Unless otherwise indicated in the footnotes below, the persons and
entities named in the table have sole voting and investment power with respect
to all shares beneficially owned, subject to community property laws where
applicable.
<TABLE>
<CAPTION>
Shares Beneficially Shares Beneficially
Owned Prior to this Owned After this
Offering Shares Offering
Name and Address of --------------------- Being ---------------------
Beneficial Owner Number Percentage Offered Number Percentage
- ------------------- ---------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Amazon.com, Inc.(1)..... 12,355,745 26.8% -- 12,355,745 24.5%
1516 2nd Avenue
Seattle, WA 98101
Rite Aid
Corporation(2)......... 9,334,746 20.3 1,500,000 7,834,746 15.5
30 Hunter Lane
Camp Hill, PA 17011
Kleiner Perkins Caufield
& Byers(3)............. 7,033,271 15.3 -- 7,033,271 13.9
2750 Sand Hill Road
Menlo Park, CA 94025
General Nutrition
Investment Company(4).. 2,947,853 6.4 -- 2,947,853 5.8
1002 South 63rd Avenue
At Buckeye
Phoenix, AZ 15222
Vulcan Ventures,
Incorporated(5)........ 2,266,289 4.9 -- 2,266,289 4.5
110 110th Avenue NE,
Suite 550
Bellevue, WA 98004
Peter M. Neupert(6)..... 1,931,479 4.2 -- 1,931,479 3.8
13920 Southeast
Eastgate Way Suite
300
Bellevue, WA 98005
Maveron Equity Partners,
L.P.(7)................ 1,187,183 2.6 -- 1,187,183 2.3
Jeffrey P. Bezos(1)..... 12,355,745 26.8 -- 12,355,745 24.5
Brook H. Byers(3)....... 7,033,271 15.3 -- 7,033,271 13.9
L. John Doerr(3)........ 7,033,271 15.3 -- 7,033,271 13.9
Melinda French Gates.... -- -- -- -- --
Mary Sammons(8)......... 9,334,746 20.3 1,500,000 7,834,746 15.5
William Savoy(5)........ 2,276,289 4.9 -- 2,276,289 4.5
Howard Schultz(7)....... 1,187,183 2.6 -- 1,187,183 2.3
Kal Raman(9)............ 62,050 * -- 62,050 *
David E. Rostov(10)..... 48,500 * -- 48,500 *
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Shares Beneficially
Owned Prior to this Shares Beneficially Owned
Offering Shares After this Offering
Name and Address of --------------------- Being ------------------------------
Beneficial Owner Number Percentage Offered Number Percentage
- ------------------- ---------- ---------- --------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Mark L. Silverman(11).. 52,000 * -- 52,000 *
All directors and
executive officers
as a group (13
persons)(12)........ 34,290,096 74.2 1,500,000 32,790,096 64.7
drugstore.com
Foundation............ 200,000 * 20,000 180,000 *
13920 Southeast
Eastgate Way
Bellevue, WA 98005
</TABLE>
- --------
* Less than 1%
(1) Includes 1,066,667 shares of common stock issued and sold to Amazon.com
on January 24, 2000 in a private placement transaction. Jeffrey P. Bezos
is a director of drugstore.com and is the chairman of the board and
chief executive officer of Amazon.com, Inc.
(2) Consists of shares held by Rite Investments Corp., a wholly owned
subsidiary of Rite Aid Corporation. Under the terms of the Third Amended
and Restated Voting Agreement dated June 17, 1999, Rite Aid has the
right to nominate one member to our board of directors.
(3) Consists of 6,313,633 shares held by Kleiner Perkins Caufield & Byers
VIII, L.P. (KPCB VIII), 365,600 shares held by KPCB VIII Founders Fund,
L.P. 351,538 shares held by KPCB Life Sciences Zaibatsu Fund II, L.P.
and 2,500 shares held by KPCB IX Associates, L.P. KPCB VIII and KPCB
VIII Founders Fund, L.P. are wholly controlled by KPCB VIII Associates,
L.P. KPCB Life Sciences Zaibatsu Fund II, L.P. is wholly controlled by
KPCB VII Associates, L.P. Brook H. Byers and L. John Doerr, each a
general partner of KPCB VIII Associates and KPCB VII Associates, L.P.,
are both directors of drugstore.com. Mr. Byers and Mr. Doerr each
disclaim beneficial ownership of shares held by these entities except to
the extent of his pecuniary interest in those shares.
(4) In August 1999, General Nutrition Companies, Inc., the parent company of
General Nutrition Investment Company, was acquired by Royal Numico N.V.,
a European maker of nutrition products.
(5) Includes 2,266,289 shares held by Vulcan Ventures Incorporated. William
D. Savoy is a director of drugstore.com and is the vice president of
Vulcan Ventures, a venture capital firm wholly-owned by Paul Allen. Mr.
Savoy disclaims beneficial ownership of shares held by Vulcan Ventures
except to the extent of his pecuniary interest in those shares.
(6) As of February 3, 2000, 761,250 of such shares are subject to a right of
repurchase at cost in the event Peter M. Neupert ceases to be an
employee of drugstore.com. Mr. Neupert's shares of common stock are held
jointly by Mr. Neupert and Sheryl Neupert. Includes 66,666 shares
subject to options exercisable within 60 days of February 3, 2000.
(7) Howard Schultz is a director of drugstore.com and one of two founding
members of Maveron LLC and is one of two members of a limited liability
company that serves as a general partner of its affiliated venture
capital fund, Maveron Equity Partners, L.P. Mr. Schultz disclaims
beneficial ownership of shares held by these entities except to the
extent of his pecuniary interest in those shares.
(8) Consists of shares held by Rite Investments Corp., a wholly owned
subsidiary of Rite Aid Corporation. Mary Sammons is the president and
chief operating officer of Rite Aid Corporation.
(9) Includes 55,250 shares subject to options exercisable within 60 days of
February 3, 2000.
(10) Includes 1,000 shares held by Mr. Rostov as custodian for his two
children and 32,500 shares subject to options exercisable within 60 days
of February 3, 2000.
(11) Includes 37,500 shares subject to options exercisable within 60 days of
February 3, 2000.
(12) 191,916 shares subject to options held by the directors and officers are
exercisable within 60 days of February 3, 2000.
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DESCRIPTION OF CAPITAL STOCK
As of February 3, 2000, there were 46,022,560 shares of common stock
outstanding. We are authorized to issue 250,000,000 shares of common stock,
$.0001 par value, and 10,000,000 shares of undesignated preferred stock,
$.0001 par value.
The following description of drugstore.com's capital stock is not complete
and is qualified in its entirety by drugstore.com's certificate of
incorporation and bylaws, which are included as exhibits to the registration
statement of which this prospectus forms a part, and by the provisions of
applicable Delaware law.
Common Stock
The holders of common stock are entitled to one vote per share on all
matters to be voted on by the stockholders. Subject to preferences that may be
applicable to any outstanding preferred stock, the holders of common stock are
entitled to receive ratably such dividends, if any, as may be declared from
time to time by the board of directors out of funds legally available for that
purpose. See "Dividend Policy" for a description of drugstore.com's policy of
distribution of dividends. In the event of a liquidation, dissolution or
winding up of drugstore.com, the holders of common stock are entitled to share
ratably in all assets remaining after payment of liabilities, subject to prior
distribution rights of preferred stock, if any, then outstanding. The common
stock has no preemptive or conversion rights or other subscription rights.
There are no redemption or sinking fund provisions applicable to the common
stock. All outstanding shares of common stock are fully paid and
nonassessable, and the shares of common stock to be issued by us upon the
closing of this offering will be 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. drugstore.com has no present plans to issue any shares of
preferred stock.
Registration Rights
Following this offering, the holders of 34,762,722 shares of common stock
(the "registrable securities") or their permitted transferees will be entitled
to certain rights with respect to registration of such shares under the
Securities Act pursuant to the terms of an 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 two occasions that drugstore.com register their shares for public
resale. We are obligated to register these shares only if the shares to be
registered would have an anticipated public offering price of at least
$5,000,000. In addition, holders of then-outstanding registrable securities
with an aggregate offering price of at least $40 million may require that we
register their shares for public resale on Form S-3 or similar short-form
registration, provided we are eligible to use Form S-3 or similar short-form
registration statement and provided further that the value of the securities
to be registered is at least $500,000. Furthermore, in the event we elect to
register any of our shares of common stock for purposes of effecting any
public offering, the holders of registrable securities are entitled to include
their shares of common stock in the registration, subject however to our right
to reduce the number of shares proposed to be registered in view of market
conditions. All expenses in connection with any registration (other than
underwriting discounts and commissions) will be borne by us. The registration
rights of all holders other than Rite Aid and GNC will terminate five years
after the date of our initial
71
<PAGE>
public offering or, with respect to each holder of registrable securities, at
such time as the holder is entitled to sell all of its shares in any three
month period under Rule 144 of the Securities Act. The registration rights of
Rite Aid and GNC terminate ten years after the date of our initial public
offering. In addition, subject to certain limitations, including the release
of such shares from escrow arrangements, the holders of all 1,266,289 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.
A provision of the investors' rights agreement between drugstore.com and
some of our stockholders precludes Kleiner Perkins Caufield & Byers,
Amazon.com, Maveron Equity Partners, Rite Aid and GNC from purchasing
additional shares of our common stock without our prior approval if the
purchase would cause them to hold more than 40% of our outstanding common
stock (calculated on a fully-diluted basis to include outstanding options and
shares reserved under our stock plans). This restriction lasts until August
2002.
Delaware and Washington Antitakeover Law and Certain Charter and Bylaw
Provisions
Provisions of Delaware law and our certificate of incorporation and bylaws
could make more difficult the acquisition of drugstore.com by a third party
and the removal of incumbent officers and directors. These provisions,
summarized below, are expected to discourage certain types of coercive
takeover practices and inadequate takeover bids and to encourage persons
seeking to acquire control of drugstore.com to first negotiate with us. We
believe that the benefits of increased protection of our ability to negotiate
with the proponent of an unfriendly or unsolicited proposal to acquire or
restructure drugstore.com outweigh the disadvantages of discouraging such
proposals because, among other things, negotiation of such proposals could
result in an improvement of their terms.
We are subject to Section 203 of the Delaware General Corporation Law,
which regulates corporate acquisitions. In general, Section 203 prohibits a
publicly held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years following the
date the person became an interested stockholder, unless:
. the board of directors approved the transaction in which such
stockholder became an interested stockholder prior to the date the
interested stockholder attained such status;
. upon consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, he or she owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding shares owned by persons who are directors and also
officers and shares in employee stock plans in which the participants
have no right to determine confidentially whether shares held subject to
the plan will be tendered in a tender or exchange offer; or
. on or subsequent to such date the business combination is approved by
the board of directors and authorized by 66 2/3% vote at an annual or
special meeting of stockholders.
A business combination generally includes a merger, asset or stock sale, or
other transaction resulting in a financial benefit to the interested
stockholder. In general, an "interested stockholder" is a person who, together
with affiliates and associates, owns, or within three years prior to the
determination of interested stockholder status, did own, 15% or more of a
corporation's voting stock.
The laws of the State of Washington, where our principal executive offices
are located, also impose restrictions on certain transactions between certain
foreign corporations and significant stockholders. Chapter 23B.19 of the
Washington Business Corporation Act (the WBCA) prohibits a "target
corporation," with certain exceptions, from engaging in certain "significant
business transactions" with a person or group of persons who beneficially own
10% or more of the voting securities of the target corporation (an "acquiring
person") for a period of five years after such acquisition, unless the
transaction or acquisition of such shares is approved by a majority of the
members of the target corporation's board of directors prior to the time of
72
<PAGE>
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
corporation's employees are Washington residents or more than 1,000 Washington
residents are employees of the corporation, and (5) a majority of the
corporation's tangible assets are located in Washington or the corporation has
more than $50.0 million of tangible assets located in Washington. A
corporation may not "opt out" of this statute and, therefore, we anticipate
this statute will apply to us. Depending upon whether we meet the definition
of a target corporation, Chapter 23B.19 of the WBCA may have the effect of
delaying, deferring or preventing a change in control of us.
Our certificate of incorporation permits the board of directors to issue
preferred stock with voting or other rights without any stockholder action.
The authorization of undesignated preferred stock makes it possible for the
board of directors to issue preferred stock with voting or other rights or
preferences that could impede the success of any attempt to change control of
drugstore.com. These and other provisions may have the effect of deterring
hostile takeovers or delaying changes in control or management of
drugstore.com.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is ChaseMellon
Shareholder Services LLC.
73
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, we will have 50,522,560 shares of common
stock outstanding. Of these shares, the 6,020,000 shares sold in the offering
plus any shares issued upon exercise of the underwriters' over-allotment
options, and the 5,750,000 shares sold in our initial public offering, will be
freely tradable without restriction under the Securities Act, unless held by
our "affiliates" as that term is defined in Rule 144 under the Securities Act
(generally, officers, directors or 10% stockholders). Of the remaining shares,
a total of 38,373,261 shares held by our existing stockholders are "restricted
securities" within the meaning of Rule 144 under the Securities Act.
Restricted shares may be sold in the public market only if registered or if
they qualify for an exemption from registration under Rules 144, 144(k) or 701
promulgated under the Securities Act, which are summarized below. Sales of the
restricted shares in the public market, or the availability of such shares for
sale, could adversely affect the market price of the common stock.
Our directors, officers, the selling stockholders and certain other
stockholders have entered into lock-up agreements in connection with this
offering generally providing that they will not offer, sell, contract to sell
or grant any option to purchase or otherwise dispose of our common stock or
any securities exercisable for or convertible into our common stock owned by
them for a period of at least 90 days after the date of this prospectus
without the prior written consent of Morgan Stanley & Co. Incorporated, the
representative of the underwriters. As a result of these contractual
restrictions, notwithstanding possible earlier eligibility for sale under the
provisions of Rules 144, 144(k) and 701, shares subject to lock-up agreements
will not be salable until such agreements expire or are waived by the
designated underwriters' representative. Morgan Stanley & Co. Incorporated has
notified us that it currently has no plans to release any portion of the
securities subject to lock-up agreements. Taking into account the lock-up
agreements, and assuming Morgan Stanley & Co. Incorporated does not release
stockholders from these agreements, the following shares will be eligible for
sale in the public market at the following times:
. As of the date hereof, approximately 1,124,750 shares are eligible for
sale in the public market pursuant to Rule 701 and Rule 144, assuming no
exercise of options, of which 162,500 shares held on February 3, 2000 by
Jed Smith, one of our founders, are subject to a lock-up agreement with
us that will be released in eight equal quarterly installments beginning
on March 31, 2000.
. Beginning 90 days after the date of this prospectus, approximately
23,387,401 shares will be eligible for sale in the public market
pursuant to Rule 701 and Rule 144, assuming no exercise of options, of
which 761,250 shares held by Peter M. Neupert at February 3, 2000 are
subject to repurchase by us if his employment terminates under certain
circumstances.
. The following shares of common stock will become eligible for sale in
the public market pursuant to Rule 144 on the following dates: 2,266,289
shares on May 19, 2000 (subject to the expiration of the lock-up
agreement referred to above); 10,782,599 shares on July 8, 2000; 555,555
shares on August 2, 2000; 1,066,667 shares on January 24, 2001; and
1,266,289 shares on February 2, 2001 (subject to the release of such
shares from escrow arrangements). Any such shares that are held by our
"affiliates" are subject to the volume restrictions of Rule 144
described below.
In addition, the holders of 36,029,011 shares of our common stock are entitled
to certain rights with respect to registration of such shares of common stock
for offer and sale to the public. See "Description of Capital Stock--
Registration Rights."
In general, under Rule 144, and beginning after the expiration of the
applicable lock-up agreements, a person, or persons whose shares are combined,
who has beneficially owned restricted securities for at least one year would
be entitled to sell within any three-month period a number of shares that does
not exceed the greater of the following:
. one percent of the number of shares of common stock then outstanding
(which will equal approximately 505,226 shares immediately after this
offering); or
. the average weekly trading volume of the common stock during the four
calendar weeks preceding the sale.
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<PAGE>
Sales under Rule 144 are also subject to certain manner of sale provisions
and notice requirements and to the availability of current public information
about us. Under Rule 144(k), a person who is not deemed to have been our
affiliate at any time during the three months preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years, is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
Rule 701, as currently in effect, permits resales of shares in reliance
upon Rule 144 but without compliance with certain restrictions, including the
holding period requirement, of Rule 144. Any of our employees, officers,
directors or consultants who purchased shares pursuant to a written
compensatory plan or contract may be entitled to rely on the resale provisions
of Rule 144. Rule 701 permits affiliates to sell their Rule 701 shares under
Rule 144 without complying with the holding period requirement of Rule 144.
Rule 701 further provides that non-affiliates may sell such shares in reliance
on Rule 144 without having to comply with the holding period, public
information, volume limitation or notice provisions of Rule 144.
We filed registration statements under the Securities Act covering a total
of 13,992,000 shares of common stock issuable under our employee benefit
plans. As a result, any options exercised under the 1998 stock plan, the 1999
employee stock purchase plan or any other benefit plan are freely tradable in
the public market, except that shares held by affiliates will still be subject
to the volume limitation, manner of sale, notice and public information
requirements of Rule 144 unless otherwise resalable under Rule 701. As of
February 3, 2000, there were outstanding options for the purchase of 6,731,054
shares of our common stock under the 1998 stock plan and 3,965,616 shares were
available for future grant.
Future sales of substantial amounts of common stock (including shares
issued upon exercise of outstanding options) in the public market could
adversely affect prevailing market price of our common stock and impair our
ability to raise equity capital in the future.
75
<PAGE>
UNDERWRITERS
Under the terms and subject to conditions contained in the underwriting
agreement dated the date of this prospectus, the underwriters named below, for
whom Morgan Stanley & Co. Incorporated, Donaldson, Lufkin & Jenrette
Securities Corporation, Salmon Smith Barney Inc. and Thomas Weisel Partners
LLC are acting as representatives, have severally agreed to purchase, and
drugstore.com and the selling stockholders have agreed to sell to them,
severally, the respective number of shares of common stock set forth opposite
the names of such underwriters below:
<TABLE>
<CAPTION>
Number of
Name Shares
---- ---------
<S> <C>
Morgan Stanley & Co. Incorporated..................................
Donaldson, Lufkin & Jenrette Securities Corporation................
Salomon Smith Barney Inc. .........................................
Thomas Weisel Partners LLC.........................................
---------
Total............................................................ 6,020,000
=========
</TABLE>
The underwriters are offering the shares subject to their acceptance of the
shares from drugstore.com and the selling stockholders and subject to prior
sale. The underwriting agreement provides that the obligations of the several
underwriters to pay for and accept delivery of the shares of common stock
offered hereby are subject to the approval of legal matters by their counsel
and to certain other conditions. The underwriters are obligated to take and
pay for all of the shares of common stock offered by this prospectus, other
than those covered by the over-allotment option described below, if any such
shares are taken.
The underwriters initially propose to offer part of the shares of common
stock directly to the public at the public offering price set forth on the
cover page of the prospectus and part to certain dealers at a price that
represents a concession not in excess of $ a share under the public offering
price. Any underwriter may allow, and the dealers may reallow, a concession
not in excess of $ a share to other underwriters or to certain other
dealers. After the initial offering of the shares of common stock, the
offering price and other selling terms may from time to time be varied by the
representatives of the underwriters.
drugstore.com has granted to the underwriters an option, exercisable for 30
days from the date of this prospectus, to purchase up to an aggregate of
782,400 additional shares of common stock at the public offering price set
forth on the cover page hereof, less estimated underwriting discounts and
commissions. One of the selling stockholders has granted to the underwriters a
similar option to purchase up to an aggregate of 120,600 additional shares of
common stock. The underwriters may exercise these options solely for the
purpose of covering over-allotments, if any, made in connection with this
offering of common stock, and any exercise must be on a pro rata basis. To the
extent these over-allotment options are exercised, each underwriter will
become obligated, subject to certain conditions, to purchase approximately the
same percentage of additional shares of common stock as the number set forth
next to each underwriter's name in the preceding table bears to the total
number of shares of common stock set forth next to the names of all
underwriters in the preceding table.
Each of drugstore.com, its officers and directors, the selling stockholders
and certain other stockholders has agreed that, without the prior written
consent of Morgan Stanley & Co. Incorporated on behalf of the underwriters, or
otherwise during the period ending at least 90 days after the date of this
prospectus it will not: (1) offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant to purchase, lend or otherwise transfer or
dispose of, directly or indirectly, any shares of common stock or any
securities convertible into or exercisable or exchangeable for common stock;
or (2) enter into any swap or similar arrangement that transfers to another,
in whole or in part, any of the economic consequences of ownership of the
common stock; whether any such transaction described above is to be settled by
delivery of common stock or such other securities after the date of this
prospectus. Morgan Stanley & Co. Incorporated informed drugstore.com that they
do not presently intend to release any person from these agreements.
Our common stock is traded on the Nasdaq National Market under the symbol
"DSCM."
76
<PAGE>
In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock. Specifically, the underwriters may over-allot in
connection with the offering, creating a short position in the common stock
for their own account. In addition, to cover any over-allotments or to
stabilize the price of the common stock, the underwriters may bid for, and
purchase, shares of common stock in the open market. Finally, the underwriting
syndicate may reclaim selling concessions allowed to an underwriter or a
dealer for distributing the common stock in the offering if the syndicate
repurchases previously distributed common stock in transactions to cover
syndicate short positions, in stabilization transactions or otherwise. Any of
these activities may stabilize or maintain the market price of the common
stock above independent market levels. The underwriters are not required to
engage in these activities, and may end any of these activities at any time.
drugstore.com, the selling stockholders and the underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act.
Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. The
following disclosure is included because Thomas Weisel Partners LLC was
organized within the past three years. Since December 1998, Thomas Weisel
Partners LLC has been named as a lead or co-manager on 110 filed public
offerings of equity securities, of which 79 have been completed, and has acted
as a syndicate member in an additional 54 public offerings of equity
securities. Thomas Weisel Partners LLC does not have any material relationship
with us or any of our officers, directors or controlling persons, except with
respect to its contractual relationship with us under the underwriting
agreement entered into in connection with this offering.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
drugstore.com by Shearman & Sterling, San Francisco, California. Certain legal
matters will be passed upon for the underwriters by Wilson Sonsini Goodrich &
Rosati, Professional Corporation, Palo Alto, California.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements as of January 2, 2000 and December 31, 1998 and for the
year ended January 2, 2000 and the period from April 2, 1998 (inception) to
December 31, 1998 and as set forth in their report. We have included our
financial statements in the prospectus and elsewhere in the registration
statement in reliance on Ernst & Young LLP's report, given on their authority
as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC, a registration statement on Form S-1 under the
Securities Act with respect to the shares of common stock offered hereby. This
prospectus does not contain all the information set forth in the registration
statement and the exhibits thereto. For further information with respect to
drugstore.com and such common stock, we refer you to the registration
statement and to the exhibits filed therewith. Statements contained in this
prospectus as to the contents of any contract or other document referred to
are not necessarily complete, and in each instance reference is made to the
copy of such contract or other document filed as an exhibit to the
registration statement, each such statement being qualified in all respects by
such reference. A copy of the registration statement may be inspected by
anyone without charge at the Public Reference Section of the SEC at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of all
or any portion of the registration statement may be obtained from the Public
Reference Section of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549,
upon payment of prescribed fees. The SEC maintains a web site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the SEC.
77
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........................... F-2
Consolidated Balance Sheets................................................. F-3
Consolidated Statements of Operations....................................... F-4
Consolidated Statements of Stockholders' Equity............................. F-5
Consolidated Statements of Cash Flows....................................... F-6
Notes to Consolidated Financial Statements.................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
drugstore.com, inc.
We have audited the accompanying consolidated balance sheets of
drugstore.com, inc. as of January 2, 2000 and December 31, 1998, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the year ended January 2, 2000 and the period from April 2, 1998
(inception) to December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free from material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of
drugstore.com, inc. at January 2, 2000 and December 31, 1998, and the
consolidated results of its operations and its cash flows for the year ended
January 2, 2000 and the period from April 2, 1998 (inception) to December 31,
1998, in conformity with accounting principles generally accepted in the
United States.
Ernst & Young LLP
Seattle, Washington
January 21, 2000, except as to Note 10,
as to which the date is February 2, 2000
F-2
<PAGE>
DRUGSTORE.COM, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
January 2, December 31,
2000 1998
---------- ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents............................ $ 26,526 $14,408
Marketable securities................................ 106,228 --
Accounts receivable, less allowance for doubtful
accounts and sales returns of $251.................. 4,273 --
Inventories.......................................... 2,862 --
Prepaid marketing expenses........................... 8,010 4,317
Other current assets................................. 1,333 520
--------- -------
Total current assets............................... 149,232 19,245
Fixed assets, net of accumulated depreciation of $3,179
and $66............................................... 25,208 2,616
Intangible assets, net of accumulated amortization of
$10,673 and $33....................................... 200,742 230
Prepaid marketing expenses............................. 19,465 --
Note receivable from officer........................... 269 250
Deposits and other assets.............................. 792 176
--------- -------
Total assets........................................... $ 395,708 $22,517
========= =======
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable, including amounts due to related
parties of $4,483
as of January 2, 2000............................... $ 25,788 $ 1,254
Accrued compensation................................. 4,231 327
Accrued marketing expenses, including amounts due to
related party of $1,500............................. 8,520 --
Other current liabilities............................ 1,245 142
Current portion of capital lease obligations......... 2,488 472
--------- -------
Total current liabilities.......................... 42,272 2,195
Capital lease obligations, less current portion........ 2,687 975
Commitments and contingencies (See Note 5)
Stockholders' equity:
Preferred stock, $.0001 par value:
Authorized shares--10,000,000
Series A preferred stock
Issued and outstanding shares--None and 10,000,000
as of January 2, 2000 and December 31, 1998,
respectively...................................... -- 7,986
Series B preferred stock
Issued and outstanding shares--None and 5,446,268
as of January 2, 2000 and December 31, 1998,
respectively...................................... -- 18,237
Common stock, $.0001 par value, stated at amounts paid
in:
Authorized shares--250,000,000
Issued and outstanding shares--43,508,808 and
2,323,000 as of January 2, 2000 and December 31,
1998, respectively................................ 485,377 5,080
Deferred stock-based compensation..................... (10,770) (3,929)
Accumulated deficit................................... (123,858) (8,027)
--------- -------
Total stockholders' equity......................... 350,749 19,347
--------- -------
Total liabilities and stockholders' equity............. $ 395,708 $22,517
========= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
DRUGSTORE.COM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Period from
April 2, 1998
Year Ended (Inception) to
January 2, 2000 December 31, 1998
--------------- -----------------
<S> <C> <C>
Net sales....................................... $ 34,848 $ --
Cost and expenses:
Cost of sales................................. 38,440 --
Marketing and sales........................... 61,492 3,092
Technology and content........................ 14,918 2,178
General and administrative.................... 11,126 1,861
Charitable contribution....................... 3,600 --
Amortization of intangible assets............. 10,640 33
Amortization of stock-based compensation...... 15,375 1,037
---------- -------
Total cost and expenses..................... 155,591 8,201
---------- -------
Operating loss.................................. (120,743) (8,201)
Other income (expense):
Interest income............................... 5,036 177
Interest expense.............................. (124) (3)
---------- -------
Net loss........................................ $ (115,831) $(8,027)
========== =======
Basic and diluted net loss per share............ $ (6.13) $(14.70)
========== =======
Weighted average shares outstanding used to
compute basic and diluted net loss per share... 18,880,969 546,149
========== =======
Pro forma basic and diluted net loss per share
(unaudited).................................... $ (3.73)
==========
Weighted average shares outstanding used to
compute pro forma basic and diluted net loss
per share (unaudited).......................... 31,045,835
==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
DRUGSTORE.COM, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
<TABLE>
<CAPTION>
Preferred Stock
--------------------------------------------------------------------------------------------------------------
Series A Series B Series C Series D Series E
-------------------- --------------------- --------------------- ------------------- ---------------------
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount
----------- ------- ----------- -------- ----------- -------- ---------- ------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial issuance
of common shares
to founders in
exchange for
cash and
intellectual
property........ -- $ -- -- $ -- -- $ -- -- $ -- -- $ --
Issuance of
Series A
preferred stock,
net of offering
costs of $14.... 5,000,000 3,986 -- -- -- -- -- -- -- --
Issuance of
Series A
preferred stock
in exchange for
Technology
License and
Advertising
Agreement....... 5,000,000 4,000 -- -- -- -- -- -- -- --
Issuance of
Series B
preferred stock,
net of offering
costs of $8..... -- 5,446,268 18,237 -- -- -- -- -- --
Exercise of
common stock
options......... -- -- -- -- -- -- -- -- -- --
Deferred stock-
based
compensation.... -- -- -- -- -- -- -- -- -- --
Amortization of
stock-based
compensation.... -- -- -- -- -- -- -- -- -- --
Net loss and
comprehensive
loss............ -- -- -- -- -- -- -- -- -- --
----------- ------- ----------- -------- ----------- -------- ---------- ------- ----------- --------
Balance at
December 31,
1998............ 10,000,000 7,986 5,446,268 18,237 -- -- -- -- -- --
Issuance of
Series C
preferred stock,
net of offering
costs of $19.... -- -- -- -- 4,472,844 34,981 -- -- -- --
Issuance of
Series D
preferred
stock, net of
offering costs
of $18.......... -- -- -- -- -- -- 2,266,289 44,982 -- --
Issuance of
Series E
preferred stock,
net of offering
costs of $396... -- -- -- -- -- -- -- -- 12,282,599 243,567
Conversion of
preferred stock
to common stock
in conjunction
with initial
public
offering........ (10,000,000) (7,986) (5,446,268) (18,237) (4,472,844) (34,981) (2,266,289) (44,982) (12,282,599) (243,567)
Issuance of
common stock for
cash in initial
public offering,
net of offering
costs of
$8,921.......... -- -- -- -- -- -- -- -- -- --
Private
placement of
common stock.... -- -- -- -- -- -- -- -- -- --
Contribution of
common stock to
charitable
foundation...... -- -- -- -- -- -- -- -- -- --
Issuance of
warrants to
purchase common
stock........... -- -- -- -- -- -- -- -- -- --
Exercise of
common stock
options and
warrants........ -- -- -- -- -- -- -- -- -- --
Deferred stock-
based
compensation.... -- -- -- -- -- -- -- -- -- --
Amortization of
stock-based
compensation.... -- -- -- -- -- -- -- -- -- --
Cancellation of
common stock
options......... -- -- -- -- -- -- -- -- -- --
Net loss and
comprehensive
loss............ -- -- -- -- -- -- -- -- -- --
----------- ------- ----------- -------- ----------- -------- ---------- ------- ----------- --------
Balance at
January 2,
2000............ -- $ -- -- $ -- -- $ -- -- $ -- -- $ --
=========== ======= =========== ======== =========== ======== ========== ======= =========== ========
<CAPTION>
Deferred
Stock-
Common Stock based Accumu-
-------------------- Compensa- lated
Shares Amount tion Deficit Total
---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Initial issuance
of common shares
to founders in
exchange for
cash and
intellectual
property........ 2,315,000 $ 113 $ -- $ -- $ 113
Issuance of
Series A
preferred stock,
net of offering
costs of $14.... -- -- -- -- 3,986
Issuance of
Series A
preferred stock
in exchange for
Technology
License and
Advertising
Agreement....... -- -- -- -- 4,000
Issuance of
Series B
preferred stock,
net of offering
costs of $8..... -- -- -- -- 18,237
Exercise of
common stock
options......... 8,000 1 -- -- 1
Deferred stock-
based
compensation.... -- 4,966 (4,966) -- --
Amortization of
stock-based
compensation.... -- -- 1,037 -- 1,037
Net loss and
comprehensive
loss............ -- -- -- (8,027) (8,027)
---------- --------- ---------- ---------- ----------
Balance at
December 31,
1998............ 2,323,000 5,080 (3,929) (8,027) 19,347
Issuance of
Series C
preferred stock,
net of offering
costs of $19.... -- -- -- -- 34,981
Issuance of
Series D
preferred
stock, net of
offering costs
of $18.......... -- -- -- -- 44,982
Issuance of
Series E
preferred stock,
net of offering
costs of $396... -- -- -- -- 243,567
Conversion of
preferred stock
to common stock
in conjunction
with initial
public
offering........ 34,468,000 349,753 -- -- --
Issuance of
common stock for
cash in initial
public offering,
net of offering
costs of
$8,921.......... 5,750,000 94,579 94,579
Private
placement of
common stock.... 555,555 10,000 -- -- 10,000
Contribution of
common stock to
charitable
foundation...... 200,000 3,600 -- -- 3,600
Issuance of
warrants to
purchase common
stock........... -- 24 -- -- 24
Exercise of
common stock
options and
warrants........ 212,253 125 -- -- 125
Deferred stock-
based
compensation.... -- 22,630 (22,630) -- --
Amortization of
stock-based
compensation.... -- -- 15,375 -- 15,375
Cancellation of
common stock
options......... -- (414) 414 -- --
Net loss and
comprehensive
loss............ -- -- -- (115,831) (115,831)
---------- --------- ---------- ---------- ----------
Balance at
January 2,
2000............ 43,508,808 $485,377 $(10,770) $(123,858) $ 350,749
========== ========= ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
DRUGSTORE.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Period from
April 2, 1998
Year Ended (Inception) to
January 2, 2000 December 31, 1998
--------------- -----------------
<S> <C> <C>
Operating Activities:
Net loss..................................... $(115,831) $(8,027)
Adjustments to reconcile net loss to net cash
used in operating activities:
Non-cash expenses:
Depreciation............................... 3,242 57
Marketing and sales........................ 4,947 58
Charitable contributions................... 3,600 --
Amortization of intangible assets.......... 10,640 33
Amortization of stock-based compensation... 15,375 1,037
Changes in:
Accounts receivable........................ (4,273) --
Inventories................................ (2,862) --
Prepaid marketing expenses................. (161) (552)
Other current assets....................... (857) (484)
Deposits and other assets.................. (616) (176)
Accounts payable and accrued expenses...... 30,079 1,723
Other...................................... (103) --
--------- -------
Net cash used in operating activities........ (56,820) (6,331)
Investing Activities:
Purchases of marketable securities........... (881,072) --
Sales of marketable securities............... 774,844 --
Purchases of fixed assets.................... (13,630) (1,202)
Purchases of intangible assets............... (95) (90)
Issuance of note receivable to officer....... -- (250)
--------- -------
Net cash used in investing activities........ (119,953) (1,542)
Financing Activities:
Proceeds from sales of common stock.......... 104,578 90
Proceeds from exercise of stock options and
warrants.................................... 126 1
Net proceeds from sales of preferred stock... 84,598 22,223
Proceeds from capital lease obligations...... 538 --
Principal payments on capital lease
obligations................................. (949) (33)
--------- -------
Net cash provided by financing activities.... 188,891 22,281
--------- -------
Net increase in cash and cash equivalents.... 12,118 14,408
Cash and cash equivalents at beginning of
period...................................... 14,408 --
--------- -------
Cash and cash equivalents at end of period... $ 26,526 $14,408
========= =======
Supplemental Cash Flow Information:
Cash paid for interest....................... $ 108 $ 48
Equipment acquired through capital lease
agreements.................................. $ 4,138 $ 1,480
Issuance of common stock in exchange for
intellectual property....................... $ -- $ 23
Issuance of Series A preferred stock in
exchange for technology license and
advertising agreement....................... $ -- $ 4,000
Issuance of Series D preferred stock in
exchange for cable television advertising... $ 5,000 $ --
Issuance of Series E preferred stock in
exchange for access to insurance coverage,
advertising commitments, and a vendor
agreement................................... $ 233,932 $ --
Issuance of warrants to purchase common stock
in exchange for intangible asset............ $ 24 $ --
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
DRUGSTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company and Summary of Significant Accounting Policies
The Company
drugstore.com, inc. and its subsidiaries, (collectively, the Company) are
engaged in the development of Internet-based retailing opportunities focused
on filling needs for health, wellness, beauty, personal care and pharmacy
products and related information. The Company was incorporated on April 2,
1998 and launched its Web store and commenced commercial operations on
February 24, 1999. The Company was previously considered a development stage
company.
All customer orders are processed through the Company's Web store. The
Company has contracts with RxAmerica LLC (RxAmerica) and Rite Aid Corporation
(Rite Aid) to purchase and distribute substantially all of its pharmaceutical
products, and with Walsh Distribution, Inc. (Walsh) to purchase a majority of
its non-pharmaceutical products. Under the terms of the Rite Aid agreement,
customers may order existing Rite Aid prescriptions for pick up at a local
Rite Aid store.
In the first quarter of 2000, the Company opened its own distribution
center and will be transitioning its distribution capabilities for
pharmaceutical and non-pharmaceutical products from third-party fulfillment
partners to its own distribution center. In addition, customers will be able
to order new prescriptions on the Company's Web store and pick them up at a
local Rite Aid store or have the prescriptions shipped from the Company's
distribution center to the customer.
Principles of Consolidation and Basis of Presentation
The accompanying consolidated financial statements include those of
drugstore.com, inc. and its subsidiaries. All material intercompany
transactions and balances have been eliminated.
On January 1, 1999, the Company adopted a 52/53 week fiscal year ending on
the Sunday closest to December 31. The 1999 fiscal year ends on January 2,
2000, with each of the fiscal quarters representing a 13-week period. The
effect of the change on prior periods is insignificant.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements.
Actual results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less at the date of purchase to be cash equivalents.
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of its holdings of cash and
marketable securities. The Company's credit risk is managed by investing its
cash and marketable securities in high-quality money market instruments and
securities of the U.S. government and its agencies, foreign governments and
high-quality corporate issuers. The Company's credit risk is managed through
monitoring the stability of the financial institutions utilized and
diversification of its financial resources. At January 2, 2000, the Company
has no significant concentrations of credit risk.
F-7
<PAGE>
DRUGSTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Financial Instruments
Financial instruments consist of cash and cash equivalents, marketable
securities and capital lease obligations. The fair value of all financial
instruments approximates the carrying amount based on the current rate offered
for similar instruments.
At January 2, 2000, marketable securities consist primarily of commercial
paper and short-term obligations and corporate notes and bonds and were
carried at cost, which approximates market value. Unrealized holding gains and
losses at January 2, 2000 were not significant. Approximately $8,983,000 of
the Company's marketable securities mature in greater than one year.
Accounts Receivable
Accounts receivable consists primarily of the net amounts to be collected
from third parties including managed care organizations and pharmacy benefit
management and insurance companies as well as amounts collectible related to
credit card purchases. Under the terms of the Company's agreement with Rite
Aid, Rite Aid collects insurance reimbursement payments on the Company's
behalf. As of January 2, 2000, accounts receivable includes $3,839,000 being
collected by Rite Aid on the Company's behalf. Accounts receivable is recorded
net of an allowance for doubtful accounts and sales returns.
Inventories
Inventories are stated at the lower of cost (using the weighted average
cost method) or market. The Company has contracts with RxAmerica and Rite Aid
to purchase and distribute substantially all of its pharmaceutical products
and with Walsh to purchase a majority of its non-pharmaceutical products. The
agreement with RxAmerica is for a one-year term ending February 2000, which
will automatically extend for an additional year unless either party gives
written notice of termination. The agreement with Walsh ends on March 31,
2000. This agreement is extendible for an additional three months at the sole
discretion of the Company. The agreement includes a penalty not to exceed $1
million if the Company does not process a minimum number of orders through
Walsh. The Company is currently in the process of establishing its own
distribution center for both pharmaceutical and non-pharmaceutical products.
The Company is obligated to purchase all of its pharmaceutical inventory for
its own distribution center from Rite Aid unless it can obtain better overall
terms from other vendors.
Fixed Assets
Fixed assets are stated at cost less accumulated depreciation and
amortization, which includes the amortization of assets recorded under capital
leases. Depreciation and amortization is provided using the straight-line
method over the estimated useful lives of the related assets, which range from
two to seven years. Fixed assets purchased under capital leases and leasehold
improvements are amortized over the shorter of the lease term or estimated
useful life.
Intangible Assets
Intangible assets consists of assets received in conjunction with
agreements between the Company and Rite Aid and GNC including access to
insurance coverage and a vendor agreement, and other intangibles including a
technology license agreement, domain names and trademarks. Intangible assets
are being amortized over their expected useful lives, generally ten years.
Long-Lived Assets
Long-lived assets and intangible assets are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. Impairment is measured by comparing
F-8
<PAGE>
DRUGSTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the carrying value of the long-lived assets to the estimated undiscounted
future cash flows expected to result from use of the assets and their ultimate
disposition. In circumstances where impairment is determined to exist, the
Company will write down the asset to its fair value based on the present value
of estimated expected future cash flows. To date, no such impairment has been
indicated.
Net Sales
Net sales includes gross revenues from sales of product and related
shipping fees, net of discounts and provision for sales returns, third-party
reimbursement and other allowances. The Company generally refunds to customers
all or a portion of the selling price, including related shipping fees if
applicable, in the event a customer is not satisfied with the product
purchased or the quality of customer service provided. Sales returns and
allowances have not been significant to date.
Revenues from sales of product shipped to customers, and related shipping
fees, are recognized upon shipment. The Company arranges for shipment of
product to customers through various contractual relationships with third
party fulfillment partners. Revenues from sales of certain pharmaceutical
products ordered through the Company's Web store for delivery at a Rite Aid
store are recognized when the product is delivered to the customer.
Upon receiving and validating a customer's order for products that will be
purchased by the Company from a fulfillment partner, and subsequently shipped
or delivered to the customer by that fulfillment partner, the Company submits
relevant order information and, if applicable, shipping instructions to that
fulfillment partner for processing. The Company believes it acts as a
principal in connection with orders shipped or delivered to customers by
fulfillment partners on the Company's behalf because, among other things, the
Company establishes the retail prices of its non-pharmaceutical and non-
insured pharmaceutical products (and accepts contractual reimbursement amounts
from third-party payors for insured pharmaceutical products) and shipping
fees; contractually takes title to, and assumes risk of loss of, products
prior to their shipment; bears credit and collection risk from the customer
or, in the case of certain pharmaceutical sales, third-party payors; and bears
the risk that the product will be returned. Title to products ordered by
customers and shipped or delivered by a fulfillment partner passes to the
Company at the fulfillment partners' distribution center or, for certain
pharmaceutical sales, when the pharmaceuticals are made available for customer
retrieval at a Rite Aid store.
Net sales also includes consignment service fees earned under arrangements
where the Company does not take title to the inventory and cannot establish
pricing. Consignment service fees earned have not been significant to date.
Net sales for the fiscal year ended January 2, 2000 included $18,782,000
related to pharmaceutical products and $16,066,000 related to non-
pharmaceutical products and other.
Cost of Sales
Cost of sales consists primarily of the cost of products sold to our
customers, including allowances for shrinkage and slow moving and expired
inventory, as well as outbound and inbound shipping costs. Payments that the
Company expects to receive from vendors in connection with joint merchandising
activities, net of related costs, will be netted against cost of sales in the
period in which the related inventory is sold.
Marketing and Sales
Marketing and sales expenses consist primarily of fulfillment and order
processing expenses and customer acquisition and marketing expenses.
Fulfillment and order processing expenses include distribution center
equipment and packaging supplies, per-unit fulfillment fees charged by third
parties, and payroll and related
F-9
<PAGE>
DRUGSTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
expenses for personnel engaged in customer service, purchasing, and
distribution and fulfillment activities, including pharmacists engaged in
prescription verification activities and warehouse personnel. These expenses
also include rent expense and depreciation related to the Company's
distribution center.
Customer acquisition and marketing expenses include advertising and
marketing expenses, promotional expenditures, credit card processing fees and
payroll and related expenses for personnel engaged in marketing and
merchandising activities. Promotional expenses include the cost of certain
items the Company gives away to our customers in connection with the Company's
customer acquisition and retention activities and branding campaign. These
items include sample merchandise in sizes or quantities not normally sold on
the Company's Web site, certain drugstore.com-branded products and the cost of
products given away in the Company's one cent sales promotions.
Advertising production costs are expensed as incurred. Costs of
communicating advertising associated with television, radio, print and other
media are expensed when such services are used. Costs associated with Web
portal advertising contracts are amortized on a straight-line basis over the
period such advertising is expected to be used. Advertising expense for the
year ended January 2, 2000 and the period ended December 31, 1998, was
$28,567,000 and $1,638,000, respectively.
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 the Company's 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.
Income Taxes
The Company accounts for income taxes under the liability method. Under the
liability method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to be recovered. Valuation
allowances are established, when necessary, to reduce deferred tax assets to
the amounts expected to be realized.
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees (APB No. 25), and related
interpretations, in accounting for employee stock options rather than the
alternative fair value accounting allowed by Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation (SFAS No. 123). APB
No. 25 provides that the compensation expense relative to the Company's
employee stock options is measured based on the intrinsic value of the stock
option. SFAS No. 123 requires companies that continue to follow APB No. 25 to
provide a pro forma disclosure of the impact of applying the fair value method
of SFAS No. 123 (see Note 8). The Company accounts for stock issued to non-
employees in accordance with the provisions of SFAS No. 123 and the Emerging
Issues Task Force consensus in Issue No. 96-18, Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services.
Net Loss Per Share
Net loss per share is computed using the weighted average number of shares
of common stock outstanding less the number of shares subject to repurchase.
Shares associated with stock options, warrants and the
F-10
<PAGE>
DRUGSTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
convertible preferred stock are not included in the calculation of diluted net
loss per share because they are antidilutive.
Pro forma net loss per share is computed using the weighted average number
of common shares outstanding, including the pro forma effects of the automatic
conversion of all outstanding convertible preferred stock into shares of
common stock effective upon the closing of the Company's initial public
offering as if such conversion occurred at the date of original issuance.
The following table sets forth the computation of basic and diluted net
loss per share and pro forma basic and diluted net loss per share for the
periods indicated:
<TABLE>
<CAPTION>
Period from
April 2, 1998
Year Ended (Inception) to
January 2, 2000 December 31, 1998
--------------- -----------------
<S> <C> <C>
Numerator:
Net loss............................... $(115,831,000) $(8,027,000)
============= ===========
Denominator:
Weighted average common shares
outstanding........................... 20,005,233 1,462,311
Less weighted average common shares
issued subject to repurchase
agreements............................ (1,124,264) (916,162)
------------- -----------
Denominator for basic and diluted
calculation........................... 18,880,969 546,149
===========
Weighted average effect of pro forma
conversion of Securities:
Series A convertible preferred
stock............................... 5,694,824
Series B convertible preferred
stock............................... 3,101,553
Series C convertible preferred
stock............................... 2,193,765
Series D convertible preferred
stock............................... 438,437
Series E convertible preferred
stock............................... 736,287
-------------
Denominator for pro forma basic and
diluted calculation (unaudited)....... 31,045,835
=============
Net loss per share:
Basic and diluted...................... $ (6.13) $ (14.70)
============= ===========
Pro forma basic and diluted
(unaudited)........................... $ (3.73)
=============
</TABLE>
At January 2, 2000 and December 31, 1998 there were 5,850,658 and 1,515,334
stock options, respectively, that were excluded from the computation of actual
and pro forma diluted net loss per share as their effect was antidilutive. If
the Company had reported net income, the calculation of these per share
amounts would have included the dilutive effect of these common stock
equivalents using the treasury stock method.
Segment and Geographic Information
The Company operates in one principal business segment in the United
States. No geographic area accounted for more than 10% of net sales in the
year ended January 2, 2000. There were no transfers between geographic areas
during the year ended January 2, 2000. All of the Company's operating results
and identifiable assets are in the United States.
New Accounting Pronouncements
In December 1999, the Securities and Exchange Commission staff released
Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements
(SAB No. 101), which provides guidance on the
F-11
<PAGE>
DRUGSTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
recognition, presentation and disclosure of revenue in financial statements.
SAB No. 101 did not impact the Company's revenue recognition policies.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 is effective for fiscal years
beginning after June 15, 2000. SFAS No. 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in
the fair value of derivatives are recorded each period in current earnings or
other comprehensive income, depending on whether a derivative is designed as
part of a hedge transaction and, if it is, the type of hedge transaction. The
Company does not expect that the adoption of SFAS No. 133 will have a material
impact on its financial statements because it does not currently hold any
derivative instruments.
Reclassifications
Certain prior year amounts have been reclassified to conform with the
current year presentation.
2. Fixed Assets
Fixed assets consists of the following:
<TABLE>
<CAPTION>
January 2, December 31,
2000 1998
---------- ------------
(in thousands)
<S> <C> <C>
Computers and equipment.............................. $ 9,208 $ 492
Purchased software................................... 2,148 711
Furniture and fixtures............................... 102 20
Leasehold improvements............................... 2,694 89
Construction in progress............................. 14,235 1,370
------- ------
28,837 2,682
Less accumulated depreciation........................ (3,179) (66)
------- ------
$25,208 $2,616
======= ======
</TABLE>
Included in computers and equipment and purchased software as of January 2,
2000 are assets acquired under capital leases with an original cost of
approximately $5,791,000 and $365,000, respectively. Included in construction
in progress and purchased software as of December 31, 1998 are assets acquired
under capital leases with an original cost of $1,115,000 and $385,000,
respectively. Accumulated amortization on the leased assets as of January 2,
2000 and December 31, 1998 was approximately $794,000 and $10,000,
respectively. The Company expects to spend approximately an additional $15
million in order to place the fixed assets under construction as of January 2,
2000 into service.
3. Intangible Assets
Intangible assets consists of the following:
<TABLE>
<CAPTION>
January 2, December 31,
2000 1998
---------- ------------
(in thousands)
<S> <C> <C>
Access to insurance.................................. $182,042 $--
Vendor agreements.................................... 28,990 --
Technology license, domain names and other........... 383 263
-------- ----
211,415 263
Less accumulated amortization........................ (10,673) (33)
-------- ----
$200,742 $230
======== ====
</TABLE>
F-12
<PAGE>
DRUGSTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Note Receivable from Officer
On December 3, 1998, the Company loaned an officer $250,000 evidenced by a
full recourse promissory note bearing 7% interest.
5. Commitments and Contingencies
The Company leases office and distribution center facilities under
noncancelable operating leases, which call for fixed rental payments through
2012. In addition, the Company leases various office equipment under operating
leases. The Company has the option to extend some of these leases for
additional terms ranging from three to five years. Total rent expense under
operating leases for the year ended January 2, 2000 and period ended December
31, 1998 approximated $2,054,000 and $127,000, respectively.
The Company also leases computer equipment under noncancelable capital
leases. Capital lease obligations bear interest at rates ranging from 4% to 7%
and mature 24 to 36 months from the date of funding. At January 2, 2000, the
Company had additional financing available under certain agreements of
approximately $2.8 million.
The Company has entered into certain advertising agreements with various
Web portals, including America On-Line, MSNBC and the Discovery Channel, which
require the Company to make fixed payments to such portals over the term of
the agreements. The costs associated with these Web portal advertising
contracts are amortized on a straight-line basis over the period such
advertising is expected to be used.
Subsequent to January 2, 2000, the Company provided letters of credit
totaling $16,430,000 and collateralized by an equivalent amount of cash and
cash equivalents as security for leases and certain other operating
agreements. If the Company's cash, cash equivalents and marketable securities
balance falls below $25,000,000, the Company is contractually obligated to
increase these letters of credit and the related cash collateral to
$20,680,000. At December 31, 1998, there were no letters of credit
outstanding.
Future minimum commitments at January 2, 2000 are as follows:
<TABLE>
<CAPTION>
Capital Operating Marketing
Leases Leases Agreements
------- --------- ----------
(in thousands)
<S> <C> <C> <C>
2000......................................... $ 2,736 $ 3,938 $7,781
2001......................................... 1,879 4,156 239
2002......................................... 899 7,509 166
2003......................................... -- 7,018 166
2004......................................... -- 6,689 138
Thereafter................................... -- 36,665 --
------- ------- ------
Total minimum lease payments................. 5,514 $65,975 $8,490
======= ======
Less amounts representing interest........... (339)
-------
Present value of minimum payments............ 5,175
Less current portion of capital lease
obligations................................. (2,488)
-------
Noncurrent portion of capital lease
obligations................................. $ 2,687
=======
</TABLE>
The Company is party to routine claims and litigation incidental to its
business. The Company believes the ultimate resolution of these routine
matters will not have a material adverse effect on its financial position and
results of operations or cash flows.
F-13
<PAGE>
DRUGSTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Income Taxes
The Company did not provide any current or deferred United States federal
income tax provision or benefit for any of the periods presented because it
has experienced operating losses since inception. The Company provided a full
valuation allowance on the net deferred tax asset, consisting primarily of net
operating loss carryforwards and research and development credit
carryforwards, because management has determined that it is more likely than
not that the Company will not earn income sufficient to realize the deferred
tax assets during the carryforward period.
At January 2, 2000, the Company had approximately $98.4 million of net
operating loss carryforwards that will expire beginning in 2018. In 1999, due
to the issuance and sale of Series D and Series E preferred stock, the Company
incurred ownership changes pursuant to applicable regulations in effect under
the Internal Revenue Code of 1986, as amended. Therefore, the Company's use of
losses incurred through the date of these ownership changes will be limited
during the carryforward period. The Company estimates that the use of
approximately $53.9 million of net operating losses incurred through the date
of the ownership change would be limited to approximately $6.6 million per
year in order to offset future taxable income. To the extent that any single-
year loss is not utilized to the full amount of the limitation, such unused
loss is carried over to subsequent years until the earlier of its utilization
or the expiration of the relevant carryforward period. The initial public
offering did not cause an additional ownership change that would result in
additional limitations on the utilization of net operation loss carryforward.
Deferred tax assets reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Since the Company's
utilization of these deferred tax assets is dependent on future profits which
are not assured, a valuation allowance equal to the deferred tax assets has
been provided. Significant components of the Company's deferred tax assets are
as follows:
<TABLE>
<CAPTION>
January 2, December 31,
2000 1998
---------- ------------
(in thousands)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward................... $ 33,449 $ 2,291
Research and development credit carryforward...... 32 32
Amortization of intangible assets................. 1,547 --
Charitable contribution........................... 1,224
Other temporary differences....................... 279 79
-------- -------
Total gross deferred tax assets..................... 36,531 2,402
Less valuation allowance............................ (36,531) (2,402)
-------- -------
Net deferred tax assets............................. $ -- $ --
======== =======
</TABLE>
A reconciliation of income taxes computed at the statutory rate to the
income tax amount recorded is as follows:
<TABLE>
<CAPTION>
January 2, December 31,
2000 1998
---------- ------------
(in thousands)
<S> <C> <C>
Income tax benefit at statutory rate................. $ 39,378 $ 2,729
Stock-based compensation............................. (5,228) (351)
Other permanent differences.......................... (21) (8)
Research and development credit...................... -- 32
Increase in valuation allowance...................... (34,129) (2,402)
-------- -------
Income tax benefit................................... $ -- $ --
======== =======
</TABLE>
F-14
<PAGE>
DRUGSTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Stockholders' Equity
Issuance of Warrants
In February 1999, the Company issued a warrant to purchase 10,000 shares of
its common stock at $7.83 per share in exchange for the right to use the 1-
800-DRUGSTORE and related iterations of telephone numbers. Such warrant was
exercised in July 1999. The fair value of such warrant was estimated at
$24,000 and was recorded as an intangible asset.
Convertible Preferred Stock
In June and August 1998, the Company issued 10,000,000 shares of Series A
preferred stock in a private placement offering in exchange for gross cash
proceeds of $4,000,000, and a Technology License and Advertising Agreement
with Amazon.com that provides for the right to license certain technology and
receive certain technological and advertising support from Amazon.com. In
addition, the Company agreed to license its technology to Amazon.com and
participate in mutually agreed upon advertising activities. No cash payments
are required under the Technology License and Advertising Agreement with
Amazon.com. The Company valued the right to license certain technology and
receive such technological and advertising support at $4,000,000 based on the
value of Series A preferred stock issued concurrently for cash. Such value was
allocated to prepaid marketing expense, license rights and prepaid technical
consulting services in the amount of $3,765,000, $150,000 and $85,000,
respectively, based on their estimated fair value. The prepaid marketing
expense was amortized over five months commencing in February 1999. The
license rights and prepaid technical consulting are being amortized over five
years and approximately eight months, respectively, commencing on the date of
the agreement. For the year ended January 2, 2000 and the period ended
December 31, 1998, the Company recognized expenses under such agreement
totaling $3,830,000 and $58,000 respectively.
In October, November and December 1998, the Company issued 5,446,268 shares
of Series B preferred stock in a private placement offering in exchange for
gross cash proceeds of $18,245,000.
In January and March 1999, the Company issued 4,472,844 shares of Series C
preferred stock in a private placement offering in exchange for gross cash
proceeds of $35,000,000.
In June 1999, the Company issued 2,266,289 shares of Series D preferred
stock to a new investor in exchange for $40 million in cash and $5 million in
cable television advertising obligations. The cable television advertising is
expected to be aired within the next 12 months and has been classified as a
current asset in prepaid marketing expenses.
In July 1999, the Company consummated a series of agreements with Rite Aid
and General Nutrition Companies, Inc. (GNC) to issue 12,282,599 shares of
Series E preferred stock in exchange for an aggregate of $10 million in cash
and other consideration, including access to insurance coverage, advertising
commitments and a vendor agreement with an estimated fair value of $233.9
million. The $233.9 million non-cash portion of the consideration from the
Rite Aid and GNC agreements was allocated to the following components based on
a valuation obtained from an independent valuation expert (in millions):
<TABLE>
<S> <C>
Access to insurance coverage..................................... $182.0
Advertising commitments.......................................... 22.9
Vendor agreement................................................. 29.0
------
$233.9
======
</TABLE>
F-15
<PAGE>
DRUGSTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The access to insurance coverage and the vendor agreement have been
classified as intangible assets and the advertising commitments have been
classified within prepaid marketing expenses. All of the assets are to be
amortized on a straight-line basis over their contractual life of 10 years.
Common Stock
On July 27, 1999, the Company completed its initial public offering of
5,750,000 shares of common stock resulting in approximately $94.6 million in
net proceeds. In connection with the closing of the offering, all of the
outstanding convertible preferred stock was converted into an aggregate of
34,468,000 shares of common stock. Through a separate private placement
transaction, the Company also issued 555,555 shares of common stock to
Amazon.com, Inc., resulting in proceeds of approximately $10 million.
Subsequent to the Company's initial public offering, the total number of
authorized shares was changed to 260,000,000 shares, of which 250,000,000
shares are common stock and 10,000,000 shares are undesignated preferred
stock. Additionally, the par value of the Company's common and preferred stock
was changed to $.0001 per share. The accompanying financial statements have
been restated to reflect the change in the par value of the common stock.
A portion of the Company's shares outstanding are subject to repurchase by
the Company over a three year period. As of January 2, 2000, there were
787,500 shares subject to repurchase rights at $0.04 per share.
In July 1999, the Company donated 200,000 shares of its common stock to the
drugstore.com Foundation, a separately organized 501(c)(3) organization in
which the Company is neither a trustee or beneficiary, and recognized the fair
market value of the shares donated as a $3,600,000 charitable contribution
expense.
8. Employee Benefit Plans
Defined Contribution Plan
Effective April 1999, the Company adopted a defined contribution retirement
plan under Section 401(k) of the Internal Revenue Code which covers
substantially all employees. Eligible employees may contribute amounts to the
plan, via payroll withholding, subject to certain limitations. Under the
401(k) plan, employees may elect to reduce their current compensation by up to
the statutorily prescribed annual limit ($10,000 in 1999) and to have the
amount of such reduction contributed to the 401(k) plan. The 401(k) plan
permits, but does not require, additional matching contributions to the 401(k)
plan by the Company on behalf of all participants in the 401(k) plan. To date,
the Company has not made any matching contributions to the 401(k) plan.
1998 Stock Plan
Under the terms of the 1998 stock plan, the board of directors may grant
incentive and nonqualified stock options to employees, officers, directors,
agents, consultants, and independent contractors of the Company. In connection
with the introduction of the 1998 stock plan, 2,735,000 shares of common stock
were reserved for future issuance. During 1999, the Company increased the
number of shares reserved for future issuance under such plan by 8,265,000,
bring the total shares reserved for future issuance to 11,000,000. Generally,
the Company grants stock options with exercise prices equal to the fair market
value of the common stock on the date of grant, as determined by the board of
directors. Options generally vest over a four to five year period and expire
ten years from the date of grant.
F-16
<PAGE>
DRUGSTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes activity under the Company's stock plan:
<TABLE>
<CAPTION>
Outstanding Options
---------------------------
Shares Available Number of Weighted-Average
for Grant Shares Exercise Price
---------------- --------- ----------------
<S> <C> <C> <C>
Initial authorization....... 2,735,000 -- --
Options granted............. (1,683,584) 1,683,584 $ .17
Options exercised........... -- (8,000) $ .12
Options canceled............ 160,250 (160,250) $ .04
---------- ---------
Outstanding at December 31,
1998......................... 1,211,666 1,515,334 $ .18
Additional authorizations... 8,265,000 -- --
Options granted............. (4,958,075) 4,958,075 $19.99
Options exercised........... -- (202,253) $ .23
Options canceled............ 420,498 (420,498) $ 6.84
---------- ---------
Outstanding at January 2,
2000......................... 4,939,089 5,850,658 $16.49
========== =========
</TABLE>
The following table summarizes information regarding stock options
outstanding and exercisable as of January 2, 2000:
<TABLE>
<CAPTION>
Outstanding Options
-------------------------- Vested and
Weighted-Average Exercisable
Number of Remaining Number of
Exercise Price Shares Contractual Life Shares
-------------- --------- ---------------- -----------
<S> <C> <C> <C>
$.01 to $.45 2,041,308 8.9 years 285,375
$6.28 to $9.00 1,187,325 9.4 years 35,000
$16.00 to $28.50 370,050 9.6 years --
$31.69 to $38.75 2,030,950 9.9 years 43,334
$40.94 to $67.50 221,025 9.7 years 200
--------- -------
Total 5,850,658 9.4 years 363,909
========= =======
</TABLE>
Under APB No. 25, no compensation expense is recognized when the exercise
price of the Company's employee stock options equals the fair value of the
underlying stock on the date of grant. Deferred stock-based compensation is
recorded for those situations where the exercise price of an option or the
purchase price of restricted stock was lower than the deemed fair value for
financial reporting purposes of the underlying common stock. For the year
ended January 2, 2000 and the period from April 2, 1998 (inception) to
December 31, 1998, the Company recorded aggregate deferred stock-based
compensation of $22,630,000 and $4,966,000, respectively. The deferred stock-
based compensation is being amortized over the vesting period of the
underlying options and restricted stock. For the year ended January 2, 2000
and the period from April 2, 1998 (inception) to December 31, 1998, total
amortization of stock-based compensation recognized was $15,375,000 and
$1,037,000, respectively. Amortization of stock-based compensation is
allocable to employees in the following expense categories:
<TABLE>
<CAPTION>
Period from
April 2, 1998
Year Ended (Inception) to
January 2, December 31,
2000 1998
---------- --------------
<S> <C> <C>
Marketing and sales............................ 24% 18%
Technology and content......................... 21 20
General and administrative..................... 55 62
--- ---
100% 100%
=== ===
</TABLE>
F-17
<PAGE>
DRUGSTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Had the stock-based compensation for the Company's stock option plan and
restricted stock agreements been determined based on the Black-Scholes model
using the multiple-option approach, the Company's net loss would have been
adjusted to the following pro forma amount for the year ended January 2, 2000
and the period ended December 31, 1998:
<TABLE>
<CAPTION>
Period from
April 2, 1998
Year ended (Inception) to
January 2, December 21,
2000 1998
---------- --------------
(in thousands, except
per share data)
<S> <C> <C>
Net loss--as reported.............................. $(115,831) $(8,027)
Incremental pro forma compensation expense under
SFAS No. 123...................................... (2,589) (12)
--------- -------
Net loss--pro forma................................ $(118,420) $(8,039)
========= =======
Basic and diluted net loss per share--as reported.. $ (6.13) $(14.70)
========= =======
Basic and diluted net loss per share--pro forma.... $ (6.27) $(14.72)
========= =======
Pro forma basic and diluted net loss per share--as
reported.......................................... $ (3.73)
---------
Pro forma basic and diluted net loss per share--pro
forma............................................. $ (3.81)
=========
</TABLE>
The weighted-average fair value of options granted during the year ended
January 2, 2000 and the period from April 2, 1998 (inception) to December 31,
1998 was $14.87 and $1.41, respectively, for options granted at fair market
value. The initial impact on pro forma net loss may not be representative of
compensation expense in future years, when the effect of amortization of
multiple awards would be reflected in pro forma earnings.
The fair value at each option grant is estimated on the date of grant using
the Black-Scholes option pricing model, assuming no expected dividends. The
volatility of the Company's stock prior to its initial public offering was
estimated based on a review of a peer group of Internet companies at a
comparable developmental stage. Subsequent to the Company's initial public
offering, the volatility of the Company's stock was based on actual stock
prices subsequent to the initial month of trading. The following weighted
average assumptions were utilized in arriving at the fair value of each option
grant:
<TABLE>
<CAPTION>
Period from
July 27, January 1, April 2, 1998
1999 to 1999 to (Inception) to
January 2, July 26, December 31,
2000 1999 1998
---------- ---------- --------------
<S> <C> <C> <C>
Average risk-free interest
rate........................ 6.5% 6.5% 4.5%
Average expected life........ 3 years 3 years 3 years
Volatility................... 80% 50% 50%
</TABLE>
1999 Employee Stock Purchase Plan
The Company's 1999 employee stock purchase plan was adopted by the board of
directors in 1999, and was effective upon the completion of the Company's
initial public offering of its common stock. A total of 500,000 shares of
common stock has been reserved for issuance under the employee stock purchase
plan plus an annual increase on the first day of each of the fiscal years
beginning in 2000, 2001, 2002, 2003 and 2004 equal to the lesser of (1)
500,000 shares, (2) three percent (3%) of our shares outstanding on the last
day of the immediate preceding fiscal year, or (3) such lesser number of
shares as is determined by the board of directors. Eligible employees may
purchase common stock at 85% of the lesser of the fair market value of the
Company's common stock on the first or the last day of the applicable six
month purchase period.
F-18
<PAGE>
DRUGSTORE.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Related Parties
The Company purchased $10,636,000 of inventory and fulfillment-related
services and recognized $1,145,000 of marketing and sales expense during the
year ended January 2, 2000 in connection with the agreements between the
Company and Rite Aid Corporation and General Nutrition Companies, Inc.
Approximately $4,483,000 relating to the purchase of inventory and
fulfillment-related services was payable as of January 2, 2000.
The Company recognized marketing and sales expense in connection with its
strategic relationship with Amazon.com totaling approximately $5,265,000 and
$58,000 for the year ended January 2, 2000 and the period ended December 31,
1998, respectively. Approximately $1,500,000 of these expenses were payable as
of January 2, 2000.
10. Subsequent Events
Proposed Secondary Public Offering of Common Stock
In January 2000, the board of directors authorized the Company to proceed
with a secondary public offering of its common stock.
Acquisition of Beauty.com
On February 2, 2000, the Company acquired Beauty.com, Inc., a leading
online retailer of prestige beauty products, and entered into an agreement to
retain the employment of its founder, for consideration totaling approximately
$40.7 million comprised of approximately 1.3 million shares of the Company's
stock. The Company intends to account for the acquisition as a purchase.
Agreements with Amazon.com
On January 24, 2000, the Company reached an agreement with Amazon.com to
provide certain advertising services over a three year term for $105 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 million in a private
placement transaction.
F-19
<PAGE>
The fourth page of the gatefold includes:
drugstore.com
Makes Shopping Easy
The following text is placed on the top left of the page:
HELP ON A PERSONAL LEVEL
The advantage of the Internet allows drugstore.com to offer customers help on a
personal level. Customers can shop from their home or office any time of the day
or night. They can get useful information to make informed product decisions.
They can ask a pharmacist questions in privacy. drugstore.com provides the
information and interaction that makes shopping easy.
[PICTURE OF THE SHOPPING ADVISOR PAGE]
[PICTURE OF THE SOLUTIONS PAGE]
[PICTURE OF A YOUR LIST PAGE]
[PICTURE OF THE QUICK LISTS PAGE]
The following text appears to the left of the picture of the Shopping Advisor
page:
SHOPPING ADVISOR
drugstore.com helps customers who are not sure about what product to buy. The
customer provides information about what he or she needs, and the Shopping
Advisors help identify the right products.
The following text appears to the right of the picture of the Solutions page:
SOLUTIONS
An easy way for customers to find the information they need in order to make
informed product decisions, the Solutions area includes Ask Your Pharmacist,
Health and Wellness Guides, Shopping Advisors and more.
The following text appears under the picture of the Your List page:
YOUR LIST
Buying regularly-replenished items is easy because customers can move products
into their shopping bag directly from their personalized shopping list.
The following text appears to the left of the picture of the Quick Lists page:
QUICK LISTS
An easy way to find what you need and assist you in stocking up on frequently
used items.
<PAGE>
[drugstore.com logo]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by registrant in connection
with the sale of common stock being registered. All amounts are estimates
except the SEC registration fee and the NASD filing fee and the Nasdaq
National Market entry and listing fee.
<TABLE>
<CAPTION>
Amount
to be Paid
----------
<S> <C>
SEC registration fee........................................... $ 53,003
NASD filing fee................................................ 19,776
Nasdaq National Market filing fee.............................. 17,500
Printing and engraving expenses................................ 250,000
Legal fees and expenses........................................ 150,000
Accounting fees and expenses................................... 150,000
Blue Sky qualification fees and expenses....................... 3,000
Transfer Agent and Registrar fees.............................. 3,000
Miscellaneous fees and expenses................................ 53,721
--------
Total........................................................ $700,000
========
</TABLE>
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's board of directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933, as amended (the Act).
Article XIII of registrant's certificate of incorporation and sections 6.1 and
6.2 of Article VI of registrant's bylaws provide for indemnification of its
directors, officers, employees and other agents to the maximum extent
permitted by the Delaware General Corporation Law. In addition, registrant has
entered into indemnification agreements with its directors and officers. The
indemnification agreements may require registrant, among other things, to
indemnify its directors against certain liabilities that may arise by reason
of their status or service as directors (other than liabilities arising from
willful misconduct of culpable nature), to advance their expenses incurred as
a result of any proceeding against them as to which they could be indemnified,
and to obtain directors' insurance if available on reasonable terms. The
underwriting agreement (Exhibit 1.1 hereto) also provides for cross
indemnification among drugstore.com and the underwriters with respect to
certain matters, including matters arising under the Act.
Item 15. Recent Sales of Unregistered Securities
(a) Since inception in April 1998, registrant has issued and sold (without
payment of any selling commission to any person) the following unregistered
securities:
(1) June, July and August 1998, registrant issued and sold 2,265,000
shares of common stock to a total of 5 investors for an aggregate purchase
price of $90,600.
(2) In June 1998 and August 1998, registrant issued and sold shares of
Series A preferred stock convertible into an aggregate of 10,000,000 shares
of common stock to a total of 5 investors for an aggregate purchase price
of $8,000,000.
(3) In October, November and December 1998, registrant issued and sold
shares of Series B preferred stock convertible into an aggregate of
5,446,268 shares of common stock to a total of 6 investors for an aggregate
purchase price of $18,244,997.80.
II-1
<PAGE>
(4) In January 1999, registrant issued and sold shares of Series C
preferred stock convertible into an aggregate of 1,457,891 shares of common
stock to a total of 5 investors for an aggregate purchase price of
$11,407,997.07.
(5) In January 1999, registrant issued and sold two convertible
promissory notes convertible into shares of Series C preferred stock and
further convertible into an aggregate of 3,014,953 shares of common stock
to a total of 2 investors for an aggregate purchase price of
$23,592,007.22. These notes were converted into shares of Series C
preferred stock in March 1999.
(6) In February 1999, registrant issued a warrant to purchase 10,000
shares of common stock in connection with a corporate partnership
agreement.
(7) In May 1999, registrant issued and sold a convertible promissory
note convertible into shares of Series D preferred stock and further
convertible into 2,266,289 shares of common stock to one investor for an
aggregate purchase price of $40,000,000.85 and an obligation to provide
cable advertising valued at $5,000,000. This note was converted to shares
of Series D preferred stock in June 1999.
(8) In July 1999, registrant issued 12,282,599 shares of Series E
preferred stock to Rite Aid and a wholly owned subsidiary of GNC. Under the
agreement, registrant issued Rite Aid 9,334,746 shares of Series E
preferred stock in exchange for $7.6 million in cash and additional non-
cash consideration, and registrant issued GNC 2,947,853 shares of Series E
preferred stock for $2.4 million in cash and additional non-cash
consideration.
(9) In July 1999, registrant issued 200,000 shares of common stock to a
charitable foundation established by the registrant.
(10) In July 1999, registrant issued 10,000 shares of common stock to
Dial 800, LLC upon the exercise of warrants that had previously been issued
in connection with a corporate partnership agreement. The aggregate
exercise price for the warrants was $78,000.
(11) In August 1999, concurrently with registrant's initial public
offering, registrant issued 555,555 shares of common stock to Amazon.com
for a purchase price of $10,000,000.
(12) In January 2000, registrant issued 1,066,667 shares of common stock
to Amazon.com for a purchase price of $30,000,009.38.
(13) In February 2000, registrant issued 1,266,289 shares of common
stock to the stockholders of Beauty.com in connection with the acquisition
by registrant of Beauty.com.
(14) As of July 28, 1999, 8,000 shares of fully vested common stock had
been issued pursuant to restricted stock purchase agreements and 3,750
shares of common stock had been issued upon exercise of options.
(b) There were no underwritten offerings employed in connection with any of
the transactions set forth in Item 15(a).
The issuances described in Items 15(a)(1)-(13) were deemed to be exempt
from registration under the Securities Act in reliance upon Section 4(2)
thereof as transactions by an issuer not involving any public offering. The
issuances described in Item 15(a)(14) were deemed to be exempt from
registration under the Act in reliance upon Rule 701 promulgated thereunder in
that they were offered and sold either pursuant to written compensatory
benefit plans or pursuant to a written contract relating to compensation, as
provided by Rule 701. In addition, such issuances were deemed to be exempt
from registration under Section 4(2) of the Act as transactions by an issuer
not involving any public offering. The recipients of securities in each such
transaction represented their intentions to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends where affixed to the securities
issued in such transactions. All recipients had adequate access, through their
relationships with the registrant, to information about the registrant.
II-2
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
No. Item
------- ----
<C> <S>
1.1* Form of Underwriting Agreement.
3.2 Amended and Restated Certificate of Incorporation of drugstore.com.
3.3 Amended and Restated Bylaws.
5.1 Opinion of Shearman & Sterling.
10.1 Form of Indemnification Agreement between drugstore.com and each of
its officers and directors (Incorporated by reference to exhibit
number 10.1 to drugstore.com's registration statement on Form S-1
(file number 333-78813) filed May 19, 1999).
10.2 1998 Stock Plan, as amended (Incorporated by reference to exhibit
number 10.2 to drugstore.com's registration statement on Form S-1
(file number 333-78813) filed July 20, 1999).
10.3 1999 Employee Stock Purchase Plan as amended.
10.4 Restricted Stock Purchase Agreement with Jed A. Smith dated June 19,
1998 (Incorporated by reference to exhibit number 10.4 to
drugstore.com's registration statement on Form S-1 (file number 333-
78813) filed May 19, 1999).
10.5 Restricted Stock Purchase Agreement with Peter M. Neupert dated July
23, 1998 (Incorporated by reference to exhibit number 10.5 to
drugstore.com's registration statement on Form S-1 (file number 333-
78813) filed May 19, 1999).
10.6 Series A Preferred Stock Purchase Agreement dated June 22, 1998
(Incorporated by reference to exhibit number 10.7 to drugstore.com's
registration statement on Form S-1 (file number 333-78813) filed May
19, 1999).
10.7 Series B Preferred Stock Purchase Agreement dated October 9, 1998
(Incorporated by reference to exhibit number 10.8 to drugstore.com's
registration statement on Form S-1 (file number 333-78813) filed May
19, 1999).
10.8 Series B Preferred Stock Rescission Agreement dated November 23, 1998
between drugstore.com and entities affiliated with Kleiner Perkins
Caufield & Byers. (Incorporated by reference to exhibit number 10.9 to
drugstore.com's registration statement on Form S-1 (file number 333-
78813) filed May 19, 1999).
10.9 Series C Preferred Stock and Convertible Note Purchase Agreement dated
January 29, 1999 (Incorporated by reference to exhibit number 10.10 to
drugstore.com's registration statement on Form S-1 (file number 333-
78813) filed May 19, 1999).
10.10 Series D Preferred Stock and Convertible Note Purchase Agreement dated
May 19, 1999 (Incorporated by reference to exhibit number 10.11 to
drugstore.com's registration statement on Form S-1 (file number 333-
78813) filed May 19, 1999).
10.11 Fourth Amended and Restated Investors' Rights Agreement dated May 19,
1999 (Incorporated by reference to exhibit number 10.12 to
drugstore.com's registration statement on Form S-1 (file number 333-
78813) filed July 8, 1999).
10.12 Sublease Agreement dated January 29, 1999 between drugstore.com and
The Boeing Company for offices at 13920 Southeast Eastgate Way, Suite
300, Bellevue, Washington (Incorporated by reference to exhibit number
10.13 to drugstore.com's registration statement on Form S-1 (file
number 333-78813) filed May 19, 1999).
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Item
------- ----
<C> <S>
10.13 Lease Agreement dated August 30, 1999 between DS Distribution, Inc.
and the Northwestern Mutual Life Insurance Company (Incorporated by
reference to exhibit number 10.1 to drugstore.com's quarterly report
on form 10-Q (file number 000-26137), dated November 2, 1999).
10.14 Amended and Restated Technology License and Advertising Agreement
between drugstore.com and Amazon.com (Incorporated by reference to
exhibit number 10.14 to drugstore.com's registration statement on Form
S-1 (file number 333-78813) filed July 26, 1999).
10.15+ Pharmacy Service Agreement dated February 8, 1999 with RxAmerica.
(Incorporated by reference to exhibit number 10.15 to drugstore.com's
registration statement on Form S-1 (file number 333-78813) filed May
25, 1999).
10.16+ Service & Supply Agreement dated January 29, 1999 with Walsh
Distribution, Inc (Incorporated by reference to exhibit number 10.16
to drugstore.com's registration statement on Form S-1 (file number
333-78813) filed May 25, 1999).
10.17 Offer Letter dated June 29, 1998 with Peter M. Neupert (Incorporated
by reference to exhibit number 10.17 to drugstore.com's registration
statement on Form S-1 (file number 333-78813) filed May 19, 1999).
10.18 Offer Letter dated July 28, 1998 with Kal Raman (Incorporated by
reference to exhibit number 10.18 to drugstore.com's registration
statement on Form S-1 (file number 333-78813) filed May 19, 1999).
10.19 Offer Letter dated December 4, 1998 with Mark L. Silverman
(Incorporated by reference to exhibit number 10.19 to drugstore.com's
registration statement on Form S-1 (file number 333-78813) filed May
19, 1999).
10.20 Fifth Amended and Restated Voting Agreement dated December 23, 1999.
10.21 Letter Agreement dated May 19, 1999 with Amazon.com (Incorporated by
reference to exhibit number 10.22 to drugstore.com's registration
statement on Form S-1 (file number 333-78813) filed May 19, 1999).
10.22 Cable Advertising Agreement dated May 19, 1999 with Vulcan Ventures
Incorporated (Incorporated by reference to exhibit number 10.23 to
drugstore.com's registration statement on Form S-1 (file number 333-
78813) filed May 19, 1999).
10.23 Series E Preferred Stock Purchase Agreement dated June 17, 1999
(Incorporated by reference to exhibit number 10.24 to drugstore.com's
registration statement on Form S-1 (file number 333-78813) filed June
28, 1999).
10.24 Addendum to Fourth Amended and Restated Investors' Rights Agreement
dated June 17, 1999 (Incorporated by reference to exhibit number 10.25
to drugstore.com's registration statement on Form S-1 (file number
333-78813) filed June 28, 1999).
10.26 Main Agreement dated June 17, 1999 with Rite Aid Corporation
(Incorporated by reference to exhibit number 10.27 to drugstore.com's
registration statement on Form S-1 (file number 333-78813) filed June
28, 1999).
10.27 Main Agreement dated June 17, 1999 with General Nutrition Companies,
Inc. (Incorporated by reference to exhibit number 10.28 to
drugstore.com's registration statement on Form S-1 (file number 333-
78813) filed June 28, 1999).
10.28 Governance Agreement dated June 17, 1999 with Rite Aid Corporation
(Incorporated by reference to exhibit number 10.29 to drugstore.com's
registration statement on Form S-1 (file number 333-78813) filed June
28, 1999).
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Item
------- ----
<C> <S>
10.29 Governance Agreement dated June 17, 1999 with General Nutrition
Companies, Inc. and General Nutrition Investment Company (Incorporated
by reference to exhibit number 10.30 to drugstore.com's registration
statement on Form S-1 (file number 333-78813) filed June 28, 1999).
10.30 Pharmacy Supply and Services Agreement dated June 17, 1999 with Rite
Aid Corporation (Incorporated by reference to exhibit number 10.31 to
drugstore.com's registration statement on Form S-1 (file number 333-
78813) filed June 28, 1999).
10.33 Second Addendum to Fourth Amended and Restated Investors' Rights
Agreement dated July 26, 1999 (Incorporated by reference to exhibit
number 10.32 to drugstore.com's registration statement on Form S-1
(file number 333-78813) filed July 20, 1999).
10.34 Office Lease Agreement dated November 22, 1999 between WRC Sunset
North LLC and drugstore.com.
10.35 Agreement dated January 24, 2000 between Amazon.com Commerce Services
Inc. and drugstore.com, inc.
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.
10.37 Stock Purchase Letter Agreement dated January 24, 2000 between
drugstore.com, inc. and Amazon.com, Inc.
10.38 Third Addendum to Fourth Amended and Restated Investors' Rights
Agreement dated January 24, 2000.
21.1 Subsidiaries.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Shearman & Sterling (see Exhibit 5.1).
24.1 Power of Attorney (included on page II-7).
27.1 Financial Data Schedule (EDGAR-filed version only).
99.1 Report of Ernst & Young LLP, Independent Auditors, on financial
statement schedule.
</TABLE>
- --------
* To be filed by amendment.
+ Portions of these exhibits have been granted confidential treatment by the
Securities and Exchange Commission. Such confidential portions are marked
by an asterisk (*) in the Exhibit filed.
(b) Financial Statement Schedules
Schedule II--Valuation and Qualifying Accounts
The Company has included in this filing, on page S-1, Schedule II --
Valuation and Qualifying Accounts. All other financial statement schedules not
listed are omitted because they are inapplicable or the requested information
is shown in the financial statements of the registrant or the related notes to
the financial statements.
Item 17. Undertakings
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (Act) may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions, or otherwise, the
II-5
<PAGE>
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the registrant pursuant to Rule 424(b)(1), or (4),
or 497(h) under the Act shall be deemed to be a part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
posteffective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and this offering of such securities at that time shall be deemed
to be the initial bonafide offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the undersigned
Registrant has duly caused this Registration Statement on Form S-1 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Bellevue, State of Washington, on February 9, 2000.
drugstore.com, inc.
/s/ Peter M. Neupert
By: _________________________________
Peter M. Neupert,
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints David E. Rostov and Mark L. Silverman,
and each one of them, his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any and all
amendments to this Registration Statement (including post-effective
amendments), and any and all registration statements filed pursuant to Rule
462 under the Securities Act of 1933, as amended, in connection with or
related to the offering contemplated by this registration statement and its
amendments, if any, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said attorneys-
in-fact, or his substitute or substitutes, may do or cause to be done by
virtue hereof. This Power of Attorney may be signed in several counterparts.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form S-1 has been signed by the following persons in
the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Peter M. Neupert President, Chief Executive February 9, 2000
______________________________________ Officer and Director
(Peter M. Neupert) (Principal Executive
Officer)
/s/ David Rostov Vice President and Chief February 9, 2000
______________________________________ Financial Officer
(David Rostov) (Principal Financial and
Accounting Officer)
Director February , 2000
______________________________________
(Jeffrey P. Bezos)
/s/ Brook H. Byers Director February 9, 2000
______________________________________
(Brook H. Byers)
/s/ L. John Doerr Director February 9, 2000
______________________________________
(L. John Doerr)
/s/ Melinda French Gates Director February 9, 2000
______________________________________
(Melinda French Gates)
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
Director February , 2000
______________________________________
(Mary Sammons)
Director February , 2000
______________________________________
(William D. Savoy)
/s/ Howard Schultz Director February 9, 2000
______________________________________
(Howard Schultz)
</TABLE>
II-8
<PAGE>
DRUGSTORE.COM, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Charged to
Balance at Revenue, Charged Balance
Beginning Costs or to Other at End
of Period Expenses Accounts Deductions of Period
---------- ---------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Period from April 2, 1998
(Inception) to December
31, 1998
Allowance for
uncollectible
accounts............... $-- $-- $-- $-- $--
Allowance for sales
returns................ $-- $-- $-- $-- $--
Reserve for inventory
obsolescence........... $-- $-- $-- $-- $--
Year Ended January 2, 2000
Allowance for
uncollectible
accounts............... $-- $385 $-- $215(A) $170
Allowance for sales
returns................ $-- $336 $-- $255(B) $ 81
Reserve for inventory
obsolescence........... $-- $606 $-- $ 50(C) $556
</TABLE>
- --------
(A) Deductions consist of write-offs of uncollectible accounts, net of
recoveries.
(B) Deductions consist of sales credits to customers for product returns.
(C) Deductions consist of write-off of obsolete inventory.
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Item
------- ----
<C> <S>
1.1* Form of Underwriting Agreement.
3.2 Amended and Restated Certificate of Incorporation of drugstore.com.
3.3 Amended and Restated Bylaws.
5.1 Opinion of Shearman & Sterling.
10.1 Form of Indemnification Agreement between drugstore.com and each of
its officers and directors (Incorporated by reference to exhibit
number 10.1 to drugstore.com's registration statement on Form S-1
(file number 333-78813) filed May 19, 1999).
10.2 1998 Stock Plan, as amended (Incorporated by reference to exhibit
number 10.2 to drugstore.com's registration statement on Form S-1
(file number 333-78813) filed July 20, 1999).
10.3 1999 Employee Stock Purchase Plan as amended.
10.4 Restricted Stock Purchase Agreement with Jed A. Smith dated June 19,
1998 (Incorporated by reference to exhibit number 10.4 to
drugstore.com's registration statement on Form S-1 (file number 333-
78813) filed May 19, 1999).
10.5 Restricted Stock Purchase Agreement with Peter M. Neupert dated July
23, 1998 (Incorporated by reference to exhibit number 10.5 to
drugstore.com's registration statement on Form S-1 (file number 333-
78813) filed May 19, 1999).
10.6 Series A Preferred Stock Purchase Agreement dated June 22, 1998
(Incorporated by reference to exhibit number 10.7 to drugstore.com's
registration statement on Form S-1 (file number 333-78813) filed May
19, 1999).
10.7 Series B Preferred Stock Purchase Agreement dated October 9, 1998
(Incorporated by reference to exhibit number 10.8 to drugstore.com's
registration statement on Form S-1 (file number 333-78813) filed May
19, 1999).
10.8 Series B Preferred Stock Rescission Agreement dated November 23, 1998
between drugstore.com and entities affiliated with Kleiner Perkins
Caufield & Byers. (Incorporated by reference to exhibit number 10.9 to
drugstore.com's registration statement on Form S-1 (file number 333-
78813) filed May 19, 1999).
10.9 Series C Preferred Stock and Convertible Note Purchase Agreement dated
January 29, 1999 (Incorporated by reference to exhibit number 10.10 to
drugstore.com's registration statement on Form S-1 (file number 333-
78813) filed May 19, 1999).
10.10 Series D Preferred Stock and Convertible Note Purchase Agreement dated
May 19, 1999 (Incorporated by reference to exhibit number 10.11 to
drugstore.com's registration statement on Form S-1 (file number 333-
78813) filed May 19, 1999).
10.11 Fourth Amended and Restated Investors' Rights Agreement dated May 19,
1999 (Incorporated by reference to exhibit number 10.12 to
drugstore.com's registration statement on Form S-1 (file number 333-
78813) filed July 8, 1999).
10.12 Sublease Agreement dated January 29, 1999 between drugstore.com and
The Boeing Company for offices at 13920 Southeast Eastgate Way, Suite
300, Bellevue, Washington (Incorporated by reference to exhibit number
10.13 to drugstore.com's registration statement on Form S-1 (file
number 333-78813) filed May 19, 1999).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Item
------- ----
<C> <S>
10.13 Lease Agreement dated August 30, 1999 between DS Distribution, Inc.
and the Northwestern Mutual Life Insurance Company (Incorporated by
reference to exhibit number 10.1 to drugstore.com's quarterly report
on form 10-Q (file number 000-26137), dated November 2, 1999).
10.14 Amended and Restated Technology License and Advertising Agreement
between drugstore.com and Amazon.com (Incorporated by reference to
exhibit number 10.14 to drugstore.com's registration statement on Form
S-1 (file number 333-78813) filed July 26, 1999).
10.15+ Pharmacy Service Agreement dated February 8, 1999 with RxAmerica.
(Incorporated by reference to exhibit number 10.15 to drugstore.com's
registration statement on Form S-1 (file number 333-78813) filed May
25, 1999).
10.16+ Service & Supply Agreement dated January 29, 1999 with Walsh
Distribution, Inc (Incorporated by reference to exhibit number 10.16
to drugstore.com's registration statement on Form S-1 (file number
333-78813) filed May 25, 1999).
10.17 Offer Letter dated June 29, 1998 with Peter M. Neupert (Incorporated
by reference to exhibit number 10.17 to drugstore.com's registration
statement on Form S-1 (file number 333-78813) filed May 19, 1999).
10.18 Offer Letter dated July 28, 1998 with Kal Raman (Incorporated by
reference to exhibit number 10.18 to drugstore.com's registration
statement on Form S-1 (file number 333-78813) filed May 19, 1999).
10.19 Offer Letter dated December 4, 1998 with Mark L. Silverman
(Incorporated by reference to exhibit number 10.19 to drugstore.com's
registration statement on Form S-1 (file number 333-78813) filed May
19, 1999).
10.20 Fifth Amended and Restated Voting Agreement dated December 23, 1999.
10.21 Letter Agreement dated May 19, 1999 with Amazon.com (Incorporated by
reference to exhibit number 10.22 to drugstore.com's registration
statement on Form S-1 (file number 333-78813) filed May 19, 1999).
10.22 Cable Advertising Agreement dated May 19, 1999 with Vulcan Ventures
Incorporated (Incorporated by reference to exhibit number 10.23 to
drugstore.com's registration statement on Form S-1 (file number 333-
78813) filed May 19, 1999).
10.23 Series E Preferred Stock Purchase Agreement dated June 17, 1999
(Incorporated by reference to exhibit number 10.24 to drugstore.com's
registration statement on Form S-1 (file number 333-78813) filed
June 28, 1999).
10.24 Addendum to Fourth Amended and Restated Investors' Rights Agreement
dated June 17, 1999 (Incorporated by reference to exhibit number 10.25
to drugstore.com's registration statement on Form S-1 (file number
333-78813) filed June 28, 1999).
10.26 Main Agreement dated June 17, 1999 with Rite Aid Corporation
(Incorporated by reference to exhibit number 10.27 to drugstore.com's
registration statement on Form S-1 (file number 333-78813) filed
June 28, 1999).
10.27 Main Agreement dated June 17, 1999 with General Nutrition Companies,
Inc. (Incorporated by reference to exhibit number 10.28 to
drugstore.com's registration statement on Form S-1 (file number 333-
78813) filed June 28, 1999).
10.28 Governance Agreement dated June 17, 1999 with Rite Aid Corporation
(Incorporated by reference to exhibit number 10.29 to drugstore.com's
registration statement on Form S-1 (file number 333-78813) filed June
28, 1999).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Item
------- ----
<C> <S>
10.29 Governance Agreement dated June 17, 1999 with General Nutrition
Companies, Inc. and General Nutrition Investment Company (Incorporated
by reference to exhibit number 10.30 to drugstore.com's registration
statement on Form S-1 (file number 333-78813) filed June 28, 1999).
10.30 Pharmacy Supply and Services Agreement dated June 17, 1999 with Rite
Aid Corporation (Incorporated by reference to exhibit number 10.31 to
drugstore.com's registration statement on Form S-1 (file number 333-
78813) filed June 28, 1999).
10.33 Second Addendum to Fourth Amended and Restated Investors' Rights
Agreement dated July 26, 1999 (Incorporated by reference to exhibit
number 10.32 to drugstore.com's registration statement on Form S-1
(file number 333-78813) filed July 20, 1999).
10.34 Office Lease Agreement dated November 22, 1999 between WRC Sunset
North LLC and drugstore.com.
10.35 Agreement dated January 24, 2000 between Amazon.com Commerce Services
Inc. and drugstore.com, inc.
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.
10.37 Stock Purchase Letter Agreement dated January 24, 2000 between
drugstore.com, inc. and Amazon.com, Inc.
10.38 Third Addendum to Fourth Amended and Restated Investors' Rights
Agreement dated January 24, 2000.
21.1 Subsidiaries.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Shearman & Sterling (see Exhibit 5.1).
24.1 Power of Attorney (included on page II-7).
27.1 Financial Data Schedule (EDGAR-filed version only).
99.1 Report of Ernst & Young LLP, Independent Auditors, on financial
statement schedule.
</TABLE>
- --------
* To be filed by amendment.
+ Portions of these exhibits have been granted confidential treatment by the
Securities and Exchange Commission. Such confidential portions are marked by
an asterisk (*) in the Exhibit filed.
<PAGE>
Exhibit 3.2
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
DRUGSTORE.COM, INC.
The undersigned, Peter M. Neupert and Mark L. Silverman, hereby certify
that:
1. They are the duly elected and acting President and Secretary,
respectively, of drugstore.com, inc., a Delaware corporation.
2. The Certificate of Incorporation of this corporation was originally
filed with the Secretary of State of Delaware on April 2, 1998.
3. The Certificate of Incorporation of this corporation shall be amended
and restated to read in full as follows:
ARTICLE I
"The name of this corporation is drugstore.com, inc. (the "Corporation").
ARTICLE II
The address of the Corporation's registered office in the State of Delaware
is 1013 Centre Road, Wilmington, Delaware 19805, County of New Castle. The name
of its registered agent at such address is Corporation Service Company.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of the
State of Delaware.
ARTICLE IV
(1) Classes of Stock. The Corporation is authorized to issue two classes
of stock to be designated, respectively, "Common Stock" and "Preferred Stock."
The total number of shares which the Corporation is authorized to issue is Two
Hundred Sixty Million (260,000,000) shares, each with a par value of $0.0001 per
share. Two Hundred Fifty Million (250,000,000) shares shall be Common Stock and
Ten Million (10,000,000) shares shall be Preferred Stock.
(2) Rights, Preferences and Restrictions of Preferred Stock. The Preferred
Stock may be issued from time to time in one or more series. The Board of
Directors is hereby authorized to provide for the issuance of shares of
Preferred Stock in one or more series and, by filing a certificate pursuant to
the applicable law of the State of Delaware (hereinafter referred to as
"Preferred Stock Designation"), to establish from time to time the number of
shares to be included in each such series, and to fix the designation, powers,
preferences and rights of the shares of each such series and the qualifications,
limitations and restrictions thereof. The
<PAGE>
authority of the Board of Directors with respect to each series shall include,
but not be limited to, determination of the following:
(1) The designation of the series, which may be by
distinguishing number, letter or title.
(2) The number of shares of the series, which number the Board
of Directors may thereafter (except where otherwise provided in the Preferred
Stock Designation) increase or decrease (but not below the number of shares
thereof then outstanding).
(3) The amounts payable on, and the preferences, if any, of
shares of the series in respect of dividends, and whether such dividends, if
any, shall be cumulative or noncumulative.
(4) Dates at which dividends, if any, shall be payable.
(5) The redemption rights and price or prices, if any, for
shares of the series.
(6) The terms and amount of any sinking fund provided for the
purchase or redemption of shares of the series.
(7) The amounts payable on, and the preferences, if any, of
shares of the series in the event of any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Corporation.
(8) Whether the shares of the series shall be convertible into
or exchangeable for shares of any other class or series, or any other security,
of the Corporation or any other corporation, and, if so, the specification of
such other class or series or such other security, the conversion or exchange
price or prices or rate or rates, any adjustments thereof, the date or dates at
which such shares shall be convertible or exchangeable and all other terms and
conditions upon which such conversion or exchange may be made.
(9) Restrictions on the issuance of shares of the same series or
of any other class or series.
(10) The voting rights, if any, of the holders of shares of the
series.
(C) Common Stock. The Common Stock shall be subject to the express terms
of the Preferred Stock and any series thereof. Except as may otherwise be
provided in this Amended and Restated Certificate of Incorporation, in a
Preferred Stock Designation or by applicable law, the holders of shares of
Common Stock shall be entitled to one vote for each such share upon all
questions presented to the stockholders, the Common Stock shall have the
exclusive right to vote for the election of directors and for all other
purposes, and holders of Preferred Stock shall not be entitled to vote at or
receive notice of any meeting of stockholders.
-2-
<PAGE>
The Corporation shall be entitled to treat the person in whose name
any share of its stock is registered as the owner thereof for all purposes and
shall not be bound to recognize any equitable or other claim to, or interest in,
such share on the part of any other person, whether or not the Corporation shall
have notice thereof, except as expressly provided by applicable law.
ARTICLE V
In furtherance of, and not in limitation of, the powers conferred by law,
the Board of Directors is expressly authorized and empowered to adopt, alter,
amend or repeal the Bylaws of the Corporation.
ARTICLE VI
Elections of directors need not be by written ballot unless otherwise
provided in the Bylaws of the Corporation.
ARTICLE VII
(3) To the fullest extent permitted by the General Corporation Law of the
State of Delaware, as the same exists or as may hereafter be amended, a director
of the Corporation shall not be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director.
(4) Neither any amendment nor repeal of this Article VII, nor the adoption
of any provision of the Corporation's Certificate of Incorporation inconsistent
with this Article VII, shall eliminate or reduce the effect of this Article VII
in respect of any matter occurring, or any action or proceeding accruing or
arising or that, but for this Article VII, would accrue or arise, prior to such
amendment, repeal or adoption of an inconsistent provision.
ARTICLE VIII
The Corporation reserves the right at any time, and from time to time, to
amend, alter, change or repeal any provision contained in this Amended and
Restated Certificate of Incorporation, and other provisions authorized by the
laws of the State of Delaware at the time in force may be added or inserted, in
the manner now or hereafter prescribed by law; and all rights, preferences and
privileges of whatsoever nature conferred upon stockholders, directors or any
other persons whomsoever by and pursuant to this Amended and Restated
Certificate of Incorporation in its present form or as hereafter amended are
granted subject to the rights reserved in this Article."
* * *
-3-
<PAGE>
The foregoing Amended and Restated Certificate of Incorporation, which both
amends and restates the certificate of incorporation of the Corporation, as
heretofore amended and restated, has been duly adopted by the Corporation's
Board of Directors and stockholders in accordance with the applicable provisions
of Sections 242 and 245, and by written consent of stockholders pursuant to
Section 228, of the General Corporation Law of the State of Delaware.
Executed at Bellevue, Washington on August 2, 1999.
/s/ Peter M. Neupert
----------------------------------------
Peter M. Neupert, President
/s/ Mark L. Silverman
----------------------------------------
Mark L. Silverman, Secretary
-4-
<PAGE>
Exhibit 3.3
AMENDED AND RESTATED
BYLAWS
OF
DRUGSTORE.COM, INC.
Dated August 2, 1999
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
ARTICLE I
CORPORATE OFFICES
1.1 Registered Office............................................. 1
1.2 Other Offices................................................. 1
ARTICLE II
MEETINGS OF STOCKHOLDERS
2.1 Place Of Meetings............................................. 1
2.2 Annual Meeting................................................ 1
2.3 Special Meeting............................................... 1
2.4 Notice Of Stockholders' Meetings.............................. 2
2.5 Manner Of Giving Notice; Affidavit Of Notice.................. 2
2.6 Quorum........................................................ 2
2.7 Adjourned Meeting; Notice..................................... 2
2.8 Conduct Of Business........................................... 2
2.9 Voting........................................................ 3
2.10 Waiver Of Notice.............................................. 3
2.11 Stockholder Action By Written Consent Without A Meeting....... 3
2.12 Record Date For Stockholder Notice; Voting; Giving Consents... 4
2.13 Proxies....................................................... 5
2.14 Notice of Stockholder Business and Nominations................ 5
ARTICLE III
DIRECTORS
3.1 Powers........................................................ 8
3.2 Number Of Directors........................................... 8
3.3 Qualification And Term Of Office Of Directors................. 8
3.4 Resignation................................................... 8
3.5 Place Of Meetings; Meetings By Telephone...................... 8
3.6 Regular Meetings.............................................. 8
3.7 Special Meetings; Notice...................................... 9
3.8 Quorum........................................................ 9
3.9 Waiver Of Notice.............................................. 9
3.10 Board Action By Written Consent Without A Meeting............. 9
3.11 Fees And Compensation Of Directors............................ 10
3.12 Approval Of Loans To Officers................................. 10
3.13 Chairman Of The Board Of Directors............................ 10
-i-
<PAGE>
ARTICLE IV
COMMITTEES
4.1 Committees Of Directors....................................... 10
4.2 Committee Minutes............................................. 11
4.3 Meetings And Action Of Committees............................. 11
ARTICLE V
OFFICERS
5.1 Officers...................................................... 11
5.2 Appointment Of Officers....................................... 11
5.3 Subordinate Officers.......................................... 12
5.4 Removal And Resignation Of Officers........................... 12
5.5 Vacancies In Offices.......................................... 12
5.6 Chief Executive Officer....................................... 12
5.7 President..................................................... 12
5.8 Vice Presidents............................................... 13
5.9 Secretary..................................................... 13
5.10 Chief Financial Officer....................................... 13
5.11 Representation Of Shares Of Other Corporations................ 14
5.12 Authority And Duties Of Officers.............................. 14
ARTICLE VI
INDEMNIFICATION
6.1. Right to Indemnification...................................... 14
6.2. Prepayment of Expenses........................................ 15
6.3. Claims........................................................ 15
6.4. Nonexclusivity of Rights...................................... 15
6.5. Other Sources................................................. 15
6.6. Amendment or Repeal........................................... 15
6.7. Other Indemnification and Prepayment of Expenses.............. 16
ARTICLE VII
RECORDS AND REPORTS
7.1 Maintenance Of Records........................................ 16
7.2 Annual Statement To Stockholders.............................. 16
ARTICLE VIII
GENERAL MATTERS
8.1 Checks........................................................ 16
-ii-
<PAGE>
8.2 Execution Of Corporate Contracts And Instruments.............. 16
8.3 Stock Certificates; Partly Paid Shares........................ 17
8.4 Special Designation On Certificates........................... 17
8.5 Lost Certificates............................................. 18
8.6 Dividends..................................................... 18
8.7 Fiscal Year................................................... 18
8.8 Seal.......................................................... 18
8.9 Transfer Of Stock............................................. 18
8.10 Stock Transfer Agreements..................................... 19
8.11 Registered Stockholders....................................... 19
-iii-
<PAGE>
AMENDED AND RESTATED
BYLAWS
OF
DRUGSTORE.COM, INC.
ARTICLE I
CORPORATE OFFICES
1.1 Registered Office.
The registered office of the corporation shall be in the City of
Wilmington, County of New Castle, State of Delaware. The name of the registered
agent of the corporation at such location is Corporation Service Company.
1.2 Other Offices.
The Board of Directors may at any time establish other offices at any
place or places where the corporation is qualified to do business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
2.1 Place Of Meetings.
Meetings of stockholders shall be held at any place, within or outside
the State of Delaware, designated by the Board of Directors. In the absence of
any such designation, stockholders' meetings shall be held at the registered
office of the corporation.
2.2 Annual Meeting.
To the extent required by applicable law, an annual meeting of
stockholders shall be held on such date, time and place, either within or
without the State of Delaware, as may be designated by resolution of the Board
of Directors. At the meeting, directors shall be elected and any other proper
business may be transacted.
2.3 Special Meeting.
A special meeting of the stockholders may be called at any time by the
Board of Directors or the chairman of the board.
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2.4 Notice Of Stockholders' Meetings.
All notices of meetings with stockholders shall be sent or otherwise
given in accordance with Section 2.5 of these Bylaws not less than ten (10) nor
more than sixty (60) days before the date of the meeting to each stockholder
entitled to notice of such meeting. The notice shall specify the place, date,
and hour of the meeting, and, in the case of a special meeting, the purpose or
purposes for which the meeting is called.
2.5 Manner Of Giving Notice; Affidavit Of Notice.
Notice of any meeting of stockholders, if mailed, is given when
deposited in the United States mail, postage prepaid, directed to the
stockholder at his address as it appears on the records of the corporation. An
affidavit of the secretary or an assistant secretary or of the transfer agent of
the corporation that the notice has been given shall, in the absence of fraud,
be prima facie evidence of the facts stated therein.
2.6 Quorum.
The holders of a majority in voting power of the stock issued and
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the stockholders for the
transaction of business except as otherwise provided by statute or by the
certificate of incorporation. If, however, such quorum is not present or
represented at any meeting of the stockholders, then either (a) the chairman of
the meeting or (b) the stockholders entitled to vote thereat, present in person
or represented by proxy, shall have power to adjourn the meeting from time to
time, without notice other than announcement at the meeting, until a quorum is
present or represented. At such adjourned meeting at which a quorum is present
or represented, any business may be transacted that might have been transacted
at the meeting as originally noticed.
2.7 Adjourned Meeting; Notice.
When a meeting is adjourned to another time or place, unless these
Bylaws otherwise require, notice need not be given of the adjourned meeting if
the time and place thereof are announced at the meeting at which the adjournment
is taken. At the adjourned meeting the corporation may transact any business
that might have been transacted at the original meeting. If the adjournment is
for more than thirty (30) days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.
2.8 Conduct Of Business.
The date and time of the opening and the closing of the polls for each
matter upon which the stockholders will vote at a meeting shall be announced at
the meeting by the person presiding over the meeting. The Board of Directors may
adopt by resolution such rules and regulations for the conduct of the meeting of
stockholders as it shall deem appropriate. Except to the extent inconsistent
with such rules and regulations as adopted by the Board of Directors, the
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chairman of any meeting of stockholders shall have the right and authority to
convene and to adjourn the meeting, to prescribe such rules, regulations and
procedures and to do all such acts as, in the judgment of such chairman, are
appropriate for the proper conduct of the meeting. Such rules, regulations or
procedures, whether adopted by the Board of Directors or prescribed by the
chairman of the meeting, may include, without limitation, the following: (i) the
establishment of an agenda or order of business for the meeting; (ii) rules and
procedures for maintaining order at the meeting and the safety of those present;
(iii) limitations on attendance at or participation in the meeting to
stockholders of record of the corporation, their duly authorized and constituted
proxies or such other persons as the chairman of the meeting shall determine;
(iv) restrictions on entry to the meeting after the time fixed for the
commencement thereof; and (v) limitations on the time allotted to questions or
comments by participants. Unless and to the extent determined by the Board of
Directors or the chairman of the meeting, meetings of stockholders shall not be
required to be held in accordance with the rules of parliamentary procedure.
2.9 Voting.
The stockholders entitled to vote at any meeting of stockholders shall
be determined in accordance with the provisions of Section 2.12 of these Bylaws,
subject to the provisions of Sections 217 and 218 of the General Corporation Law
of the State of Delaware (relating to voting rights of fiduciaries, pledgors and
joint owners of stock and to voting trusts and other voting agreements).
Except as may be otherwise provided in the certificate of
incorporation, each stockholder shall be entitled to one vote for each share of
capital stock held by such stockholder.
2.10 Waiver Of Notice.
Whenever notice is required to be given under any provision of the
General Corporation Law of the State of Delaware or of the certificate of
incorporation or these Bylaws, a written waiver thereof, signed by the person
entitled to notice, whether before or after the time stated therein, shall be
deemed equivalent to notice. Attendance of a person at a meeting shall
constitute a waiver of notice of such meeting, except when the person attends a
meeting for the express purpose of objecting, at the beginning of the meeting,
to the transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the stockholders need be specified in any written
waiver of notice unless so required by the certificate of incorporation or these
Bylaws.
2.11 Stockholder Action By Written Consent Without A Meeting.
Unless otherwise provided in the certificate of incorporation, any
action required to be taken at any annual or special meeting of stockholders of
the corporation, or any action that may be taken at any annual or special
meeting of such stockholders, may be taken without a meeting, without prior
notice, and without a vote if a consent in writing, setting forth the action so
taken, is signed by the holders of outstanding stock having not less than the
minimum number
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of votes that would be necessary to authorize or take such action at a meeting
at which all shares entitled to vote thereon were present and voted.
Prompt notice of the taking of the corporate action without a meeting
by less than unanimous written consent shall be given to those stockholders who
have not consented in writing and who, if the action had been taken at a
meeting, would have been entitled to notice of the meeting if the record date
for such meeting had been the date that written consents signed by a sufficient
number of holders or members to take the action were delivered to the
corporation as provided in subsection (c) of Section 228 of the General
Corporation Law of the State of Delaware. If the action which is consented to is
such as would have required the filing of a certificate under any section of the
General Corporation Law of Delaware if such action had been voted on by
stockholders at a meeting thereof, then the certificate filed under such section
shall state, in lieu of any statement required by such section concerning any
vote of stockholders, that written notice and written consent have been given as
provided in Section 228 of the General Corporation Law of the State of Delaware.
2.12 Record Date For Stockholder Notice; Voting; Giving Consents.
In order that the corporation may determine the stockholders entitled
to notice of or to vote at any meeting of stockholders or any adjournment
thereof, or to express consent to corporate action in writing without a meeting
(to the extent permitted by the certificate of incorporation), or entitled to
receive payment of any dividend or other distribution or allotment of any
rights, or entitled to exercise any rights in respect of any change, conversion
or exchange of stock or for the purpose of any other lawful action, the Board of
Directors may fix a record date, which record date shall not precede the date
upon which the resolution fixing the record date is adopted by the Board of
Directors, and which record date: (1) in the case of determination of
stockholders entitled to vote at any meeting of stockholders or adjournment
thereof, shall, unless otherwise required by law, not be more than sixty (60)
nor less than ten (10) days before the date of such meeting; (2) in the case of
determination of stockholders entitled to express consent to corporate action in
writing without a meeting (to the extent permitted by the certificate of
incorporation), shall not be more than ten (10) days from the date upon which
the resolution fixing the record date is adopted by the Board of Directors; and
(3) in the case of any other action, shall not be more than sixty (60) days
prior to such other action. If no record date is fixed: (1) the record date for
determining stockholders entitled to notice of or to vote at a meeting of
stockholders shall be at the close of business on the day next preceding the day
on which notice is given, or, if notice is waived, at the close of business on
the day next preceding the day on which the meeting is held; (2) the record date
for determining stockholders entitled to express consent to corporate action in
writing without a meeting (to the extent permitted by the certificate of
incorporation), when no prior action of the Board of Directors is required by
law, shall be the first date on which a signed written consent setting forth the
action taken or proposed to be taken is delivered to the corporation in
accordance with applicable law, or, if prior action by the Board of Directors is
required by law, shall be at the close of business on the day on which the Board
of Directors adopts the resolution taking such prior action; and (3) the record
date for determining stockholders for any other purpose shall be at the close of
business on the day on which the Board of Directors adopts the resolution
relating thereto. A determination of stock-
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holders of record entitled to notice of or to vote at a meeting of stockholders
shall apply to any adjournment of the meeting; provided, however, that the Board
of Directors may fix a new record date for the adjourned meeting.
2.13 Proxies.
Each stockholder entitled to vote at a meeting of stockholders may
authorize another person or persons to act for such stockholder by a proxy, but
no such proxy shall be voted or acted upon after three (3) years from its date,
unless the proxy provides for a longer period. The revocability of a proxy that
states on its face that it is irrevocable shall be governed by the provisions of
Section 212(e) of the General Corporation Law of the State of Delaware.
2.14 Notice of Stockholder Business and Nominations.
(A) Annual Meetings of Stockholders. (1) Nominations of persons for
election to the Board of Directors of the corporation and the proposal of
business to be considered by the stockholders may be made at an annual meeting
of stockholders only (a) pursuant to the corporation's notice of meeting (or any
supplement thereto), (b) by or at the direction of the Board of Directors or (c)
by any stockholder of the corporation who was a stockholder of record of the
corporation at the time the notice provided for in this Section 2.14 is
delivered to the Secretary of the corporation, who is entitled to vote at the
meeting and who complies with the notice procedures set forth in this Section
2.14.
(2) For nominations or other business to be properly brought
before an annual meeting by a stockholder pursuant to clause (c) of paragraph
(A)(1) of this Section 2.14, the stockholder must have given timely notice
thereof in writing to the Secretary of the corporation and any such proposed
business other than the nominations of persons for election to the Board of
Directors must constitute a proper matter for stockholder action. To be timely,
a stockholder's notice shall be delivered to the Secretary at the principal
executive offices of the corporation not later than the close of business on the
ninetieth day nor earlier than the close of business on the one hundred
twentieth day prior to the first anniversary of the preceding year's annual
meeting (provided, however, that in the event that the date of the annual
meeting is more than thirty days before or more than seventy days after such
anniversary date, notice by the stockholder must be so delivered not earlier
than the close of business on the one hundred twentieth day prior to such annual
meeting and not later than the close of business on the later of the ninetieth
day prior to such annual meeting or the tenth day following the day on which
public announcement of the date of such meeting is first made by the
corporation). In no event shall the public announcement of an adjournment or
postponement of an annual meeting commence a new time period (or extend any time
period) for the giving of a stockholder's notice as described above. Such
stockholder's notice shall set forth: (a) as to each person whom the stockholder
proposes to nominate for election as a director all information relating to such
person that is required to be disclosed in solicitations of proxies for election
of directors in an election contest, or is otherwise required, in each case
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended
(the "Exchange Act") and Rule 14a-11 thereunder (and such person's written
consent to being named in the proxy statement as a nominee and to serving as a
director
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if elected); (b) as to any other business that the stockholder proposes to bring
before the meeting, a brief description of the business desired to be brought
before the meeting, the text of the proposal or business (including the text of
any resolutions proposed for consideration and in the event that such business
includes a proposal to amend the Bylaws of the corporation, the language of the
proposed amendment), the reasons for conducting such business at the meeting and
any material interest in such business of such stockholder and the beneficial
owner, if any, on whose behalf the proposal is made; and (c) as to the
stockholder giving the notice and the beneficial owner, if any, on whose behalf
the nomination or proposal is made (i) the name and address of such stockholder,
as they appear on the corporation's books, and of such beneficial owner, (ii)
the class and number of shares of capital stock of the corporation which are
owned beneficially and of record by such stockholder and such beneficial owner,
(iii) a representation that the stockholder is a holder of record of stock of
the corporation entitled to vote at such meeting and intends to appear in person
or by proxy at the meeting to propose such business or nomination, and (iv) a
representation whether the stockholder or the beneficial owner, if any, intends
or is part of a group which intends (a) to deliver a proxy statement and/or form
of proxy to holders of at least the percentage of the corporation's outstanding
capital stock required to approve or adopt the proposal or elect the nominee
and/or (b) otherwise to solicit proxies from stockholders in support of such
proposal or nomination. The corporation may require any proposed nominee to
furnish such other information as it may reasonably require to determine the
eligibility of such proposed nominee to serve as a director of the corporation.
(3) Notwithstanding anything in the second sentence of paragraph
(A)(2) of this Section 2.14 to the contrary, in the event that the number of
directors to be elected to the Board of Directors of the corporation at an
annual meeting is increased and there is no public announcement by the
corporation naming the nominees for the additional directorships at least one
hundred days prior to the first anniversary of the preceding year's annual
meeting, a stockholder's notice required by this Section 2.14 shall also be
considered timely, but only with respect to nominees for the additional
directorships, if it shall be delivered to the Secretary at the principal
executive offices of the corporation not later than the close of business on the
tenth day following the day on which such public announcement is first made by
the corporation.
(B) Special Meetings of Stockholders. Only such business shall be
conducted at a special meeting of stockholders as shall have been brought before
the meeting pursuant to the corporation's notice of meeting. Nominations of
persons for election to the Board of Directors may be made at a special meeting
of stockholders at which directors are to be elected pursuant to the
corporation's notice of meeting (1) by or at the direction of the Board of
Directors or (2) provided that the Board of Directors has determined that
directors shall be elected at such meeting, by any stockholder of the
corporation who is a stockholder of record at the time the notice provided for
in this Section 2.14 is delivered to the Secretary of the corporation, who is
entitled to vote at the meeting and upon such election and who complies with the
notice procedures set forth in this Section 2.14. In the event the corporation
calls a special meeting of stockholders for the purpose of electing one or more
directors to the Board of Directors, any such stockholder entitled to vote in
such election of directors may nominate a person or persons (as the case may be)
for election to such position(s) as specified in the corporation's notice of
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meeting, if the stockholder's notice required by paragraph (A)(2) of this
Section 2.14 shall be delivered to the Secretary at the principal executive
offices of the corporation not earlier than the close of business on the one
hundred twentieth day prior to such special meeting and not later than the close
of business on the later of the ninetieth day prior to such special meeting or
the tenth day following the day on which public announcement is first made of
the date of the special meeting and of the nominees proposed by the Board of
Directors to be elected at such meeting. In no event shall the public
announcement of an adjournment or postponement of a special meeting commence a
new time period (or extend any time period) for the giving of a stockholder's
notice as described above.
(C) General. (1) Only such persons who are nominated in accordance
with the procedures set forth in this Section 2.14 shall be eligible to be
elected at an annual or special meeting of stockholders of the corporation to
serve as directors and only such business shall be conducted at a meeting of
stockholders as shall have been brought before the meeting in accordance with
the procedures set forth in this Section 2.14. Except as otherwise provided by
law, the chairman of the meeting shall have the power and duty (a) to determine
whether a nomination or any business proposed to be brought before the meeting
was made or proposed, as the case may be, in accordance with the procedures set
forth in this Section 2.14 (including whether the stockholder or beneficial
owner, if any, on whose behalf the nomination or proposal is made solicited (or
is part of a group which solicited) or did not so solicit, as the case may be,
proxies in support of such stockholder's nominee or proposal in compliance with
such stockholder's representation as required by clause (A)(2)(c)(iv) of this
Section 2.14) and (b) if any proposed nomination or business was not made or
proposed in compliance with this Section 2.14, to declare that such nomination
shall be disregarded or that such proposed business shall not be transacted.
(2) For purposes of this Section 2.14, "public announcement"
shall mean disclosure in a press release reported by the Dow Jones News Service,
Associated Press or comparable national news service or in a document publicly
filed by the corporation with the Securities and Exchange Commission pursuant to
Section 13, 14 or 15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of this Section
2.14, a stockholder shall also comply with all applicable requirements of the
Exchange Act and the rules and regulations thereunder with respect to the
matters set forth in this Section 2.14. Nothing in this Section 2.14 shall be
deemed to affect any rights (a) of stockholders to request inclusion of
proposals in the corporation's proxy statement pursuant to Rule 14a-8 under the
Exchange Act or (b) of the holders of any series of Preferred Stock to elect
directors pursuant to any applicable provisions of the certificate of
incorporation.
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ARTICLE III
DIRECTORS
3.1 Powers.
Subject to the provisions of the General Corporation Law of the State
of Delaware and any limitations in the certificate of incorporation, the
business and affairs of the corporation shall be managed and all corporate
powers shall be exercised by or under the direction of the Board of Directors.
3.2 Number Of Directors.
The number of directors constituting the entire Board of Directors
shall be nine.
3.3 Qualification And Term Of Office Of Directors.
Except as provided in Section 3.4 of these Bylaws, directors shall be
elected at each annual meeting of the stockholders to hold office until the next
annual meeting. Directors need not be stockholders unless so required by the
certificate of incorporation or these Bylaws, wherein other qualifications for
directors may be prescribed. Each director, including a director elected to fill
a vacancy, shall hold office until his or her successor is elected and qualified
or until his or her earlier resignation or removal.
Elections of directors need not be by written ballot.
3.4 Resignation.
Any director may resign at any time upon written notice to the
attention of the Secretary of the corporation.
3.5 Place Of Meetings; Meetings By Telephone.
The Board of Directors of the corporation may hold meetings, both
regular and special, either within or outside the State of Delaware.
Unless otherwise restricted by the certificate of incorporation or
these Bylaws, members of the Board of Directors, or any committee designated by
the Board of Directors, may participate in a meeting of the Board of Directors,
or any committee, by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and such participation in a meeting shall constitute presence in
person at the meeting.
3.6 Regular Meetings.
Regular meetings of the Board of Directors may be held without notice
at such time and at such place as shall from time to time be determined by the
board.
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3.7 Special Meetings; Notice.
Special meetings of the Board of Directors for any purpose or purposes
may be called at any time by the chairman of the board, the president, any vice
president, the secretary or any two directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone, sent by first-class mail, telegram, or telecopier or
otherwise given by other lawful means (including by electronic mail) to each
director. If the notice is mailed, it shall be deposited in the United States
mail at least four (4) days before the time of the holding of the meeting. If
the notice is delivered personally or by telephone, or by telegram, telecopier
or other lawful means (including by electronic mail), it shall be delivered at
least forty-eight (48) hours before the time of the holding of the meeting. Any
oral notice given personally or by telephone may be communicated either to the
director or to a person at the office of the director who the person giving the
notice has reason to believe will promptly communicate it to the director. The
notice need not specify the purpose or the place of the meeting, if the meeting
is to be held at the principal executive office of the corporation.
3.8 Quorum.
At all meetings of the Board of Directors, a majority of the
authorized number of directors shall constitute a quorum for the transaction of
business and the act of a majority of the directors present at any meeting at
which there is a quorum shall be the act of the Board of Directors, except as
may be otherwise specifically provided by statute or by the certificate of
incorporation. If a quorum is not present at any meeting of the Board of
Directors, then the directors present thereat may adjourn the meeting from time
to time, without notice other than announcement at the meeting, until a quorum
is present.
3.9 Waiver Of Notice.
Whenever notice is required to be given under any provision of the
General Corporation Law of the State of Delaware or of the certificate of
incorporation or these Bylaws, a written waiver thereof, signed by the person
entitled to notice, whether before or after the time stated therein, shall be
deemed equivalent to notice. Attendance of a person at a meeting shall
constitute a waiver of notice of such meeting, except when the person attends a
meeting for the express purpose of objecting, at the beginning of the meeting,
to the transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the directors, or members of a committee of
directors, need be specified in any written waiver of notice unless so required
by the certificate of incorporation or these Bylaws.
3.10 Board Action By Written Consent Without A Meeting.
Unless otherwise restricted by the certificate of incorporation or
these Bylaws, any action required or permitted to be taken at any meeting of the
Board of Directors, or of any committee thereof, may be taken without a meeting
if all members of the board or committee, as
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the case may be, consent thereto in writing and the writing or writings are
filed with the minutes of proceedings of the board or committee. Written
consents representing actions taken by the board or committee may be executed by
telex, telecopy or other facsimile transmission, and such facsimile shall be
valid and binding to the same extent as if it were an original.
3.11 Fees And Compensation Of Directors.
Unless otherwise restricted by the certificate of incorporation or
these Bylaws, the Board of Directors shall have the authority to fix the
compensation of directors. No such compensation shall preclude any director from
serving the corporation in any other capacity and receiving compensation
therefor.
3.12 Approval Of Loans To Officers.
The corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the corporation or of its
subsidiary, including any officer or employee who is a director of the
corporation or its subsidiary, whenever, in the judgment of the directors, such
loan, guaranty or assistance may reasonably be expected to benefit the
corporation. The loan, guaranty or other assistance may be with or without
interest and may be unsecured, or secured in such manner as the Board of
Directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing in this section contained shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
3.13 Removal of Directors.
Unless otherwise restricted by statue or by the certificate of
incorporation, any director or the entire Board of Directors may be removed,
with or without cause by the holders of a majority of the shares then entitled
to vote at an election of directors; provided, however, that if the stockholders
of the corporation are entitled to cumulative voting, if less than the entire
Board of Directors is to be removed, no director may be removed without cause if
the votes cast against his removal would be sufficient to elect him if then
cumulatively voted at an election of the entire Board of Directors.
No reduction of the authorized number of directors shall have the
effect of removing any director prior to the expiration of such director's term
of office.
3.14 Chairman Of The Board Of Directors.
The corporation may also have, at the discretion of the Board of
Directors, a chairman of the Board of Directors who shall not be considered an
officer of the corporation.
ARTICLE IV
COMMITTEES
4.1 Committees Of Directors.
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The Board of Directors may designate one or more committees, each
committee to consist of one or more of the directors of the corporation. The
Board may designate 1 or more directors as alternate members of any committee,
who may replace any absent or disqualified member at any meeting of the
committee. In the absence or disqualification of a member of a committee, the
member or members present at any meeting and not disqualified from voting,
whether or not such member or members constitute a quorum, may unanimously
appoint another member of the Board of Directors to act at the meeting in the
place of any such absent or disqualified member. Any such committee, to the
extent provided in the resolution of the Board of Directors, or in these Bylaws,
shall have and may exercise all the powers and authority of the Board of
Directors in the management of the business and affairs of the corporation, and
may authorize the seal of the corporation to be affixed to all papers which may
require it; but no such committee shall have the power or authority in reference
to the following matters: (i) approving or adopting, or recommending to the
stockholders, any action or matter expressly required by the General Corporation
Law of the State of Delaware to be submitted to stockholders for approval or
(ii) adopting, amending or repealing any Bylaw of the corporation.
4.2 Committee Minutes.
Each committee shall keep regular minutes of its meetings and report
the same to the Board of Directors when required.
4.3 Meetings And Action Of Committees.
Meetings and actions of committees shall be governed by, and held and
taken in accordance with, the provisions of Section 3.5 (place of meetings and
meetings by telephone), Section 3.6 (regular meetings), Section 3.7 (special
meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice), and
Section 3.10 (action without a meeting) of these Bylaws, with such changes in
the context of such provisions as are necessary to substitute the committee and
its members for the Board of Directors and its members; provided, however, that
the time of regular meetings of committees may be determined either by
resolution of the Board of Directors or by resolution of the committee, that
special meetings of committees may also be called by resolution of the Board of
Directors and that notice of special meetings of committees shall also be given
to all alternate members, who shall have the right to attend all meetings of the
committee. The Board of Directors may adopt rules for the governance of any
committee not inconsistent with the provisions of these Bylaws.
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ARTICLE V
OFFICERS
5.1 Officers.
The officers of the corporation shall be a chief executive officer, a
president, a secretary, and a chief financial officer (who shall also serve as
the treasurer of the corporation). The corporation may also have, at the
discretion of the Board of Directors, one or more vice presidents, one or more
assistant secretaries, one or more assistant treasurers, and any such other
officers as may be appointed in accordance with the provisions of Section 5.3 of
these Bylaws. Any number of offices may be held by the same person.
5.2 Appointment Of Officers.
The officers of the corporation, except such officers as may be
appointed in accordance with the provisions of Sections 5.3 or 5.5 of these
Bylaws, shall be appointed by the Board of Directors, subject to the rights, if
any, of an officer under any contract of employment.
5.3 Subordinate Officers.
The Board of Directors may appoint, or empower the chief executive
officer or the president to appoint, such other officers and agents as the
business of the corporation may require, each of whom shall hold office for such
period, have such authority, and perform such duties as are provided in these
Bylaws or as the Board of Directors may from time to time determine.
5.4 Removal And Resignation Of Officers.
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by the
Board of Directors at any regular or special meeting of the board or, except in
the case of an officer chosen by the Board of Directors, by any officer upon
whom such power of removal may be conferred by the Board of Directors.
Any officer may resign at any time by giving written notice to the
attention of the Secretary of the corporation. Any resignation shall take effect
at the date of the receipt of that notice or at any later time specified in that
notice; and, unless otherwise specified in that notice, the acceptance of the
resignation shall not be necessary to make it effective. Any resignation is
without prejudice to the rights, if any, of the corporation under any contract
to which the officer is a party.
5.5 Vacancies In Offices.
Any vacancy occurring in any office of the corporation shall be filled
by the Board of Directors or by an officer duly authorized to do so.
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5.6 Chief Executive Officer.
Subject to such supervisory powers, if any, as may be given by the
Board of Directors to the chairman of the board, if any, the chief executive
officer of the corporation shall, subject to the control of the Board of
Directors, have general supervision, direction and control of the business and
the officers of the corporation. He or she shall preside at all meetings of the
stockholders and, in the absence or nonexistence of a chairman of the board, at
all meetings of the Board of Directors and shall have the general powers and
duties of management usually vested in the office of chief executive officer of
a corporation and shall have such other powers and duties as may be prescribed
by the Board of Directors or these bylaws.
5.7 President.
Subject to such supervisory powers, if any, as may be given by the
Board of Directors to the chairman of the board (if any) or the chief executive
officer, the president shall have general supervision, direction and control of
the business and other officers of the corporation. He or she shall have the
general powers and duties of management usually vested in the office of
president of a corporation and such other powers and duties as may be prescribed
by the Board of Directors or these Bylaws.
5.8 Vice Presidents.
In the absence or disability of the chief executive officer and
president, the vice presidents, if any, in order of their rank as fixed by the
Board of Directors or, if not ranked, a vice president designated by the Board
of Directors, shall perform all the duties of the president and when so acting
shall have all the powers of, and be subject to all the restrictions upon, the
president. The vice presidents shall have such other powers and perform such
other duties as from time to time may be prescribed for them respectively by the
Board of Directors, these Bylaws, the president or the chairman of the board.
5.9 Secretary.
The secretary shall keep or cause to be kept, at the principal
executive office of the corporation or such other place as the Board of
Directors may direct, a book of minutes of all meetings and actions of
directors, committees of directors and stockholders. The minutes shall show the
time and place of each meeting, the names of those present at directors'
meetings or committee meetings, the number of shares present or represented at
stockholders' meetings and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal
executive office of the corporation or at the office of the corporation's
transfer agent or registrar, as determined by resolution of the Board of
Directors, a share register, or a duplicate share register, showing the names of
all stockholders and their addresses, the number and classes of shares held by
each, the number and date of certificates evidencing such shares and the number
and date of cancellation of every certificate surrendered for cancellation.
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The secretary shall give, or cause to be given, notice of all meetings
of the stockholders and of the Board of Directors required to be given by law or
by these Bylaws. He or she shall keep the seal of the corporation, if one be
adopted, in safe custody and shall have such other powers and perform such other
duties as may be prescribed by the Board of Directors or by these Bylaws.
5.10 Chief Financial Officer.
The chief financial officer and treasurer shall keep and maintain, or
cause to be kept and maintained, adequate and correct books and records of
accounts of the properties and business transactions of the corporation,
including accounts of its assets, liabilities, receipts, disbursements, gains,
losses, capital retained earnings and shares. The books of account shall at all
reasonable times be open to inspection by any director.
The chief financial officer and treasurer shall deposit all moneys and
other valuables in the name and to the credit of the corporation with such
depositories as may be designated by the Board of Directors. He or she shall
disburse the funds of the corporation as may be ordered by the Board of
Directors, shall render to the president, the chief executive officer or the
directors, upon request, an account of all his or her transactions as chief
financial officer and of the financial condition of the corporation, and shall
have other powers and perform such other duties as may be prescribed by the
Board of Directors or the Bylaws.
5.11 Representation Of Shares Of Other Corporations.
The chairman of the board, the chief executive officer, the president,
any vice president, the chief financial officer, the secretary or assistant
secretary of this corporation, or any other person authorized by the Board of
Directors or the chief executive officer or the president or a vice president,
is authorized to vote, represent and exercise on behalf of this corporation all
rights incident to any and all shares of any other corporation or corporations
standing in the name of this corporation. The authority granted herein may be
exercised either by such person directly or by any other person authorized to do
so by proxy or power of attorney duly executed by the person having such
authority.
5.12 Authority And Duties Of Officers.
In addition to the foregoing authority and duties, all officers of the
corporation shall respectively have such authority and perform such duties in
the management of the business of the corporation as may be designated from time
to time by the Board of Directors or the stockholders.
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ARTICLE VI
INDEMNIFICATION
6.1. Right to Indemnification.
The corporation shall indemnify and hold harmless, to the fullest
extent permitted by applicable law as it presently exists or may hereafter be
amended, any person (a "Covered Person") who was or is made or is threatened to
be made a party or is otherwise involved in any action, suit or proceeding,
whether civil, criminal, administrative or investigative (a "proceeding"), by
reason of the fact that he, or a person for whom he is the legal representative,
is or was a director or officer of the corporation or, while a director or
officer of the corporation, is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation or of a
partnership, joint venture, trust, enterprise or nonprofit entity, including
service with respect to employee benefit plans, against all liability and loss
suffered and expenses (including attorneys' fees) reasonably incurred by such
Covered Person. Notwithstanding the preceding sentence, except as otherwise
provided in Section 6.3, the corporation shall be required to indemnify a
Covered Person in connection with a proceeding (or part thereof) commenced by
such Covered Person only if the commencement of such proceeding (or part
thereof) by the Covered Person was authorized by the Board of Directors of the
corporation.
6.2. Prepayment of Expenses.
The corporation shall pay the expenses (including attorneys' fees)
incurred by a Covered Person in defending any proceeding in advance of its final
disposition, provided, however, that, to the extent required by law, such
payment of expenses in advance of the final disposition of the proceeding shall
be made only upon receipt of an undertaking by the Covered Person to repay all
amounts advanced if it should be ultimately determined that the Covered Person
is not entitled to be indemnified under this Article VI or otherwise.
6.3. Claims.
If a claim for indemnification or advancement of expenses under this
Article VI is not paid in full within thirty days after a written claim therefor
by the Covered Person has been received by the corporation, the Covered Person
may file suit to recover the unpaid amount of such claim and, if successful in
whole or in part, shall be entitled to be paid the expense of prosecuting such
claim. In any such action the corporation shall have the burden of proving that
the Covered Person is not entitled to the requested indemnification or
advancement of expenses under applicable law.
6.4. Nonexclusivity of Rights.
The rights conferred on any Covered Person by this Article VI shall
not be exclusive of any other rights which such Covered Person may have or
hereafter acquire under any statute, provision of the certificate of
incorporation, these Bylaws, agreement, vote of stockholders or disinterested
directors or otherwise.
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6.5. Other Sources.
The corporation's obligation, if any, to indemnify or to advance
expenses to any Covered Person who was or is serving at its request as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust, enterprise or nonprofit entity shall be reduced by any amount
such Covered Person may collect as indemnification or advancement of expenses
from such other corporation, partnership, joint venture, trust, enterprise or
non-profit enterprise.
6.6. Amendment or Repeal.
Any repeal or modification of the foregoing provisions of this Article
VI shall not adversely affect any right or protection hereunder of any Covered
Person in respect of any act or omission occurring prior to the time of such
repeal or modification.
6.7. Other Indemnification and Prepayment of Expenses.
This Article VI shall not limit the right of the corporation, to the
extent and in the manner permitted by law, to indemnify and to advance expenses
to persons other than Covered Persons when and as authorized by appropriate
corporate action.
ARTICLE VII
RECORDS AND REPORTS
7.1 Maintenance Of Records.
The corporation shall, either at its principal executive offices or at
such place or places as designated by the Board of Directors, keep a record of
its stockholders listing their names and addresses and the number and class of
shares held by each stockholder, a copy of these Bylaws as amended to date,
accounting books and other records.
7.2 Annual Statement To Stockholders.
The Board of Directors shall present at each annual meeting, and at
any special meeting of the stockholders when called for by vote of the
stockholders, a full and clear statement of the business and condition of the
corporation.
ARTICLE VIII
GENERAL MATTERS
8.1 Checks.
From time to time, the Board of Directors shall determine by
resolution which person or persons may sign or endorse all checks, drafts, other
orders for payment of money, notes or other evidences of indebtedness that are
issued in the name of or payable to the corporation, and only the persons so
authorized shall sign or endorse those instruments.
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8.2 Execution Of Corporate Contracts And Instruments.
The Board of Directors, except as otherwise provided in these Bylaws,
may authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the Board of Directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
8.3 Stock Certificates; Partly Paid Shares.
The shares of a corporation shall be represented by certificates,
provided that the Board of Directors of the corporation may provide by
resolution or resolutions that some or all of any or all classes or series of
its stock shall be uncertificated shares. Any such resolution shall not apply to
shares represented by a certificate until such certificate is surrendered to the
corporation. Notwithstanding the adoption of such a resolution by the Board of
Directors, every holder of stock represented by certificates and upon request
every holder of uncertificated shares shall be entitled to have a certificate
signed by, or in the name of the corporation by the chairman or vice-chairman of
the Board of Directors, or the president or vice-president, and by the treasurer
or an assistant treasurer, or the secretary or an assistant secretary of such
corporation representing the number of shares registered in certificate form.
Any or all of the signatures on the certificate may be a facsimile. In case any
officer, transfer agent or registrar who has signed or whose facsimile signature
has been placed upon a certificate has ceased to be such officer, transfer agent
or registrar before such certificate is issued, it may be issued by the
corporation with the same effect as if he or she were such officer, transfer
agent or registrar at the date of issue.
The corporation may issue the whole or any part of its shares as
partly paid and subject to call for the remainder of the consideration to be
paid therefor. Upon the face or back of each stock certificate issued to
represent any such partly paid shares, upon the books and records of the
corporation in the case of uncertificated partly paid shares, the total amount
of the consideration to be paid therefor and the amount paid thereon shall be
stated. Upon the declaration of any dividend on fully paid shares, the
corporation shall declare a dividend upon partly paid shares of the same class,
but only upon the basis of the percentage of the consideration actually paid
thereon.
8.4 Special Designation On Certificates.
If the corporation is authorized to issue more than one class of stock
or more than one series of any class, then the powers, the designations, the
preferences, and the relative, participating, optional or other special rights
of each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the corporation shall
issue to represent such class or series of stock; provided, however, that,
except as otherwise provided in
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Section 202 of the General Corporation Law of the State of Delaware, in lieu of
the foregoing requirements there may be set forth on the face or back of the
certificate that the corporation shall issue to represent such class or series
of stock a statement that the corporation will furnish without charge to each
stockholder who so requests the powers, the designations, the preferences, and
the relative, participating, optional or other special rights of each class of
stock or series thereof and the qualifications, limitations or restrictions of
such preferences and/or rights.
8.5 Lost Certificates.
Except as provided in this Section 8.5, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation and cancelled at the same time. The corporation
may issue a new certificate of stock or uncertificated shares in the place of
any certificate previously issued by it, alleged to have been lost, stolen or
destroyed, and the corporation may require the owner of the lost, stolen or
destroyed certificate, or the owner's legal representative, to give the
corporation a bond sufficient to indemnify it against any claim that may be made
against it on account of the alleged loss, theft or destruction of any such
certificate or the issuance of such new certificate or uncertificated shares.
8.6 Dividends.
The directors of the corporation, subject to any restrictions
contained in (a) the General Corporation Law of the State of Delaware or (b) the
certificate of incorporation, may declare and pay dividends upon the shares of
its capital stock. Dividends may be paid in cash, in property or in shares of
the corporation's capital stock.
The directors of the corporation may set apart out of any of the funds
of the corporation available for dividends a reserve or reserves for any proper
purpose and may abolish any such reserve. Such purposes shall include but not be
limited to equalizing dividends, repairing or maintaining any property of the
corporation and meeting contingencies.
8.7 Fiscal Year.
The fiscal year of the corporation shall be fixed by resolution of the
Board of Directors and may be changed by the Board of Directors.
8.8 Seal.
The corporation may adopt a corporate seal, which may be altered at
pleasure, and may use the same by causing it or a facsimile thereof, to be
impressed or affixed or in any other manner reproduced.
8.9 Transfer Of Stock.
Upon surrender to the corporation or the transfer agent of the
corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignation or authority to transfer, it shall be the
duty of the corporation, subject to any
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applicable restrictions on transfer noted conspicuously thereon, to issue a new
certificate to the person entitled thereto, cancel the old certificate and
record the transaction in its books.
8.10 Stock Transfer Agreements.
The corporation shall have power to enter into and perform any
agreement with any number of stockholders of any one or more classes of stock of
the corporation to restrict the transfer of shares of stock of the corporation
of any one or more classes owned by such stockholders in any manner not
prohibited by the General Corporation Law of the State of Delaware.
8.11 Registered Stockholders.
The corporation shall be entitled to recognize the exclusive right of
a person registered on its books as the owner of shares to receive dividends and
to vote as such owner, shall be entitled to hold liable for calls and
assessments the person registered on its books as the owner of shares and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of another person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
ARTICLE IX
AMENDMENTS
The Bylaws of the corporation may be adopted, amended or repealed as set
forth in the certificate of incorporation
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EXHIBIT 5.1
[Letterhead of Shearman & Sterling]
February 9, 2000
drugstore.com, inc.
13920 Southeast Eastgate Way
Suite 300
Bellevue, Washington 98005
We have acted as special counsel to drugstore.com, inc., a Delaware
corporation (the "Company"), in connection with the proposed offering (the
"Offering") of up to 6,923,000 shares of the Company's common stock, par value
$0.0001 per share (the "Shares"), by the Company and the selling stockholders
(the "Selling Stockholders"), as described in the Registration Statement on Form
S-1 (the "Registration Statement") filed by the Company with the Securities and
Exchange Commission under the Securities Act of 1933, as amended (the
"Securities Act"). The Shares are to be sold to the public pursuant to the terms
of an underwriting agreement among the Company, the Selling Stockholders and the
Underwriters named therein (the "Underwriting Agreement"), the form of which
will be filed as an exhibit to the Registration Statement.
In connection with this opinion, we have (i) examined and relied upon the
originals or copies certified or otherwise identified to our satisfaction of
such records, documents, certificates, and other instruments as in our judgment
are necessary or appropriate to enable us to render the opinion expressed below,
and (ii) assumed that the Shares will be sold by the Underwriters at a price
approved by the Company's Board of Directors. In our examination, we have
assumed the genuineness of all signatures, the authenticity of all documents
presented to us as originals and the conformity to the originals of all
documents presented to us as copies. Our opinion expressed herein is limited to
the General Corporation Law of the State of Delaware.
Based upon the foregoing, we are of the opinion that the Shares to be sold
in the Offering (including Shares, if any, registered in a registration
statement relating to the Offering filed by the Company pursuant to Rule 462(b)
under the Securities Act) when issued and delivered in accordance with the terms
of the Underwriting Agreement, will be validly issued, fully paid and
nonassessable.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the reference to this firm under the heading
"Legal Matters" in the Registration Statement. We hereby also consent to the
incorporation by reference of this opinion and consent to a registration
statement, if any, relating to the Offering filed by the Company pursuant to
Rule 462(b) under the Securities Act. In giving this consent, we do not thereby
concede that we come within the category of persons whose consent is required by
the Securities Act or the General Rules and Regulations promulgated thereunder.
Very truly yours,
/s/ SHEARMAN & STERLING
<PAGE>
Exhibit 10.3
DRUGSTORE.COM
1999 EMPLOYEE STOCK PURCHASE PLAN
---------------------------------
(As amended by the Board of Directors ______, 2000)
The following constitute the provisions of the 1999 Employee Stock Purchase
Plan of drugstore.com.
1. Purpose. The purpose of the Plan is to provide employees of the
Company and its Designated Subsidiaries with an opportunity to purchase Common
Stock of the Company. It is the intention of the Company to have the Plan
qualify as an "Employee Stock Purchase Plan" under Section 423 of the Code. The
provisions of the Plan shall, accordingly, be construed so as to extend and
limit participation in a manner consistent with the requirements of that section
of the Code.
2. Definitions.
(a) "Board" means the Board of Directors of the Company.
(b) "Code" means the Internal Revenue Code of 1986, as amended.
(c) "Common Stock" means the Common Stock of the Company.
(d) "Company" means drugstore.com, a Delaware corporation.
(e) "Compensation" means total cash compensation received by an
Employee from the Company or a Designated Subsidiary. By way of illustration,
but not limitation, Compensation includes regular compensation such as salary,
wages, overtime, shift differentials, bonuses, commissions and incentive
compensation, but excludes relocation, expense reimbursements, tuition or other
reimbursements and income realized as a result of participation in any stock
option, stock purchase, or similar plan of the Company or any Designated
Subsidiary.
(f) "Continuous Status as an Employee" means the absence of any
interruption or termination of service as an Employee. Continuous Status as an
Employee shall not be considered interrupted in the case of (i) sick leave; (ii)
military leave; (iii) any other leave of absence approved by the Administrator,
provided that such leave is for a period of not more than 90 days, unless
reemployment upon the expiration of such leave is guaranteed by contract or
statute, or unless provided otherwise pursuant to Company policy adopted from
time to time; or (iv) in the case of transfers between locations of the Company
or between the Company and its Designated Subsidiaries.
(g) "Contributions" means all amounts credited to the account of a
participant pursuant to the Plan.
<PAGE>
(h) "Corporate Transaction" means a sale of all or substantially all
of the Company's assets, or a merger, consolidation or other capital
reorganization of the Company with or into another corporation.
(i) "Designated Subsidiaries" means the Subsidiaries that have been
designated by the Board from time to time in its sole discretion as eligible to
participate in the Plan; provided however that the Board shall only have the
discretion to designate Subsidiaries if the issuance of options to such
Subsidiary's Employees pursuant to the Plan would not cause the Company to incur
adverse accounting charges.
(j) "Employee" means any person, including an Officer, who is an
Employee of the Company for tax purposes and who is customarily employed for at
least twenty (20) hours per week and more than five (5) months in a calendar
year by the Company or one of its Designated Subsidiaries.
(k) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(l) "Offering Date" means the first business day of each Offering
Period of the Plan, except that in the case of an individual who becomes an
eligible Employee after the first business day of an Offering Period but prior
to the first business day of the fourth calendar month within such Offering
Period, the term "Offering Date" means the first business day of such fourth
calendar month coinciding with or next succeeding the day on which that
individual becomes an eligible Employee.
Options granted after the first business day of an Offering Period
will be subject to the same terms and conditions as the options granted on the
first business day of such Offering Period except that they will have a
different grant date (and thus, potentially, a different Purchase Price) and,
because they expire at the same time as the options granted on the first
business day of such Offering Period, a shorter term.
(m) "Offering Period" means a period of six (6) months commencing on
February 1 and August 1 of each year, other than the first Offering Period as
set forth in Section 4.
(n) "Officer" means a person who is an officer of the Company within
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(o) "Plan" means this 1999 Employee Stock Purchase Plan.
(p) "Purchase Date" means the last day of each Offering Period of the
Plan.
(q) "Purchase Price" means with respect to an Offering Period an
amount equal to 85% of the Fair Market Value (as defined in Section 7(b) below)
of a Share of Common Stock on the Offering Date or on the Purchase Date,
whichever is lower; provided, however, that in the event (i) of any stockholder-
approved increase in the number of Shares available for issuance under the Plan,
and (ii) all or a portion of such additional Shares are to be issued with
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respect to the Offering Period that is underway at the time of such increase
("Additional Shares"), and (iii) the Fair Market Value of a Share of Common
Stock on the date of such increase (the "Approval Date Fair Market Value") is
higher than the Fair Market Value on the Offering Date for any such Offering
Period, then in such instance the Purchase Price with respect to Additional
Shares shall be 85% of the Approval Date Fair Market Value or the Fair Market
Value of a Share of Common Stock on the Purchase Date, whichever is lower.
(s) "Share" means a share of Common Stock, as adjusted in accordance
with Section 19 of the Plan.
(t) "Subsidiary" means a corporation, domestic or foreign, of which
not less than 50% of the voting shares are held by the Company or a Subsidiary,
whether or not such corporation now exists or is hereafter organized or acquired
by the Company or a Subsidiary.
3. Eligibility.
(a) Any person who is an Employee as of the Offering Date of a given
Offering Period shall be eligible to participate in such Offering Period under
the Plan, subject to the requirements of Section 5(a) and the limitations
imposed by Section 423(b) of the Code.
(b) Any provisions of the Plan to the contrary notwithstanding, no
Employee shall be granted an option under the Plan (i) if, immediately after the
grant, such Employee (or any other person whose stock would be attributed to
such Employee pursuant to Section 424(d) of the Code) would own capital stock of
the Company and/or hold outstanding options to purchase stock possessing five
percent (5%) or more of the total combined voting power or value of all classes
of stock of the Company or of any subsidiary of the Company, or (ii) if such
option would permit his or her rights to purchase stock under all employee stock
purchase plans (described in Section 423 of the Code) of the Company and its
Subsidiaries to accrue at a rate that exceeds Twenty-Five Thousand Dollars
($25,000) of the Fair Market Value (as defined in Section 7(b) below) of such
stock (determined at the time such option is granted) for each calendar year in
which such option is outstanding at any time.
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4. Offering Periods. The Plan shall be implemented by a series of
Offering Periods of six (6) months' duration, with new Offering Periods
commencing on or about February 1 and August 1 of each year (or at such other
time or times as may be determined by the Board of Directors). The first
Offering Period shall commence on the effective date of the Registration
Statement on Form S-1 for the initial public offering of the Company's Common
Stock (the "IPO Date") and continue until January 31, 2000. The Plan shall
continue until terminated in accordance with Section 19 hereof. The Board of
Directors of the Company shall have the power to change the duration and/or the
frequency of Offering Periods with respect to future offerings without
stockholder approval if such change is announced at least five (5) days prior to
the scheduled beginning of the first Offering Period to be affected.
5. Participation.
(a) An eligible Employee may become a participant in the Plan by
completing a subscription agreement and any other required documents
("Enrollment Documents") provided by the Company and submitting them to the
Company's Human Resources Department or the a stock brokerage or other financial
services firm designated by the Company ("Designated Broker") prior to the
applicable Offering Date, unless a later time for submission of the Enrollment
Documents is set by the Board for all eligible Employees with respect to a given
Offering Period. The Enrollment Documents and their submission may be
electronic, as directed by the Company. The Enrollment Documents shall set
forth the percentage of the participant's Compensation (subject to Section 6(a)
below) to be paid as Contributions pursuant to the Plan.
(b) Payroll deductions shall commence on the date of the first
paycheck paid following the Offering Date and shall end on the date of the last
paycheck paid on or prior to the Purchase Date of the Offering Period to which
the Enrollment Documents are applicable, unless sooner terminated by the
participant as provided in Section 10.
6. Method of Payment of Contributions.
(a) A participant shall elect to have payroll deductions made on each
payday during the Offering Period in an amount not less than one percent (1%)
and not more than twenty percent (20%) (or such greater percentage as the Board
may establish from time to time before an Offering Date) of such participant's
Compensation on each payday during the Offering Period. All payroll deductions
made by a participant shall be credited to his or her account under the Plan. A
participant may not make any additional payments into such account.
(b) A participant may discontinue his or her participation in the
Plan as provided in Section 10, or, on one occasion only during an Offering
Period may increase or decrease the rate of his or her Contributions with
respect to the Offering Period by completing and filing with the Company new
Enrollment Documents authorizing a change in the payroll deduction rate. The
change in rate shall be effective as of the beginning of the next payroll period
following the date of filing of the new Enrollment Documents, if the documents
are completed at least five (5) business days prior to such date and, if not, as
of the beginning of the next succeeding payroll period.
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(c) Notwithstanding the foregoing, to the extent necessary to comply
with Section 423(b)(8) of the Code and Section 3(b) herein, a participant's
payroll deductions may be decreased during any Offering Period scheduled to end
during the current calendar year to 0%. Payroll deductions shall re-commence at
the rate provided in such participant's subscription agreement at the beginning
of the first Offering Period that is scheduled to end in the following calendar
year, unless terminated by the participant as provided in Section 10. In
addition, a participant's payroll deductions may be decreased by the Company to
0% at any time during an Offering Period in order to avoid unnecessary payroll
contributions as a result of application of the maximum share limit set forth in
Section 7(a), in which case payroll deductions shall re-commence at the rate
provided in such participant's subscription agreement at the beginning of the
next Offering Period, unless terminated by the participant as provided in
Section 10.
7. Grant of Option.
(a) On the Offering Date of each Offering Period, each eligible
Employee participating in such Offering Period shall be granted an option to
purchase on each Purchase Date a number of Shares of the Company's Common Stock
determined by dividing such Employee's Contributions accumulated prior to such
Purchase Date and retained in the participant's account as of the Purchase Date
by the applicable Purchase Price; provided however that the maximum number of
Shares an Employee may purchase during each Offering Period shall be 2,500
Shares (subject to any adjustment pursuant to Section 18 below), and provided
further that such purchase shall be subject to the limitations set forth in
Sections 3(b) and 12.
(b) The fair market value of the Company's Common Stock on a given
date (the "Fair Market Value") shall be determined by the Board in its
discretion based on the closing sales price of the Common Stock for such date
(or, in the event that the Common Stock is not traded on such date, on the
immediately preceding trading date), as reported by the National Association of
Securities Dealers Automated Quotation (Nasdaq) National Market or, if such
price is not reported, the mean of the bid and asked prices per share of the
Common Stock as reported by Nasdaq or, in the event the Common Stock is listed
on a stock exchange, the Fair Market Value per share shall be the closing sales
price on such exchange on such date (or, in the event that the Common Stock is
not traded on such date, on the immediately preceding trading date), as reported
in The Wall Street Journal. For purposes of the Offering Date that coincides
with the IPO Date, the Fair Market Value of a share of the Common Stock of the
Company shall be the Price to Public as set forth in the final prospectus filed
with the Securities and Exchange Commission pursuant to Rule 424 under the
Securities Act of 1933, as amended.
8. Exercise of Option. Unless a participant withdraws from the Plan as
provided in Section 10, his or her option for the purchase of Shares will be
exercised automatically on each Purchase Date of an Offering Period, and the
maximum number of Shares subject to the option will be purchased at the
applicable Purchase Price with the accumulated Contributions in his or her
account. Fractional Shares shall be issued, as necessary. The Shares purchased
upon exercise of an option hereunder shall be deemed to be transferred to the
participant on the Purchase Date. During his or her lifetime, a participant's
option to purchase Shares hereunder is exercisable only by him or her.
-5-
<PAGE>
9. Delivery. As promptly as practicable after a Purchase Date, the
number of Shares purchased by each participant upon exercise of his or her
option shall be deposited into an account established in the participant's name
with the Designated Broker. Any payroll deductions accumulated in a
participant's account that are not applied toward the purchase of Shares on a
Purchase Date due to limitations imposed by the Plan shall be returned to the
participant.
10. Voluntary Withdrawal; Termination of Employment.
(a) A participant may withdraw all but not less than all the
Contributions credited to his or her account under the Plan at any time prior to
a Purchase Date by submitting a completed "Notice of Withdrawal" form to the
Company's Human Resources Department or electronically completing the required
documentation provided by the Company through the Designated Broker, as directed
by the Company's Human Resources Department. All of the participant's
Contributions credited to his or her account will be paid to him or her promptly
after receipt of his or her notice of withdrawal and his or her option for the
current period will be automatically terminated, and no further Contributions
for the purchase of Shares will be made during the Offering Period.
(b) Upon termination of the participant's Continuous Status as an
Employee prior to the Purchase Date of an Offering Period for any reason,
whether voluntary or involuntary, including retirement or death, the
Contributions credited to his or her account will be returned to him or her or,
in the case of his or her death, to the person or persons entitled thereto under
Section 14, and his or her option will be automatically terminated.
(c) In the event an Employee fails to remain in Continuous Status as
an Employee of the Company for at least twenty (20) hours per week during the
Offering Period in which the employee is a participant, he or she will be deemed
to have elected to withdraw from the Plan and the Contributions credited to his
or her account will be returned to him or her and his or her option terminated.
(d) A participant's withdrawal from an offering will not have any
effect upon his or her eligibility to participate in a succeeding offering or in
any similar plan that may hereafter be adopted by the Company.
11. Interest. No interest shall accrue on the Contributions of a
participant in the Plan.
12. Stock.
(a) Subject to adjustment as provided in Section 18, the maximum
number of Shares that shall be made available for sale under the Plan shall be
500,000 Shares, plus an annual increase on the first day of each of the
Company's fiscal years beginning in 2000, 2001, 2002, 2003 and 2004 equal to the
lesser of (i) 500,000 Shares, (ii) three percent (3%) of the Shares outstanding
on the last day of the immediately preceding fiscal year, or (iii) such lesser
number of Shares as is determined by the Board. If the Board determines that,
on a given
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<PAGE>
Purchase Date, the number of shares with respect to which options are to be
exercised may exceed (1) the number of shares of Common Stock that were
available for sale under the Plan on the Offering Date of the applicable
Offering Period, or (2) the number of shares available for sale under the Plan
on such Purchase Date, the Board may in its sole discretion provide (x) that the
Company shall make a pro rata allocation of the Shares of Common Stock available
for purchase on such Offering Date or Purchase Date, as applicable, in as
uniform a manner as shall be practicable and as it shall determine in its sole
discretion to be equitable among all participants exercising options to purchase
Common Stock on such Purchase Date, and continue the Plan as then in effect, or
(y) that the Company shall make a pro rata allocation of the Shares available
for purchase on such Offering Date or Purchase Date, as applicable, in as
uniform a manner as shall be practicable and as it shall determine in its sole
discretion to be equitable among all participants exercising options to purchase
Common Stock on such Purchase Date, and terminate the Plan pursuant to Section
19 below. The Company may make a pro rata allocation of the Shares available on
the Offering Date of any applicable Offering Period pursuant to the preceding
sentence, notwithstanding any authorization of additional Shares for issuance
under the Plan by the Company's stockholders subsequent to such Offering Date.
(b) The participant shall have no interest or voting right in Shares
covered by his or her option until such option has been exercised.
(c) Shares to be delivered to a participant under the Plan will be
registered in the name of the participant or in the name of the participant and
his or her spouse.
13. Administration. The Board, or a committee named by the Board, shall
supervise and administer the Plan and shall have full power to adopt, amend and
rescind any rules deemed desirable and appropriate for the administration of the
Plan and not inconsistent with the Plan, to construe and interpret the Plan, and
to make all other determinations necessary or advisable for the administration
of the Plan.
14. Designation of Beneficiary.
(a) A participant may designate a beneficiary who is to receive any
Shares and cash, if any, from the participant's account under the Plan in the
event of such participant's death subsequent to the end of an Offering Period
but prior to delivery to him or her of such Shares and cash. In addition, a
participant may designate a beneficiary who is to receive any cash from the
participant's account under the Plan in the event of such participant's death
prior to the Purchase Date of an Offering Period. If a participant is married
and the designated beneficiary is not the spouse, spousal consent shall be
required for such designation to be effective. Beneficiary designations under
this Section 14(a) shall be made as directed by the Human Resources Department
of the Company, which may require electronic submission of the required
documentation with the Designated Broker.
(b) Such designation of beneficiary may be changed by the participant
(and his or her spouse, if any) at any time by submission of the required
notice, which required notice may be electronic. In the event of the death of a
participant and in the absence of a beneficiary validly designated under the
Plan who is living at the time of such participant's death, the Company shall
-7-
<PAGE>
deliver such Shares and/or cash to the executor or administrator of the estate
of the participant, or if no such executor or administrator has been appointed
(to the knowledge of the Company), the Company, in its discretion, may deliver
such Shares and/or cash to the spouse or to any one or more dependents or
relatives of the participant, or if no spouse, dependent or relative is known to
the Company, then to such other person as the Company may designate.
15. Transferability. Neither Contributions credited to a participant's
account nor any rights with regard to the exercise of an option or to receive
Shares under the Plan may be assigned, transferred, pledged or otherwise
disposed of in any way (other than by will, the laws of descent and
distribution, or as provided in Section 14) by the participant. Any such
attempt at assignment, transfer, pledge or other disposition shall be without
effect, except that the Company may treat such act as an election to withdraw
funds in accordance with Section 10.
16. Use of Funds. All Contributions received or held by the Company under
the Plan may be used by the Company for any corporate purpose, and the Company
shall not be obligated to segregate such Contributions.
17. Reports. Individual accounts will be maintained for each participant
in the Plan. Statements of account will be provided to participating Employees
by the Company or the Designated Broker at least annually, which statements will
set forth the amounts of Contributions, the per Share Purchase Price, the number
of Shares purchased and the remaining cash balance, if any.
18. Adjustments Upon Changes in Capitalization; Corporate Transactions.
(a) Adjustment. Subject to any required action by the stockholders
of the Company, the number of Shares covered by each option under the Plan that
has not yet been exercised, the number of Shares that have been authorized for
issuance under the Plan but have not yet been placed under option (collectively,
the "Reserves"), the maximum number of Shares of Common Stock that may be
purchased by a participant in an Offering Period, the number of Shares of Common
Stock set forth in Section 12(a)(i) above, and the price per Share of Common
Stock covered by each option under the Plan that has not yet been exercised,
shall be proportionately adjusted for any increase or decrease in the number of
issued Shares resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock (including any such change
in the number of Shares of Common Stock effected in connection with a change in
domicile of the Company), or any other increase or decrease in the number of
Shares effected without receipt of consideration by the Company; provided
however that conversion of any convertible securities of the Company shall not
be deemed to have been "effected without receipt of consideration." Such
adjustment shall be made by the Board, whose determination in that respect shall
be final, binding and conclusive. Except as expressly provided herein, no issue
by the Company of shares of stock of any class, or securities convertible into
shares of stock of any class, shall affect, and no adjustment by reason thereof
shall be made with respect to, the number or price of Shares subject to an
option.
(b) Corporate Transactions. In the event of a dissolution or
liquidation of the Company, any Offering Period then in progress will terminate
immediately prior to the
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<PAGE>
consummation of such action, unless otherwise provided by the Board. In the
event of a Corporate Transaction, each option outstanding under the Plan shall
be assumed or an equivalent option shall be substituted by the successor
corporation or a parent or Subsidiary of such successor corporation. In the
event that the successor corporation refuses to assume or substitute for
outstanding options, each Offering Period then in progress shall be shortened
and a new Purchase Date shall be set (the "New Purchase Date"), as of which date
any Offering Period then in progress will terminate. The New Purchase Date shall
be on or before the date of consummation of the transaction and the Board shall
notify each participant in writing, at least ten (10) days prior to the New
Purchase Date, that the Purchase Date for his or her option has been changed to
the New Purchase Date and that his or her option will be exercised automatically
on the New Purchase Date, unless prior to such date he or she has withdrawn from
the Offering Period as provided in Section 10. For purposes of this Section 18,
an option granted under the Plan shall be deemed to be assumed, without
limitation, if, at the time of issuance of the stock or other consideration upon
a Corporate Transaction, each holder of an option under the Plan would be
entitled to receive upon exercise of the option the same number and kind of
shares of stock or the same amount of property, cash or securities as such
holder would have been entitled to receive upon the occurrence of the
transaction if the holder had been, immediately prior to the transaction, the
holder of the number of Shares of Common Stock covered by the option at such
time (after giving effect to any adjustments in the number of Shares covered by
the option as provided for in this Section 18); provided however that if the
consideration received in the transaction is not solely common stock of the
successor corporation or its parent (as defined in Section 424(e) of the Code),
the Board may, with the consent of the successor corporation, provide for the
consideration to be received upon exercise of the option to be solely common
stock of the successor corporation or its parent equal in Fair Market Value to
the per Share consideration received by holders of Common Stock in the
transaction.
The Board may, if it so determines in the exercise of its sole discretion,
also make provision for adjusting the Reserves, as well as the price per Share
of Common Stock covered by each outstanding option, in the event that the
Company effects one or more reorganizations, recapitalizations, rights offerings
or other increases or reductions of Shares of its outstanding Common Stock, and
in the event of the Company's being consolidated with or merged into any other
corporation.
19. Amendment or Termination.
(a) The Board may at any time and for any reason terminate or amend
the Plan. Except as provided in Section 18, no such termination of the Plan may
affect options previously granted, provided that the Plan or an Offering Period
may be terminated by the Board on a Purchase Date or by the Board's setting a
new Purchase Date with respect to an Offering Period then in progress if the
Board determines that termination of the Plan and/or the Offering Period is in
the best interests of the Company and the stockholders or if continuation of the
Plan and/or the Offering Period would cause the Company to incur adverse
accounting charges as a result of a change after the effective date of the Plan
in the generally accepted accounting rules applicable to the Plan. Except as
provided in Section 18 and in this Section 19, no amendment to the Plan shall
make any change in any option previously granted that adversely affects the
rights of any participant. In addition, to the extent necessary to comply with
Rule 16b-3 under the
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<PAGE>
Exchange Act, or under Section 423 of the Code (or any successor rule or
provision or any applicable law or regulation), the Company shall obtain
stockholder approval in such a manner and to such a degree as so required.
(b) Without stockholder consent and without regard to whether any
participant rights may be considered to have been adversely affected, the Board
(or its committee) shall be entitled to change the Offering Periods, limit the
frequency and/or number of changes in the amount withheld during an Offering
Period, establish the exchange ratio applicable to amounts withheld in a
currency other than U.S. dollars, permit payroll withholding in excess of the
amount designated by a participant in order to adjust for delays or mistakes in
the Company's processing of properly completed withholding elections, establish
reasonable waiting and adjustment periods and/or accounting and crediting
procedures to ensure that amounts applied toward the purchase of Common Stock
for each participant properly correspond with amounts withheld from the
participant's Compensation, and establish such other limitations or procedures
as the Board (or its committee) determines in its sole discretion advisable that
are consistent with the Plan.
20. Notices. All notices or other communications by a participant to the
Company under or in connection with the Plan shall be deemed to have been duly
given when received in the form specified by the Company at the location, or by
the person, designated by the Company for the receipt thereof.
21. Conditions Upon Issuance of Shares. Shares shall not be issued with
respect to an option unless the exercise of such option and the issuance and
delivery of such Shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Exchange Act, the rules and regulations
promulgated thereunder, applicable state securities laws and the requirements of
any stock exchange upon which the Shares may then be listed, and shall be
further subject to the approval of counsel for the Company with respect to such
compliance.
As a condition to the exercise of an option, the Company may require the
person exercising such option to represent and warrant at the time of any such
exercise that the Shares are being purchased only for investment and without any
present intention to sell or distribute such Shares if, in the opinion of
counsel for the Company, such a representation is required by any of the
aforementioned applicable provisions of law.
22. Term of Plan; Effective Date. The Plan shall become effective upon
approval by the Company's stockholders. It shall continue in effect for a term
of ten (10) years unless sooner terminated under Section 19.
23. Additional Restrictions of Rule 16b-3. The terms and conditions of
options granted hereunder to, and the purchase of Shares by, persons subject to
Section 16 of the Exchange Act shall comply with the applicable provisions of
Rule 16b-3. This Plan shall be deemed to contain, and such options shall
contain, and the Shares issued upon exercise thereof shall be subject to, such
additional conditions and restrictions as may be required by Rule 16b-3
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<PAGE>
to qualify for the maximum exemption from Section 16 of the Exchange Act with
respect to Plan transactions.
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<PAGE>
DRUGSTORE.COM
1999 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
----------------------
New Election ______
Change of Election ______
1. I, ________________________, hereby elect to participate in the
drugstore.com 1999 Employee Stock Purchase Plan (the "Plan") for the Offering
Period ______________, ____ to _______________, ____, and subscribe to purchase
shares of the Company's Common Stock in accordance with this Subscription
Agreement and the Plan.
2. I elect to have Contributions in the amount of ____% of my
Compensation, as those terms are defined in the Plan, applied to this purchase.
I understand that this amount must not be less than 1% and not more than 20% of
my Compensation during the Offering Period. (Please note that no fractional
percentages are permitted).
3. I hereby authorize payroll deductions from each paycheck during the
Offering Period at the rate stated in Item 2 of this Subscription Agreement. I
understand that all payroll deductions made by me shall be credited to my
account under the Plan and that I may not make any additional payments into such
account. I understand that all payments made by me shall be accumulated for the
purchase of shares of Common Stock at the applicable purchase price determined
in accordance with the Plan. I further understand that, except as otherwise set
forth in the Plan, shares will be purchased for me automatically on the Purchase
Date of each Offering Period unless my employment is terminated prior to the
Purchase Date or I otherwise withdraw from the Plan by giving written notice to
the Company for such purpose.
4. I understand that I may discontinue at any time prior to the Purchase
Date my participation in the Plan as provided in Section 10 of the Plan. I also
understand that I can increase or decrease the rate of my Contributions on one
occasion only with respect to each rate change during any Offering Period by
completing and filing a new Subscription Agreement with such increase or
decrease taking effect as of the beginning of the payroll period following the
date of filing of the new Subscription Agreement, if filed at least five (5)
business days prior to the beginning of such payroll period. Further, I may
change the rate of deductions for future Offering Periods by filing a new
Subscription Agreement, and any such change will be effective as of the
beginning of the next Offering Period. In addition, I acknowledge that, unless
I discontinue my participation in the Plan as provided in Section 10 of the
Plan, my election will continue to be effective for each successive Offering
Period.
<PAGE>
5. I have received a copy of the Company's most recent description of the
Plan and a copy of the complete "drugstore.com 1999 Employee Stock Purchase
Plan." I understand that my participation in the Plan is in all respects
subject to the terms of the Plan.
6. Shares purchased for me under the Plan should be issued in the name(s)
of (name of employee or employee and spouse only):
----------------------------------------
----------------------------------------
7. In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due to me under the Plan:
NAME: (Please print) ----------------------------------------
(First) (Middle) (Last)
- ----------------------------- ----------------------------------------
(Relationship) (Address)
----------------------------------------
8. I understand that if I dispose of any shares received by me pursuant
to the Plan within 2 years after the Offering Date (the first day of the
Offering Period during which I purchased such shares) or within 1 year after the
Purchase Date, I will be treated for federal income tax purposes as having
received ordinary compensation income at the time of such disposition in an
amount equal to the excess of the fair market value of the shares on the
Purchase Date over the price that I paid for the shares, regardless of whether I
disposed of the shares at a price less than their fair market value at the
Purchase Date. The remainder of the gain or loss, if any, recognized on such
disposition will be treated as capital gain or loss.
I hereby agree to notify the Company in writing within 30 days after the
date of any such disposition, and I will make adequate provision for federal,
state or other tax withholding obligations, if any, that arise upon the
disposition of the Common Stock. The Company may, but will not be obligated to,
withhold from my compensation the amount necessary to meet any applicable
withholding obligation including any withholding necessary to make available to
the Company any tax deductions or benefits attributable to the sale or early
disposition of Common Stock by me.
9. If I dispose of such shares at any time after expiration of the 2-year
and 1-year holding periods, I understand that I will be treated for federal
income tax purposes as having received compensation income only to the extent of
an amount equal to the lesser of (1) the excess of the fair market value of the
shares at the time of such disposition over the purchase price that I paid for
the shares under the option, or (2) 15% of the fair market value of the shares
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<PAGE>
on the Offering Date. The remainder of the gain or loss, if any, recognized on
such disposition will be treated as capital gain or loss.
I understand that this tax summary is only a summary and is subject to
change. I further understand that I should consult a tax advisor concerning the
tax implications of the purchase and sale of stock under the Plan.
10. I hereby agree to be bound by the terms of the Plan. The effectiveness
of this Subscription Agreement is dependent upon my eligibility to participate
in the Plan.
SIGNATURE:
-----------------------------
SOCIAL SECURITY #:
---------------------
DATE:
----------------------------------
SPOUSE'S SIGNATURE (necessary
if beneficiary is not spouse):
- ---------------------------------------
(Signature)
- ---------------------------------------
(Print name)
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<PAGE>
DRUGSTORE.COM
1999 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
--------------------
I, __________________________, hereby elect to withdraw my participation in
the drugstore.com 1999 Employee Stock Purchase Plan (the "Plan") for the
Offering Period that began on _________ ___, _____. This withdrawal covers all
Contributions credited to my account and is effective on the date designated
below.
I understand that all Contributions credited to my account will be paid to
me within ten (10) business days of receipt by the Company of this Notice of
Withdrawal and that my option for the current period will automatically
terminate, and that no further Contributions for the purchase of shares can be
made by me during the Offering Period.
The undersigned further understands and agrees that he or she shall be
eligible to participate in succeeding offering periods only by delivering to the
Company a new Subscription Agreement.
Dated:
---------------------- ----------------------------------------
Signature of Employee
----------------------------------------
Social Security Number
<PAGE>
Exhibit 10.20
DRUGSTORE.COM, INC.
FIFTH AMENDED AND RESTATED VOTING AGREEMENT
-------------------------------------------
This Fifth Amended and Restated Voting Agreement (this "Agreement") is made
as of December 23, 1999, by and among drugstore.com, inc., a Delaware
corporation (the "Company"), Jed A. Smith (the "Founder"), Peter M. Neupert
("Neupert") and the holders of shares of the Company's Common Stock listed on
Exhibit A together with any affiliates (as defined in the Securities Act of
1933) of such holders to which such the shares are assigned or transferred
(collectively, the "Investors" and each individually, an "Investor") and
terminates and supersedes in all respects that certain Fourth Amended and
Restated Voting Agreement dated July 9, 1999, by and among the Company and
certain of the Investors (the "Prior Agreement").
RECITAL
-------
To correctly reflect the intentions of the parties at the time of the
execution of the Third Amended and Restated Voting Agreement; to clarify certain
matters regarding removal of the legend required by Section 2.3 of the Prior
Agreement; and pursuant to Section 4.2 of the Prior Agreement, this Agreement
is being executed by the Company, the Founder, and holders of at least two-
thirds (2/3) of the Company's capital stock held by the Investors who were
parties to the Prior Agreement, thereby permitting the Prior Agreement to be
terminated and superseded by this Agreement.
AGREEMENT
---------
The parties agree as follows:
1. Election of Directors. The number of authorized directors of the
Company will initially be set at nine (9). At each annual meeting of the
stockholders of the Company, or at any meeting of the stockholders of the
Company at which members of the Company's Board of Directors (the "Board") are
to be elected, or wherever members of the Board are to be elected by written
consent, the Founder, Neupert and the Investors agree to vote or act with
respect to their shares so as to elect:
(a) Two (2) persons designated by Kleiner Perkins Caufield & Byers
VIII ("KPCB"). One such designee may be made at KPCB's sole discretion and the
other such designee shall be reasonably acceptable to a majority of the
remaining Board members (excluding the KPCB designees). Such persons shall
initially be John Doerr and Brook Byers. Notwithstanding the foregoing, the
parties hereto shall not be obligated to vote or act to elect any representative
of KPCB if KPCB, together with all of its affiliates, does not hold at least
2,000,000 shares of Series A Preferred Stock (as adjusted for any future stock
splits, stock dividends, recapitalizations and the like);
<PAGE>
(b) Two (2) persons designated by Amazon.com, Inc. ("Amazon.com").
One such designee may be made at Amazon.com's sole discretion and the other such
designee shall be reasonably acceptable to a majority of the remaining Board
members (excluding the Amazon.com designees). Such persons shall initially be
Jeffrey Bezos and such other designee as may be named at any time by Amazon.com;
(c) One (1) person designated by Vulcan Ventures Incorporated
("Vulcan"). Such person shall initially be William Savoy. Notwithstanding the
foregoing, the parties hereto shall not be obligated to vote or act to elect any
representative of Vulcan (i) until that certain convertible Promissory Note,
dated May 19, 1999 (the "Vulcan Note") is converted into shares of the Company's
equity securities and (ii) if Vulcan, together with all of its affiliates, does
not hold at least 2,000,000 shares of Series D Preferred Stock (as adjusted for
any future stock splits, stock dividends, recapitalizations and the like after
May 19, 1999);
(d) One (1) person designated by Rite Aid on or after January 1,
2000. Notwithstanding the foregoing, the parties hereto shall not be obligated
to elect any representative of Rite Aid if (x) Rite Aid does not beneficially
own at least 5% of the then-outstanding securities of the Company entitled to
vote for the election of directors of the Company or (y) each of the Main
Agreement dated as of June 17, 1999 between the Company and Rite Aid, the
Governance Agreement dated as of June 17, 1999 between the Company and Rite Aid
("Rite Aid Governance Agreement") and the Pharmacy Supply and Services Agreement
dated as of June 17, 1999 between the Company and Rite Aid shall have
terminated;
(e) Jed Smith, unless the Board has determined by majority vote
(excluding Mr. Smith) that Mr. Smith is no longer a valuable contributor to the
Company and therefore should no longer continue to serve as a director; and
(f) Peter Neupert, unless the Board has determined by majority vote
(excluding Mr. Neupert) that Mr. Neupert is no longer a valuable contributor to
the Company and therefore should no longer continue to serve as a director.
Notwithstanding the provisions of paragraphs (a) and (b) above, at any
time after the date of this Agreement, either KPCB or Amazon.com may (by written
notice to the other party and the Company) withdraw its right to designate two
Board members. In such event, KPCB and Amazon.com shall each cause one of its
designees to resign from the Board; thereafter, KPCB and Amazon.com shall each
have the right to designate one Board member, selected in such party's sole
discretion.
In the event of any termination, removal or resignation of any
director (other than as provided in the previous paragraph), the parties hereto
shall take all actions necessary and appropriate to cause such vacancy to be
filled in the manner by which such director was elected pursuant to the terms of
this Agreement.
2
<PAGE>
2. Additional Representations and Covenants.
----------------------------------------
2.1 No Revocation. The voting agreements contained herein are
coupled with an interest and may not be revoked during the term of this
Agreement.
2.2 Change in Number of Directors. The Founder and the Investors
will not vote for any amendment or change to the Company's Sixth Amended and
Restated Certificate of Incorporation or Bylaws providing for the election of
more than nine (9) directors, or any other amendment or change to the
Certificate of Incorporation or Bylaws inconsistent with the terms of this
Agreement.
2.3 Legends. Each certificate representing shares of the Company's
capital stock held by the Founder or the Investors shall bear the following
legend:
"THE SHARES EVIDENCED HEREBY ARE SUBJECT TO A VOTING AGREEMENT BY AND AMONG
THE COMPANY AND CERTAIN STOCKHOLDERS OF THE COMPANY (A COPY OF WHICH MAY BE
OBTAINED FROM THE COMPANY), AND BY ACCEPTING ANY INTEREST IN SUCH SHARES
THE PERSON ACCEPTING SUCH INTEREST SHALL BE DEEMED TO AGREE TO AND SHALL
BECOME BOUND BY ALL THE PROVISIONS OF SAID VOTING AGREEMENT."
2.4 Vulcan Director. The parties hereto agree to take reasonable
steps to fill the vacancy on the Board with the person nominated by Vulcan
pursuant to Section 1(c) as soon as practicable following the conversion of the
Vulcan Note into equity securities of the Company.
3. Termination.
-----------
3.1 Termination Events. (a) This Agreement shall terminate when the
Company shall sell, convey, or otherwise dispose of all or substantially all of
its property or business or merge or consolidate with any other corporation
(other than a wholly-owned subsidiary corporation) where the stockholders of the
Company own less than fifty percent (50%) of the voting power of the surviving
entity after such merger or consolidation, provided that this subsection shall
not apply to a merger effected exclusively for the purpose of changing the
domicile of the Company.
(b) The rights and obligations of the Founder, Neupert and the
Investors pursuant to Sections 1(a), 1(b), 1(c), 1(d), 1(e) and 1(f) shall
terminate upon the consummation of an underwritten public offering by the
Company of shares of its Common Stock pursuant to a registration statement filed
under the Securities Act of 1933, which results in gross proceeds in excess of
$15,000,000 and the public offering price of which is at least $5.00 per share
(appropriately adjusted for any stock split, dividend, combination or other
recapitalization); provided, however, that on the first business day following
the termination of Amazon.com's rights under Section 1(b) pursuant to this
Section 3.1(b), the Company will cause the Board to nominate, recommend and
solicit proxies (if necessary) for election to the Board of one person
3
<PAGE>
designated by Amazon.com, provided that this obligation shall be deemed
fulfilled in the event an Amazon.com designated director is already sitting on
the Board at such time. Thereafter, in the event of a vacancy in an Amazon.com
Board seat, or in any Board election in which an Amazon.com designated director
is up for re-election, unless a second Amazon.com designated director is then
serving on the Board, the Company will cause the vacancy to be filled with an
Amazon.com designated director or will cause such Amazon.com designated director
to be included on the slate of directors proposed by the Board at such election
and cause the Board to recommend and solicit proxies (if necessary) in favor of
such Amazon.com designated director. Notwithstanding any of the foregoing, the
Company's obligations under this Section 3.1(b) will terminate on the earlier
of:
(i) the date Amazon.com ceases to beneficially own at least 5%
of the then-outstanding shares of Common Stock; and
(ii) termination of this Agreement for any reason including, a
termination pursuant to Section 3.1(a).
(c) The rights and obligations of the Founder, Neupert and the
Investors pursuant to Sections 1(a), 1(c), 1(e) and 1(f) shall terminate when
the Company shall effect any transaction or series of related transactions in
which more than fifty percent (50%) of the voting power of the Company is
disposed of, provided that this subsection shall not apply to any transaction or
series of related transactions effected exclusively for purpose of changing the
domicile of the Company, provided that this subsection shall not apply to a
transaction or series of transactions effected exclusively for the purpose of
changing the domicile of the Company.
(d) Notwithstanding the termination of the rights and obligations of
the Founder, Neupert and the Investors pursuant to Section 3.1(b) of this
Agreement, following any such termination Founder, Neupert and the Investors
(but not any transferee of any shares held by the Founder, Neupert and the
Investors) agree to vote or act with respect to their shares so as to elect the
nominee for director who is designated by Amazon.com in accordance with Section
3.1(b) of this Agreement and the nominee for director designated by Rite Aid in
accordance with Section 3.1 of the Rite Aid Governance Agreement.
3.2 Removal of Legend. Any assignee of the Founder or Investors that
holds a stock certificate legended pursuant to Section 2.3 may surrender such
certificate to the Company for removal of the legend and the Company will duly
reissue a new certificate without the legend. At any time after the termination
of this Agreement in accordance with Section 3.1, any holder of a stock
certificate legended pursuant to Section 2.3 may surrender such certificate to
the Company for removal of the legend, and the Company will duly reissue a new
certificate without the legend.
4
<PAGE>
4. Miscellaneous.
4.1 Successors and Assigns. The terms and conditions of this
Agreement shall inure to the benefit of and be binding upon the respective
successors and assigns of the parties. Nothing in this Agreement, express or
implied, is intended to confer upon any party other than the parties hereto or
their respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.
4.2 Amendments and Waivers. Any term hereof may be amended or waived
only with the written consent of the Company, the Founder, Neupert, and at least
two-thirds (2/3) of the Company's capital stock held by the Investors
(including, in the case of Amazon.com, any wholly-owned subsidiary of
Amazon.com); provided, however, that (i) any amendment to Section 1(c) or
Section 2.4 shall require the consent of Vulcan, (ii) any amendment to Section
1(d) or Section 3.1 shall require the consent of Rite Aid and (iii) any
amendment to Section 1(b) or Section 3.1 shall require the consent of
Amazon.com. Any amendment or waiver effected in accordance with this Section 4.2
shall be binding upon the Company, the Investors and any holder of the Founder's
shares, and each of their respective successors and assigns.
4.3 Notices. Any notice required or permitted by this Agreement
shall be in writing and shall be deemed sufficient on the date of delivery, when
delivered personally or by overnight courier or sent by telegram or fax, or
forty-eight (48) hours after being deposited in the U.S. mail, as certified or
registered mail, with postage prepaid, and addressed to the party to be notified
at such party's address or fax number as set forth on the signature page or on
Exhibit A hereto, or as subsequently modified by written notice.
4.4 Severability. If one or more provisions of this Agreement are
held to be unenforceable under applicable law, the parties agree to renegotiate
such provision in good faith. In the event that the parties cannot reach a
mutually agreeable and enforceable replacement for such provision, then (a) such
provision shall be excluded from this Agreement, (b) the balance of the
Agreement shall be interpreted as if such provision were so excluded and (c) the
balance of the Agreement shall be enforceable in accordance with its terms.
4.5 Governing Law. This Agreement and all acts and transactions
pursuant hereto and the rights and obligations of the parties hereto shall be
governed, construed and interpreted in accordance with the laws of the State of
Delaware, without giving effect to principles of conflicts of law.
4.6 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.
4.7 Titles and Subtitles. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
5
<PAGE>
The parties hereto have executed this Fifth Amended and Restated Voting
Agreement as of the date first written above.
<TABLE>
<CAPTION>
<S> <C>
COMPANY: INVESTORS:
DRUGSTORE.COM, INC. RITE AID CORPORATION
By: /s/ Peter M. Neupert By: /s/ Elliot S. Gerson
---------------------------------------- -----------------------------------------
Peter M. Neupert Name: Elliot S. Gerson
Chairman of the Board, President and ---------------------------------------
Chief Executive Officer Title: Senior Executive Vice President
--------------------------------------
Address: Address:
13920 SE Eastgate Way 30 Hunter Lane
Suite 300 Camp Hill, PA 17011
Bellevue, WA 98005
With a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
New York, NY 10022-3607
Attention: Nancy Lieberman, Esq.
FOUNDER: RITE INVESTMENTS CORP.
By: /s/ Jed A. Smith By: /s/ Elliot S. Gerson
---------------------------------------- -----------------------------------------
Jed Smith Name: Elliot S. Gerson
Founder ---------------------------------------
Title: Senior Vice President
--------------------------------------
Address:
Address: 30 Hunter Lane
227 Summit Ave. #E405 Camp Hill, PA 17011
- ---------------------------------------------
Brookline, MA 02446 With a copy to:
- --------------------------------------------- Skadden, Arps, Slate, Meagher & Flom LLP
New York, NY 10022-3607
- --------------------------------------------- Attention: Nancy Lieberman, Esq.
</TABLE>
SIGNATURE PAGE TO
FIFTH AMENDED AND RESTATED VOTING AGREEMENT
<PAGE>
GENERAL NUTRITION COMPANIES, INC.
By: /s/ James M. Sander
--------------------------------
Name: James M. Sander
------------------------------
Title: V.P. Law, Chief Legal Officer
-----------------------------
and Secretary
-----------------------------
Address:
General Nutrition Companies, Inc.
------------------------------------
300 Sixth Avenue
------------------------------------
Pittsburgh, PA 15222
------------------------------------
GENERAL NUTRITION INVESTMENT COMPANY
By: /s/ James M. Sander
--------------------------------
Name: James M. Sander
------------------------------
Title: V.P. Law, Chief Legal Officer
-----------------------------
and Secretary
-----------------------------
Address:
General Nutrition Companies, Inc.
------------------------------------
300 Sixth Avenue
------------------------------------
Pittsburgh, PA 15222
------------------------------------
VULCAN VENTURES INCORPORATED
By: /s/ William D. Savoy
--------------------------------
Name: William D. Savoy
------------------------------
Title: Vice President
-----------------------------
Address:
110 110th Avenue Northeast
Suite 550
Bellevue, WA 98004
SIGNATURE PAGE TO
FIFTH AMENDED AND RESTATED VOTING AGREEMENT
<PAGE>
KLEINER PERKINS CAUFIELD &
BYERS VIII, L.P.
By: KPCB VIII Associates, L.P.,
its General Partner
By: /s/ L. John Doerr
-------------------------------
Name: L. John Doerr
-----------------------------
a General Partner
Address:
2750 Sand Hill Road
Menlo Park, CA 94025
KPCB VIII FOUNDERS FUND, L.P.
By: KPCB VIII Associates, L.P.,
its General Partner
By: /s/ L. John Doerr
-------------------------------
Name: L. John Doerr
-----------------------------
a General Partner
Address:
2750 Sand Hill Road
Menlo Park, CA 94025
KPCB LIFE SCIENCES ZAIBATSU FUND II, L.P.
By: KPCB VII Associates, L.P.,
its General Partner
By: /s/ L. John Doerr
-------------------------------
Name: L. John Doerr
-----------------------------
a General Partner
Address:
2750 Sand Hill Road
Menlo Park, CA 94025
SIGNATURE PAGE TO
FIFTH AMENDED AND RESTATED VOTING AGREEMENT
<PAGE>
AMAZON.COM, INC.
By: /s/ Mark Britto
-------------------------------
Name: Mark Britto
-----------------------------
Title: Vice President
----------------------------
Address:
1200 12th Avenue S., Ste. 1200
Seattle, WA 98144
NEUPERT:
By: /s/ Peter M. Neupert
-------------------------------
Peter M. Neupert
Address:
1603 Evergreen Point Road
Bellevue, WA 98004
SIGNATURE PAGE TO
FIFTH AMENDED AND RESTATED VOTING AGREEMENT
<PAGE>
EXHIBIT A
---------
INVESTORS
---------
Name and Address
- ------------------------------------------------------------------------------
Kleiner Perkins Caufield & Byers VIII
2750 Sand Hill Road
Menlo Park, CA 94025
KPCB VIII Founders Fund, L.P.
2750 Sand Hill Road
Menlo Park, CA 94025
KPCB Life Sciences Zaibatsu Fund II, L.P.
2750 Sand Hill Road
Menlo Park, CA 94025
Amazon.com, Inc.
1200 12th Avenue, Suite 1200
Seattle, WA 98144
Attn: General Counsel
David Whorton
c/o Kleiner Perkins Caufield & Byers
2750 Sand Hill Road
Menlo Park, CA 94025
Vulcan Ventures Incorporated
110 110th Avenue Northeast, Suite 550
Bellevue, Washington 98004
Rite Aid Corporation, through its wholly owned subsidiary Rite Investments Corp.
30 Hunter Lane
Camp Hill, PA 17011
With a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
New York, NY 10022-3607
Attention: Nancy Lieberman, Esq.
<PAGE>
General Nutrition Companies, Inc., through its wholly owned subsidiary
General Nutrition Investment Company
300 6th Avenue
Pittsburgh, PA 15222
Attention: General Counsel
<PAGE>
Exhibit 10.34
SUNSET NORTH
BELLEVUE, WASHINGTON
OFFICE LEASE AGREEMENT
BETWEEN
WRC SUNSET NORTH LLC
("LANDLORD")
AND
DRUGSTORE.COM, INC., a Delaware corporation
("TENANT")
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
I. Basic Lease Information.......................... 1
II. Lease Grant...................................... 4
III. Adjustment of Commencement Date; Possession...... 4
IV. Rent............................................. 5
V. Compliance with Laws; Use........................ 10
VI. Security Deposit................................. 10
VII. Services to be Furnished by Landlord............. 12
VIII. Leasehold Improvements........................... 13
IX. Repairs and Alterations.......................... 14
X. Use of Electrical Services by Tenant............. 15
XI. Entry by Landlord................................ 16
XII. Assignment and Subletting........................ 16
XIII. Liens............................................ 18
XIV. Indemnity and Waiver of Claims................... 18
XV. Insurance........................................ 19
XVI. Subrogation...................................... 20
XVII. Casualty Damage.................................. 20
XVIII. Condemnation..................................... 21
XIX. Events of Default................................ 21
XX. Remedies......................................... 22
XXI. Limitation of Liability.......................... 23
XXII. No Waiver........................................ 23
XXIII. Quiet Enjoyment.................................. 24
XXIV. Relocation....................................... 24
XXV. Holding Over..................................... 24
XXVI. Subordination to Mortgages; Estoppel Certificate. 24
XXVII. Attorneys' Fees.................................. 25
XXVIII. Notice........................................... 25
XXIX. Excepted Rights.................................. 25
XXX. Surrender of Premises............................ 26
XXXI. Miscellaneous.................................... 26
XXXII. Entire Agreement................................. 28
</TABLE>
<PAGE>
OFFICE LEASE AGREEMENT
This Office Lease Agreement (the "Lease") is made and entered into as
of the 22/nd/ day of November, 1999, by and between WRC SUNSET NORTH LLC, a
Washington limited liability company ("Landlord") and DRUGSTORE.COM, INC., a
Delaware corporation ("Tenant").
I. Basic Lease Information.
A. "Buildings" shall mean the office buildings commonly known as
Building 3, Building 4 and Building 5 of Sunset North Corporate Campus, located
at the Northeast corner of 139th Avenue Southeast and Southeast 32nd Street,
Bellevue, King County, Washington. "Building" means any one of the Buildings,
individually.
B. "Property" shall mean the Buildings and the parcel(s) of land on
which they are located, all other property in the Sunset North Corporate Campus,
the garages serving the Buildings, and all other improvements owned by Landlord
and serving the Buildings and the tenants thereof and the parcel(s) of land on
which they are located. The legal description of the Property is set forth on
Exhibit A-2, attached hereto and incorporated herein by this reference.
C. "Rentable Square Footage of the Property" is deemed to be 460,629
square feet.
D. "Premises" shall mean the areas shown on Exhibit A to this Lease.
---------
The Premises are located on the floors of the Buildings set forth below, and the
"Rentable Square Footage of the Premises" is approximately 57,436 square feet,
consisting of the areas set forth below.
<TABLE>
<CAPTION>
Building Location Rentable Area Usable Area
<S> <C> <C> <C>
3 2nd Floor 10,000 8,649
4 1st Floor 26,663 24,341
5 1st Floor 20,773 17,967
Total 57,436 50,957
</TABLE>
The precise square footage of the Premises shall be determined by Landlord and
Tenant based upon Tenant's Final Plans, and once so determined shall not be
further adjusted except to reflect additions to or other modifications of the
Premises. Once the area of the Premises is so determined, the area of the
Premises, Base Rent, Tenant's Pro Rata Share and the Allowance shall be
appropriately adjusted and confirmed in writing by Landlord and Tenant. If the
Premises include one or more floors in their entirety, all corridors and
restroom facilities located on such full floor(s) shall be considered part of
the Premises. "Rentable Area," "rentable square feet" and similar terms shall
mean Rentable Area as determined in accordance with the American National
Standard Method of measuring floor space in office buildings as published by the
<PAGE>
Building Owners and Managers Association International dated June 7, 1996
("BOMA"). "Usable Area "and "usable square feet" shall mean Usable Area as
determined in accordance with BOMA.
E. "Base Rent":
<TABLE>
<CAPTION>
Period Annual Rate Per Annual Base Rent Monthly Base Rent
Square Foot
<S> <C> <C> <C>
Years 1 through 3 $22.50 $1,292,310.00 $107,692.50
</TABLE>
F. "Tenant's Pro Rata Share": 12.4690%.
G. "Term": A period of approximately thirty six (36) months,
commencing on the later to occur of (i) March 1, 2000 (the "Target Commencement
Date") and (ii) the date on which the Landlord Work is Substantially Complete,
as determined by Section III.A. The Termination Date shall be the last day of
the calendar month in which the third anniversary of the Commencement Date
occurs. If Landlord fails to Substantially Complete the Landlord Work by the
Target Commencement Date, it shall not be a default by Landlord or otherwise
render Landlord liable for damages. Notwithstanding the foregoing, if there
have been no Tenant Delays and the Commencement Date does not occur by June 1,
2000 (the "Outside Completion Date"), Tenant, as its sole remedy, may terminate
this Lease by giving Landlord written notice of termination on or before the
earlier to occur of: (i) five (5) Business Days after the Outside Completion
Date; and (ii) the Commencement Date. In such event, this Lease shall be deemed
null and void and of no further force and effect and Landlord shall promptly
refund any prepaid Rent and Security Deposit previously advanced by Tenant under
this Lease and, so long as Tenant has not previously defaulted under any of its
obligations under the Work Letter, the parties hereto shall have no further
responsibilities or obligations to each other with respect to this Lease.
Landlord and Tenant acknowledge and agree that: (i) the determination of the
Commencement Date shall take into consideration the effect of any Tenant Delays
by Tenant; and (ii) the Outside Completion Date shall be postponed by the number
of days the Commencement Date is delayed due to events of Force Majeure.
Notwithstanding anything herein to the contrary, if Landlord determines that it
will be unable to cause the Commencement Date to occur by the Outside Completion
Date, Landlord shall have the right to immediately cease its performance of the
Landlord Work and provide Tenant with written notice (the "Outside Extension
Notice") of such inability, which Outside Extension Notice shall set forth the
date on which Landlord reasonably believes that the Commencement Date will
occur. Upon receipt of the Outside Extension Notice, Tenant shall have the
right to terminate this Lease by providing written notice of termination to
Landlord within five (5) Business Days after the date of the Outside Extension
Notice. In the event that Tenant does not terminate this Lease within such five
(5) Business Day period, the Outside Completion Date shall automatically be
amended to be the date set forth in Landlord's Outside Extension Notice.
Promptly after the determination of the Commencement Date, Landlord and Tenant
shall enter into a commencement letter agreement in the form attached as Exhibit
-------
C.
- -
2
<PAGE>
H. Tenant allowance(s): $27.50 per square foot of usable area in
the Premises. See Exhibit D.
---------
I. "Security Deposit": $200,000
J. "Guarantor(s)": None.
K. "Broker(s)": Geoff Boguch of Colliers International representing
Tenant, and John Black of Broderick Group, Inc. representing Landlord.
L. "Permitted Use": General office uses, and any other legally
permitted use suitable for the Building, considering the business of the other
tenants in the Building and the Building's prestige.
M. "Notice Addresses":
Tenant: notices shall be sent to Tenant at the following
address:
drugstore.com, inc.
Attention: Office Manager
13920 SE Eastgate Way, Suite 300
Bellevue, WA 98005
Fax: (425) 372-3800
And to:
drugstore.com, inc.
Attention: Director of Finance
13920 SE Eastgate Way, Suite 300
Bellevue, WA 98005
Fax: (425) 372-3800
Landlord:
WRC Sunset North LLC
1191 Second Avenue, Suite 2000
Seattle, WA 98101
Attention: Building Manager
With a copy to:
Equity Office Properties Trust
Two North Riverside Plaza, Suite 2200
Chicago, IL 60606
Attention: Regional Counsel -- West Region
3
<PAGE>
Payments of Rent shall be made payable to the order of: WRC Sunset
North LLC at the address of the Landlord set forth above, or such other address
as may be specified in the Commencement Letter delivered to Tenant pursuant to
Section I.G.
N. "Business Day(s)" are Monday through Friday of each week,
exclusive of New Year's Day, Martin Luther King, Jr. Day, President's Day,
Memorial Day, Independence Day, Labor Day, Veterans' Day, Thanksgiving Day and
Christmas Day ("Holidays"). Landlord may designate additional Holidays,
provided that the additional Holidays are commonly recognized by other office
buildings in the area where the Buildings are located.
O. "Landlord Work" means the work, if any, that Landlord is
obligated to perform in the Premises pursuant to a separate work letter
agreement (the "Work Letter"), if any, attached as Exhibit D.
---------
P. "Law(s)" means all applicable statutes, codes, ordinances,
orders, rules and regulations of any municipal or governmental entity.
Q. "Normal Business Hours" for the Buildings are 7:00 a.m. to 6:00
p.m. on Business Days and 8:00 a.m. to 1:00 p.m. on Saturdays.
II. Lease Grant.
Landlord leases the Premises to Tenant and Tenant leases the Premises
from Landlord, together with the right in common with others to use any portions
of the Property that are designated by Landlord for the common use of tenants
and others, such as sidewalks, driveways, parking structures, unreserved parking
areas, common corridors, elevator foyers, restrooms, vending areas and lobby
areas (the "Common Areas").
III. Adjustment of Commencement Date; Possession.
A. The Landlord Work shall be deemed to be "Substantially Complete"
on the date that all Landlord Work has been performed, other than any details of
construction, mechanical adjustment or any other similar matter, the
noncompletion of which does not materially interfere with Tenant's use of the
Premises. However, if Landlord is delayed in the performance of the Landlord
Work as a result of any Tenant Delay(s) (defined below), the Landlord Work shall
be deemed to be Substantially Complete on the date that Landlord could
reasonably have been expected to Substantially Complete the Landlord Work absent
any Tenant Delay. "Tenant Delay" means any act or omission of Tenant or its
agents, employees, vendors or contractors that actually delays the Substantial
Completion of the Landlord Work, including, without limitation: (1) Tenant's
failure to furnish information or approvals within any time period specified in
this Lease, including the failure to prepare or approve preliminary or final
plans by any applicable due date; (2) Tenant's selection of equipment or
materials that have long lead times after first being informed by Landlord that
the selection may result in a delay; (3) changes requested or made by Tenant to
previously approved plans and specifications; (4) performance of work in the
Premises by Tenant or Tenant's contractor(s) during the performance of the
Landlord Work; or (5) if the performance of any portion of the Landlord
4
<PAGE>
Work depends on the prior or simultaneous performance of work by Tenant, a delay
by Tenant or Tenant's contractor(s) in the completion of such work.
B. Subject to (i) Landlord's obligation to perform Landlord Work
(including punchlist items) and Landlord's obligations under Section IX.B., and
(ii) latent structural or systemic defects in the Buildings, the Premises are
accepted by Tenant in "as is" condition and configuration. By taking possession
of the Premises, Tenant agrees that the Premises are in good order and
satisfactory condition, except as may otherwise be noted by Tenant to Landlord
in writing within thirty (30) days after the Commencement Date, and that there
are no representations or warranties by Landlord regarding the condition of the
Premises or the Buildings. If Landlord is delayed delivering possession of the
Premises or any other space due to the holdover or unlawful possession of such
space by any party, Landlord shall use reasonable efforts to obtain possession
of the space. Any claim by Tenant with respect to Landlord Work or a latent or
structural defect must be made in writing and delivered to Landlord within one
(1) year after the Commencement Date; thereafter Tenant shall have no right to
make any such claim.
C. If Tenant takes possession of the Premises before the Commencement
Date, such possession shall be subject to the terms and conditions of this Lease
and Tenant shall pay Rent (defined in Section IV.A.) to Landlord for each day of
possession before the Commencement Date. Notwithstanding the foregoing, Tenant
shall have the right to enter the Premises at no cost for up to fifteen (15)
days prior to the Commencement Date for purposes of installing furniture,
fixtures, cabling, wiring and equipment (the "Installation Period"), provided
that the Installation Period shall not delay the Commencement Date. Tenant shall
coordinate its work with the Shell and Core Contractor and the Tenant
Improvements Contractor and shall not interfere with any such contractors or
their subcontractors. Tenant shall not be charged Rent during the Installation
Period unless Tenant has occupied the Premises during such period for normal
business operations.
IV. Rent.
A. Payments. As consideration for this Lease, Tenant shall pay
--------
Landlord, without any setoff or deduction, except as expressly permitted
hereunder, the total amount of Base Rent and Additional Rent due for the Term.
"Additional Rent" means all sums (exclusive of Base Rent) that Tenant is
required to pay Landlord. Additional Rent and Base Rent are sometimes
collectively referred to as "Rent". Tenant shall pay and be liable for all
rental, sales and use taxes (but excluding income taxes), if any, imposed upon
or measured by Rent under applicable Law. Base Rent and recurring monthly
charges of Additional Rent shall be due and payable in advance on the first day
of each calendar month without notice or demand, provided that the installment
of Base Rent for the first full calendar month of the Term shall be payable upon
the execution of this Lease by Tenant. All other items of Rent shall be due and
payable by Tenant on or before 30 days after billing by Landlord. All payments
of Rent shall be by good and sufficient check or by other means (such as
automatic debit or electronic transfer) acceptable to Landlord. If Tenant fails
to pay any item or installment of Rent when due, Tenant shall pay Landlord an
administration fee equal to 5% of the past due Rent, provided that Tenant shall
be entitled to a grace period of 5 days for the first 2 late payments of Rent in
a given calendar year. If the Term commences on a day other than the first day
of a calendar month or terminates on a
5
<PAGE>
day other than the last day of a calendar month, the monthly Base Rent and
Tenant's Pro Rata Share of Expenses (defined in Section IV.C.) and Taxes
(defined in Section IV.D.) for the month shall be prorated based on the number
of days in such calendar month. Landlord's acceptance of less than the correct
amount of Rent shall be considered a payment on account of the earliest Rent
due. No endorsement or statement on a check or letter accompanying a check or
payment shall be considered an accord and satisfaction, and either party may
accept the check or payment without prejudice to that party's right to recover
the balance or pursue other available remedies. Tenant's covenant to pay Rent is
independent of every other covenant in this Lease.
B. Payment of Tenant's Pro Rata Share of Expenses and Taxes. Tenant
--------------------------------------------------------
shall pay Tenant's Pro Rata Share of the total amount of Expenses (defined in
Section IV.C.) and Taxes (defined in Section IV.D.) for each calendar year
during the Term. Landlord shall endeavor to provide Tenant with a good faith
estimate of the total amount of Expenses and Taxes for each calendar year during
the Term no later than March 31 of each year. On or before the first day of
each month, Tenant shall pay to Landlord a monthly installment equal to one-
twelfth of Tenant's Pro Rata Share of Landlord's estimate of the total amount of
Expenses and Taxes. If Landlord determines that its good faith estimate was
incorrect by over five percent (5%), Landlord shall provide Tenant with a
revised estimate. After its receipt of the revised estimate, Tenant's monthly
payments shall be based upon the revised estimate. If Landlord does not provide
Tenant with an estimate of the total amount of Expenses and Taxes by January 1
of a calendar year, Tenant shall continue to pay monthly installments based on
the previous year's estimate until Landlord provides Tenant with the new
estimate. Upon delivery of the new estimate, an adjustment shall be made for
any month for which Tenant paid monthly installments based on the previous
year's estimate. Tenant shall pay Landlord the amount of any underpayment
within 30 days after receipt of the new estimate. Any overpayment shall be
refunded to Tenant within 30 days or credited against the next due future
installment(s) of Additional Rent.
As soon as is practical following the end of each calendar year,
Landlord shall furnish Tenant with a statement of the actual amount of Expenses
and Taxes for the prior calendar year and Tenant's Pro Rata Share of the actual
amount of Expenses and Taxes for the prior calendar year. If the estimated
amount of Expenses and Taxes for the prior calendar year is more than the actual
amount of Expenses and Taxes for the prior calendar year, Landlord shall apply
any overpayment by Tenant against Additional Rent due or next becoming due,
provided if the Term expires before the determination of the overpayment,
Landlord shall promptly refund any overpayment to Tenant after first deducting
the amount of Rent due. If the estimated amount of Expenses and Taxes for the
prior calendar year is less than the actual amount of Expenses and Taxes for
such prior year, Tenant shall pay Landlord, within 30 days after its receipt of
the statement of Expenses and Taxes, any underpayment for the prior calendar
year.
C. Expenses Defined. "Expenses" means all costs and expenses
----------------
incurred in each calendar year in connection with operating, maintaining,
repairing, and managing the Property, including, but not limited to:
1. Labor costs, including, wages, salaries, social security and
employment taxes, medical and other types of insurance, uniforms, training,
and retirement and
6
<PAGE>
pension plans, but only to the extent the personnel representing such labor
costs devote their time to the Buildings and the Property.
2. Management fees (not to exceed market rates), the cost of
equipping and maintaining a management office, accounting and bookkeeping
services, legal fees not attributable to financing, sale, leasing or
collection activity or defense of Landlord's title, and other
administrative costs. Landlord, by itself or through an affiliate, shall
have the right to directly perform or provide any services under this Lease
(including management services), provided that the cost of any such
services shall not exceed the cost that would have been incurred had
Landlord entered into an arms-length contract for such services with an
unaffiliated entity of comparable skill and experience.
3. The cost of services, including amounts paid to service providers
and the rental and purchase cost of parts, supplies, tools and equipment,
but only to the extent that such services, parts, supplies, tools and
equipment were used in connection with the Property.
4. Premiums and deductibles paid by Landlord for insurance, including
workers' compensation, fire and extended coverage, earthquake, general
liability, rental loss, elevator, boiler and other insurance customarily
carried from time to time by owners of comparable office buildings.
5. Electrical Costs (defined below) and charges for water, gas, steam
and sewer, but excluding those charges for which Landlord is reimbursed by
tenants. "Electrical Costs" means: (a) charges paid by Landlord for
electricity; and (b) costs incurred in connection with an energy management
program for the Property. Electrical Costs shall be adjusted as follows:
(i) amounts received by Landlord as reimbursement for above standard
electrical consumption shall be deducted from Electrical Costs; (ii) the
cost of electricity incurred to provide overtime HVAC to specific tenants
(as reasonably estimated by Landlord) shall be deducted from Electrical
Costs; and (iii) if Tenant is billed directly for the cost of building
standard electricity to the Premises as a separate charge in addition to
Base Rent, the cost of electricity to individual tenant spaces in the
Property shall be deducted from Electrical Costs.
6. The amortized cost of capital improvements (as distinguished from
replacement parts or components installed in the ordinary course of
business) made to the Property which are: (a) performed primarily to
reduce operating expense costs or otherwise improve the operating
efficiency of the Property; or (b) required to comply with any Laws that
are enacted, or first interpreted to apply to the Property, after the date
of this Lease. The cost of capital improvements shall be amortized by
Landlord over the lesser of the Payback Period (defined below) or 5 years.
The amortized cost of capital improvements may, at Landlord's option,
include actual or imputed interest at the rate that Landlord would
reasonably be required to pay to finance the cost of the capital
improvement. "Payback Period" means the reasonably estimated period of
time that it takes for the cost savings resulting from a capital
improvement to equal the total cost of the capital improvement.
Notwithstanding the foregoing, the portion of the annual amortized costs to
be included in Expenses in any calendar year with respect to a capital
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improvement which is intended to reduce expenses or improve the operating
efficiency of the Property or Building shall equal the lesser of: a) such
annual amortized costs; and b) the projected annual amortized reduction in
expenses for that portion of the amortization period of the capital
improvement which falls within the Term (based on the total cost savings
for such period, as reasonably estimated by Landlord).
If Landlord incurs Expenses for the Property together with one or more
other buildings or properties, whether pursuant to a reciprocal easement
agreement, common area agreement or otherwise, the shared costs and expenses
shall be equitably prorated and apportioned between the Property and the other
buildings or properties. Expenses shall not include: the cost of capital
improvements (except as set forth above); depreciation; interest (except as
provided above for the amortization of capital improvements); principal payments
of mortgage and other non-operating debts of Landlord; the cost of repairs or
other work to the extent Landlord is reimbursed by insurance or condemnation
proceeds or to the extent made to correct or mitigate any defect in design,
materials or workmanship of the Buildings, or the Common Areas, or to the extent
necessitated by the negligence or misconduct of Landlord; costs in connection
with leasing space in the Property, including brokerage commissions and
advertising costs; lease concessions, including rental abatements and
construction allowances, granted to specific tenants; costs incurred in
connection with the sale, financing or refinancing of the Property; fines,
interest and penalties incurred due to the late payment of Taxes (defined in
Section IV.D.) or Expenses; organizational expenses associated with the creation
and operation of the entity which constitutes Landlord; any penalties or damages
that Landlord pays to Tenant under this Lease or to other tenants in the
Property under their respective leases; Landlord's general overhead expenses not
related to the Buildings; costs (including permit, license and inspection fees)
incurred in renovating or otherwise improving, decorating, painting or altering
(1) vacant space (excluding common areas) in the Buildings or (2) space for
tenants or other occupants in the Buildings; costs incurred due to a violation
by Landlord of the terms and conditions of a lease; expenses incurred as a
result of allowing any other tenant of a Building or any other person or entity
to use the roof of a Building for any purpose; any recalculation of or addition
of Expenses actually incurred more than two (2) years prior to the year in which
Landlord proposes that such costs be included; rentals and other related
expenses incurred in leasing air conditioning systems, elevators or other
equipment ordinarily considered to be of a capital nature, if purchased, except
equipment not affixed to a Building; costs arising from Landlord's political or
charitable contributions; or costs for acquisitions or sculpture, paintings or
other objects of art (but the expense of maintaining such items shall be
included). Landlord shall not collect in excess of one hundred percent (100%)
of Operating Expenses and shall not recover any item of cost more than once. If
the Property is not at least 95% occupied during any calendar year or if
Landlord is not supplying services to at least 95% of the total Rentable Square
Footage of the Property at any time during a calendar year, Expenses that vary
based on occupancy, such as utilities and janitorial services provided to areas
other than Common Areas (and at Landlord's option, Taxes) shall, at Landlord's
option, be determined as if the Property had been 95% occupied and Landlord had
been supplying services to 95% of the Rentable Square Footage of the Property
during that calendar year. The extrapolation of Expenses under this Section
shall be performed by appropriately adjusting the cost of those components of
Expenses that are impacted by changes in the occupancy of the Property.
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D. Taxes Defined. "Taxes" shall mean: (1) all real estate taxes
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and other assessments on the Property, including, but not limited to,
assessments for special improvement districts and building improvement
districts, taxes and assessments levied in substitution or supplementation in
whole or in part of any such taxes and assessments and the Property's share of
any real estate taxes and assessments under any reciprocal easement agreement,
common area agreement or similar agreement as to the Property; (2) all personal
property taxes for property that is owned by Landlord and used in connection
with the operation, maintenance and repair of the Property; and (3) all costs
and fees incurred in connection with seeking reductions in any tax liabilities
described in (1) and (2), including, without limitation, any costs incurred by
Landlord for compliance, review and appeal of tax liabilities. Without
limitation, Taxes shall not include any income, capital levy, franchise, capital
stock, gift, estate or inheritance tax. If an assessment is payable in
installments, Taxes for the year shall include the amount of the installment and
any interest due and payable during that year. For all other real estate taxes,
Taxes for that year shall, at Landlord's election, include either the amount
accrued, assessed or otherwise imposed for the year or the amount due and
payable for that year, provided that Landlord's election shall be applied
consistently throughout the Term. If a change in Taxes is obtained for any year
of the Term, then Taxes for that year will be retroactively adjusted and
Landlord shall provide Tenant with a credit, if any, based on the adjustment.
E. Audit Rights. Tenant may, within 120 days after receiving
------------
Landlord's statement of Expenses, give Landlord written notice ("Review Notice")
that Tenant intends to review Landlord's records of the Expenses for that
calendar year. Within a reasonable time after receipt of the Review Notice,
Landlord shall make all pertinent records available for inspection that are
reasonably necessary for Tenant to conduct its review. If any records are
maintained at a location other than the office of the Building, Tenant may
either inspect the records at such other location or pay for the reasonable cost
of copying and shipping the records. If Tenant retains an agent to review
Landlord's records, the agent must be with a licensed CPA firm. Landlord agrees
that Tenant may retain a third party agent to review Landlord's books and
records which third party agent is not a CPA firm, so long as the third party
agent retained by Tenant shall have expertise in and familiarity with general
industry practice with respect to the operation of and accounting for a first
class office building and whose compensation shall in no way be contingent upon
or correspond to the financial impact on Tenant resulting from the review.
Tenant shall be solely responsible for all costs, expenses and fees incurred for
the audit. Within 60 days after the records are made available to Tenant,
Tenant shall have the right to give Landlord written notice (an "Objection
Notice") stating in reasonable detail any objection to Landlord's statement of
Expenses for that year. If Tenant fails to give Landlord an Objection Notice
within the 60 day period or fails to provide Landlord with a Review Notice
within the 90 day period described above, Tenant shall be deemed to have
approved Landlord's statement of Expenses and shall be barred from raising any
claims regarding the Expenses for that year. If Tenant provides Landlord with a
timely Objection Notice, Landlord and Tenant shall work together in good faith
to resolve any issues raised in Tenant's Objection Notice. If Landlord and
Tenant determine that Expenses for the calendar year are less than reported,
Landlord shall provide Tenant with a credit against the next installment of Rent
in the amount of the overpayment by Tenant. Likewise, if Landlord and Tenant
determine that Expenses for the calendar year are greater than reported, Tenant
shall pay Landlord the amount of any underpayment within 30 days. In addition,
if Landlord and Tenant determine that Basic Costs for the Building for the year
in question were less than stated by more than five percent (5%),
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Landlord, within thirty (30) days after its receipt of paid invoices therefor
from Tenant, shall reimburse Tenant for any reasonable amounts paid by Tenant to
third parties in connection with such review by Tenant. The records obtained by
Tenant shall be treated as confidential. In no event shall Tenant be permitted
to examine Landlord's records or to dispute any statement of Expenses unless
Tenant has paid and continues to pay all Rent when due.
V. Compliance with Laws; Use.
The Premises shall be used only for the Permitted Use and for no other
use whatsoever. Tenant shall not use or permit the use of the Premises for any
purpose which is illegal, dangerous to persons or property or which, in
Landlord's reasonable opinion, unreasonably disturbs any other tenants of the
Buildings or interferes with the operation of the Buildings. Tenant shall
comply with all Laws, including the Americans with Disabilities Act, regarding
the operation of Tenant's business and the use, condition, configuration and
occupancy of the Premises. Tenant, within 10 days after receipt, shall provide
Landlord with copies of any notices it receives regarding a violation or alleged
violation of any Laws. Tenant shall comply with the rules and regulations of
the Buildings attached as Exhibit B and such other reasonable rules and
---------
regulations adopted by Landlord from time to time after prior written notice to
Tenant. Tenant shall also cause its agents, contractors, subcontractors,
employees, customers, and subtenants to comply with all rules and regulations.
Landlord shall not knowingly discriminate against Tenant in Landlord's
enforcement of the rules and regulations.
VI. Security Deposit.
The Security Deposit shall be in the form of cash or a letter of
credit, as Tenant may elect. If Tenant elects to deposit a letter of credit,
the terms of Section VI.B. below shall apply.
A. Applicable Terms. The Security Deposit shall be delivered to
----------------
Landlord upon the execution of this Lease by Tenant and shall be held by
Landlord without liability for interest (unless required by Law) as security for
the performance of Tenant's obligations. The Security Deposit may be in the
form of a letter of credit, in which case the terms of Section VI.B. below shall
apply. The Security Deposit is not an advance payment of Rent or a measure of
Tenant's liability for damages. Landlord may, from time to time following a
default and the expiration of any applicable notice and cure period, without
prejudice to any other remedy, use all or a portion of the Security Deposit to
satisfy past due Rent or to cure any uncured default by Tenant. If Landlord
uses the Security Deposit, Tenant shall on demand restore the Security Deposit
to its original amount. Landlord shall return any unapplied portion of the
Security Deposit to Tenant within 45 days after the later to occur of: (1) the
determination of Tenant's Pro Rata Share of Expenses and Taxes for the final
year of the Term; (2) the date Tenant surrenders possession of the Premises to
Landlord in accordance with this Lease; or (3) the Termination Date. If
Landlord transfers its interest in the Premises, Landlord may assign the
Security Deposit to the transferee and, following the assignment, Landlord shall
have no further liability for the return of the Security Deposit. Landlord
shall not be required to keep the Security Deposit separate from its other
accounts. Notwithstanding anything to the contrary contained in this Article
VI, and provided that Tenant has not been in default beyond any
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applicable cure period under the Lease as of the second (2nd) anniversary of the
Commencement Date, Landlord shall return the Security Deposit (whether in the
form of cash or letter of credit) to Tenant within five (5) business days
following such second (2nd) anniversary of the Commencement Date.
B. Letter of Credit.
----------------
1. Security Amounts. If Tenant elects to provide a letter of credit
----------------
for the Security Deposit, Tenant shall, concurrently with the execution of
this Lease, deposit with Landlord, and shall keep on deposit at all times
during the term hereof, as security for the faithful performance of all the
terms, conditions and covenants of this Lease, one or more unconditional
and irrevocable letters of credit in form satisfactory to Landlord in its
sole discretion (each, a "Letter of Credit" and collectively, the "Letters
of Credit"), in the principal amount of Two Hundred Thousand Dollars
($200,000).
2. Terms of Payment. The Letters of Credit shall be payable at
----------------
sight, upon draft of Landlord, accompanied by the Letter of Credit and a
certificate signed by a duly authorized officer of Landlord that "Tenant
has committed an 'event of default' as defined in this Lease, as Tenant,
beyond applicable notice and cure periods", and stating the amount then due
and owing to Landlord.
3. Term of Each Credit Facility. The first Letter of Credit may be
----------------------------
for a term less than the term of this Lease. The first Letter of Credit
shall be deposited with Landlord upon execution of this Lease, and any
subsequent Letter of Credit shall be deposited with Landlord no later than
forty-five (45) days prior to the expiration of the preceding Letter of
Credit.
4. Actions Upon Non-Renewal. Notwithstanding Subsection 3 above,
------------------------
upon Tenant's receipt of any notice from the issuing bank that it will not
renew or replace the Letter of Credit in the scheduled amount, as required
hereunder, for the succeeding period, Tenant shall promptly notify Landlord
of such notice and provide Landlord with a copy thereof. If such Letter of
Credit is not, in fact, renewed or replaced with a Letter of Credit from
another qualified issuer pursuant hereto, or replaced with a $200,000 cash
deposit, not later than thirty (30) days prior to expiration of such Letter
of Credit, such event shall also be an event of default hereunder, without
the necessity of further written notice or time to cure. If Tenant fails
to renew or replace the then existing Letter of Credit prior to such forty-
five (45) day period, Landlord may draw upon such existing Letter of Credit
and hold such funds as security until a new Letter of Credit in the amount
required under the corresponding period as outlined in the schedule set
forth in subsection 1 above has been provided to Landlord, at which time
Landlord shall return to Tenant without interest the amount previously
drawn against the prior Letter of Credit. Any draw upon a Letter of Credit
by Landlord pursuant to this Section shall not relieve Tenant from its
obligation to provide Landlord with a Letter of Credit in the appropriate
amount in future years.
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5. Issuer. The Letters of Credit shall be issued by a banking
------
association acceptable to Landlord. The Letters of Credit shall be
assignable and transferable by Landlord.
6. Purpose of Credit Facility. Tenant acknowledges that the Letters
--------------------------
of Credit are intended to provide Landlord with the same unconditional and
unhinderable access to such security as it would have if Tenant were to
deliver to Landlord cash funds as a Security Deposit.
7. Draws on Credit Facility. If, at any time during the Term, Tenant
------------------------
has committed an event of default in the payment or performance of any
provision of this Lease, beyond any applicable notice and cure periods,
Landlord shall have the right to draw on the then-current or any succeeding
Letter of Credit in whole or in part and use the proceeds, or so much as is
necessary, in payment of any rent or other sums due from Tenant and in
default hereunder, reimbursement of any expense incurred by Landlord, and
in payment of any damages incurred by Landlord by reason of Tenant's
default. The Letter of Credit shall provide that the issuing bank agrees
with the drawers, endorsers and bona fide holders of drafts drawn under and
in compliance with the terms of the Letter of Credit that such drafts will
be duly honored on presentation to the drawee. Drafts on the last Letter
of Credit deposited hereunder must be drawn and presented to the issuing
bank not later than sixty (60) days after the Termination Date.
8. Obligation to Restore. If Landlord draws an amount under a Letter
---------------------
of Credit, the issuing bank shall endorse the amount paid to Landlord on
the reverse side of the Letter of Credit, and Tenant and Tenant's issuing
bank shall promptly restore such Letter of Credit to the original amount
and shall immediately return the Letter of Credit so endorsed and re-funded
to Landlord.
9. Refunds. If the Letter of Credit is not used as aforesaid, the
-------
last Letter of Credit, or so much as has not been used, shall be refunded
to Tenant, without interest, upon full performance of this Lease by Tenant
(or after the second anniversary of the Commencement Date, as provided by,
and subject to the terms of, Section VI.A. above).
10. Claims in Excess of Proceeds. If claims of Landlord under the
----------------------------
terms of the Lease exceed the proceeds of the Letter of Credit, Tenant
shall remain liable for the balance of such claims, as provided for herein
and in the Lease.
VII. Services to be Furnished by Landlord.
A. Landlord agrees to furnish Tenant with the following services
seven (7) days per week, twenty four (24) hours per day, unless otherwise
specified: (1) Water service for use in the drinking fountains and lavatories
on each floor on which the Premises are located and in any lunchroom or kitchen
facility within the Premises; (2) Heat and air conditioning during Normal
Business Hours, at such temperatures and in such amounts as are standard for
comparable buildings or as required by governmental authority. Tenant, upon
such advance notice as is reasonably required by Landlord, shall have the right
to receive HVAC service during hours other than Normal Business Hours. Tenant
shall pay Landlord the actual cost for
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the additional service (including additional wear and tear on equipment) as
reasonably determined by Landlord from time to time, which charge is currently
$14.00 per hour; (3) Maintenance and repair of the Property as described in
Section IX.B.; (4) Janitor service on Business Days. If Tenant's use, floor
covering or other improvements require special services in excess of the
standard services for the Buildings, Tenant shall pay the additional cost
attributable to the special services; (5) Elevator service; (6) Electricity to
the Premises for general office use, in accordance with and subject to the terms
and conditions in Article X; and (7) such other services as Landlord reasonably
determines are necessary or appropriate for the operation of the Property as a
first class office facility.
B. Landlord's failure to furnish, or any interruption or
termination of, services due to the application of Laws, the failure of any
equipment, the performance of repairs, improvements or alterations, or the
occurrence of any event or cause beyond the reasonable control of Landlord (a
"Service Failure") shall not render Landlord liable to Tenant, constitute a
constructive eviction of Tenant, give rise to an abatement of Rent, nor relieve
Tenant from the obligation to fulfill any covenant or agreement. However, if the
Premises, or a portion of the Premises, is made untenantable for a period in
excess of three (3) consecutive days, or more than six (6) periods of at least
twenty four (24) hours each in any ninety (90) day period, as a result of the
Service Failure, then Tenant, as its sole remedy, shall be entitled to receive
an abatement of Rent payable hereunder during the period beginning on the 4th
consecutive day of the Service Failure, or the fourth (4th) day of such Service
Failure within such 90-day period, as the case may be, and ending on the day the
service has been restored. If the entire Premises has not been rendered
untenantable by the Service Failure, the amount of abatement that Tenant is
entitled to receive shall be prorated based upon the percentage of the Premises
rendered untenantable and not used by Tenant. In no event, however, shall
Landlord be liable to Tenant for any loss or damage, including the theft of
Tenant's Property (defined in Article XV), arising out of or in connection with
a Service Failure. In case of a Service Failure caused by Landlord's fault or
neglect, or which is otherwise within Landlord's reasonable control, Tenant may
abate Rent as provided above except that Tenant's abatement right shall begin
one (1) day after the Service Failure. Landlord shall use reasonable efforts to
restore any Service Failure as soon as reasonably possible in order to minimize
the disruption to Tenant caused by the Service Failure.
VIII. Leasehold Improvements.
All improvements to the Premises (collectively, "Leasehold
Improvements") shall be owned by Landlord and shall remain upon the Premises
without compensation to Tenant. However, Landlord, by written notice to Tenant
within 30 days prior to the Termination Date, may require Tenant to remove, at
Tenant's expense, any Leasehold Improvements that are performed by or for the
benefit of Tenant and, in Landlord's reasonable judgment, are of a nature that
would require removal and repair costs that are materially in excess of the
removal and repair costs associated with standard office improvements
(collectively referred to as "Required Removables"). Without limitation, it is
agreed that Required Removables include internal stairways, raised floors,
personal baths and showers, vaults, rolling file systems and structural
alterations and modifications of any type, but shall not include Cable (defined
in Section IX.A.). The Required Removables designated by Landlord shall be
removed by Tenant before the Termination Date, provided that upon prior written
notice to Landlord, Tenant may remain in the
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Premises for up to 5 days after the Termination Date for the sole purpose of
removing the Required Removables. Tenant's possession of the Premises shall be
subject to all of the terms and conditions of this Lease, including the
obligation to pay Rent on a per diem basis at the rate in effect for the last
month of the Term. Tenant shall repair damage caused by the installation or
removal of Required Removables. Upon Tenant's removal of the Required
Removables, Landlord and Tenant shall jointly inspect the Premises and agree in
writing upon the satisfactory completion of the Required Removables. If Tenant
fails to remove any Required Removables or perform related repairs in a timely
manner, Landlord, at Tenant's expense, may remove and dispose of the Required
Removables and perform the required repairs. Tenant, within 30 days after
receipt of an invoice, shall reimburse Landlord for the reasonable costs
incurred by Landlord. Notwithstanding the foregoing, Tenant, at the time it
requests approval for a proposed Alteration (defined in Section IX.C.), may
request in writing that Landlord advise Tenant whether the Alteration or any
portion of the Alteration will be designated as a Required Removable. Within 10
days after receipt of Tenant's request, Landlord shall advise Tenant in writing
as to which portions of the Alteration, if any, will be considered to be
Required Removables.
IX. Repairs and Alterations.
A. Tenant's Repair Obligations. Tenant shall, at its sole cost and
---------------------------
expense, promptly perform all maintenance and repairs to the Premises that are
not Landlord's express responsibility under this Lease, and shall keep the
Premises in good condition and repair, reasonable wear and tear and damage from
insured casualty excepted. Tenant's repair obligations include, without
limitation, repairs to: (1) floor covering; (2) interior partitions; (3) doors;
(4) the interior side of demising walls; (5) electronic, phone and data cabling
and related equipment (collectively, "Cable") that is installed by or for the
exclusive benefit of Tenant and located in the Premises or other portions of the
Buildings; (6) supplemental air conditioning units, private showers and
kitchens, including hot water heaters, plumbing, and similar facilities serving
Tenant exclusively; and (7) Alterations performed by contractors retained by
Tenant, including related HVAC balancing. All work shall be performed in
accordance with the rules and procedures described in Section IX.C. below. If
Tenant fails to make any repairs to the Premises for more than 15 days after
written notice from Landlord (although notice shall not be required if there is
an emergency), Landlord may make the repairs, and Tenant shall pay the
reasonable cost of the repairs to Landlord within 30 days after receipt of an
invoice.
B. Landlord's Repair Obligations. Landlord shall keep and maintain
-----------------------------
in good repair and working order and make repairs to and perform maintenance
upon: (1) structural elements of the Buildings; (2) mechanical (including
HVAC), electrical, plumbing and fire/life safety systems serving the Buildings
and Premises in general; (3) Common Areas; (4) the roofs of the Buildings; (5)
exterior windows of the Buildings; and (6) elevators serving the Buildings.
Landlord shall promptly make repairs (considering the nature and urgency of the
repair) for which Landlord is responsible.
C. Alterations. Tenant shall not make alterations, additions or
-----------
improvements to the Premises or install any Cable in the Premises or other
portions of the Buildings (collectively referred to as "Alterations") without
first obtaining the written consent of Landlord
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in each instance, which consent shall not be unreasonably withheld or delayed.
However, Landlord's consent shall not be required for any Alteration that
satisfies all of the following criteria (a "Cosmetic Alteration"): (1) is of a
cosmetic nature such as painting, wallpapering, hanging pictures and installing
carpeting; (2) is not visible from the exterior of the Premises or Buildings;
(3) will not affect the systems or structure of the Buildings; and (4) does not
require work to be performed inside the walls or above the ceiling of the
Premises. However, even though consent is not required, the performance of
Cosmetic Alterations shall be subject to all the other provisions of this
Section IX.C. Prior to starting work, Tenant shall furnish Landlord with plans
and specifications reasonably acceptable to Landlord; names of contractors
reasonably acceptable to Landlord (provided that Landlord may designate specific
contractors with respect to Building systems); copies of contracts; necessary
permits and approvals; evidence of contractor's and subcontractor's insurance in
amounts reasonably required by Landlord; and any security for performance that
is reasonably required by Landlord. Changes to the plans and specifications must
also be submitted to Landlord for its approval. Alterations shall be constructed
in a good and workmanlike manner using materials of a quality that is at least
equal to the quality designated by Landlord as the minimum standard for the
Buildings. Landlord may designate reasonable rules, regulations and procedures
for the performance of work in the Buildings and, to the extent reasonably
necessary to avoid disruption to the occupants of the Buildings, shall have the
right to designate the time when Alterations may be performed. Tenant shall
reimburse Landlord within 30 days after receipt of an invoice for sums paid by
Landlord for third party examination of Tenant's plans for non-Cosmetic
Alterations. In addition, within 30 days after receipt of an invoice from
Landlord, Tenant shall pay Landlord a fee for Landlord's oversight and
coordination of any non-Cosmetic Alterations equal to 10% of the cost of the
non-Cosmetic Alterations. Upon completion, Tenant shall furnish "as-built" plans
(except for Cosmetic Alterations), completion affidavits, full and final waivers
of lien and receipted bills covering all labor and materials. Tenant shall
assure that the Alterations comply with all insurance requirements and Laws.
Landlord's approval of an Alteration shall not be a representation by Landlord
that the Alteration complies with applicable Laws or will be adequate for
Tenant's use.
X. Use of Electrical Services by Tenant.
A. Electricity used by Tenant in the Premises shall, at Landlord's
option, be paid for by Tenant either: (1) through inclusion in Expenses (except
as provided in Section X.B. for excess usage); (2) by a separate charge payable
by Tenant to Landlord within 30 days after billing by Landlord; or (3) by
separate charge billed by the applicable utility company and payable directly by
Tenant. Electrical service to the Premises may be furnished by one or more
companies providing electrical generation, transmission and distribution
services, and the cost of electricity may consist of several different
components or separate charges for such services, such as generation,
distribution and stranded cost charges. Landlord shall have the exclusive right
to select any company providing electrical service to the Premises, to aggregate
the electrical service for the Property and Premises with other buildings, to
purchase electricity through a broker and/or buyers group and to change the
providers and manner of purchasing electricity. Landlord shall not charge any
other fees specifically related to providing electricity to the Property.
Landlord shall not charge Tenant for electricity at above-market rates.
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B. Tenant's use of electrical service shall not exceed, either in
voltage, rated capacity, use beyond Normal Business Hours or overall load, that
which Landlord deems to be standard for the Buildings. If Tenant requests
permission to consume excess electrical service, Landlord may condition consent
upon conditions that Landlord reasonably elects (including, without limitation,
the installation of utility service upgrades, meters, submeters, air handlers or
cooling units), and the additional usage (to the extent permitted by Law),
installation and maintenance costs shall be paid by Tenant. Landlord shall have
the right to separately meter electrical usage for the Premises and to measure
electrical usage by survey or other commonly accepted methods.
XI. Entry by Landlord.
Landlord, its agents, contractors and representatives may enter the
Premises to inspect or show the Premises, to clean and make repairs, alterations
or additions to the Premises, and to conduct or facilitate repairs, alterations
or additions to any portion of the Buildings, including other tenants' premises.
Entry to the Premises for purposes of showing the Premises to prospective
tenants shall be limited to the last twelve (12) months of the Lease term.
Except in emergencies or to provide janitorial and other Building services after
Normal Business Hours, Landlord shall provide Tenant with reasonable prior
notice of entry into the Premises (except in case of emergency), which may be
given orally, but which also must be given in writing at least twenty four (24)
hours in advance, and if Tenant so requires, with a representative of Tenant
present. If reasonably necessary for the protection and safety of Tenant and
its employees, Landlord shall have the right to temporarily close all or a
portion of the Premises to perform repairs, alterations and additions. However,
except in emergencies, Landlord will not close the Premises if the work can
reasonably be completed on weekends and after Normal Business Hours. Entry by
Landlord shall not constitute constructive eviction or entitle Tenant to an
abatement or reduction of Rent. Notwithstanding the foregoing, if Landlord
temporarily closes the Premises as provided above for a period in excess of
three (3) consecutive days, Tenant, as its sole remedy, shall be entitled to
receive a per diem abatement of Base Rental during the period beginning on the
fourth (4th) consecutive day of closure and ending on the date on which the
Premises are returned to Tenant in a tenantable condition. Tenant, however,
shall not be entitled to an abatement if the repairs, alterations and/or
additions to be performed are required as a result of the acts or omissions of
Tenant, its agents, employees or contractors, including, without limitation, a
default by Tenant in its maintenance and repair obligations under the Lease.
XII. Assignment and Subletting.
A. Except in connection with a Permitted Transfer (defined in Section
XII.E. below), Tenant shall not assign, sublease, transfer or encumber any
interest in this Lease or allow any third party to use any portion of the
Premises (collectively or individually, a "Transfer") without the prior written
consent of Landlord, which consent shall not be unreasonably withheld,
conditioned or delayed if Landlord does not elect to exercise its termination
rights under Section XII.B. below. Without limitation, it is agreed that
Landlord's consent shall not be considered unreasonably withheld if: (1) the
proposed transferee's financial condition does not meet the criteria Landlord
uses to select Building tenants having similar leasehold obligations; (2) the
proposed transferee's business is not suitable for the Building considering the
business of
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the other tenants and the Building's prestige, or would result in a violation of
another tenant's rights; (3) the proposed transferee is a governmental agency or
occupant of the Building; (4) Tenant is then in default after the expiration of
the notice and cure periods in this Lease; or (5) any portion of the Buildings
or Premises would likely become subject to additional or different Laws as a
consequence of the proposed Transfer. Any attempted Transfer in violation of
this Article shall, at Landlord's option, be void. Consent by Landlord to one or
more Transfer(s) shall not operate as a waiver of Landlord's rights to approve
any subsequent Transfers. In no event shall any Transfer or Permitted Transfer
release or relieve Tenant from any obligation under this Lease.
B. As part of its request for Landlord's consent to a Transfer,
Tenant shall provide Landlord with financial statements for the proposed
transferee, a complete copy of the proposed assignment, sublease and other
contractual documents and such other information as Landlord may reasonably
request. Landlord shall, by written notice to Tenant within thirty (30) days of
its receipt of the required information and documentation, either: (1) consent
to the Transfer by the execution of a consent agreement in a form reasonably
designated by Landlord or reasonably refuse to consent to the Transfer in
writing; or (2) notify Tenant of its intention to exercise its right to
terminate this Lease with respect to the portion of the Premises that Tenant is
proposing to assign or sublet. If Tenant does not withdraw its request for the
proposed transfer within ten (10) days after receiving Landlord's notice of its
election to terminate, then Landlord may terminate the Lease, and any such
termination shall be effective on the proposed effective date of the Transfer
for which Tenant requested consent. Tenant shall pay Landlord a review fee of
$750.00 for Landlord's review of any Permitted Transfer or requested Transfer,
provided if Landlord's actual reasonable costs and expenses (including
reasonable attorney's fees) exceed $750.00, Tenant shall reimburse Landlord for
its actual reasonable costs and expenses in lieu of a fixed review fee.
C. Tenant shall pay Landlord 100% of all rent and other consideration
which Tenant receives as a result of a Transfer that is in excess of the Rent
payable to Landlord for the portion of the Premises and Term covered by the
Transfer. Tenant shall pay Landlord for Landlord's share of any excess within 30
days after Tenant's receipt of such excess consideration. Tenant may deduct from
the excess all reasonable and customary expenses directly incurred by Tenant
attributable to the Transfer (other than Landlord's review fee), including
brokerage fees, legal fees, construction costs and, to the extent paid to the
new tenant as a lease concession, moving costs. If Tenant is in Monetary Default
(defined in Section XIX.A. below), Landlord may require that all sublease
payments be made directly to Landlord, in which case Tenant shall receive a
credit against Rent in the amount of any payments received (less Landlord's
share of any excess).
D. Except as provided below with respect to a Permitted Transfer, if
Tenant is a corporation, limited liability company, partnership, or similar
entity, and if the entity which owns or controls a majority of the voting
shares/rights at any time changes for any reason (including but not limited to a
merger, consolidation or reorganization), such change of ownership or control
shall constitute a Transfer. The foregoing shall not apply so long as Tenant is
an entity whose outstanding stock is listed on a recognized security exchange,
or if at least 80% of its voting stock is owned by another entity, the voting
stock of which is so listed.
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E. Notwithstanding anything herein to the contrary, Landlord hereby
consents to an assignment of this Lease, or a subletting of all or part of the
Premises (a "Permitted Transfer"), to (i) any entity that controls, is
controlled by, or is under common control with, Tenant (control meaning the
ability to direct the management policy of the entity in question), (ii) any
corporation in whom or with which Tenant may be merged or consolidated, or (iii)
any entity to whom Tenant sells all or substantially all of its assets, provided
that in each such instance such entity expressly assumes all of Tenant's
obligations hereunder, and provided further that in instance (ii) and (iii) such
entity has a net worth at least equal to the greater of (A) the net worth of
Tenant on the date hereof or (B) the net worth of Tenant immediately prior to
such assignment or transaction. With respect to the transactions described in
Subsections (ii) above, such net worth may be on a consolidated basis with
Tenant's affiliated entity, and every net worth determination hereunder shall be
made on a balance sheet (not on a market capitalization or other basis). An
initial public offering of Tenant's stock and any subsequent transfers shall not
be considered a Transfer hereunder.
XIII. Liens.
Tenant shall not permit mechanic's or other liens to be placed upon
the Property, Premises or Tenant's leasehold interest in connection with any
work or service done or purportedly done by or for benefit of Tenant. If a lien
is so placed, Tenant shall, within fifteen (15) days of notice from Landlord of
the filing of the lien, fully discharge the lien by settling the claim which
resulted in the lien or by bonding or insuring over the lien in the manner
prescribed by the applicable lien Law. If Tenant fails to discharge the lien,
then, in addition to any other right or remedy of Landlord, Landlord may bond or
insure over the lien or otherwise discharge the lien. Tenant shall reimburse
Landlord for any amount paid by Landlord to bond or insure over the lien or
discharge the lien, including, without limitation, reasonable attorneys' fees
(if and to the extent permitted by Law) within 30 days after receipt of an
invoice from Landlord.
XIV. Indemnity and Waiver of Claims.
A. Except to the extent caused by the negligence or willful
misconduct of Landlord or any Landlord Related Parties (defined below), Tenant
shall indemnify, defend and hold Landlord, its trustees, members, principals,
beneficiaries, partners, officers, directors, employees, Mortgagee(s) (defined
in Article XXVI) and agents ("Landlord Related Parties") harmless against and
from all liabilities, obligations, damages, penalties, claims, actions, costs,
charges and expenses, including, without limitation, reasonable attorneys' fees
and other professional fees (if and to the extent permitted by Law), which may
be imposed upon, incurred by or asserted against Landlord or any of the Landlord
Related Parties and arising out of or in connection with any damage or injury
occurring in the Premises or any acts or omissions (including violations of Law)
of Tenant, the Tenant Related Parties (defined below) or any of Tenant's
transferees, contractors or licensees.
B. Except to the extent caused by the negligence or willful
misconduct of Tenant or any Tenant Related Parties (defined below), Landlord
shall indemnify, defend and hold Tenant, its trustees, members, principals,
beneficiaries, partners, officers, directors, employees and agents ("Tenant
Related Parties") harmless against and from all liabilities,
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obligations, damages, penalties, claims, actions, costs, charges and expenses,
including, without limitation, reasonable attorneys' fees and other professional
fees (if and to the extent permitted by Law), which may be imposed upon,
incurred by or asserted against Tenant or any of the Tenant Related Parties and
arising out of or in connection with the acts or omissions (including violations
of Law) of Landlord, the Landlord Related Parties or any of Landlord's
contractors.
C. Landlord and the Landlord Related Parties shall not be liable for,
and Tenant waives, all claims for loss or damage to Tenant's business or loss,
theft or damage to Tenant's Property or the property of any person claiming by,
through or under Tenant resulting from: (1) wind or weather; (2) the failure of
any sprinkler, heating or air-conditioning equipment, any electric wiring or any
gas, water or steam pipes; (3) the backing up of any sewer pipe or downspout;
(4) the bursting, leaking or running of any tank, water closet, drain or other
pipe; (5) water, snow or ice upon or coming through the roof, skylight, stairs,
doorways, windows, walks or any other place upon or near the Buildings; (6) any
act or omission of any party other than Landlord or Landlord Related Parties;
and (7) any causes not reasonably within the control of Landlord. Tenant shall
insure itself against such losses under Article XV below.
XV. Insurance.
Tenant shall carry and maintain the following insurance ("Tenant's
Insurance"), at its sole cost and expense: (1) Commercial General Liability
Insurance applicable to the Premises and its appurtenances providing, on an
occurrence basis, a minimum combined single limit of $2,000,000.00; (2) All Risk
Property/Business Interruption Insurance, including flood and earthquake,
written at replacement cost value and with a replacement cost endorsement
covering all of Tenants trade fixtures, equipment furniture and other personal
property within the Premises ("Tenant's Property"); (3) Workers' Compensation
Insurance as required by the state in which the Premises is located and in
amounts as may be required by applicable statute; and (4) Employers Liability
Coverage of at least $1,000,000.00 per occurrence. Any company writing any of
Tenants Insurance shall have an A.M. Best rating of not less than A-VIII. All
Commercial General Liability Insurance policies shall name Tenant as a named
insured and Landlord (or any successor), Equity Office Properties Trust, a
Maryland real estate investment trust, EOP Operating Limited Partnership, a
Delaware limited partnership, Wright Runstad Associates Limited Partnership, a
Washington limited partnership, any Mortgagee(s), and their respective members,
principals, beneficiaries, partners, officers, directors, employees, and agents,
and other designees of Landlord as the interest of such designees shall appear,
as additional insureds. All policies of Tenant's Insurance shall contain
endorsements that the insurer(s) shall give Landlord and its designees at least
30 days' advance written notice of any change, cancellation, termination or
lapse of insurance. Tenant shall provide Landlord with a certificate of
insurance evidencing Tenant's Insurance prior to the earlier to occur of the
Commencement Date or the date Tenant is provided with possession of the Premises
for any reason, and upon renewals at least 15 days prior to the expiration of
the insurance coverage. So long as the same is available at commercially
reasonable rates, Landlord shall maintain so called All Risk property insurance
on the Buildings at replacement cost value, as reasonably estimated by Landlord.
Except as specifically provided to the contrary, the limits of either party's'
insurance shall not limit such party's liability under this Lease.
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XVI. Subrogation.
Notwithstanding anything in this Lease to the contrary, Landlord and
Tenant shall cause their respective insurance carriers to waive any and all
rights of recovery, claim, action or causes of action against the other and
their respective trustees, principals, beneficiaries, partners, officers,
directors, agents, and employees, for any loss or damage that may occur to
Landlord or Tenant or any party claiming by, through or under Landlord or
Tenant, as the case may be, with respect to Tenant's Property, the Buildings,
the Premises, any additions or improvements to the Buildings or Premises, or any
contents thereof, including all rights of recovery, claims, actions or causes of
action arising out of the negligence of Landlord or any Landlord Related Parties
or the negligence of Tenant or any Tenant Related Parties, which loss or damage
is (or would have been, had the insurance required by this Lease been carried)
covered by insurance.
XVII. Casualty Damage.
A. If all or any part of the Premises is damaged by fire or other
casualty, Tenant shall immediately notify Landlord in writing. During any
period of time that all or a material portion of the Premises is rendered
untenantable as a result of a fire or other casualty, the Rent shall abate for
the portion of the Premises that is untenantable and not used by Tenant.
Landlord shall have the right to terminate this Lease if: (1) the Building
shall be damaged so that, in Landlord's reasonable judgment, substantial
alteration or reconstruction of the Building shall be required (whether or not
the Premises has been damaged); (2) Landlord is not permitted by Law to rebuild
the Building in substantially the same form as existed before the fire or
casualty; (3) the Premises have been materially damaged and there is less than
one (1) year of the Term remaining on the date of the casualty; (4) any
Mortgagee requires that the insurance proceeds be applied to the payment of the
mortgage debt; or (5) a material uninsured loss to the Building occurs.
Landlord may exercise its right to terminate this Lease by notifying Tenant in
writing within 90 days after the date of the casualty. In addition to
Landlord's rights to terminate as provided herein, Tenant shall have the right
to terminate this Lease if: (a) a substantial portion of the Premises has been
damaged by fire or other casualty and such damage cannot reasonably be repaired
within sixty (60) days after the date of such fire or other casualty; (b) there
is less than one (1) year of the Lease Term remaining on the date of such
casualty; (c) the casualty was not caused by the negligence or willful
misconduct of Tenant or its agents, employees or contractors; and (d) Tenant
provides Landlord with written notice of its intent to terminate within thirty
(30) days after the date of the fire or other casualty. If neither Landlord nor
Tenant elect to terminate this Lease, Landlord shall commence and proceed with
reasonable diligence to repair and restore the Building and the Leasehold
Improvements (excluding any Alterations that were performed by Tenant in
violation of this Lease). However, in no event shall Landlord be required to
spend more than the insurance proceeds received by Landlord. Landlord shall not
be liable for any loss or damage to Tenant's Property or to the business of
Tenant resulting in any way from the fire or other casualty or from the repair
and restoration of the damage. Landlord and Tenant hereby waive the provisions
of any Law relating to the matters addressed in this Article, and agree that
their respective rights for damage to or destruction of the Premises shall be
those specifically provided in this Lease.
B. If all or any portion of the Premises shall be made untenantable
by fire or other casualty, Landlord shall, with reasonable promptness, cause an
architect or general
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contractor selected by Landlord to provide Landlord and Tenant with a written
estimate of the amount of time required to substantially complete the repair and
restoration of the Premises and make the Premises tenantable again, using
standard working methods ("Completion Estimate"). If the Completion Estimate
indicates that the Premises cannot be made tenantable within 210 days from the
date the repair and restoration is started, then regardless of anything in
Section XVII.A. above to the contrary, either party shall have the right to
terminate this Lease by giving written notice to the other of such election
within 30 days after receipt of the Completion Estimate. Tenant, however, shall
not have the right to terminate this Lease if the fire or casualty was caused by
the negligence or intentional misconduct of Tenant, Tenant Related Parties or
any of Tenant's transferees, contractors or licensees.
XVIII. Condemnation.
Either party may terminate this Lease if the whole or any material
part of the Premises shall be taken or condemned for any public or quasi-public
use under Law, by eminent domain or private purchase in lieu thereof (a
"Taking"). Landlord shall also have the right to terminate this Lease if there
is a Taking of any portion of the Building or Property which would leave the
remainder of the Building unsuitable for use as an office building in a manner
comparable to the Building's use prior to the Taking. In order to exercise its
right to terminate the Lease, Landlord or Tenant, as the case may be, must
provide written notice of termination to the other within 45 days after the
terminating party first receives notice of the Taking. Any such termination
shall be effective as of the date the physical taking of the Premises or the
portion of the Building or Property occurs. If this Lease is not terminated,
the Rentable Square Footage of the Building, the Rentable Square Footage of the
Premises and Tenant's Pro Rata Share shall, if applicable, be appropriately
adjusted. In addition, Rent for any portion of the Premises taken or condemned
shall be abated during the unexpired Term of this Lease effective when the
physical taking of the portion of the Premises occurs. All compensation awarded
for a Taking, or sale proceeds, shall be the property of Landlord, any right to
receive compensation or proceeds being expressly waived by Tenant. However,
Tenant may file a separate claim at its sole cost and expense for Tenant's
Property and Tenant's reasonable relocation expenses, provided the filing of the
claim does not diminish the award which would otherwise be receivable by
Landlord.
XIX. Events of Default.
Tenant shall be considered to be in default of this Lease upon the
occurrence of any of the following events of default:
A. Tenant's failure to pay when due all or any portion of the
Rent, if the failure continues for 3 days after written notice to Tenant
("Monetary Default").
B. Tenant's failure (other than a Monetary Default) to comply with
any term, provision or covenant of this Lease, if the failure is not cured
within 30 days after written notice to Tenant. However, if Tenant's failure to
comply cannot reasonably be cured within 30 days, Tenant shall be allowed
additional time (not to exceed 60 days) as is reasonably necessary to cure the
failure so long as: (1) Tenant commences to cure the failure within 30 days,
and (2) Tenant diligently pursues a course of action that will cure the failure
and bring Tenant back
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into compliance with the Lease. However, if Tenant's failure to comply creates a
hazardous condition, the failure must be cured immediately upon notice to
Tenant. In addition, if Landlord provides Tenant with notice of Tenant's failure
to comply with any particular term, provision or covenant of the Lease on 3
occasions during any 12 month period, Tenant's subsequent violation of such
term, provision or covenant shall, at Landlord's option, not require a thirty
(30) day cure period.
C. Tenant or any Guarantor becomes insolvent, makes a transfer in
fraud of creditors or makes an assignment for the benefit of creditors, or
admits in writing its inability to pay its debts when due.
D. The leasehold estate is taken by process or operation of Law.
XX. Remedies.
A. Upon any default, Landlord shall have the right without notice or
demand (except as provided in Article XIX) to pursue any of its rights and
remedies at Law or in equity, including any one or more of the following
remedies:
1. Terminate this Lease, in which case Tenant shall immediately
surrender the Premises to Landlord. If Tenant fails to surrender the
Premises, Landlord may, in compliance with applicable Law and without
prejudice to any other right or remedy, enter upon and take possession of
the Premises and expel and remove Tenant, Tenant's Property and any party
occupying all or any part of the Premises. Tenant shall pay Landlord on
demand the amount of all past due Rent and other losses and damages which
Landlord may suffer as a result of Tenant's default, whether by Landlord's
inability to relet the Premises on satisfactory terms or otherwise,
including, without limitation, all Costs of Reletting (defined below) and
any deficiency that may arise from reletting or the failure to relet the
Premises. "Costs of Reletting" shall include all costs and expenses
incurred by Landlord in reletting or attempting to relet the Premises,
including, without limitation, reasonable legal fees, brokerage
commissions, the cost of alterations and the value of other concessions or
allowances granted to a new tenant.
2. Terminate Tenant's right to possession of the Premises and, in
compliance with applicable Law, expel and remove Tenant, Tenant's Property
and any parties occupying all or any part of the Premises. Landlord may
relet all or any part of the Premises, without notice to Tenant, for a term
that may be greater or less than the balance of the Term and on such
conditions (which may include concessions, free rent and alterations of the
Premises) and for such uses as Landlord in its reasonable business judgment
shall determine. Landlord may collect and receive all rents and other
income from the reletting. Tenant shall pay Landlord on demand all past
due Rent, all Costs of Reletting and any deficiency arising from the
reletting or failure to relet the Premises. The re-entry or taking of
possession of the Premises shall not be construed as an election by
Landlord to terminate this Lease unless a written notice of termination is
given to Tenant. Landlord shall make reasonable efforts to mitigate its
damages as required by law or equity following a default by Tenant.
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3. In lieu of calculating damages under Sections XX.A.1. or XX.A.2.
above, Landlord may elect to receive as damages the sum of (a) all Rent
accrued through the date of termination of this Lease or Tenant's right to
possession, and (b) an amount equal to the total Rent that Tenant would
have been required to pay for the remainder of the Term discounted to
present value at the Prime Rate (defined in Section XX.B. below) then in
effect, minus the then present fair rental value of the Premises for the
remainder of the Term, similarly discounted, after deducting the
proportionate share of the anticipated Costs of Reletting attributable to
the period between the Lease termination date and the last day of the Lease
term.
B. Unless expressly provided in this Lease, the repossession or re-
entering of all or any part of the Premises shall not relieve Tenant of its
liabilities and obligations under the Lease. No right or remedy of Landlord
shall be exclusive of any other right or remedy. Each right and remedy shall be
cumulative and in addition to any other right and remedy now or subsequently
available to Landlord at Law or in equity. If Landlord declares Tenant to be in
default, Landlord shall be entitled to receive interest on any unpaid item of
Rent at a rate equal to the Prime Rate plus 4%. For purposes hereof, the "Prime
Rate" shall be the per annum interest rate publicly announced as its prime or
base rate in the "Money Rates" column of the Wall Street Journal. Forbearance
by Landlord to enforce one or more remedies shall not constitute a waiver of any
default.
XXI. Limitation of Liability.
NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THIS LEASE, THE
LIABILITY OF LANDLORD (AND OF ANY SUCCESSOR LANDLORD) TO TENANT SHALL BE LIMITED
TO THE INTEREST OF LANDLORD IN THE PROPERTY. TENANT SHALL LOOK SOLELY TO
LANDLORD'S INTEREST IN THE PROPERTY FOR THE RECOVERY OF ANY JUDGMENT OR AWARD
AGAINST LANDLORD. NEITHER LANDLORD NOR ANY LANDLORD RELATED PARTY SHALL BE
PERSONALLY LIABLE FOR ANY JUDGMENT OR DEFICIENCY. BEFORE FILING SUIT FOR AN
ALLEGED DEFAULT BY LANDLORD, TENANT SHALL GIVE LANDLORD AND THE MORTGAGEE(S)
(DEFINED IN ARTICLE XXVI BELOW) WHOM TENANT HAS BEEN NOTIFIED HOLD MORTGAGES
(DEFINED IN ARTICLE XXVI BELOW) ON THE PROPERTY, BUILDING OR PREMISES, NOTICE
AND REASONABLE TIME TO CURE THE ALLEGED DEFAULT. IN ADDITION, TENANT
ACKNOWLEDGES THAT ANY ENTITY MANAGING THE BUILDING ON BEHALF OF LANDLORD, OR
WHICH EXECUTES THIS LEASE AS AGENT FOR LANDLORD, IS ACTING SOLELY IN ITS
CAPACITY AS AGENT FOR LANDLORD AND SHALL NOT BE LIABLE FOR ANY OBLIGATIONS,
LIABILITIES, LOSSES OR DAMAGES ARISING OUT OF OR IN CONNECTION WITH THE
LANDLORD'S OBLIGATIONS UNDER THIS LEASE, ALL OF WHICH ARE EXPRESSLY WAIVED BY
TENANT.
XXII. No Waiver.
Either party's failure to declare a default immediately upon its
occurrence, or delay in taking action for a default shall not constitute a
waiver of the default, nor shall it
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constitute an estoppel. Either party's failure to enforce its rights for a
default shall not constitute a waiver of its rights regarding any subsequent
default. Receipt by Landlord of Tenant's keys to the Premises shall not
constitute an acceptance or surrender of the Premises.
XXIII. Quiet Enjoyment.
Tenant shall, and may peacefully have, hold and enjoy the Premises,
subject to the terms of this Lease, provided Tenant pays the Rent and fully
performs all of its covenants and agreements. This covenant and all other
covenants of Landlord shall be binding upon Landlord and its successors only
during its or their respective periods of ownership of the Buildings, and shall
not be a personal covenant of Landlord or the Landlord Related Parties.
XXIV. Relocation.
[Intentionally omitted.]
XXV. Holding Over.
Except for any permitted occupancy by Tenant under Article VIII, if
Tenant fails to surrender the Premises at the expiration or earlier termination
of this Lease, occupancy of the Premises after the termination or expiration
shall be that of a tenancy at sufferance. Tenant's occupancy of the Premises
during the holdover shall be subject to all the terms and provisions of this
Lease and Tenant shall pay an amount (on a per month basis without reduction for
partial months during the holdover) equal to 150% of the greater of: (1) the
sum of the Base Rent and Additional Rent due for the period immediately
preceding the holdover; or (2) the fair market gross rental for the Premises as
reasonably determined by Landlord. No holdover by Tenant or payment by Tenant
after the expiration or early termination of this Lease shall be construed to
extend the Term or prevent Landlord from immediate recovery of possession of the
Premises by summary proceedings or otherwise. In addition to the payment of the
amounts provided above, if Landlord is unable to deliver possession of the
Premises to a new tenant, or to perform improvements for a new tenant, as a
result of Tenant's holdover and Tenant fails to vacate the Premises within 30
days after Landlord notifies Tenant of Landlord's inability to deliver
possession, or perform improvements, Tenant shall be liable to Landlord for all
damages, including, without limitation, consequential damages, that Landlord
suffers from the holdover.
XXVI. Subordination to Mortgages; Estoppel Certificate.
Tenant accepts this Lease subject and subordinate to any
mortgage(s), deed(s) of trust, ground lease(s) or other lien(s) now or
subsequently arising upon the Premises, the Buildings or the Property, and to
renewals, modifications, refinancings and extensions thereof (collectively
referred to as a "Mortgage"). The party having the benefit of a Mortgage shall
be referred to as a "Mortgagee". This clause shall be self-operative, but upon
request from a Mortgagee, Tenant shall execute a subordination agreement in the
form of Exhibit F attached hereto or in other commercially reasonable form
---------
containing a nondisturbance clause. In lieu of having the Mortgage be superior
to this Lease, a Mortgagee shall have the right at any time to subordinate its
Mortgage to this Lease. If requested by a successor-in-interest to all or a part
of
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Landlord's interest in the Lease, Tenant shall, without charge, attorn to the
successor-in-interest. Landlord and Tenant shall each, within 10 days after
receipt of a written request from the other, execute and deliver an estoppel
certificate to those parties as are reasonably requested by the other (including
a Mortgagee or prospective purchaser). The estoppel certificate shall include a
statement certifying that this Lease is unmodified (except as identified in the
estoppel certificate) and in full force and effect, describing the dates to
which Rent and other charges have been paid, representing that, to such party's
actual knowledge, there is no default (or stating the nature of the alleged
default) and indicating other matters with respect to the Lease that may
reasonably be requested. Tenant approves the form of Estoppel Certificate
attached hereto as Exhibit G. Landlord shall use commercially reasonable efforts
---------
to furnish Tenant with an executed Subordination Agreement in the form of
Exhibit F within thirty (30) days after mutual execution of this Lease.
- ---------
XXVII. Attorneys' Fees.
If either party institutes a suit against the other for violation
of or to enforce any covenant or condition of this Lease, or if either party
intervenes in any suit in which the other is a party to enforce or protect its
interest or rights, the prevailing party shall be entitled to all of its costs
and expenses, including, without limitation, reasonable attorneys' fees.
XXVIII. Notice.
If a demand, request, approval, consent or notice (collectively
referred to as a "notice") shall or may be given to either party by the other,
the notice shall be in writing and delivered by hand or sent by registered or
certified mail with return receipt requested, or sent by overnight or same day
courier service or sent by facsimile (with electric confirmation of receipt) at
the party's respective Notice Address(es) set forth in Article I, except that if
Tenant has vacated the Premises (or if the Notice Address for Tenant is other
than the Premises, and Tenant has vacated such address) without providing
Landlord a new Notice Address, Landlord may serve notice in any manner described
in this Article or in any other manner permitted by Law. Each notice shall be
deemed to have been received or given on the earlier to occur of actual delivery
or the date on which delivery is refused, or, if Tenant has vacated the Premises
or the other Notice Address of Tenant without providing a new Notice Address,
three (3) days after notice is deposited in the U.S. mail or with a courier
service in the manner described above. Either party may, at any time, change its
Notice Address by giving the other party written notice of the new address in
the manner described in this Article.
XXIX. Excepted Rights.
This Lease does not grant any rights to light or air over or about
the Buildings. Landlord excepts and reserves exclusively to itself the use of:
(1) roofs, (2) telephone, electrical and janitorial closets, (3) equipment
rooms, Building risers or similar areas that are used by Landlord for the
provision of Building services, (4) rights to the land and improvements below
the floor of the Premises, (5) the improvements and air rights above the
Premises, (6) the improvements and air rights outside the demising walls of the
Premises, and (7) the areas within the Premises used for the installation of
utility lines and other installations serving occupants of
25
<PAGE>
the Buildings. Landlord has the right to change the Building's name or address.
Landlord also has the right to make such other changes to the Property and
Buildings as Landlord deems appropriate, provided the changes do not materially
affect Tenant's ability to use the Premises for the Permitted Use. Landlord
shall also have the right (but not the obligation) to temporarily close the
Buildings if Landlord reasonably determines that there is an imminent danger of
significant damage to the Buildings or of personal injury to Landlord's
employees or the occupants of the Buildings. The circumstances under which
Landlord may temporarily close the Buildings shall include, without limitation,
electrical interruptions, hurricanes and civil disturbances. A closure of the
Buildings under such circumstances shall not constitute a constructive eviction
nor entitle Tenant to an abatement or reduction of Rent.
XXX. Surrender of Premises.
At the expiration or earlier termination of this Lease or Tenant's
right of possession, Tenant shall remove Tenant's Property (defined in Article
XV) from the Premises, and quit and surrender the Premises to Landlord, broom
clean, and in good order, condition and repair, ordinary wear and tear and
damage from casualty excepted. Tenant shall also be required to remove the
Required Removables in accordance with Article VIII. If Tenant fails to remove
any of Tenant's Property within 2 days after the termination of this Lease or of
Tenant's right to possession, Landlord, at Tenant's sole cost and expense, shall
be entitled (but not obligated) to remove and store Tenant's Property. Landlord
shall not be responsible for the value, preservation or safekeeping of Tenant's
Property. Tenant shall pay Landlord, upon demand, the expenses and storage
charges incurred for Tenant's Property. In addition, if Tenant fails to remove
Tenant's Property from the Premises or storage, as the case may be, within 30
days after written notice, Landlord may deem all or any part of Tenant's
Property to be abandoned, and title to Tenant's Property shall be deemed to be
immediately vested in Landlord.
XXXI. Miscellaneous.
A. This Lease and the rights and obligations of the parties shall
be interpreted, construed and enforced in accordance with the Laws of the state
of Washington and Landlord and Tenant hereby irrevocably consent to the
jurisdiction and proper venue of such state. If any term or provision of this
Lease shall to any extent be invalid or unenforceable, the remainder of this
Lease shall not be affected, and each provision of this Lease shall be valid and
enforced to the fullest extent permitted by Law. The headings and titles to the
Articles and Sections of this Lease are for convenience only and shall have no
effect on the interpretation of any part of the Lease.
B. Tenant shall not record this Lease or any memorandum without
Landlord's prior written consent.
C. Whenever a period of time is prescribed for the taking of an
action by Landlord or Tenant, the period of time for the performance of such
action shall be extended by the number of days that the performance is actually
delayed due to strikes, acts of God, shortages of labor or materials, war, civil
disturbances and other causes beyond the reasonable control of the performing
party ("Force Majeure"). However, events of Force Majeure shall not extend any
26
<PAGE>
period of time for the payment of Rent or other sums payable by either party or
any period of time for the written exercise of an option or right by either
party.
D. Landlord shall have the right to transfer and assign, in whole
or in part, all of its rights and obligations under this Lease and in the
Buildings and/or Property referred to herein, and upon such transfer Landlord
shall be released from any future, unaccrued obligations hereunder, and Tenant
agrees to look solely to the successor in interest of Landlord for the
performance of such obligations.
E. 1. Tenant represents that it has dealt directly with and only
with the Broker as a broker in connection with this Lease. Tenant shall
indemnify and hold Landlord and the Landlord Related Parties harmless from all
claims of any other brokers claiming to have represented Tenant in connection
with this Lease. Landlord agrees to indemnify and hold Tenant and the Tenant
Related Parties harmless from all claims of any brokers claiming to have
represented Landlord in connection with this Lease. Landlord agrees to pay a
brokerage commission to Broker in accordance with the terms of a written
commission agreement between Landlord and Broker.
2. Agency Disclosure. At the signing of this Lease, Landlord's
-----------------
leasing agent John Black, of Broderick Group, Inc., represented Landlord. At
the signing of this Lease, Tenant's agent, Geoff Boguch of Colliers
International, represented Tenant. Each party signing this document confirms
that the prior oral and/or written disclosure of agency was provided to such
party in this transaction, as required by RCW 18.86.030(l)(g).
3. Landlord and Tenant, by their execution of this Lease, each
acknowledge and agree that they have timely received a pamphlet on the law of
real estate agency as required under RCW 18.86.030(1)(f).
F. Tenant covenants, warrants and represents that: (1) each
individual executing, attesting and/or delivering this Lease on behalf of Tenant
is authorized to do so on behalf of Tenant; (2) this Lease is binding upon
Tenant; and (3) Tenant is duly organized and legally existing in the state of
its organization and is qualified to do business in the state in which the
Premises are located. If there is more than one Tenant, or if Tenant is
comprised of more than one party or entity, the obligations imposed upon Tenant
shall be joint and several obligations of all the parties and entities.
Notices, payments and agreements given or made by, with or to any one person or
entity shall be deemed to have been given or made by, with and to all of them.
G. Time is of the essence with respect to Tenant's exercise of any
expansion, renewal or extension rights granted to Tenant. This Lease shall
create only the relationship of landlord and tenant between the parties, and not
a partnership, joint venture or any other relationship. This Lease and the
covenants and conditions in this Lease shall inure only to the benefit of and be
binding only upon Landlord and Tenant and their permitted successors and
assigns.
H. The expiration of the Term, whether by lapse of time or
otherwise, shall not relieve either party of any obligations which accrued prior
to or which may continue to
27
<PAGE>
accrue after the expiration or early termination of this Lease. Without limiting
the scope of the prior sentence, it is agreed that Tenant's obligations under
Sections IV.A., IV.B., VIII, XIV, XX, XXV and XXX shall survive the expiration
or early termination of this Lease.
I. Landlord has delivered a copy of this Lease to Tenant for
Tenant's review only, and the delivery of it does not constitute an offer to
Tenant or an option. This Lease shall not be effective against any party hereto
until an original copy of this Lease has been signed by such party.
J. All understandings and agreements previously made between the
parties are superseded by this Lease, and neither party is relying upon any
warranty, statement or representation not contained in this Lease. This Lease
may be modified only by a written agreement signed by Landlord and Tenant.
K. Tenant, within 15 days after request, shall provide Landlord
with a current financial statement and such other information as Landlord may
reasonably request in order to create a "business profile" of Tenant and
determine Tenant's ability to fulfill its obligations under this Lease.
Landlord, however, shall not require Tenant to provide such information unless
Landlord is requested to produce the information in connection with a proposed
financing or sale of the Buildings. Upon written request by Tenant, Landlord
shall enter into a commercially reasonable confidentiality agreement covering
any confidential information that is disclosed by Tenant.
XXXII. Entire Agreement.
This Lease and the following exhibits and attachments constitute
the entire agreement between the parties and supersede all prior agreements and
understandings related to the Premises, including all lease proposals, letters
of intent and other documents: Exhibit A (Outline and Location of Premises),
---------
Exhibit A-2 (Legal Description of Property), Exhibit B (Rules and Regulations),
- ----------- ---------
Exhibit C (Commencement Letter), Exhibit D (Work Letter Agreement, if required),
- --------- ---------
Exhibit E (Additional Provisions, if required), Exhibit F (Subordination
- --------- ---------
Agreement; Acknowledgment of Lease Assignment, Estoppel, Attornment and Non-
Disturbance Agreement); and Exhibit G (Tenant Estoppel Certificate).
---------
28
<PAGE>
Landlord and Tenant have executed this Lease as of the day and year
first above written.
LANDLORD:
WRC SUNSET NORTH LLC, a Washington limited liability
company
By: WRIGHT RUNSTAD
ASSOCIATES LIMITED
PARTNERSHIP, a Washington
limited partnership, its Manager
By: WRIGHT RUNSTAD &
COMPANY, a Washington
corporation, its general partner
By:
--------------------------------
Its:
--------------------------------
EOP SUNSET NORTH, L.L.C., a
Delaware limited liability company, its
manager
By: EOP OPERATING LIMITED
PARTNERSHIP, a Delaware limited
partnership, its sole member
By: EQUITY OFFICE
PROPERTIES TRUST, a
Maryland real estate investment
trust, its managing general
partner
By:
--------------------------------
Its:
--------------------------------
29
<PAGE>
TENANT:
drugstore.com, inc.,
a Delaware corporation
By:
--------------------------------
Its:
--------------------------------
LANDLORD ACKNOWLEDGMENTS
STATE OF WASHINGTON )
) ss:
COUNTY OF KING )
On this the ______ day of _______________, 1999, before me a Notary Public
duly authorized in and for said County in the State aforesaid to take
acknowledgments personally appeared _________________________ known to me to be
_______________ of Wright Runstad & Company, the general partner of Wright
Runstad Associates Limited Partnership, a Member of WRC SUNSET NORTH LLC, a
Washington limited liability company, the Landlord in the foregoing instrument,
and acknowledged that as such officer, being authorized so to do, (s)he executed
the foregoing instrument on behalf of said corporation by subscribing the name
of such corporation by himself/herself as such officer and caused the corporate
seal of said corporation to be affixed thereto, as a free and voluntary act, and
as the free and voluntary act of said corporation, for the uses and purposes
therein set forth.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
Notary Public:
--------------------------------------------
Printed Name:
---------------------------------------------
Residing at:
----------------------------------------------
My Commission expires:
------------------------------------
30
<PAGE>
STATE OF _______________ )
) ss:
COUNTY OF ______________ )
On this the ______ day of _______________, 1999, before me a Notary Public
duly authorized in and for said County in the State aforesaid to take
acknowledgments personally appeared _________________________ known to me to be
_______________ of Equity Office Properties Trust, the general partner of EOP
Operating Limited Partnership, the sole member of EOP Sunset North, L.L.C., a
Member of WRC SUNSET NORTH LLC, a Washington limited liability company, the
Landlord in the foregoing instrument, and acknowledged that as such officer,
being authorized so to do, (s)he executed the foregoing instrument on behalf of
said corporation by subscribing the name of such corporation by himself/herself
as such officer and caused the corporate seal of said corporation to be affixed
thereto, as a free and voluntary act, and as the free and voluntary act of said
corporation, for the uses and purposes therein set forth.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
Notary Public:
--------------------------------------------
Printed Name:
---------------------------------------------
Residing at:
----------------------------------------------
My Commission expires:
------------------------------------
31
<PAGE>
TENANT ACKNOWLEDGMENT
STATE OF WASHINGTON )
) ss:
COUNTY OF KING )
On this the ______ day of _______________, 1999, before me a Notary Public
duly authorized in and for said County in the State aforesaid to take
acknowledgments personally appeared _________________________ known to me to be
_______________ of drugstore.com, inc., a Delaware corporation, the Tenant in
the foregoing instrument, and acknowledged that as such officer, being
authorized so to do, (s)he executed the foregoing instrument on behalf of said
corporation by subscribing the name of such corporation by himself/herself as
such officer and caused the corporate seal of said corporation to be affixed
thereto, as a free and voluntary act, and as the free and voluntary act of said
corporation, for the uses and purposes therein set forth.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
Notary Public:
--------------------------------------------
Printed Name:
---------------------------------------------
Residing at:
----------------------------------------------
My Commission expires:
------------------------------------
32
<PAGE>
EXHIBIT A-1
PREMISES
This Exhibit is attached to and made a part of the Lease dated
November 22, 1999, by and between WRC SUNSET NORTH LLC, a Washington limited
liability company ("Landlord") and drugstore.com, inc., a Delaware corporation
("Tenant") for space in the Buildings located at the Northeast corner of 139th
Avenue Southeast and Southeast 32nd Street, Bellevue, King County, Washington.
Exhibit A-1, Page 1
<PAGE>
EXHIBIT A-2
LEGAL DESCRIPTION OF PROPERTY
This Exhibit is attached to and made a part of the Lease dated
November 22, 1999, by and between WRC SUNSET NORTH LLC, a Washington limited
liability company ("Landlord") and drugstore.com, inc., a Delaware corporation
("Tenant") for space in the Buildings located at the Northeast corner of 139th
Avenue Southeast and Southeast 32nd Street, Bellevue, King County, Washington.
LOTS 6 THROUGH 10 OF SUNSET RIDGE I-90 CORPORATE CAMPUS, A BINDING SITE PLAN, AS
PER PLAT RECORDED IN VOLUME 154 OF PLATS, PAGES 77 THROUGH 80, RECORDS OF KING
COUNTY;
EXCEPT ANY PORTION CONVEYED FOR 139TH AVE. S.E., BY DEED RECORDED UNDER
RECORDING NO. 9101280422;
TOGETHER WITH AN UNDIVIDED 60% INTEREST IN LOT 11 AND TRACT C OF SAID PLAT;
AND TOGETHER WITH THOSE CERTAIN EASEMENT RIGHTS AS DELINEATED IN INSTRUMENT
RECORDED UNDER RECORDING NO. 9601091040;
AND TOGETHER WITH THOSE CERTAIN EASEMENT RIGHTS AS DELINEATED IN INSTRUMENT
RECORDED UNDER RECORDING NO. 9107260572;
AND TOGETHER WITH THOSE CERTAIN EASEMENT RIGHTS AS DELINEATED IN INSTRUMENT
RECORDED UNDER RECORDING NO. 9309292404;
SITUATE IN THE CITY OF BELLEVUE, COUNTY OF KING, STATE OF WASHINGTON.
Exhibit A-2, Page 1
<PAGE>
EXHIBIT B
BUILDING RULES AND REGULATIONS
The following rules and regulations shall apply, where applicable, to
the Premises, the Buildings, the parking garage (if any), the Property and the
appurtenances. Capitalized terms have the same meaning as defined in the Lease.
1. Sidewalks, doorways, vestibules, halls, stairways and other
similar areas shall not be obstructed by Tenant or used by Tenant for any
purpose other than ingress and egress to and from the Premises. No rubbish,
litter, trash, or material shall he placed, emptied, or thrown in those areas.
At no time shall Tenant permit Tenant's employees to loiter in Common Areas or
elsewhere about the Buildings or Property.
2. Plumbing fixtures and appliances shall be used only for the
purposes for which designed, and no sweepings, rubbish, rags or other unsuitable
material shall be thrown or placed in the fixtures or appliances. Damage
resulting to fixtures or appliances by Tenant, its agents, employees or
invitees, shall be paid for by Tenant, and Landlord shall not be responsible for
the damage.
3. No signs, advertisements or notices shall be painted or affixed to
windows, doors or other parts of the Buildings, except those of such color,
size, style and in such places as are first approved in writing by Landlord and
except those that are within the interior of the Premises and not visible from
outside the Premises. All tenant identification and suite numbers at the
entrance to the Premises shall be installed by Landlord, at Tenant's cost and
expense, using the standard graphics for the Buildings. Except in connection
with the hanging of lightweight pictures and wall decorations, no nails, hooks
or screws shall be inserted into any part of the Premises or Buildings except by
the Building maintenance personnel.
4. Landlord shall provide and maintain in the first floor (main
lobby) of the Building an alphabetical directory board or other directory device
listing tenants, and no other directory shall be permitted unless previously
consented to by Landlord in writing.
5. Tenant shall not place any lock(s) on any door in the Premises or
Buildings without Landlord's prior written consent and Landlord shall have the
right to retain at all times and to use keys to all locks within and into the
Premises. A reasonable number of keys to the locks on the entry doors in the
Premises shall be furnished by Landlord to Tenant at Tenant's cost, and Tenant
shall not make any duplicate keys. All keys shall be returned to Landlord at the
expiration or early termination of this Lease.
6. All contractors, contractors representatives and installation
technicians performing work in the Buildings shall be subject to Landlord's
prior approval (which shall not be unreasonably withheld) and shall be required
to comply with Landlord's standard rules, regulations, policies and procedures,
which may be revised from time to time following prior written notice to Tenant.
Exhibit B, Page 1
<PAGE>
7. Movement in or out of the Buildings of furniture or office
equipment, or dispatch or receipt by Tenant of merchandise or materials
requiring the use of elevators, stairways, lobby areas or loading dock areas,
shall be restricted to hours designated by Landlord. Tenant shall obtain
Landlord's prior approval by providing a detailed listing of the activity. If
approved by Landlord, the activity shall be under the supervision of Landlord
and performed in the manner required by Landlord. Tenant shall assume all risk
for damage to articles moved and injury to any persons resulting from the
activity. If equipment, property, or personnel of Landlord or of any other party
is damaged or injured as a result of or in connection with the activity, Tenant
shall be solely liable for any resulting damage or loss.
8. Landlord shall have the right to approve the weight, size, or
location of heavy equipment or articles in and about the Premises. Damage to the
Buildings by the installation, maintenance, operation, existence or removal of
property of Tenant shall be repaired at Tenant's sole expense.
9. Corridor doors, when not in use, shall be kept closed.
10. Tenant shall not: (1) make or permit any improper, objectionable
or unpleasant noises or odors in the Buildings, or otherwise interfere in any
way with other tenants or persons having business with them; (2) solicit
business or distribute, or cause to be distributed, in any portion of the
Buildings, handbills, promotional materials or other advertising; or (3) conduct
or permit other activities in the Buildings that might, in Landlord's sole
opinion, constitute a nuisance.
11. No animals, except those assisting handicapped persons, shall be
brought into the Buildings or kept in or about the Premises.
12. No inflammable, explosive or dangerous fluids or substances shall
be used or kept by Tenant in the Premises, Buildings or about the Property
except for those properly stored and typically associated with office use,
including cleaning supplies, and except for samples of pharmaceuticals, and
other products stored and disposed of in compliance with all applicable laws and
regulations. Tenant shall not, without Landlord's prior written consent, use,
store, install, spill, remove, release or dispose of, within or about the
Premises or any other portion of the Property, any asbestos-containing materials
or any solid, liquid or gaseous material now or subsequently considered toxic or
hazardous under the provisions of 42 U.S.C. Section 9601 et seq. or any other
applicable environmental Law which may now or later be in effect. Tenant shall
comply with all Laws pertaining to and governing the use of these materials by
Tenant, and shall remain solely liable for the costs of abatement and removal.
13. Tenant shall not use or occupy the Premises in any manner or for
any purpose which might injure the reputation or impair the present or future
value of the Premises or the Buildings. Tenant shall not use, or permit any part
of the Premises to be used, for lodging, sleeping or for any illegal purpose.
14. Tenant shall not take any action which would violate Landlord's
labor contracts or which would cause a work stoppage, picketing, labor
disruption or dispute, or interfere with Landlord's or any other tenant's or
occupant's business or with the rights and
Exhibit B, Page 2
<PAGE>
privileges of any person lawfully in the Buildings ("Labor Disruption"). Tenant
shall take the actions necessary to resolve the Labor Disruption, and shall have
pickets removed and, at the request of Landlord, immediately terminate any work
in the Premises that gave rise to the Labor Disruption, until Landlord gives its
written consent for the work to resume. Tenant shall have no claim for damages
against Landlord or any of the Landlord Related Parties, nor shall the date of
the commencement of the Term be extended as a result of the above actions.
15. Tenant shall not install, operate or maintain in the Premises or
in any other area of the Buildings, electrical equipment that would overload the
electrical system beyond its capacity for proper, efficient and safe operation
as determined solely by Landlord. Tenant shall not furnish cooling or heating to
the Premises, including, without limitation, the use of electronic or gas
heating devices, without Landlord's prior written consent, or as provided in
Exhibit D. Tenant shall not use more than its proportionate share of telephone
lines and other telecommunication facilities available to service the Buildings.
Current base Building design for telephone capacity is 300 lines per floor, as
provided by U.S. West, although Tenant may arrange with that service provider to
increase that capacity at Tenant's expense.
16. Tenant shall not operate or permit to be operated a coin or token
operated vending machine or similar device (including, without limitation,
telephones, lockers, toilets, scales, amusement devices and machines for sale of
beverages, foods, candy, cigarettes and other goods), except for machines for
the exclusive use of Tenant's employees, and then only if the operation does not
violate the lease of any other tenant in the Buildings.
17. Bicycles and other vehicles are not permitted inside the
Buildings or on the walkways outside the Buildings, except in areas designated
by Landlord.
18. Landlord may from time to time adopt systems and procedures for
the security and safety of the Buildings, its occupants, entry, use and
contents. Tenant, its agents, employees, contractors, guests and invitees shall
comply with Landlord's systems and procedures.
19. Landlord shall have the right to prohibit the use of the name of
the Buildings or any other publicity by Tenant that in Landlord's sole opinion
may impair the reputation of the Buildings or their desirability. Upon written
notice from Landlord, Tenant shall refrain from and discontinue such publicity
immediately.
20. Tenant shall not canvass, solicit or peddle in or about the
Buildings or the Property.
21. Neither Tenant nor its agents, employees, contractors, guests or
invitees shall smoke or permit smoking in the Common Areas, unless the Common
Areas have been declared a designated smoking area by Landlord, nor shall the
above parties allow smoke from the Premises to emanate into the Common Areas or
any other part of the Buildings. Landlord shall have the right to designate the
Buildings (including the Premises) as a non-smoking building.
22. Landlord shall have the right to designate and approve standard
window coverings for the Premises and to establish rules to assure that the
Buildings present a uniform
Exhibit B, Page 3
<PAGE>
exterior appearance. Tenant shall ensure, to the extent reasonably practicable,
that window coverings are closed on windows in the Premises while they are
exposed to the direct rays of the sun.
23. Deliveries to and from the Premises shall be made only at the
times, in the areas and through the entrances and exits reasonably designated by
Landlord. Tenant shall not make deliveries to or from the Premises in a manner
that might interfere with the use by any other tenant of its premises or of the
Common Areas, any pedestrian use, or any use which is inconsistent with good
business practice.
24. The work of cleaning personnel shall not be hindered by Tenant
after 6:00 p.m., and cleaning work may be done at any time when the offices are
vacant. Windows, doors and fixtures may be cleaned at any time. Tenant shall
provide adequate waste and rubbish receptacles to prevent unreasonable hardship
to the cleaning service.
Exhibit B, Page 4
<PAGE>
EXHIBIT C
COMMENCEMENT LETTER
Date
------------------------
Tenant
Address
Re: Commencement Letter with respect to that certain Lease dated
____________________ by and between WRC SUNSET NORTH LLC, a Washington
limited liability company, as Landlord, drugstore.com, inc., a Delaware
corporation, as Tenant for 57,436 square feet of Rentable Area in the
Buildings located at Northeast comer of 139th Avenue Southeast and
Southeast 32nd Street, Bellevue, King County, Washington.
Dear _______________:
In accordance with the terms and conditions of the above referenced Lease,
Tenant hereby accepts possession of the Premises and agrees as follows:
1. The Commencement Date of the Lease is __________________;
2. The Termination Date of the Lease is ___________________.
Please acknowledge your acceptance of possession and agreement to the terms
set forth above by signing all three (3) copies of this Commencement Letter in
the space provided and returning two (2) fully executed copies of the same to my
attention.
Sincerely,
Property Manager
Agreed and Accepted:
Tenant:__________________________________
By:______________________________________
Name:____________________________________
Title:___________________________________
Date:____________________________________
Exhibit C, Page 1
<PAGE>
EXHIBIT D
WORK LETTER
This Exhibit is attached to and made a part of the Lease dated
November 22, 1999, by and between WRC SUNSET NORTH LLC, a Washington limited
liability company ("Landlord") and drugstore.com, inc., a Delaware corporation
("Tenant") for space on the Buildings located at the Northeast corner of 139th
Avenue Southeast and Southeast 32nd Street, Bellevue, King County, Washington.
Defined terms used in this Exhibit D shall have the same meanings
given them in the attached Lease.
I. IMPROVEMENTS PROVIDED BY LANDLORD: Landlord agrees to provide
improvements to the Buildings and the Premises pursuant to the attached Exhibit
D-1, Base Building Condition (together with the Tenant Improvements, as defined
below, the "Landlord Work"), on or before the date the Tenant Improvement
Contractor commences construction of the Tenant Improvements.
II. IMPROVEMENTS BY TENANT/REIMBURSEMENT BY LANDLORD: Design and
construction of all improvements in the Premises beyond those listed on Exhibit
D-1 (the "Tenant Improvements") shall be provided at Tenant's expense. Landlord
shall pay the cost of such additional improvements up to an amount equal to
$27.50 per square foot of "Tenant's Usable Area" as outlined on the floor
plan(s) in Exhibit A, for a total payment by Landlord, based on a usable area of
50,957 square feet, of $1,401,317.50 (the "Allowance"). The Allowance shall be
applied only to the cost of design and construction of such improvements,
including but not be limited to: architectural and engineering design,
partitions (including one-half (1/2) the cost of any public corridor or demising
partitions enclosing the Tenant's Usable Area), doors, door frames, hardware,
paint, wall coverings, base, ceilings, lights, mechanical distribution,
diffusers, thermostats, sprinkler distribution, sprinkler heads, emergency
speakers, fire extinguishers and cabinets, telephone and electrical outlets,
light switches, floor coverings, and all applicable permit fees and sales tax.
Notwithstanding anything to the contrary contained herein, the Allowance may
only be applied to Building Standard tenant improvements unless otherwise
approved in writing by Landlord.
Landlord shall obtain all permits and government approvals and assume
specific responsibility for delivery of the Premises as defined in the Lease and
this Exhibit D, provided Tenant shall have met the drawing delivery dates
herein. If Tenant does not initially select a contractor, then Landlord shall
manage the bidding of tenant improvements to at least three (3) firms acceptable
to Landlord, one of which shall be Landlord's Contractor. The contractor
selected by Tenant to construct the Tenant Improvements, Turner Construction,
Inc., shall be hereinafter known as the "Tenant Improvement Contractor.
III. BUILDING STANDARD IMPROVEMENTS: As used herein, "Building
Standard" shall mean the type, grade, brand, quality and/or quantity of
materials Landlord designates from time to time to be the minimum quality and/or
quantity to be used in
Exhibit D, Page 1
<PAGE>
the Building. Tenant shall use Building Standard lighting, window coverings,
doors, relites, hardware, ceiling treatment and heating, ventilating and air
conditioning distribution equipment and controls, except that Tenant may install
a Liebert or similar dedicated cooling system in the technical rooms in the
Premises. If such system will connect to the Building system, its compatibility
must be approved by Landlord.
IV. DESIGN OF TENANT IMPROVEMENTS: Tenant, at Tenant's initial cost
and with the approval of Landlord, has retained Marvin Stein, Inc. ("Tenant's
Office Planner") to prepare the necessary drawings for Basic Plans and supply
the information necessary to complete the Working Drawings and Engineering
Drawings referred to in Section IV(B) of this Exhibit D for construction of the
tenant improvements in Tenant's area. All of Tenant's plans described below
("Tenant's Plans") shall be delivered to Landlord on the dates stated (the "Plan
Delivery Dates"), and shall be subject to approval of Landlord, such approval
not to be unreasonably withheld or delayed. Landlord agrees to respond in
writing with approval or comments within five (5) business days after initial
receipt of each component of Tenant's Plans or other initial requests for review
or approval under this Exhibit D, and two (2) business days after receipt of any
changes or additions to an initial submittal.
Tenant's Office Planner shall ensure that the work shown on Tenant's
Plans is compatible with the basic Building plans and that necessary basic
Building modifications are included in Tenant's Plans. Such modifications shall
be subject to Landlord approval. If such approved basic Building modifications
are made subsequent to completion of the shell and core documents or Landlord's
architect reasonably charges Landlord for such changes, then such modifications
shall be subject to Landlord's approval and the cost of the changes to the
documents as well as any increased shell and core construction costs shall be
paid by Tenant.
On or before the indicated dates, Tenant shall supply Landlord with
one (1) reproducible copy and five (5) black line prints of the following
Tenant's Plans with respect to the Tenant Improvements in the Premises:
A. Basic Plans Delivery Date: October 20, 1999
The Basic Plans due on this date shall be signed by Tenant and
include:
Architectural Floor Plans: These shall be fully dimensioned floor
plans showing partition layout and identifying each room with a number and each
door with a number. The Basic Plans must clearly identify and locate equipment
requiring plumbing or other special mechanical systems, area(s) subject to
above-normal floor loads, special openings in the floor, and other major or
special features.
B. Working Drawings Delivery Date: November 5, 1999
On this date and at Tenant's expense, Tenant's Office Planner shall
produce four (4) sets of Full Working Drawings for construction from the Basic
Plans using the Pin Bar or CADD System, which system shall be approved by
Landlord for compatibility with the other Building drawings. The four (4) sets
of Working Drawings due on this date shall be signed by the Tenant and include
all items in the Basic Plans referenced in Section IV(A) above plus the
following additional information:
Exhibit D, Page 2
<PAGE>
(1) Electrical and Telephone Outlets: Locate all power and telephone
requirements: Dimension the position from a corner and give height above
concrete slab for all critically located outlets. Identify all dedicated
circuits and identify all power outlets greater than 120 volts. For the
equipment used in these outlets which require dedicated circuits and/or which
require greater than 120 volts, identify the type of equipment, the
manufacturer's name and the manufacturers model number, and submit a brochure
for each piece of equipment. Also identify the manufacturer's name of the phone
system to be used and the power requirements, size, and location of its
processing equipment.
(2) Reflected Ceiling Plan: Lighting layout showing location and type
of all Building Standard and special lighting fixtures.
(3) Furniture Layout: Layout showing furniture location so that
Landlord's engineer can review the location of all light fixtures.
The Allowance shall be applied to the cost of the engineers retained
by Tenant's Office Planner. The Allowance shall also be applied to any
necessary review of the Engineering Drawings by Landlord's shell and core
engineers: electrical (Holmes Electric), mechanical (McDonald Miller) and
structural plans (KPFF) (Engineering Drawings) for Tenant's Improvements based
on the signed Working Drawings, unless Tenant engages those engineers directly
to work on the Tenant Improvements. If Tenant does not engage one or more of
those engineers, such review costs shall not exceed $.10 per usable square foot
for review by each of the mechanical and electrical engineers.
C. Permit Submittal Package: November 5, 1999
On this date, Tenant shall deliver to Landlord all materials necessary
to submit a full building permit application to the appropriate municipality.
D. Final Plans Review Date: November 23, 1999
On this date, Tenant's Office Planner shall deliver to Landlord and
Tenant for review and approval four (4) complete sets of Final Plans, and shall
deliver a set to the Tenant Improvement Contractor. The Final Plans will
incorporate the Working Drawings referenced in Section IV(B) above, plus the
following additional information:
(1) Millwork Details: These drawings shall be in final form with
Tenant's Office Planner's title block along the right border of the drawing, and
shall include construction details of all cabinets, paneling, trim, bookcases,
and door and jamb details for non-Building Standard doors and jambs.
(2) Keying Schedules and Hardware Information: This information shall
be in final form and include a preliminary keying schedule indicating which
doors are locked, plus an "X" on the side of the door where the key will be
inserted if a keyed door. Complete specifications for all non-Building Standard
hardware will also be provided. The final keying schedule will be completed by
October 25, 1999.
Exhibit D, Page 3
<PAGE>
(3) Room Finish and Color Schedule: This information shall be in
final form and include locations and specifications for all wall finishes, floor
covering and base for each room.
(4) Construction Notes and Specifications: Complete specifications
for every item included except those specified by the Landlord.
E. Final Plans Delivery Date: November 30, 1999
The four (4) sets of Final Plans approved by Landlord and Tenant and
due on this date shall include all the Final Plans referenced in Section IV(D)
above. Final Plans are to be signed by Tenant and delivered to Landlord by the
Final Plans Delivery Date. Landlord shall return one (1) signed set to Tenant
for Tenant's records. Landlord will incorporate or submit Engineering Drawings
with Tenant's Final Plans for transmittal to Landlord's Contractor.
F. Anticipated Construction Commencement Date: December 6, 1999
On this date Landlord anticipates that construction of the Tenant
Improvements shall commence.
Tenant shall be responsible for delays and additional costs in
completion of the Tenant Improvements incurred as a result of changes requested
by Tenant or Tenant's Office Planner and made to any of Tenant's Plans after the
specified Plan Delivery Date (assuming timely response by Landlord), delays
caused by Tenant's failure to comply with the Plan Delivery Dates, Tenant's
failure to provide adequate specifications or information for the completion of
Tenant's Plans, or by delays caused by Tenant's specification of special
materials; but only to the extent any of the foregoing delays or prevents
critical path work or adversely affects completion.
V. CONSTRUCTION OF TENANT IMPROVEMENTS
A. Authorization to Proceed. Upon submission of Tenant's Final
Plans to the Tenant Improvement Contractor on the Final Plans Review Date, the
Tenant Improvement Contractor shall have five (5) days to provide to Tenant
written notice of the price for such improvements. Within five (5) days of
receipt of such price, Tenant shall give Landlord written authorization to
complete the Premises in accordance with such Final Plans, or identify those
pricing issues that do not meet Tenant's approval. Tenant may in such
authorization delete any or all items of extra cost; however, if Landlord deems
these changes to be extensive, at its option, Landlord may refuse to accept the
authorization to proceed until all changes have been incorporated in the Final
Plans signed by Tenant and written acceptance of the revised price has been
received by Landlord from Tenant. In the absence of such written authorization
to proceed, Landlord shall not be obligated to commence work on the Premises and
Tenant shall be responsible for any costs due to any resulting delay in
completion of the Premises and as provided in Section III.A of the Lease.
B. Payments. Prior to commencement of tenant improvements and if
the price for such improvements is greater than the Allowance, Tenant shall
deposit with Landlord any additional cost above the Allowance (the "Additional
Cost Deposit"). The Tenant
Exhibit D, Page 4
<PAGE>
Improvement Contractor shall complete Tenant's improvements in accordance with
Tenant's approved Final Plans. Payments shall be made: first, by applying
Tenant's Additional Cost Deposit, secondly, by applying the entire Allowance
provided by Landlord against the monthly progress payments due, and then third,
Tenant shall pay within ten (10) days after receipt of monthly progress
statements from Landlord, the full amount of such progress billings in cash. The
progress billings may include a retainage amount up to ten percent (10%) of the
work ("Retainage"). Final billing shall be rendered and payable within ten (10)
days after acceptance of the Premises by Tenant in accordance with the terms of
the Lease. Retainage pursuant to the terms of this paragraph shall be payable
with such final billing. In the event acceptance of the Premises is subject to
punchlist items as provided in the Lease, a portion of the retainage equal to
the cost to complete each outstanding punchlist item may be retained until such
punchlist item is complete. If the cost of the Tenant Improvements is increased
by change order approved by Tenant, Tenant shall deposit the corresponding
increase in the Additional Cost Deposit. If the cost of the Tenant Improvements
decreases due to a deductive change order approved by Tenant, a corresponding
portion of the Additional Cost Deposit shall be released to Tenant.
C. Final Plans and Modifications. If Tenant shall request any
change after the Final Plans are submitted, Tenant shall request such change in
writing to Landlord and such request shall be accompanied by all plans and
specifications necessary to show and explain changes from the approved Final
Plans. After receiving this information, Landlord shall give Tenant within five
(5) business days a written price for the cost of engineering design services
and an estimate of construction costs to incorporate the change in Tenant's
Final Plans and any anticipated change to the completion schedule that the
change would cause. If Tenant approves such price in writing within five (5)
business days, Tenant shall within five (5) business days have such Final Plans
changes made to engineering drawings and Tenant shall have changes made to other
Final Plan design documents. Within three (3) business days after completion of
such changes in the Final Plans, Landlord shall provide Tenant a written
breakdown of the final costs, if any, which shall be chargeable or credited to
Tenant for such change, addition or deletion and any impact such changes shall
have on the schedule. Landlord shall not charge for its services in relation to
any such modifications and Landlord shall not charge Tenant a construction
management fee for Landlord's work on the Tenant Improvements. If Tenant wishes
to proceed with such changes, Tenant shall within five (5) business days so
notify Landlord in writing. In the absence of such notice, Landlord shall
proceed in accordance with the previously approved Final Plans before such
change, addition or deletion was requested. In accordance with Section 3.A of
the Lease, Tenant shall be responsible for any resulting delay in completion of
the Premises due to modification of Final Plans. Tenant shall also be
responsible for any demolition work required as a result of the change.
D. Improvements Constructed by Tenant. If any work is to be
performed in connection with the Tenant Improvements on the Premises by Tenant
or Tenant's contractor:
(1) Such work shall proceed upon Landlord's written approval (not to
be unreasonably withheld) of (i) Tenant's contractor, (ii) general liability and
property damage insurance satisfactory to Landlord carried by Tenant's
contractor, which insurance shall not be required to exceed levels carried by
the contractor engaged by Landlord to complete Landlord's Work ("Landlord's
Contractor"), and (iii) detailed plans and specifications for such work.
Exhibit D, Page 5
<PAGE>
(2) All work shall be done in conformity with a valid building permit
when required, a copy of which shall be furnished for Landlord before such work
is commenced, and in any case, all such work shall be performed in accordance
with all applicable governmental regulations. Notwithstanding any failure by
Landlord to object to any such work, Landlord shall have no responsibility for
Tenant's failure to meet all applicable regulations.
(3) All work by Tenant or Tenant's contractor shall be done with union
labor in accordance with all union labor agreements applicable to the trades
being employed, unless otherwise agreed to in writing by Landlord.
(4) All work by Tenant or Tenant's contractor shall be scheduled
through Landlord or, with Landlord's approval, directly with Landlord's
Contractor or Tenant Improvement Contractor. Landlord shall make best efforts
to accommodate work by Tenant or Tenant's contractor during times requested.
(5) Tenant or Tenant's contractor shall arrange for necessary utility,
hoisting and elevator service with the Landlord's Contractor or the Tenant
Improvement Contractor. Elevator service shall be provided without additional
charge, but Tenant shall be responsible for any damage done by Tenant or its
contractors or representatives to the elevator cabs. If Tenant requires
hoisting beyond the capacity of the Building's freight elevator, such hoisting
shall be provided at Tenant's expense.
(6) Tenant shall promptly reimburse Landlord for costs incurred by
Landlord due to faulty work done by Tenant or its contractors, or by reason of
any delays caused by such work, or by reason of inadequate clean-up. Tenant
shall receive notice from Landlord and a reasonable opportunity to cure damages
prior to Landlord undertaking corrective action.
(7) Prior to commencement of any work on the Premises by Tenant or
Tenant's contractor, Tenant or Tenant's contractor shall enter into an indemnity
agreement and a lien priority agreement satisfactory to Landlord indemnifying
and holding harmless Landlord and Landlord's Contractor or the Tenant
Improvement Contractor for any liability, losses or damages directly or
indirectly from lien claims affecting the land, the Buildings or the Premises
arising out of Tenant's or Tenant's contractor's work or that of subcontractor
or suppliers, and subordinating any such liens to the liens of construction and
permanent financing for the Buildings.
(8) Landlord shall have the right to post a notice or notices in
conspicuous places in or about the Premises announcing its non-responsibility
for the work being performed therein.
E. Tenant's Entry to Premises. Tenant's entry to the Premises for
any purpose, including without limitation, inspection or performance of Tenant
Construction by Tenant's agents, prior to the Commencement Date as specified in
Section 3.A of the Lease shall be scheduled in advance with Landlord and shall
be subject to all the terms and conditions of the Lease, except the payment of
Rent and Additional Rent. Tenant's entry shall mean entry by Tenant, its
officers, contractors, Tenant's Office Planner, licensees, agents, servants,
employees, guests, invitees, or visitors. Landlord will make reasonable efforts
to accommodate Tenant's
Exhibit D, Page 6
<PAGE>
request for access to the Premises at all times. Tenant will supply Landlord
with a pre-approved list of a limited number of individuals who will be allowed
to have access to the Premises during normal business hours prior to the
Commencement Date, provided such access does not interfere with the work being
performed in the Premises.
F. Tenant's Telephone and Computer/Data Service. Tenant is
responsible for Tenant's telephone service, computer and data service, obtaining
any applicable permits, and related cabling. Tenant shall select and coordinate
installation of such communication and information systems with the Landlord
pursuant to item V(D)(4) of this Exhibit D.
G. Meetings and Representatives. A representative of Landlord shall
attend all of Tenant's design and construction meetings, provided Landlord is
given adequate prior notice of such meetings. Michel Hebrant, Pat Daleo or Gary
Nickell shall serve as Landlord's representatives with respect to the Tenant
Improvements and shall be entitled to bind Landlord. Gwen Anderson and Bob
Barton shall serve as Tenant's representatives with respect to the Tenant
Improvements and shall be entitled to bind Tenant.
IN WITNESS WHEREOF, Landlord and Tenant have executed this exhibit as
of the day and year first above written.
LANDLORD:
WRC SUNSET NORTH LLC, a Washington limited liability
company
By: WRIGHT RUNSTAD
ASSOCIATES LIMITED
PARTNERSHIP, a Washington
limited partnership, its Manager
By: WRIGHT RUNSTAD &
COMPANY, a Washington
corporation, its general partner
By: ________________________________
Its:________________________________
Exhibit D, Page 7
<PAGE>
EOP SUNSET NORTH, L.L.C., a
Delaware limited liability company, its
manager
By: EOP OPERATING LIMITED
PARTNERSHIP, a Delaware limited
partnership, its sole member
By: EQUITY OFFICE
PROPERTIES TRUST, a
Maryland real estate investment
trust, its managing general
partner
By: ________________________________
Its:________________________________
TENANT:
drugstore.com, inc.,
a Delaware corporation
By: __________________________________________
Its:__________________________________________
Exhibit D, Page 8
<PAGE>
EXHIBIT D-1
SUNSET NORTH
Shell and Core and Landlord Provided
Tenant Improvements
Landlord shall provide bare shell and core floor ready for tenant
improvements as follows:
Building Standard restrooms completed.
Building Standard drinking fountains installed.
Drywall. Drywall installed around the core areas only and firetaped
(excludes drywall at the perimeter of the building and columns).
Main Lobby. The main lobby serving the building is completed.
Elevator Lobby. All finishes are part of tenant improvements (except
Building Standard elevator doors, frames, and buttons).
Life Safety. Life safety includes fire sprinkler riser, code minimum
tenant distribution, central life safety system with conduit, and wire to floor.
Dropping of heads, detectors, strobe lights, and speakers are part of tenant
improvements.
Mechanical. Mechanical includes the main system with medium pressure
duct (the main loop) serving the floor and return air systems. VAV boxes and
low pressure ductwork from main loop is a part of tenant improvements.
Electrical. Electrical includes panels in the electrical closets
based on a design load of 4.5 watts per square foot. The main system includes
expansion capabilities for additional panels installed during tenant
improvements. The capacity for the electrical system is: 1.2 watts per square
foot for lighting (this is the code maximum); 4.0 watts per square foot for HVAC
loads, and 6.0 watts per square foot (un-diversified) for tenant equipment load.
Perimeter Finishes. Perimeter finishes include the exterior of the
building, support structure, and insulation.
Ceiling Grid. Ceiling grid and panels are excluded and considered
tenant improvements.
Elevators and Stairwells. Elevators and stairwells (with Building
Standard finishes) serving the floor are completed.
Exhibit D-1, Page 1
<PAGE>
EXHIBIT E
ADDITIONAL PROVISIONS
This Exhibit is attached to and made a part of the Lease dated
November ___, 1999, by and between WRC SUNSET NORTH LLC, a Washington limited
liability company ("Landlord") and DRUGSTORE.COM, INC., a Delaware corporation
("Tenant') for space in the Buildings located at the Northeast corner of 139th
Avenue Southeast and Southeast 32nd Street, Bellevue, King County, Washington.
I. Parking.
A. During the initial Lease Term, Landlord shall lease to Tenant, or
cause the operator (the "Operator") of the garage serving the Buildings (the
"Garage") to lease to Tenant, and Tenant shall lease from Landlord or such
Operator, up to four (4) unreserved parking spaces in the Garage for each one
thousand (1,000) usable square feet of area in the Premises (the "Spaces") for
the use of Tenant and its employees. The Spaces shall be leased at the rate of
$45.00 per Space, per month, plus applicable tax thereon, as such rate may be
adjusted from time-to-time to reflect the then current rate for parking in the
Garage. A designated executive parking area will be located directly below the
Buildings on the top garage level and, to the extent available, a portion of the
Spaces may be located in such executive parking area, but only if requested by
Tenant, and not to exceed the number of spaces requested by Tenant. These
executive Spaces shall be leased at the rate of $65.00 per Space, per month,
plus applicable tax thereon, as such rate may be adjusted from time-to-time to
reflect the then current rate for parking in the Garage. If requested by
Landlord, Tenant shall execute and deliver to Landlord the standard parking
agreement used by Landlord or the Operator (the "Parking Agreement") in the
Garage for such Spaces.
B. No deductions or allowances shall be made for days when Tenant or
any of its employees does not utilize the parking facilities or for Tenant
utilizing less than all of the Spaces.
C. Except for particular spaces and areas designated by Landlord or
the Operator for reserved parking, all parking in the Garage shall be on an
unreserved, first-come, first-served basis. Tenant acknowledges that Landlord
may implement a valet parking system in the Garage.
D. Neither Landlord nor the Operator shall be responsible for money,
jewelry, automobiles or other personal property lost in or stolen from the
Garage or the surface parking areas regardless of whether such loss or theft
occurs when the Garage or other areas therein are locked or otherwise secured.
Except as caused by the negligence or willful misconduct of Landlord and without
limiting the terms of the preceding sentence, Landlord shall not be liable for
any loss, injury or damage to persons using the Garage or the surface parking
areas or automobiles or other property therein, it being agreed that, to the
fullest extent permitted by law, the use of the Spaces shall be at the sole risk
of Tenant and its employees.
Exhibit E, Page 1
<PAGE>
E. Landlord or its Operator shall have the right from time to time
to designate the location of the Spaces and (after written notice to Tenant) to
promulgate reasonable rules and regulations regarding the Garage, the surface
parking areas, if any, the Spaces and the use thereof, including, but not
limited to, rules and regulations controlling the flow of traffic to and from
various parking areas, the angle and direction of parking and the like. Tenant
shall comply with and cause its employees to comply with all such rules and
regulations, all reasonable additions and amendments thereto, and the terms and
provisions of the Parking Agreement.
F. Tenant shall not store or permit its employees to store any
automobiles in the Garage or on the surface parking areas without the prior
written consent of Landlord. Except for emergency repairs, Tenant and its
employees shall not perform any work on any automobiles while located in the
Garage or on the Property.
G. Landlord or the Operator shall have the right to temporarily
close the Garage or certain areas therein in order to perform necessary repairs,
maintenance and improvements to the Garage or the surface parking areas, if any.
H. Tenant shall not assign or sublease any of the Spaces without the
consent of Landlord or in connection with an assignment or sublease of this
Lease approved by Landlord in accordance with Section 11 of the Lease. Landlord
shall have the right to terminate the agreement contained in this Section I or
in the Parking Agreement with respect to any Spaces that Tenant desires to
sublet or assign.
I. Landlord may elect to provide parking cards or keys to control
access to the Garage or surface parking areas, if any. In such event, Landlord
shall provide Tenant with one card or key for each Space that Tenant is leasing
hereunder, provided that Landlord shall have the right to require Tenant or its
employees to place a deposit on such access cards or keys and to pay a fee for
any lost or damaged cards or keys.
II. Renewal Option.
A. Tenant shall have the right to extend the Lease Term (the
"Renewal Option") with respect to the portion of the Premises located on the
first floor of Building 4 only (consisting of approximately 26,663 square feet
of rentable area), but not with respect to the remainder of the Premises, for
the period running from the expiration of the initial three-year Term until July
30, 2005 (the "Renewal Term"), if:
1. Landlord receives notice of exercise of the Renewal Option
("Initial Renewal Notice") not less than twelve (12) full calendar months
prior to the expiration of the initial Lease Term and not more than fifteen
(15) full calendar months prior to the expiration of the initial Term; and
2. Tenant is not in default under the Lease beyond any
applicable cure periods at the time that Tenant delivers its Initial
Renewal Notice or at the time Tenant delivers its Binding Notice; and
Exhibit E, Page 2
<PAGE>
3. Not more than twenty five percent (25%) of the area of the
Premises is sublet at the time that Tenant delivers its Initial Renewal
Notice or at the time Tenant delivers its Binding Notice (except for a
Permitted Transfer); and
4. The Lease has not been assigned prior to the date that Tenant
delivers its Initial Renewal Notice or prior to the date Tenant delivers
its Binding Notice (except for a Permitted Transfer); and
5. Tenant executes and returns the Renewal Amendment
(hereinafter defined) within thirty (30) days after its submission to
Tenant.
B. The initial Base Rent rate per rentable square foot for the
Premises during the Renewal Term shall equal the Prevailing Market Renewal Rate
(hereinafter defined) per rentable square foot for the Premises.
C. Tenant shall pay Additional Base Rent (i.e. Basic Costs) for the
Premises during the Renewal Term in accordance with Article 4 of the Lease.
D. Within sixty (60) days after receipt of Tenant's Initial Renewal
Notice, Landlord shall advise Tenant of the applicable Base Rent rate for the
Premises for the Renewal Term. Tenant, within thirty (30) days after the date
on which Landlord advises Tenant of the applicable Base Rent rate for the
Renewal Term, shall either (i) give Landlord final binding written notice
("Binding Notice") of Tenant's exercise of its option, or (ii) if Tenant
disagrees with Landlord's determination, provide Landlord with written notice of
rejection (the "Rejection Notice"). If Tenant fails to provide Landlord with
either a Binding Notice or Rejection Notice within such thirty (30) day period,
Tenant's Renewal Option shall be null and void and of no further force and
effect. If Tenant provides Landlord with a Binding Notice, Landlord and Tenant
shall enter into the Renewal Amendment upon the terms and conditions set forth
herein. If Tenant provides Landlord with a Rejection Notice, Landlord and
Tenant shall work together in good faith to agree upon the Prevailing Market
Renewal Rent rate for the Premises during the Renewal Term. Upon agreement
Tenant shall provide Landlord with Binding Notice and Landlord and Tenant shall
enter into the Renewal Amendment in accordance with the terms and conditions
hereof. If Landlord and Tenant fail to agree upon the Prevailing Market Renewal
Rate within thirty (30) days after the date of the Rejection Notice, either
party, by written notice (the "Arbitration Notice") to the other within ten (10)
days after the expiration of such thirty (30) day period, shall have the right
to have the Prevailing Market Renewal Rate determined by binding arbitration in
accordance with the procedures set forth below. If Landlord and Tenant cannot
agree upon the Prevailing Market Renewal Rate and neither party elects to invoke
its right of arbitration, Tenant's Renewal Option shall be deemed to be null and
void and of no further force and effect. If the right of arbitration is
invoked, Landlord and Tenant, at their sole cost and expense, shall each employ
an appraiser within fifteen (15) days after the date the Arbitration Notice is
given. Each such appraiser shall be a member of the Master Appraisers Institute
or similar reputable organization, with ten (10) years of experience appraising
office buildings comparable to the location and type of that of the Buildings.
If either party fails to appoint an appraiser then the appointed appraiser shall
be the sole appraiser and his or her determination shall be binding. Each
appraiser shall render an appraisal of the Prevailing Market Renewal Rate for
the Premises within fifteen (15) calendar days. The two appraisers, within ten
Exhibit E, Page 3
<PAGE>
(10) days after the exchange of appraisals, shall mutually agree upon the
Prevailing Market Renewal Rate and notify Landlord and Tenant in writing of
their determination. Such determination shall be binding upon both Landlord and
Tenant. If the appraisers cannot agree on a determination of the Prevailing
Market Renewal Rate within ten (10) days of the exchange of appraisals, then
Landlord and Tenant shall select an independent third appraiser acceptable to
both with ten (10) days. If Landlord and Tenant are unable to select an
independent third appraiser acceptable to both with ten (10) days, either party
may request that the American Arbitration Association in the county in which the
Buildings are located appoint an independent third appraiser that meets the
qualifications described above. Within ten (10) days following appointment
(whether by mutual agreement or arbitration), the third appraiser shall choose
the appraisal of either Landlord's appraiser or Tenant's appraiser and the
chosen appraisal shall be deemed to represent the Prevailing Market Renewal Rate
for the Premises. Such determination shall be binding upon both Landlord and
Tenant. The parties shall share equally in the cost of any such third appraiser.
E. If Tenant is entitled to and properly exercises its Renewal
Option, Landlord shall prepare an amendment (the "Renewal Amendment") to reflect
changes in the Base Rent, Lease Term, Termination Date and other appropriate
terms. The Renewal Amendment shall be:
1. sent to Tenant within a reasonable time after receipt of the
Binding Notice; and
2. executed by Tenant and returned to Landlord in accordance
with paragraph A.5. above.
An otherwise valid exercise of the Renewal Option shall, at Landlord's option,
be fully effective whether or not the Renewal Amendment is executed.
F. For purpose of this Section II, "Prevailing Market Renewal Rate"
shall mean the arms length fair market annual rental rate per rentable square
foot under renewal leases and amendments entered into on or about the date on
which the Prevailing Market Renewal Rate is being determined hereunder for space
comparable to the Premises in the Buildings and office buildings comparable to
the Buildings in Bellevue, Washington. The determination of Prevailing Market
Renewal Rate shall take into account any material economic differences between
the terms of this Lease and any comparison lease, such as rent abatements,
construction costs and other concessions and the manner, if any, in which the
Landlord under any such lease is reimbursed for operating expenses and taxes.
The determination of Prevailing Market Renewal Rate shall also take into
consideration any reasonably anticipated changes in the Prevailing Market
Renewal Rate from the time such Prevailing Market Renewal Rate is being
determined and the time such Prevailing Market Renewal Rate will become
effective under this Lease. In no event shall the Prevailing Market rate be
less than the rate payable under this Lease immediately prior to the
commencement of the Renewal Term.
Exhibit E, Page 4
<PAGE>
III. Satellite Dish.
1. Tenant shall have the right to lease space on the roofs of the
Buildings for the purpose of installing (in accordance with Section X.B of the
Lease), operating and maintaining one or more dish, antenna or other
communication device approved by the Landlord (collectively the "Dish/Antenna").
Tenant shall pay, in addition to all other amounts required to be paid under
this Lease, Landlord's scheduled rates for all roof space so leased, provided
such rates shall not exceed rates then being charged for leases of roofs of
comparable buildings in the Bellevue, Washington area. The exact location of
the space on the roof to be leased by Tenant shall be designated by Landlord
(the "Roof Space"). Landlord reserves the right to relocate the Roof Space and
the Dish/Antenna at Landlord's expense and at a time and to a location approved
by Tenant as reasonably necessary during the Lease Term. Landlord's designation
shall take into account Tenant's use of the Dish/Antenna. Notwithstanding the
foregoing, Tenant's right to install the Dish/Antenna shall be subject to the
approval rights of Landlord and Landlord's architect and/or engineer with
respect to the plans and specifications of the Dish/Antenna, the manner in which
the Dish/Antenna is attached to the roof of the Building and the manner in which
any cables are run to and from the Dish/Antenna. The precise specifications and
a general description of the Dish/Antenna along with all documents Landlord
reasonably requires to review the installation of the Dish/Antenna (the "Plans
and Specifications") shall be submitted to Landlord for Landlord's written
approval no later than twenty (20) days before Tenant commences to install the
Dish/Antenna. Tenant shall be solely responsible for obtaining all necessary
governmental and regulatory approvals and for the cost of installing, operating,
maintaining and removing the Dish/Antenna. Tenant shall notify Landlord upon
completion of the installation of the Dish/Antenna. If Landlord determines that
the Dish/Antenna equipment does not comply with the approved Plans and
Specifications, that the Building has been damaged during installation of the
Dish/Antenna or that the installation was defective, Landlord shall notify
Tenant of any noncompliance or detected problems and Tenant immediately shall
cure the defects. If the Tenant fails to immediately cure the defects, Tenant
shall pay to Landlord upon demand the cost, as reasonably determined by
Landlord, of correcting any defects and repairing any damage to the Building
caused by such installation. If at any time Landlord, in its sole discretion,
deems it necessary, Tenant shall provide and install, at Tenant's sole cost and
expense, appropriate aesthetic screening, reasonably satisfactory to Landlord,
for the Dish/Antenna (the "Aesthetic Screening").
2. Landlord agrees that Tenant, upon reasonable prior written notice
to Landlord, shall have access to the roof of the Building and the Roof Space
for the purpose of installing, maintaining, repairing and removing the
Dish/Antenna, the appurtenances and the Aesthetic Screening, if any, all of
which shall be performed by Tenant or Tenant's authorized representative or
contractors, which shall be approved by Landlord, at Tenant's sole cost and
risk. It is agreed, however, that only authorized engineers, employees or
properly authorized contractors of Tenant, FCC inspectors, or persons under
their direct supervision will be permitted to have access to the roof of the
Building and the Roof Space. Tenant further agrees to exercise firm control
over the people requiring access to the roof of the Building and the Roof Space
in order to keep to a minimum the number of people having access to the roof of
the Building and the Roof Space and the frequency of their visits.
Exhibit E, Page 5
<PAGE>
3. It is further understood and agreed that the installation,
maintenance, operation and removal of the Dish/Antenna, the appurtenances and
the Aesthetic Screening, if any, will in no way damage the Building or the roof
thereof, or interfere with the use of the Building and roof by Landlord. Tenant
agrees to be responsible for any damage caused to the roof or any other part of
the Building, which may be caused by Tenant or any of its agents or
representatives.
4. Tenant agrees to install only equipment of types and frequencies
which will not cause unreasonable interference to Landlord or existing tenants
of the Building. In the event Tenant's equipment causes such interference,
Tenant will change the frequency on which it transmits and/or receives and take
any other steps necessary to eliminate the interference. If said interference
cannot be eliminated within a reasonable period of time, in the judgment of
Landlord, then Tenant agrees to remove the Dish/Antenna from the Roof Space.
5. Tenant shall, at its sole cost and expense, and at its sole risk,
install, operate and maintain the Dish/Antenna in a good and workmanlike manner,
and in compliance with all Building, electric, communication, and safety codes,
ordinances, standards, regulations and requirements, now in effect or hereafter
promulgated, of the Federal Government, including, without limitation, the
Federal Communications Commission (the "FCC"), the Federal Aviation
Administration ("FAA") or any successor agency of either the FCC or FAA having
jurisdiction over radio or telecommunications, and of the state, city and county
in which the Building is located. Under this Lease, the Landlord and its agents
assume no responsibility for the licensing, operation and/or maintenance of
Tenant's equipment. Tenant has the responsibility of carrying out the terms of
its FCC license in all respects. The Dish/Antenna shall be connected to
Landlord's power supply in strict compliance with all applicable Building,
electrical, fire and safety codes. Neither Landlord nor its agents shall be
liable to Tenant for any stoppages or shortages of electrical power furnished to
the Dish/Antenna or the Roof Space because of any act, omission or requirement
of the public utility serving the Building, or the act or omission of any other
tenant, invitee or licensee or their respective agents, employees or
contractors, or for any other cause beyond the reasonable control of Landlord,
and Tenant shall not be entitled to any rental abatement for any such stoppage
or shortage of electrical power. Neither Landlord nor its agents shall have any
responsibility or liability for the conduct or safety of any of Tenant's
representatives, repair, maintenance and engineering personnel while in or on
any part of the Building or the Roof Space.
6. The Dish/Antenna, the appurtenances and the Aesthetic Screening,
if any, shall remain the personal property of Tenant, and shall be removed by
Tenant at its own expense at the expiration or earlier termination of this Lease
or Tenant's right to possession hereunder. Tenant shall repair any damage
caused by such removal, including the patching of any holes to match, as closely
as possible, the color surrounding the area where the equipment and
appurtenances were attached. Tenant agrees to maintain all of the Tenant's
Dish/Antenna equipment placed on or about the roof or in any other part of the
Building in proper operating condition and maintain same in satisfactory
condition as to appearance, in Landlord's sole discretion, and satisfactory
condition as to safety, in Landlord's reasonable discretion. Such maintenance
and operation shall be performed in a manner to avoid any interference with any
other tenants or Landlord. Tenant agrees that at all times during the Lease
Term, it will keep the
Exhibit E, Page 6
<PAGE>
roof of the Building and the Roof Space free of all trash or waste materials
produced by Tenant or Tenant's agents, employees or contractors.
7. In light of the specialized nature of the Dish/Antenna, Tenant
shall be permitted to utilize the services of its choice for installation,
operation, removal and repair of the Dish/Antenna, the appurtenances and the
Aesthetic Screening, if any, subject to the reasonable approval of Landlord.
Notwithstanding the foregoing, Tenant must provide Landlord with prior written
notice of any such installation, removal or repair and coordinate such work with
Landlord in order to avoid voiding or otherwise adversely affecting any
warranties granted to Landlord with respect to the roof. If necessary, Tenant,
at its sole cost and expense, shall retain any contractor having a then existing
warranty in effect on the roof to perform such work (to the extent that it
involves the roof), or, at Tenant's option, to perform such work in conjunction
with Tenant's contractor. In the event the Landlord contemplates roof repairs
that could affect Tenant's Dish/Antenna, or which may result in an interruption
of the Tenant's telecommunication service, Landlord shall formally notify Tenant
at least thirty (30) days in advance (except in cases of an emergency) prior to
the commencement of such contemplated work in order to allow Tenant to make
other arrangements for such service.
8. Tenant shall not allow any provider of telecommunication, video,
data or related services ("Communication Services") to locate any equipment on
the roof of the Building or in the Roof Space for any purpose whatsoever, nor
may Tenant use the Roof Space and/or Dish/Antenna to provide Communication
Services to an unaffiliated tenant, occupant or licensee of another building, or
to facilitate the provision of Communication Services on behalf of another
Communication Services provider to an unaffiliated tenant, occupant or licensee
of the Building or any other building.
9. Tenant acknowledges that Landlord may at some time establish a
standard license agreement (the "License Agreement") with respect to the use of
roof space by tenants of the Building. Tenant, upon request of Landlord, shall
enter into such License Agreement with Landlord provided that such agreement is
reasonably acceptable to Tenant and does not materially alter the rights of
Tenant hereunder with respect to the Roof Space.
10. Tenant specifically acknowledges and agrees that the terms and
conditions of Article 13 of the Lease (Indemnity and Waiver of Claims) shall
apply with full force and effect to the Roof Space and any other portions of the
roof accessed or utilized by Tenant, its representatives, agents, employees or
contractors.
11. If Tenant defaults under any of the terms and conditions of this
Section or the Lease, and Tenant fails to cure said default within the time
allowed by Article 19 of the Lease, Landlord shall be permitted to exercise all
remedies provided under the terms of the Lease, including removing the
Dish/Antenna, the appurtenances and the Aesthetic Screening, if any, and
restoring the Building and the Roof Space to the condition that existed prior to
the installation of the Dish/Antenna, the appurtenances and the Aesthetic
Screening, if any. If Landlord removes the Dish/Antenna, the appurtenances and
the Aesthetic Screening, if any, as a result of an uncured default, Tenant shall
be liable for all costs and expenses Landlord incurs in removing the
Dish/Antenna, the appurtenances and the Aesthetic Screening, if any, and
repairing any damage to the Building, the roof of the Building and the Roof
Space caused by the
Exhibit E, Page 7
<PAGE>
installation, operation or maintenance of the Dish/Antenna, the appurtenances,
and the Aesthetic Screening, if any.
12. Tenant shall be allowed to install fiber optics and related
equipment in the Building for Tenant's personal use, the design, location, and
operating characteristics of which shall be subject to Landlord's reasonable
approval.
IV. Storage Space.
A. Subject to availability and the rights of existing tenants of the
Buildings, if any, and after written request from Tenant, Landlord shall lease
to Tenant up to 300 square feet of storage space (the "Storage Space"). The
Storage Space rental rate per square foot of the Storage Space ("Storage Space
Rental") initially shall be Fourteen Dollars ($14.00) per usable square foot per
month for the Lease Term, and shall thereafter be adjusted from time to time by
Landlord to reflect market rates. Storage Space Rental shall be payable in
advance on or before the first day of each month of the Storage Term. Any
initial or final month shall be prorated. The Lease Term for the Storage Space
shall be coterminous with the Term of the Premises. The Storage Space shall be
used by Tenant for the storage of furniture, equipment, inventory or other non-
perishable items normally used in Tenant's business (exclusive of any items or
materials which may be deemed to be hazardous to the environment or hazardous to
human life or safety), and for no other purpose whatsoever. Tenant agrees to
keep the Storage Space in a neat and orderly fashion and to keep all stored
items in cartons, file cabinets or other suitable containers. Landlord shall
have the right to designate the location within the Storage Space of any items
to be placed therein. All items stored in the Storage Space shall be elevated
at least six inches above the floor on wooden pallets, and shall be at least
eighteen inches below the bottom of all sprinklers located in the ceiling of the
Storage Space, if any. Tenant shall not store anything in the Storage Space
which is unsafe or which otherwise may create a hazardous condition, or which
may increase Landlord's insurance rates, or cause a cancellation or modification
of Landlord's insurance coverage. Without limitation, Tenant shall not store
any flammable, combustible or explosive fluid, chemical or substance nor any
perishable food or beverage products, except with Landlord's prior written
approval. Landlord reserves the right to adopt and enforce reasonable rules and
regulations governing the use of the Storage Space from time to time.
B. All terms and provisions of this Lease shall be applicable to the
Storage Space, including, without limitation, Article 13 (Indemnity and Waiver
of Claims) and Article 14 (Tenant's Insurance), except that Landlord need not
supply air-cooling, heat, water, janitorial service, cleaning, window washing or
electricity to the Storage Space and Tenant shall not be entitled to any work
allowances, rent credits, expansion rights or renewal rights with respect to the
Storage Space unless such concessions or rights are specifically provided for in
the Lease with respect to the Storage Space.
C. Tenant agrees to accept the Storage Space in its condition and
"as-built" configuration existing on the earlier of the date Tenant takes
possession of the Storage Space or the Storage Commencement Date.
Exhibit E, Page 8
<PAGE>
D. At any time and from time to time, Landlord shall have the right
to relocate the Storage Space to a new location which shall be no smaller than
the square footage of the Storage Space. Landlord shall pay the direct, out-of-
pocket, reasonable expenses of such relocation.
E. Storage Space Rental is deemed Rent under the Lease.
F. Notwithstanding anything set forth in Article 11 of the Lease,
Tenant shall not, without the prior written consent of Landlord, which consent
may be withheld in Landlord's sole discretion, assign, sublease, transfer or
encumber the Storage Space or grant any license, concession or other right of
occupancy or permit the use of the Storage Space by any party other than Tenant.
V. Hazardous Materials.
Tenant shall not (either with or without negligence) cause or permit
the escape, disposal or release of any biologically or chemically active or
other hazardous substances, or materials except those used for general office
purposes in the ordinary course of Tenant's business and in compliance with all
applicable laws, and except for samples of pharmaceuticals and other products
stored and disposed of in compliance with all applicable laws and regulations.
Tenant shall not allow the storage or use of such substances or materials in any
manner not sanctioned by law or by the highest standards prevailing in the
industry for the storage and use of such substances of materials, nor allow to
be brought into the Project any such materials or substances except to use for
general office purposes in the ordinary course of Tenant's business, and except
for samples of pharmaceuticals and other products stored and disposed of in
compliance with all applicable laws and regulations. Without limitation,
hazardous substances and materials shall include those described in the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended, 42 U.S.C. Section 9601 et seq., any applicable state or local laws and
the regulations adopted under these acts. If any governmental agency or lender
(in its reasonable judgment) shall ever require testing to ascertain whether or
not there has been any release of hazardous materials and such testing indicates
that Tenant has violated any of the terms and conditions of this section, then,
in addition to any other rights and remedies available hereunder or at law or in
equity, the reasonable costs of such testing shall be reimbursed by Tenant to
Landlord upon demand as additional charges. In addition, Tenant shall execute
affidavits, representations and the like from time to time at Landlord's request
concerning Tenant's best knowledge and belief regarding the presence of
hazardous substances or materials on the premises. In all events, except to the
extent due to the negligence or willful misconduct of Landlord or its
contractors or agents, Tenant shall indemnify Landlord in the manner elsewhere
provided in this Lease from any release of hazardous materials on the premises
occurring while Tenant is in possession, or elsewhere if caused by Tenant or
persons acting under Tenant. The within covenants shall survive the expiration
or earlier termination of the Lease Term.
Exhibit E, Page 9
<PAGE>
IN WITNESS WHEREOF, Landlord and Tenant have executed this exhibit as
of the day and year first above written.
WITNESS/ATTEST:
LANDLORD:
WRC SUNSET NORTH LLC, a
Washington limited liability company
By: WRIGHT RUNSTAD
ASSOCIATES LIMITED
PARTNERSHIP, a Washington
limited partnership, its Manager
By: WRIGHT RUNSTAD &
COMPANY, a Washington
corporation, its general partner
By:________________________________
Its:_______________________________
EOP SUNSET NORTH, L.L.C., a
Delaware limited liability company, its
manager
By: EOP OPERATING LIMITED
PARTNERSHIP, a Delaware limited
partnership, its sole member
By: EQUITY OFFICE
PROPERTIES TRUST, a
Maryland real estate investment
trust, its managing general
partner
By:________________________________
Its:_______________________________
Exhibit E, Page 10
<PAGE>
TENANT:
drugstore.com, inc.,
a Delaware corporation
By:________________________________
Its:_______________________________
Exhibit E, Page 11
<PAGE>
EXHIBIT F
SUBORDINATION AGREEMENT
(TENANT)
RETURN NAME AND ADDRESS:
WELLS FARGO BANK, NATIONAL ASSOCIATION
Real Estate Group, MAC 6101-121
1300 S.W. 5th Avenue, 12th Floor
Portland, OR 97201
Attn: Mary Kathryn Long
SUBORDINATION AGREEMENT; ACKNOWLEDGMENT OF LEASE ASSIGNMENT, ESTOPPEL,
ATTORNMENT AND NON-DISTURBANCE AGREEMENT
GRANTORS: (1) WRC SUNSET NORTH LLC; (2) DRUGSTORE.COM, INC.,
a Delaware corporation
GRANTEE: WELLS FARGO BANK, NATIONAL ASSOCIATION
LEGAL DESCRIPTION: LOTS 6 THROUGH 10 AND AN UNDIVIDED INTEREST IN LOT
11 AND TRACT C OF SUNSET RIDGE I-90 CORPORATE
CAMPUS, VOLUME 154 OF PLATS, PAGES 77-80, KING
COUNTY, WASHINGTON
Additional legal description is on Exhibit A of
this document.
ASSESSOR'S PROPERTY TAX 813530-0060-02
PARCEL ACCOUNT NUMBER(S): 813530-0070-00
813530-0080-08
813530-0090-06
813530-0100-04
813530-0110-02
502880-0050-09
Exhibit F
<PAGE>
SUBORDINATION AGREEMENT; ACKNOWLEDGMENT OF LEASE
ASSIGNMENT, ESTOPPEL, ATTORNMENT AND
NON-DISTURBANCE AGREEMENT
(Lease To Deed of Trust)
NOTICE: THIS SUBORDINATION AGREEMENT RESULTS IN YOUR LEASE BECOMING SUBJECT TO
AND OF LOWER PRIORITY THAN THE LIEN OF THE DEED OF TRUST (DEFINED
BELOW).
THIS SUBORDINATION AGREEMENT; ACKNOWLEDGMENT OF LEASE ASSIGNMENT,
ESTOPPEL, ATTORNMENT AND NON-DISTURBANCE AGREEMENT ("Agreement") is made
_______________, 19___, by and between WRC SUNSET NORTH LLC, a Washington
limited liability company ("Landlord"), DRUGSTORE.COM, INC., a Delaware
corporation ("Tenant") and WELLS FARGO BANK, NATIONAL ASSOCIATION ("Lender").
R E C I T A L S
A. Pursuant to the terms and provisions of a lease dated
_______________, 19___ ("Lease"), Landlord, as "Landlord", granted to Tenant a
leasehold estate in and to a portion of the property described on Exhibit A
attached hereto and incorporated herein by this reference (which property,
together with all improvements now or hereafter located on the property, is
defined as the "Property").
B. Landlord has executed, or proposes to execute, a deed of trust
with absolute assignment of leases and rents, security agreement and fixture
filing ("Deed of Trust") securing, among other things, a promissory note
("Note") in the principal sum of SIXTY EIGHT MILLION DOLLARS ($68,000,000),
dated September 1, 1998, in favor of Lender, which Note is payable with interest
and upon the terms and conditions described therein ("Loan").
C. As a condition to making the Loan secured by the Deed of Trust,
Lender requires that the Deed of Trust be unconditionally and at all times
remain a lien on the Property, prior and superior to all the rights of Tenant
under the Lease and that the Tenant specifically and unconditionally subordinate
the Lease to the lien of the Deed of Trust.
D. Landlord and Tenant have agreed to the subordination, attornment
and other agreements herein in favor of Lender.
NOW THEREFORE, for valuable consideration and to induce Lender to make
the Loan, Landlord and Tenant hereby agree for the benefit of Lender as follows:
1. SUBORDINATION. Landlord and Tenant hereby agree that:
-------------
Exhibit F, Page 1
<PAGE>
1.1 Prior Lien. The Deed of Trust securing the Note in favor of
----------
Lender, and any modifications, renewals or extensions thereof, shall
unconditionally be and at all times remain a lien on the Property prior and
superior to the Lease;
1.2 Subordination. Lender would not make the Loan without this
-------------
agreement to subordinate; and
1.3 Whole Agreement. This Agreement shall be the whole agreement and
---------------
only agreement with regard to the subordination of the Lease to the lien of the
Deed of Trust and shall supersede and cancel, but only insofar as would affect
the priority between the Deed of Trust and the Lease, any prior agreements as to
such subordination, including, without limitation, those provisions, if any,
contained in the Lease which provide for the subordination of the Lease to a
deed or deeds of trust or to a mortgage or mortgages,
AND FURTHER, Tenant individually declares, agrees and acknowledges for
the benefit of Lender, that:
1.4 Use of Proceeds. Lender, in making disbursements pursuant to the
---------------
Note, the Deed of Trust or any loan agreements with respect to the Property, is
under no obligation or duty to, nor has Lender represented that it will, see to
the application of such proceeds by the person or persons to whom Lender
disburses such proceeds, and any application or use of such proceeds for
purposes other than those provided for in such agreement or agreements shall not
defeat this agreement to subordinate in whole or in part;
1.5 Waiver, Relinquishment and Subordination. Tenant intentionally
----------------------------------------
and unconditionally waives, relinquishes and subordinates all of Tenant's right,
title and interest in and to the Property to the lien of the Deed of Trust and
understands that in reliance upon, and in consideration of, this waiver,
relinquishment and subordination, specific loans and advances are being and will
be made by Lender and, as part and parcel thereof, specific monetary and other
obligations are being and will be entered into which would not be made or
entered into but for said reliance upon this waiver, relinquishment and
subordination.
2. ASSIGNMENT. Tenant acknowledges and consents to the assignment
----------
of the Lease by Landlord in favor of Lender.
3. ESTOPPEL. Tenant acknowledges and represents that:
--------
3.1 Lease Effective. The Lease has been duly executed and delivered
---------------
by Tenant and, subject to the terms and conditions thereof, the Lease is in full
force and effect, the obligations of Tenant thereunder are valid and binding and
there have been no modifications or additions to the Lease, written or oral;
3.2 No Default. To the best of Tenant's knowledge, as of the date
----------
hereof: (i) there exists no breach, default, or event or condition which, with
the giving of notice or the passage of time or both, would constitute a breach
or default under the Lease; and (ii) there are no existing claims, defenses or
offsets against rental due or to become due under the Lease;
Exhibit F, Page 2
<PAGE>
3.3 Entire Agreement. The Lease constitutes the entire agreement
----------------
between Landlord and Tenant with respect to the Property and Tenant claims no
rights with respect to the Property other than as set forth in the Lease; and
3.4 No Prepaid Rent. No deposits or prepayments of rent have been
---------------
made in connection with the Lease, except as follows: (if none, state "None")
_____________________.
4. ADDITIONAL AGREEMENTS. Tenant covenants and agrees that, during
---------------------
all such times as Lender is the Beneficiary under the Deed of Trust:
4.1 Modification, Termination and Cancellation. Tenant will not
------------------------------------------
consent to any modification, amendment, termination or cancellation of the Lease
(in whole or in part) without Lender's prior written consent and will not make
any payment to Landlord in consideration of any modification, termination or
cancellation of the Lease (in whole or in part) without Lender's prior written
consent;
4.2 Notice of Default. Tenant will notify Lender in writing
-----------------
concurrently with any notice given to Landlord of any default by Landlord under
the Lease, and Tenant agrees that Lender has the right (but not the obligation)
to cure any breach or default specified in such notice within the time periods
set forth below and Tenant will not declare a default of the Lease, as to
Lender, if Lender cures such default within fifteen (15) days from and after the
expiration of the time period provided in the Lease for the cure thereof by
Landlord; provided, however, that if such default cannot with diligence be cured
by Lender within such fifteen (15) day period, the commencement of action by
Lender within such fifteen (15) day period to remedy the same shall be deemed
sufficient so long as Lender pursues such cure with diligence;
4.3 No Advance Rents. Tenant will make no payments or prepayments of
----------------
rent more than one (1) month in advance of the time when the same become due
under the Lease; and
4.4 Assignment of Rents. Upon receipt by Tenant of written notice
-------------------
from Lender that Lender has elected to terminate the license granted to Landlord
to collect rents, as provided in the Deed of Trust, and directing the payment of
rents by Tenant to Lender, Tenant shall comply with such direction to pay and
shall not be required to determine whether Landlord is in default under the Loan
and/or the Deed of Trust.
5. ATTORNMENT. Tenant agrees for the benefit of Lender (including
----------
for this purpose any transferee of Lender or any transferee of Landlord's title
in and to the Property by Lender's exercise of the remedy of sale by foreclosure
under the Deed of Trust) as follows:
5.1 Payment of Rent. Tenant shall pay to Lender all rental payments
---------------
required to be made by Tenant pursuant to the terms of the Lease for the
duration of the term of the Lease;
5.2 Continuation of Performance. Tenant shall be bound to Lender in
---------------------------
accordance with all of the provisions of the Lease for the balance of the term
thereof, and Tenant hereby attorns to Lender as its landlord, such attornment to
be effective and self-operative without the execution of any further instrument
immediately upon Lender succeeding to Landlord's interest in the Lease and
giving written notice thereof to Tenant;
Exhibit F, Page 3
<PAGE>
5.3 No Offset. Lender shall not be liable for, nor subject to, any
---------
offsets or defenses which Tenant may have by reason of any act or omission of
Landlord under the Lease, nor for the return of any sums which Tenant may have
paid to Landlord under the Lease as and for security deposits, advance rentals
or otherwise, except to the extent that such sums are actually delivered by
Landlord to Lender; and
5.4 Subsequent Transfer. If Lender, by succeeding to the interest of
-------------------
Landlord under the Lease, should become obligated to perform the covenants of
Landlord thereunder, then, upon any further transfer of Landlord's interest by
Lender, all of such obligations shall terminate as to Lender.
6. NON-DISTURBANCE. In the event of a foreclosure under the Deed of
---------------
Trust, so long as there shall then exist no breach, default, or event of default
on the part of Tenant under the Lease beyond any applicable notice and cure
periods, Lender agrees for itself and its successors and assigns that the
leasehold interest of Tenant under the Lease shall not be extinguished or
terminated by reason of such foreclosure, but rather the Lease shall continue in
full force and effect and Lender shall recognize and accept Tenant as tenant
under the Lease subject to the terms and provisions of the Lease except as
modified by this Agreement; provided, however, that Tenant and Lender agree that
the following provisions of the Lease (if any) shall not be binding on Lender:
any right of first refusal with respect to the Property; any provision regarding
the use of insurance proceeds or condemnation proceeds with respect to the
Property which is inconsistent with the terms of the Deed of Trust.
7. MISCELLANEOUS.
-------------
7.1 Heirs, Successors, Assigns and Transferees. The covenants herein
------------------------------------------
shall be binding upon, and inure to the benefit of, the heirs, successors and
assigns of the parties hereto; and
7.2 Notices. All notices or other communications required or
-------
permitted to be given pursuant to the provisions hereof shall be deemed served
upon delivery or, if mailed, upon the first to occur of receipt or the
expiration of three (3) days after deposit in United States Postal Service,
certified mail, postage prepaid and addressed to the address of Landlord, Tenant
or Lender appearing below:
"LANDLORD"
WRC SUNSET NORTH LLC
c/o Wright Runstad & Company
1191 Second Avenue, Suite 2000
Seattle, Washington 98101
Attn: Jon F. Nordby
Exhibit F, Page 4
<PAGE>
With a copy to:
EQUITY OFFICE PROPERTIES TRUST
Two North Riverside Plaza, Suite 2200
Chicago, Illinois 60606
Attention: Regional Counsel -- Western Region
"LENDER"
WELLS FARGO BANK, NATIONAL ASSOCIATION
Real Estate Group, MAC 6101-121
1300 S.W. 5th Avenue, 12th Floor
Portland, OR 97201
Attn: Mary Kathryn Long
Loan No: 2554
"TENANT"
ADDRESS
provided, however, any party shall have the right to change its address for
notice hereunder by the giving of written notice thereof to the other party in
the manner set forth in this Agreement;
7.3 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original and all of which
together shall constitute and be construed as one and the same instrument;
7.4 Remedies Cumulative. All rights of Lender herein to collect
-------------------
rents on behalf of Landlord under the Lease are cumulative and shall be in
addition to any and all other rights and remedies provided by law and by other
agreements between Lender and Landlord or others;
7.5 Paragraph Headings. Paragraph headings in this Agreement are for
------------------
convenience only and are not to be construed as part of this Agreement or in any
way limiting or applying the provisions hereof; and
7.6 INCORPORATION. Exhibit A is attached hereto and incorporated
-------------
herein by this reference.
Exhibit F, Page 5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
NOTICE: THIS SUBORDINATION AGREEMENT CONTAINS A PROVISION WHICH
ALLOWS THE LANDLORD TO OBTAIN A LOAN, THE PROCEEDS OF WHICH MAY BE EXPENDED FOR
PURPOSES OTHER THAN THE IMPROVEMENT OF THE PROPERTY.
IT IS RECOMMENDED THAT, PRIOR TO THE EXECUTION OF THIS AGREEMENT, THE
PARTIES CONSULT WITH THEIR ATTORNEYS WITH RESPECT HERETO.
"LANDLORD"
WRC SUNSET NORTH LLC, a
Washington limited liability company
By: WRIGHT RUNSTAD
ASSOCIATES LIMITED
PARTNERSHIP, a Washington
limited partnership, its Manager
By: WRIGHT RUNSTAD &
COMPANY, a Washington
corporation, its general partner
By:________________________
Its:_______________________
Exhibit F, Page 6
<PAGE>
By: EOP SUNSET NORTH, L.L.C., a
Delaware limited liability company, its
manager
By: EOP OPERATING LIMITED
PARTNERSHIP, a Delaware limited
partnership, its sole member
By: EQUITY OFFICE
PROPERTIES TRUST, a
Maryland real estate investment
trust, its managing general
partner
By:____________________________
Its:___________________________
"LENDER"
WELLS FARGO BANK,
NATIONAL ASSOCIATION
By:______________________________________
Its:_____________________________________
"TENANT"
DRUGSTORE.COM, INC.,
a Delaware corporation
By:______________________________________
Its:_____________________________________
Exhibit F, Page 7
<PAGE>
LANDLORD ACKNOWLEDGMENTS
STATE OF ___________ )
) ss.
COUNTY OF __________ )
On this the ______ day of _______________, 19___, before me a Notary Public
duly authorized in and for said County in the State aforesaid to take
acknowledgments personally appeared _________________________ known to me to be
_______________ of Wright Runstad & Company, the general partner of Wright
Runstad Associates Limited Partnership, a Member of WRC SUNSET NORTH LLC, a
Washington limited liability company, the Landlord in the foregoing instrument,
and acknowledged that as such officer, being authorized so to do, (s)he executed
the foregoing instrument on behalf of said corporation by subscribing the name
of such corporation by himself/herself as such officer and caused the corporate
seal of said corporation to be affixed thereto, as a free and voluntary act, and
as the free and voluntary act of said corporation, for the uses and purposes
therein set forth.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
Notary Public:______________________________
Printed Name:_______________________________
Residing at:________________________________
My Commission expires:______________________
Exhibit F, Page 8
<PAGE>
STATE OF _______________ )
) ss.
COUNTY OF ______________ )
On this the ______ day of _______________, 1999, before me a Notary Public
duly authorized in and for said County in the State aforesaid to take
acknowledgments personally appeared _________________________ known to me to be
_______________ of Equity Office Properties Trust, the general partner of EOP
Operating Limited Partnership, the sole member of EOP Sunset North, L.L.C., a
Member of WRC SUNSET NORTH LLC, a Washington limited liability company, the
Landlord in the foregoing instrument, and acknowledged that as such officer,
being authorized so to do, (s)he executed the foregoing instrument on behalf of
said corporation by subscribing the name of such corporation by himself/herself
as such officer and caused the corporate seal of said corporation to be affixed
thereto, as a free and voluntary act, and as the free and voluntary act of said
corporation, for the uses and purposes therein set forth.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
Notary Public:______________________________
Printed Name:_______________________________
Residing at:________________________________
My Commission expires:______________________
Exhibit F, Page 9
<PAGE>
LENDER ACKNOWLEDGMENT
STATE OF _______________ )
) ss.
COUNTY OF ______________ )
On this the ______ day of _______________, 1999, before me a Notary Public
duly authorized in and for said County in the State aforesaid to take
acknowledgments personally appeared _________________________ known to me to be
_______________ of WELLS FARGO BANK, NATIONAL ASSOCIATION, the Lender in the
foregoing instrument, and acknowledged that as such officer, being authorized so
to do, (s)he executed the foregoing instrument on behalf of said corporation by
subscribing the name of such corporation by himself/herself as such officer and
caused the corporate seal of said corporation to be affixed thereto, as a free
and voluntary act, and as the free and voluntary act of said corporation, for
the uses and purposes therein set forth.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
Notary Public:______________________________
Printed Name:_______________________________
Residing at:________________________________
My Commission expires:______________________
Exhibit F, Page 10
<PAGE>
TENANT ACKNOWLEDGMENT
STATE OF ___________ )
) ss:
COUNTY OF __________ )
On this the ______ day of _______________, 1999, before me a Notary Public
duly authorized in and for said County in the State aforesaid to take
acknowledgments personally appeared _________________________ known to me to be
_______________ of DRUGSTORE.COM, INC., a Delaware corporation, the Tenant in
the foregoing instrument, and acknowledged that as such officer, being
authorized so to do, (s)he executed the foregoing instrument on behalf of said
corporation by subscribing the name of such corporation by himself/herself as
such officer and caused the corporate seal of said corporation to be affixed
thereto, as a free and voluntary act, and as the free and voluntary act of said
corporation, for the uses and purposes therein set forth.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
Notary Public:______________________________
Printed Name:_______________________________
Residing at:________________________________
My Commission expires:______________________
Exhibit F, Page 11
<PAGE>
EXHIBIT A
Loan No. 2554
DESCRIPTION OF PROPERTY
EXHIBIT A to Subordination Agreement; Acknowledgment of Lease Assignment,
Estoppel, Attornment and Non-Disturbance Agreement dated as of _______________,
19___, executed by WRC SUNSET NORTH LLC, a Washington limited liability company
as "Landlord", DRUGSTORE.COM, INC., a Delaware corporation, as "Tenant", and
WELLS FARGO BANK, NATIONAL ASSOCIATION, as "Lender".
All that certain real property located in the County of King, State of
Washington, described as follows:
LOTS 6 THROUGH 10 OF SUNSET RIDGE I-90 CORPORATE CAMPUS, A BINDING SITE PLAN, AS
PER PLAT RECORDED IN VOLUME 154 OF PLATS, PAGES 77 THROUGH 80, RECORDS OF KING
COUNTY;
EXCEPT ANY PORTION CONVEYED FOR 139TH AVE. S.E., BY DEED RECORDED UNDER
RECORDING NO. 9101280422;
TOGETHER WITH AN UNDIVIDED 60% INTEREST IN LOT 11 AND TRACT C OF SAID PLAT;
AND TOGETHER WITH THOSE CERTAIN EASEMENT RIGHTS AS DELINEATED IN INSTRUMENT
RECORDED UNDER RECORDING NO. 9601091040;
AND TOGETHER WITH THOSE CERTAIN EASEMENT RIGHTS AS DELINEATED IN INSTRUMENT
RECORDED UNDER RECORDING NO. 9107260572;
AND TOGETHER WITH THOSE CERTAIN EASEMENT RIGHTS AS DELINEATED IN INSTRUMENT
RECORDED UNDER RECORDING NO. 9309292404;
SITUATE IN THE CITY OF BELLEVUE, COUNTY OF KING, STATE OF WASHINGTON.
Exhibit A, Page 1
<PAGE>
EXHIBIT G
TENANT ESTOPPEL CERTIFICATE
Loan No. 2554
_______________, 19___
WELLS FARGO BANK, NATIONAL ASSOCIATION ("Lender")
Real Estate Group, MAC 6101-121
1300 S.W. 5th Avenue, 12th Floor
Portland, OR 97201
Attn: Mary Kathryn Long
RE: Lease dated _______________, 1999, and amended on _______________, 1999
(the "Lease") by and between WRC SUNSET NORTH LLC, as Landlord
("Landlord") and DRUGSTORE.COM, as Tenant ("Tenant") with respect to
certain premises (the "Leased Premises") located at the Northeast corner
of 139th Avenue Southeast and Southeast 32nd Street, Bellevue, King
County, Washington (the "Property"). The Leased Premises are comprised of
____________ square feet.
Gentlemen:
The undersigned hereby acknowledges that Landlord intends to encumber the
Property with a deed of trust in favor of Lender. The undersigned further
acknowledges the right of Landlord, Lender and any and all of Landlord's present
and future lenders to rely upon the statements and representations of the
undersigned contained in this Certificate and further acknowledges that any loan
secured by any such deed of trust or further deeds of trust will be made and
entered into in material reliance on this Certificate.
Given the foregoing, the undersigned Tenant hereby certifies and represents unto
Lender, its successors and assigns, with respect to the above described Lease, a
true and correct copy of which is attached as Exhibit A hereto, as follows:
All space and improvements covered by the Lease have been completed and
furnished to the satisfaction of Tenant, all conditions required under the Lease
have been met, and Tenant has accepted and taken possession of and presently
occupies the Leased Premises, consisting of approximately ____________ square
feet.
Exhibit G, Page 1
<PAGE>
The Lease is for a total term of ________ years, ________ months commencing
_______________, 19___, and ending _______________, 19___, and has not been
modified, altered or amended in any respect and contains the entire agreement
between Landlord and Tenant, except as follows:
______________________________________________________ (list amendments and
modifications other than those, if any, attached to and forming a part of the
Lease as well as any verbal agreements, or write "None").
As of the date hereof, the annual minimum rent under the Lease is
$_______________, subject to any escalation and/or percentage rent and/or common
area maintenance charges, in accordance with the terms and provisions of the
Lease.
No rent has been paid by Tenant in advance under the Lease except for
$_______________, which amount represents rent for the period beginning
_______________, 19___, and ending _______________, 19___, and Tenant has no
current charge or claim of offset under said Lease or otherwise, against rents
or other amounts due or to become due thereunder. No "discounts", "free rent"
or "discounted rent" have been agreed to or are in effect except for
___________________________________________________________________________.
A Security Deposit of $_______________ has been made and is currently being held
by Landlord.
Tenant has no claim against Landlord for any deposit or prepaid rent except as
provided in Paragraphs 4 and 5 above.
The Landlord has satisfied all commitments, arrangements or understandings made
to induce Tenant to enter into the Lease, and to Tenant's knowledge, after due
inquiry, the Landlord is not in any respect in default in the performance of the
terms and provisions of the Lease, nor is there now any fact or condition which,
with notice or lapse of time or both, would become such a default.
Tenant is not in any respect in default under the terms and provisions of the
Lease (nor is there now any fact or condition which, with notice or lapse of
time or both, would become such a default) and has not assigned, transferred or
hypothecated its interest under the Lease, except as follows:
__________________________________________________________________.
Except as expressly provided in the Lease or in any amendment or supplement to
the Lease, Tenant (i) does not have any right to renew or extend the term of the
Lease; (ii) does not have any option or preferential right to purchase all or
any part of the Leased Premises or all or any part of the building or premises
of which the Leased Premises are a part; and (iii) does not have right, title,
or interest with respect to the Leased Premises other than as Tenant under the
Lease. There are no understandings, contracts, agreements, subleases,
assignments, or commitments of any kind whatsoever with respect to the Lease or
the Leased Premises except as expressly provided in the Lease or in any
amendment or supplement to the Lease set forth in Paragraph 2 above, copies of
which are attached hereto.
Exhibit G, Page 2
<PAGE>
To Tenant's knowledge, after due inquiry, the Lease is in full force and effect
and Tenant has no defenses, setoffs, or counterclaims against Landlord arising
out of the Lease or in any way relating thereto or arising out of any other
transactions between Tenant and Landlord.
The current address to which all notices to Tenant as required under the Lease
should be sent is:
_____________________________________________________________________________.
Dated: _______________, 19___.
________________________________________
"TENANT"
Exhibit G, Page 3
<PAGE>
EXHIBIT 10.35
AGREEMENT
This Agreement, dated as of January 24, 2000 is made and entered into by
and between Amazon.com Commerce Services, Inc., ("ACI"), an indirect wholly
owned subsidiary of Amazon.com, Inc. ("Amazon.com"), and drugstore.com, inc.
("drugstore.com"). ACI and drugstore.com sometimes are referred to collectively
as the "Parties" and individually as a "Party." ACI and drugstore.com agree as
follows:
Section 1. Definitions
Whenever used in this Agreement with initial letters capitalized, the
following terms shall have the following specified meaning:
"Amazon.com Health and Beauty Section" means an Amazon.com Product Section,
to be created pursuant to this Agreement, featuring Drugstore Products and
Beauty Products, to be labeled either "Drugstore," "Health and Beauty" or such
other title as mutually agreed by the Parties.
"Amazon.com Product Section" means any discrete group of products and
services available at any time during the Term on the Amazon.com Site that is
identified by a tab or other top-level product category identifier on the
Amazon.com Site Home Page (such as "Books," "Music," "DVD and Video," "Toys,"
etc.), but excluding (a) the Amazon.com Site Home Page itself, and (b) any
mechanisms, areas or services on or through which independent third parties may
sell products or services through the Amazon.com Site (including, without
limitation, the existing "Auctions", "zShops", "Sothebys.amazon.com" and
"Amazon.com Advantage" areas and services of the Amazon.com Site, and any
successors or replacements thereto).
"Amazon.com Site" means that Web Site, the primary Home Page for which is
identified by the URL www.amazon.com (and any successor or replacement Web
Site). For the avoidance of doubt, the "Amazon.com Site" does not include any
other Web Sites maintained by or for Amazon.com, ACI or its Affiliates
(including, without limitation, those Web Sites with the primary Home Pages
identified by the URL's www.amazon.co.uk and www.amazon.de).
---------------- ---------------
"Amazon.com Site Functionality" means, collectively: (a) tab, search and
browse functionality available to users of the Amazon.com Site for navigating
through Amazon.com Product Sections; (b) payment and transaction functionality
available to users of the Amazon.com Site for purchasing products (including,
without limitation, "shopping cart" and "Payment with 1-Click" functionality),
(c) any other functionality available on the Amazon.com Site that ACI may make
available to drugstore.com from time to time, and (d) any future equivalents,
improvements and enhancements of any of the foregoing.
"Affiliate" means, with respect to either Party, any individual or entity
that directly or indirectly controls, is controlled by or is under common
control with that Party, or which such Party beneficially owns at least fifty
percent (50%) of the equity interests therein;
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excluding any entity for which a drugstore.com or Amazon.com does not directly
or indirectly control the operation and management thereof.
"Beauty Products" means cosmetics and other makeup products, fragrance
products, bathing products, skin care products and hair care products.
"Change of Control" means, with respect to drugstore.com, a transaction or
series of related transactions that results in (a) a sale of all or
substantially of the assets of drugstore.com, (b) the transfer of fifty percent
(50%) or more of the outstanding voting power of drugstore.com (other than to a
subsidiary corporation wholly-owned by drugstore.com), (c) the acquisition by a
person or entity, by reason of any contractual arrangement with one or more
persons or entities, of the right or power to appoint or cause to be appointed a
majority of the directors or officers of drugstore.com.
"Closing" means the consummation of the purchase of common stock of
drugstore.com by Amazon.com pursuant to the Stock Purchase Letter Agreement
between Amazon.com and drugstore.com (the "Purchase Agreement").
"Confidential Information" means all nonpublic information relating to a
Party or its Affiliates that is designated as confidential or that, given the
nature of the information or the circumstances surrounding its disclosure,
reasonably should be considered as confidential, including without limitation
any information disclosing that a specific end-user traveled from the Amazon.com
Site to the drugstore.com Site (however obtained). Confidential Information
includes, without limitation, (a) all nonpublic information relating to a
Party's or its Affiliates' technology, customers, business plans, promotional
and marketing activities, finances and other business affairs and (b) all third
party information that a Party or its Affiliates is obligated to keep
confidential. Confidential Information may be contained in tangible materials,
such as drawings, data, specifications, reports and computer programs, or may be
in the nature of unwritten knowledge. Confidential Information does not include
any information that (i) has become publicly available without breach of this
Agreement, (ii) can be shown by documentation to have been known to the
Receiving Party at the time of its receipt from the Disclosing Party or its
Affiliates, (iii) is received from a third party who did not acquire or disclose
such information by a wrongful or tortious act or (iv) can be shown by
documentation to have been independently developed by the Receiving Party
without reference to any Confidential Information.
"Disclosing Party" means a Party that discloses Confidential Information to
the other Party in connection with this Agreement.
"Drugstore Products" means health, beauty, wellness, personal care and
prescription drug products, including over-the-counter drugs, first aid,
contraceptives, vitamins and fitness supplements, natural health remedies (such
as nutritional supplements, herbs and homeopathy), medical devices for home
health care and other durable medical goods, and other products relating to
hair, body, skin and eye care (e.g. contact lenses and contact lens solutions).
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"drugstore.com Site Functionality" means, collectively: (a) functionality
available on the drugstore.com Site that drugstore.com may make available to ACI
or Amazon.com from time to time, and (b) any future equivalents, improvements
and enhancements of any of the foregoing.
"drugstore.com Site" means, collectively: (a) that Web Site, the primary
Home Page for which is identified by the URL www.drugstore.com (and any
successor or replacement Web Site); (b) that Web Site, the primary Home Page for
which is identified by the URL www.beauty.com (and any successor or replacement
--------------
Web Site); and (c) any other Web Sites operated by or for drugstore.com or its
Affiliates from time to time through which Drugstore Products or Beauty Products
are sold or offered for sale.
"Home Page" means, with respect to a Web Site, the Web page designated by
the operator of the Web Site as the initial and primary end user interface for
the Web Site.
"Intellectual Property Right" means any patent, copyright, trademark,
service mark, trade dress, trade name or trade secret right and any other
intellectual property or proprietary right.
"Launch Date" means the date on which the Amazon.com Health and Beauty
Section is made generally available to all Amazon.com customers, which date
shall be mutually agreed by the Parties, but which date shall occur no later
than 90 days after the Closing.
"Receiving Party" means a Party that receives Confidential Information from
the other Party in connection with this Agreement.
"Site" means the Amazon.com Site or the drugstore.com Site, as required by
the context.
"Technology" means any design, specification, content (which includes
product files, catalogs, images, and editorial content), data, URL, domain name,
software, code, user interface, "look and feel," technique, algorithm, method,
process, device, procedure, functionality or other technology or item.
"Term" means the term of this Agreement as defined in Section 10.
"Trademark" means any trademark, service mark, trade name, trade dress,
proprietary logo or insignia or other source or business identifier.
"Transition Page" means a page of the Amazon.com Health and Beauty Section
that is part of the Amazon.com Site and contains representations of the
drugstore.com site and contains live links to pages on the drugstore.com Site,
as further described in Section 2.1.
"Web Site" means any point of presence maintained on the Internet or on any
other public data network. With respect to any Web Site maintained on the World
Wide Web or any successor public data network, such Web Site includes all HTML
pages (or similar unit
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of information presented in any relevant data protocol) that either (a) are
identified by the same second-level domain (such as http://www.amazon.com) or by
the same equivalent level identifier in any relevant address scheme, or (b)
contain branding, graphics, navigation or other characteristics such that a user
reasonably would conclude that the pages are part of an integrated information
or service offering.
"Year" means any period of twelve (12) consecutive months commencing on the
Closing, or on any anniversary of the Launch.
Section 2. Amazon.com Health and Beauty Section
The overall goal of the Parties is to maximize drugstore.com customers and
revenues through the Amazon.com Health and Beauty Section and create a superior
customer experience on the Amazon.com Health and Beauty Section.
2.1 Phase One -- Transition Page(s). ACI will create and, following the
Launch Date, maintain on the Amazon.com Site during the Term the Amazon.com
Health and Beauty Section, which shall include the Transition Page(s) ("Phase
One"). The Amazon.com Health and Beauty Section in Phase One and Phase Two will
be given generally the same treatment including visibility and persistence on
the Amazon.com Site as the top five most prominent Amazon.com Product Sections,
excluding any seasonal-based or one-time promotions involving one or more
Amazon.com Product Sections or as a result of Amazon.com Site changes for a
particular individual due to personalization of the Amazon.com Site by such
individual. The format and functionality of the Transition Page(s) will be
generally consistent with other pages of the Amazon.com Site, except that the
coloring, graphics, fonts, logos and similar "look and feel" aspects of the
Transition Page(s) will be generally consistent with similar characteristics of
the drugstore.com Site. All links, including a tab as used on the Amazon.com
Site as of the date hereof, and other navigation functions for the Amazon.com
Health and Beauty Section on the Amazon.com Home Page will link directly to a
Transition Page. The Transition Page(s) will contain hypertext links that will
allow users to navigate directly to pages on the drugstore.com Site. The
Parties will work together to determine the specific editorial and creative
content, personalization, placement, promotions, messaging, and category names
of the Transition Pages, ensuring consistency with the drugstore.com Site,
including editorial and creative content, personalization, placement,
promotions, messaging, and category names, pursuant to the implementation
procedures set forth in Section 4. Subject to the foregoing, other than with
respect to the Transition Pages, ACI will determine the content, appearance,
functionality and all other aspects of the Amazon.com Site (including the
Amazon.com Site Home Page) in its sole discretion.
2.2 Phase Two - Catalog Integration and Single Checkout. On or before
June 30, 2000, ACI in consultation with drugstore.com will determine the design
and development schedule for implementation of certain of the Amazon.com Site
Functionalities in order to enable Amazon.com customers to shop and pay for non-
prescription products available on the drugstore.com Site (along with shopping
and paying for all other products available on the Amazon.com Site) while
shopping on the Amazon.com Site. The Parties intend that with respect to this
Amazon.com Site Functionality, the shopping experience within the
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Amazon.com Health and Beauty Section will be consistent with the functionality
of the other Amazon.com Product Sections with respect to search and checkout,
while the general shopping experience within the Amazon.com Health and Beauty
Section will be generally the same as the shopping experience on the
drugstore.com Site and the coloring, graphics, logos, editorial, merchandising,
features and services and other "look and feel" aspects of the Amazon.com Health
and Beauty Section will remain generally the same as on the drugstore.com Site
(except with respect to checkout and search) or as otherwise agreed to by
drugstore.com, given the technical and production issues associated with the
search and checkout features ("Phase Two"). Customers who purchase products
through the Amazon.com Health and Beauty Section are customers of ACI,
Amazon.com and drugstore.com. drugstore.com will be solely responsible for all
order fulfillment and customer service for orders of products purchased from
drugstore.com through the Amazon.com Health and Beauty Section. ACI or its
Affiliates will provide drugstore.com with all order-related and customer-
related data necessary for drugstore.com to fulfill its order fulfillment and
customer service responsibilities as well as to recognize and transact with an
Amazon.com Heath and Beauty Section customer as a repeat customer on the
drugstore.com Site. Such information may include products ordered, name,
address, email address and credit card information of the purchaser and other
necessary information. drugstore.com shall be free to use such data and
communicate with such customers as it uses such data for, and as it communicates
with, its other customers. All revenues from sales of products or services in
the Amazon.com Health and Beauty Section, other than cross-promoted products
from other Amazon.com Product Sections, shall be drugstore.com revenues and
Amazon.com and ACI shall have no right to any revenue share or other fees,
except as set forth in Section 5.3. On or before December 31, 2000 and to the
extent commercially reasonable and technically feasible, ACI and drugstore.com
shall implement Phase Two in a manner that does not subject ACI, Amazon.com and
their Affiliates to federal, state or local regulations involving pharmacists,
over the counter drugs or homeopathic drugs and does not subject drugstore.com
to any additional regulation of such kind, and further does not create any
jurisdiction or authority for any governmental authority to impose material
additional obligations to collect sales tax, use tax or similar tax in
connection with any sales of products by ACI, Amazon.com, drugstore.com or their
Affiliates. The parties will agree to pursue in good faith ways to permit
customers to order prescription products through the Amazon.com Health and
Beauty Section in Phase Two, and cross-promote products from other Amazon.com
Product Sections.
2.3 Redesign of Amazon.com Site. Without limiting the generality of the
foregoing, nothing in this Agreement shall limit the ability of Amazon.com, ACI
or their Affiliates to re-design or modify the appearance and functionality of
the Amazon.com Site Home Page or Amazon.com Site from time to time, in their
sole discretion; provided, however, that in the event of such a redesign or
revision, the presentation of the Amazon.com Health and Beauty Section on the
Amazon.com Site Home Page and throughout the Amazon.com Site will continue to
receive generally the same treatment including visibility and persistence as the
top five most prominent Amazon.com Product Sections as set forth in Section 2.1.
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2.4 Certain drugstore.com Obligations. During the Term, drugstore.com
will (a) ensure that every page of the drugstore.com Site displayed to any user
who links to the drugstore.com Site from the Amazon.com Site displays prominent,
above-the-fold, graphical hypertext links to be designed by ACI in consultation
with drugstore.com, which, when clicked, return the user to the Amazon.com Site,
(b) ensure that substantially all products available through the drugstore.com
Site are available through the Amazon.com Health and Beauty Section, (c) ensure
that prices of products offered through the Amazon.com Health and Beauty Section
are equal to or lower than the prices for the same products on the drugstore.com
Site, and (d) ensure that promotions related to products offered through the
Amazon.com Health and Beauty Section (including, without limitation, discounts,
free products with a purchase and "points"), are equal or superior to any such
promotions generally offered by drugstore.com on the drugstore.com Site to the
extent technically and commercially feasible. Notwithstanding the functionality
necessary for a single checkout and catalog integration, drugstore.com will be
solely responsible for all order fulfillment and customer service for orders of
products from drugstore.com through the Amazon.com Health and Beauty Section.
2.5 No Framing. Neither Party will use or authorize or assist any third
party to use in connection with any links on its Site any framing techniques,
interstitial advertisements, pop-up windows, new consoles or other items or
techniques that would alter the appearance or presentation of the other party's
Site from that seen by users hand-entering the applicable URL into their
browser. Without limiting the generality of the foregoing, each Party
specifically acknowledges that it will not cause or permit any new browser
window to open upon any user's clicking on any link on its Site to the other
Party's Site.
2.6 Technical Standards; Customer Service. The Parties will at all times
comply with the technical, site and customer service requirements as mutually
agreed upon by the parties within 45 days of the Closing and to be added as
Exhibit A, and comply with the privacy policies as set forth in Exhibit B.
Without limiting the generality of the foregoing, drugstore.com will at all
times conduct its dealings with customers who link to the drugstore.com Site
from the Amazon.com Site in a professional and courteous manner which reflects
favorably upon ACI and its Affiliates and the Amazon.com Site and will in any
event ensure that (a) the drugstore.com Site is at all times at least generally
comparable in quality, ease of use and performance to the Amazon.com Site; and
(b) the customer service provided to users of the drugstore.com Site is of no
lesser quality, timeliness and responsiveness than that provided to users of the
Amazon.com Site, so long as ACI or Amazon.com has delivered all relevant
customer and order information in a timely and reliable manner.
2.7 Referral Information. drugstore.com will not disclose any personally
identifying information regarding users of the Amazon.com Site to any third
party, or use or permit any third party to use such information to target
communications specifically to users of the Amazon.com Site without ACI's prior
written consent, provided, however, that nothing in the foregoing shall prohibit
drugstore.com from contacting its own customers generally, so long as such
contacts are not specifically and intentionally directed at customers who have
linked to the drugstore.com Site from the Amazon.com Site.
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Section 3. Promotional Activities
3.1 Press Releases. Both Parties will issue mutually agreeable press
releases describing the nature of their relationship upon or shortly after (a)
the execution of this Agreement, disclosing that drugstore.com shall be the
exclusive provider of Drugstore Products and Beauty Products on the Amazon.com
Site, the Term, the Annual Fees and the purchase of drugstore.com common stock
by Amazon.com pursuant to the Purchase Agreement, and (b) the Launch Date.
Neither Party will issue any other press releases, make any other disclosures
regarding this Agreement or its terms or the relationship between the parties
except that either Party may speak in public regarding disclosures set forth in
(a) above, or use the other party's Trademarks (except as permitted by Section
6), without the other party's prior written consent, except that a Party may,
without the other Party's prior consent, distribute or issue public relations
materials or press releases that contain a description of the relationship of
the Parties, provided that such description has been approved in advance by the
Parties. Disclosure of this Agreement of the transactions contemplated herein
required by applicable law or the transactions contemplated herein shall be
governed solely by Section 11.2.
3.2 Advertising.
3.2.1 Amazon Customer Base. During the Term, ACI will exert reasonable
commercial efforts to introduce the Amazon.com Health and Beauty Section to the
Amazon.com customer base. For each Year of the Term, ACI will deliver
advertising materials for the Amazon.com Health and Beauty Section to the
Amazon.com customer base via electronic mail and product shipments to Amazon.com
customers as the Parties shall mutually agree.
ACI shall make commercially reasonable efforts to deliver these electronic
mail and product shipments ratably over each year, unless otherwise agreed to by
drugstore.com. Each such advertisement shall include a promotional offer, the
specific nature of which shall be agreed upon by the Parties, but the final
determination of which shall rest with drugstore.com so long as the promotion
shall be deemed reasonably attractive to an Amazon.com customer. During Phase
One, such electronic mail and product shipments shall contain no promotions
other than for drugstore.com unless otherwise directed by drugstore.com. During
Phase Two, such electronic mail shall contain no promotions other than for the
Amazon.com Health and Beauty Section; provided that the drugstore.com brand
shall be at least as prominent as any Amazon.com brand included in all such
promotions. During Phase Two, if the parties determine that the conversion
rates for product shipment promotions containing Amazon.com Health and Beauty
Section promotions are materially lower than conversion rates for product
shipment promotions containing drugstore.com promotions, the parties agree to
mutually determine whether all remaining product shipment promotions contain no
promotions other than for drugstore.com. drugstore.com shall design, produce,
and pay for all materials to be included in such emails and product shipments,
provided such design is subject to the reasonable prior approval of ACI. If
drugstore.com and ACI agree that ACI shall handle design or production,
drugstore.com shall reimburse ACI for its reasonable costs; provided that
Amazon.com shall not charge drugstore.com for any internal costs associated with
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segregating and delivering such emails or product shipments. ACI will invoice
drugstore.com on a monthly basis for the costs incurred by ACI, and
drugstore.com will pay ACI the invoiced sums within thirty (30) days after
receipt of the applicable invoice.
3.2.2 Other Continuing Marketing Efforts. ACI will make commercially
reasonable efforts to include the Amazon.com Health and Beauty Section in
placements on the Amazon.com Site consistent including in terms of visibility of
and persistence, with placements of the other top five most prominent Amazon.com
Product Sections to the extent technically feasible, including cross-sell
prompts, reminders on order confirmation and checkout pages, daily specials on
the Amazon.com Home Page and other pages on the Amazon.com Site, placements on
search results pages and other programmatic techniques used by Amazon.com to
promote Amazon.com Product Stores. In addition, if and when ACI produces
catalogs for multiple Amazon.com Product Sections, ACI will advertise the
Amazon.com Health and Beauty Section through such catalogs in a manner generally
consistent with the promotion of other Amazon.com Product Sections through such
catalogs.
3.2.3 Advertising Budget. For each Year during the Term, ACI will commit
to an incremental funds budget of one million dollars ($1,000,000) that is
incremental to Amazon.com's other marketing efforts for general advertising
through traditional media outlets specifically promoting the Amazon.com Health
and Beauty Section. Such funds will be used to cover actual payments to third
parties for the advertising placements and production costs. ACI will determine
the nature, timing and content of which shall be determined by ACI in its sole
discretion, subject to the reasonable prior review and approval of
drugstore.com, which will not be unreasonably withheld.
3.2.4 Competitive Advertising. Neither Amazon.com nor ACI shall post or
serve, or permit to be posted or served, on any page of the Amazon.com Site
(excluding any mechanisms, areas or services on or through which independent
third parties may sell products or services through the Amazon.com Site
(including, without limitation, the existing "Auctions", "zShops",
"Sothebys.amazon.com" and "Amazon.com Advantage" areas and services of the
Amazon.com Site, and any successors or replacements thereto), any advertising
banner, promotional button, promotion link or other advertising or promotional
placement or materials related to any competitor of drugstore.com.
drugstore.com will not post, or permit to be posted or served, on any page of
the drugstore.com Site displayed to any user who links to the drugstore.com Site
from the Amazon.com Health and Beauty Section, any advertising banner,
promotional button, promotion link or other advertising or promotional placement
or materials related to any competitor of Amazon.com, ACI or their Affiliates.
3.2.5 Other Advertising. Neither ACI nor Amazon.com shall place any
third party advertising on the Transition Pages or within the Amazon.com Health
and Beauty Section without drugstore.com's prior consent.
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Section 4. Implementation
4.1 Account Managers. Each Party will assign an account manager (which
manager shall be subject to change from time to time by the assigning Party upon
written notice to the other Party) to oversee the performance of such Party's
obligations under this Agreement and to facilitate coordination of the Parties'
performance of their respective obligations (including, without limitation, the
creation and maintenance of the Transition Pages, the integration of the
Amazon.com Site Functionality with the drugstore.com Site, and the advertising
activities contemplated in Section 3). The account managers will meet at least
once every three (3) months during the Term to review the implementation of this
Agreement and to explore methods for improving performance.
4.2 Cooperation. During the Term, the Parties will cooperate in good
faith and use commercially reasonable efforts to (a) provide a positive customer
experience between the Amazon.com Health and Beauty Section and the
drugstore.com Site, (b) maximize conversion rates and sales from or through the
Amazon.com Health and Beauty Section, and (c) review opportunities for cross-
marketing each Party's products.
4.3 Dedicated Personnel. Each Party will dedicate during the Term the
appropriate resources and personnel to produce and promote the Amazon.com Health
and Beauty Section. Each Party's designated employees will be subject to change
from time to time by such Party in its sole discretion upon notice to the other
Party.
4.4 Traffic Data. Throughout the Term as is reasonably available, on a
monthly basis, each Party will provide the other Party all relevant data
requested from time to time by the such Party concerning behavior on the
drugstore.com Site and the Amazon.com Health and Beauty Section, as the case may
be. The Parties will hold such data in confidence and will not use it except in
connection with their marketing efforts, or otherwise in accordance with such
reasonable guidelines as the Parties may agree upon. Notwithstanding anything
contained in this Section 4.4, neither Party will be required to deliver to the
other Party any user data in violation of its then-existing, generally
applicable policies regarding the protection of user information with respect to
the drugstore.com Site or the Amazon.com Site or in contravention of any
applicable law or regulation.
4.5 Dispute Resolution. In all discussions and activities relating to
this Agreement, ACI and drugstore.com will cooperate in good faith to accomplish
the objectives specified in this Agreement. If any dispute arises relating to
either Parties' rights or obligations under this Agreement, and the Parties are
unable to resolve the dispute in the ordinary course of business, ACI and
drugstore.com will use good-faith efforts to resolve the matter in accordance
with this Section 4.5. Within three (3) days following the written request of
either Party (which will describe the nature of the dispute and other relevant
information), the Parties' account managers pursuant to Section 4.1 will meet to
resolve the dispute at a mutually convenient time and place. If the account
managers are unable to resolve the dispute within two (2) days following their
initial meeting, they will refer the matter to the Parties' divisional
executives who are responsible for the administration of this Agreement, along
with a written statement (or statements) describing the nature of the
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dispute and other relevant information. Within three (3) days following the
referral of the matter to the Parties' divisional executives, the divisional
executives will meet to resolve the dispute at a mutually convenient time and
place. Additional representatives of the parties (but not their accounting
managers) may be present at the meeting. If the divisional executives are unable
to resolve the dispute within two (2) days following their initial meeting, they
will refer the matter to the Parties' General Counsels, along with a written
statement (or statements) describing the nature of the dispute and other
relevant information. Within three (3) days following the referral of the matter
to the Parties' General Counsels, the General Counsels will meet to resolve the
dispute at a mutually convenient time and place. Additional representatives of
the parties (but not their account managers or divisional executives) may be
present at the meeting. If the General Counsels are unable to resolve the
dispute, either Party shall be free to pursue any remedy it shall have at law or
in equity. Any resolution reached under this Section 4.5 will be reduced to
writing and signed by the Parties. During any dispute resolution procedure
conducted under this Section 4.5, the Parties will diligently perform all
obligations hereunder that are not directly related to the dispute.
Section 5. Compensation
5.1 General. Except as expressly provided for elsewhere in this
Agreement, each Party will be responsible for all costs and expenses incurred by
such Party in performing its obligations under this Agreement.
5.2 Setup Fee. Upon the Closing, drugstore.com shall pay to ACI a non-
refundable set-up fee in the amount of three million dollars ($3,000,000),
representing compensation for engineering work performed.
5.3 Annual Fees. During the Term, drugstore.com will pay ACI annual fees
in the amounts set forth below ("Annual Fees"):
Year 1: $27,000,000.00
Year 2: $35,000,000.00
Year 3: $40,000,000.00
Subject to Section 10.5.2, drugstore.com will pay each of the Annual Fees
set forth above in four (4) equal installments due at the end of each
consecutive three month period of the Term following the Launch Date ("Quarterly
Payments").
5.4 Prepayment. At the Closing, drugstore.com will pay to ACI
$27,000,000.00 via wire transfer, which payment will represent prepayment of the
first four Quarterly Payments due under Section 5.3, such that after such
prepayment drugstore.com shall have no obligation to make Quarterly Payments
until the fifth Quarterly Payment becomes due at the end of the fifth quarter of
the Term following the Launch Date.
5.5 Year 3 Equity Option. The parties acknowledge that, at the sole
discretion of ACI, but with drugstore.com's approval, drugstore.com shall issue
at the second anniversary of the Launch to Amazon.com shares of common stock of
drugstore.com with a
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then-current fair market value equal to the Annual Fee owed for Year 3 in lieu
of such Annual Fee.
5.6 Overdue Payments. Payments called for by this Section 5 that are not
received within fifteen (15) days of receipt of an invoice after the end of the
period for which payment is due will bear interest at a rate equal to the lesser
of one and one-half percent (1-1/2%) per month or the maximum legal rate
permitted under the controlling law. Payment of such interest shall not cure or
excuse any breach of any underlying payment obligation.
5.7 Allocation of Payments. The parties acknowledge and agree that the
Annual Fees shall be allocated as consideration for advertising services and
intangible rights granted by ACI to drugstore.com hereunder, including the
proprietary rights granted to drugstore.com under Section 6, as set forth on
Exhibit C.
Section 6. Proprietary Rights
6.1 Ownership.
6.1.1 ACI. As between the Parties, ACI reserves all right, title and
interest in and to the "ACI-Furnished Items," as defined below, the "ACI-Owned
Developments," as defined below and the Amazon.com Site, along with all
Intellectual Property Rights associated with any of the foregoing and no title
to or ownership of any of the foregoing is transferred or, except as expressly
set forth in Section 6.2, licensed to drugstore.com or any other person or
entity. drugstore.com hereby assigns to ACI all right, title and interest that
it may have or acquire in and to such items and all associated Intellectual
Property Rights, and drugstore.com shall take, at ACI's expense, any actions
(including, without limitation, execution and delivery of affidavits and other
documents) reasonably requested by ACI to effect, perfect or confirm ACI's or
its designee's right, title and interest therein. As used herein, ACI-Furnished
Item" means any Technology or Trademark of ACI, Amazon.com or their Affiliates,
as the case may be, that (a) is owned or controlled (e.g., by license or
otherwise) by ACI, Amazon.com or their Affiliates, as the case may be, (b) is
furnished by ACI for use in connection with the activities contemplated by this
Agreement, and (c) was developed or in existence prior to the date of this
Agreement or is at any time developed by or for ACI, Amazon.com or their
Affiliates independent of the activities contemplated by this Agreement. The
ACI-Furnished Items include, without limitation, the Amazon.com Site
Functionality. As used herein, "ACI-Owned Development" means any Technology
(including, without limitation, any adaptation, modification, improvement or
derivative work of any ACI-Furnished Item or any drugstore.com-Furnished Item)
that is developed (as permitted by this Agreement) by either Party or jointly by
the Parties specifically for use solely on the Amazon.com Site or in the
Amazon.com Heath and Beauty Section in connection with the activities
contemplated by this Agreement; provided, however, that the ACI-Owned
Developments do not include, without limitation, any drugstore.com-Furnished
Items, as defined below. The ACI-Owned Developments will also include, without
limitation, all adaptations, modifications, improvements or derivative works of
the Amazon.com Site Functionality that are developed (as permitted by this
Agreement) by either Party or jointly by the Parties unless such item is so
developed specifically to link or
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communicate between the Amazon.com Site and the drugstore.com Site. At the
termination of the Agreement, drugstore.com will return all ACI-Furnished Items
to ACI and drugstore.com shall have no further rights thereto.
6.1.2 drugstore.com. As between the Parties, drugstore.com reserves
all right, title and interest in and to the "drugstore.com-Furnished Items," as
defined below, the "drugstore.com-Owned Developments," as defined below, and the
drugstore.com Site., along with all Intellectual Property Rights associated with
any of the foregoing and no title to or ownership of any of the foregoing is
transferred or, except as expressly set forth in Section 6.3, licensed to ACI or
any other person or entity. ACI hereby assigns and agrees to assign to
drugstore.com all right, title and interest to such items and all associated
Intellectual Property Rights, and ACI shall take, at drugstore.com's expense,
any actions (including, without limitation, execution and delivery of affidavits
and other documents) reasonably requested by drugstore.com to effect, perfect or
confirm drugstore.com's or its designee's right, title and interest therein. As
used herein, "drugstore.com-Furnished Item" means any Technology or Trademark of
drugstore.com that (a) is owned or controlled (e.g., by license or otherwise) by
drugstore.com or its Affiliates, as the case may be, (b) is furnished by
drugstore.com for use in connection with the activities contemplated by this
Agreement, and (c) was developed or in existence prior to the date of this
Agreement or is at any time developed by or for drugstore.com independent of the
activities contemplated by this Agreement. "drugstore.com-Owned Development"
means any Technology (including, without limitation, any adaptation,
modification, improvement or derivative work of any ACI-Furnished Item or any
drugstore.com-Furnished Item) that is developed (as permitted by this Agreement)
by either Party or jointly by the Parties specifically for use solely on the
drugstore.com Site in connection with the activities contemplated by this
Agreement; provided, however, that the drugstore.com-Owned Developments will not
include, without limitation, any ACI-Furnished Item or any adaptation,
modification, improvement or derivative work of the Amazon.com Site
Functionality that is developed by either Party or jointly by the Parties. At
the termination of the Agreement, ACI shall return all drugstore.com-Furnished
Items to drugstore.com and ACI shall have no further rights thereto.
6.1.3 Joint. ACI and drugstore.com shall each have an equal and
undivided ownership interest in and to the Joint Developments, as defined below,
and all associated Intellectual Property Rights, with no duty on the part of
either Party to account to the other Party with respect to its use and
exploitation of the same. Without limiting the generality of the foregoing,
either Party may: (a) make, manufacture, assemble, produce, market, sell,
distribute, transfer, use, license and otherwise commercially and non-
commercially exploit and deal with the Joint Developments; provided, that
neither party shall seek or obtain any registration of any Intellectual Property
Rights associated with the Joint Developments without the other Party's prior
written consent, (b) make, manufacture, assemble, produce, market, sell,
distribute, transfer, use, license, seek and obtain registrations of
Intellectual Property Rights (subject to paragraph (a) above) and otherwise
commercially and non-commercially exploit and deal with any derivative works of
the Joint Developments independently created by or for such Party, whether or
not competitive with any items created by or for the other party; and (c)
authorize any third party to take any action described in (a) or (b) above.
Each Party shall take, at the other Party's expense, any actions (including,
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without limitation, execution and delivery of affidavits and other documents)
reasonably requested by the other Party to effect, perfect or confirm the other
Party's or its designee's right, title and interest any Joint Developments. As
used herein, "Joint Development" means any Technology that is developed (as
permitted by this Agreement) by either Party or jointly by the Parties
specifically (a) to link or communicate between the Amazon.com Site and the
drugstore.com Site or (b) for use on both the Amazon.com Site and the
drugstore.com Site in connection with the activities contemplated by this
Agreement; provided, however, that the Joint Developments will not include,
without limitation, any ACI-Furnished Items, any drugstore.com Furnished Items
or any adaptation, modification, improvement or derivative work of the
Amazon.com Site Functionality or of the drugstore.com Site Functionality that is
developed (as permitted by this Agreement) by either Party or jointly by the
Parties unless such item is so developed specifically to link or communicate
between the Amazon.com Site and the drugstore.com Site.
6.2 ACI License. ACI hereby grants to drugstore.com, during the Term, a
non-exclusive, non-transferable license to use the ACI-Furnished Items and ACI-
Owned Developments supplied by ACI as is reasonably necessary to perform its
obligations under this Agreement; provided, however, that drugstore.com shall
not use Trademarks of ACI, Amazon.com or their Affiliates, including in any
advertising, without ACI's prior written consent, unless such use conforms to a
written Trademark use policy previously furnished by ACI to drugstore.com. All
goodwill arising out of any use of any of ACI's, Amazon.com's or their
Affiliate's Trademarks by, through or under drugstore.com will inure solely to
the benefit of ACI, Amazon.com or such Affiliate, as the case may be.
6.3 drugstore.com License. drugstore.com hereby grants to ACI, during the
Term, a non-exclusive, non-transferable license to use the drugstore.com-
Furnished Items and drugstore.com Owned-Developments as is reasonably necessary
to perform its obligations under this Agreement; provided, however, that ACI
shall not use drugstore.com's Trademarks, including in any advertising, without
the drugstore.com's prior written consent, unless such use conforms to a written
trademark use policy previously furnished by drugstore.com to ACI. All goodwill
arising out of any use of any of drugstore.com's marks by, through or under ACI
will inure solely to the benefit of drugstore.com.
6.4 Non-Disparagement. Neither drugstore.com nor ACI or Amazon.com will
use the other Party's Trademarks in a manner that disparages the other Party or
its products or services, or portrays the other Party or its products or
services in a false, competitively adverse or poor light. Each of drugstore.com
and ACI and Amazon.com will comply with the other Party's requests as to the use
of the other Party's Trademarks and will avoid knowingly taking any action that
diminishes the value of such marks.
Section 7. Representations; Indemnification
7.1 Representations. Each party represents and warrants to the other
that: (a) it has the full corporate right, power and authority to enter into
this Agreement and perform its obligations hereunder; (b) its performance of
this Agreement, and the other party's exercise of such other party's rights
under this Agreement, will not conflict with or result in a breach
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or violation of any of the terms or provisions or constitute a default under any
agreement by which it is bound; (c) when executed and delivered, this Agreement
will constitute its legal, valid and binding obligation enforceable against it
in accordance with its terms; and (d) it will comply with all applicable laws,
regulations and orders of any governmental authority of competent jurisdiction
in its performance of this Agreement.
7.2 Indemnity. ACI and drugstore.com (as applicable, the "Indemnifying
Party") will each defend, indemnify and hold harmless the other Party (the
"Indemnified Party") and its Affiliates (and their respective employees,
directors and representatives) from and against any and all claims, costs,
losses, damages, judgments and expenses (including reasonable attorneys' fees)
arising out of any third party claim or action, to the extent it is based on (a)
the operation or content of the Indemnifying Party's Site (other than any items
or materials supplied by the Indemnified Party), (b) any actual or alleged
breach of the Indemnifying Party's representations or warranties set forth in
Section 7.1 above, or (c) any actual or alleged infringement of any Intellectual
Property Rights by any materials provided by the Indemnifying Party to the
Indemnified Party for its use under this Agreement. Subject to Section 7.3, the
Indemnifying Party will pay any award against the Indemnified Party and its
Affiliates (and their respective employees, directors or representatives) and
any costs and attorneys' fees reasonably incurred by them resulting from any
such claim or action. drugstore.com will defend, indemnify and hold harmless
the ACI and its Affiliates (and their respective employees, directors and
representatives) from and against any and all claims, costs, losses, damages,
judgments and expenses (including reasonable attorneys' fees) arising out of any
third party claim or action based on the offer, marketing (unless directed by
ACI or Amazon.com and drugstore.com has notified ACI that drugstore.com objects
to such marketing) or sale of any products or services on the Amazon.com Health
and Beauty Site. ACI will defend, indemnify and hold harmless drugstore.com and
its Affiliates (and their respective employees, directors and representatives)
from and against any and all claims, costs, losses, damages, judgments and
expenses (including reasonable attorneys' fees) arising out of any third party
claim or action based on the offer, marketing or sale of any products or
services on the Amazon.com Product Sections other than the Amazon.com Health and
Beauty Section.
7.3 Procedure. In connection with any claim or action described in this
Section 7, the Indemnified Party will (a) give the Indemnifying Party prompt
written notice of the claim, (b) cooperate with the Indemnifying Party (at the
Indemnifying Party's expense) in connection with the defense and settlement of
the claim, and (c) permit the Indemnifying Party to control the defense and
settlement of the claim, provided that the Indemnifying Party may not settle the
claim without the Indemnified Party's prior written consent (which will not be
unreasonably withheld). Further, the Indemnified Party (at its cost) may
participate in the defense and settlement of the claim with counsel of its own
choosing. If the Indemnifying Party chooses not to defend the claim, the
Indemnifying Party may control the defense and settlement of the claim.
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Section 8. Disclaimers, Limitations and Reservations
8.1 DISCLAIMER OF WARRANTIES. EXCEPT AS PROVIDED IN SECTION 7.1 ABOVE,
NEITHER PARTY MAKES, AND EACH PARTY HEREBY WAIVES AND DISCLAIMS, ANY
REPRESENTATIONS OR WARRANTIES REGARDING THIS AGREEMENT OR THE TRANSACTIONS
CONTEMPLATED HEREBY, INCLUDING (WITHOUT LIMITATION) ANY IMPLIED WARRANTIES OF
MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR NON-INFRINGEMENT OR IMPLIED
WARRANTIES ARISING OUT OF COURSE OF DEALING, COURSE OF PERFORMANCE OR USAGE OF
TRADE. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, EACH PARTY
SPECIFICALLY DISCLAIMS ANY REPRESENTATION OR WARRANTY REGARDING (A) THE AMOUNT
OF SALES REVENUES THAT MAY OCCUR DURING THE TERM, AND (B) ANY ECONOMIC OR OTHER
BENEFIT THAT THE MIGHT OBTAIN THROUGH ITS PARTICIPATION IN THIS AGREEMENT (OTHER
THAN THE SPECIFIC SUMS TO BE PAID PURSUANT TO THIS AGREEMENT).
8.2 No Consequential Damages. EXCEPT TO THE EXTENT AWARDED TO A THIRD
PARTY IN A JUDGMENT AGAINST WHICH A PARTY IS ENTITLED TO INDEMNIFICATION
PURSUANT TO SECTION 7, OR TO THE EXTENT ARISING OUT OF ANY BREACH OF SECTION
11.2, NEITHER PARTY WILL BE LIABLE (WHETHER IN CONTRACT, WARRANTY, TORT
(INCLUDING, BUT NOT LIMITED TO, NEGLIGENCE), PRODUCT LIABILITY OR OTHER THEORY),
TO THE OTHER PARTY OR ANY OTHER PERSON OR ENTITY FOR COST OF COVER OR FOR ANY
INDIRECT, INCIDENTAL, SPECIAL OR CONSEQUENTIAL DAMAGES (INCLUDING WITHOUT
LIMITATION DAMAGES FOR LOSS OF PROFIT, BUSINESS OR DATA) ARISING OUT OF THIS
AGREEMENT.
8.3 Responsibility for Web Sites. Subject to the express terms of this
Agreement, each Party will remain solely responsible for, and retains sole
control over, the programming, content and conduct of transactions on its Site.
In the event that either Party receives from a third party a bona fide claim of
infringement with a reasonable basis concerning any advertising materials or
other content supplied by the other Party, such Party may remove such materials
or content supplied by the other party from its Web Site at its sole discretion,
pending receipt of a non-infringing replacement materials or content or
satisfactory resolution of such claim, and any such removal shall not constitute
a breach of this Agreement, provided that such Party first notified the other
Party of such claim, made commercial reasonable efforts to discuss such claim
with the other Party, and the Parties did not resolve whether materials or
content should be removed within five days of such notice.
Section 9. Exclusivity.
9.1 Amazon.com Site.
9.1.1 ACI and Amazon.com New Product Sections. During the Term,
neither ACI nor Amazon.com will create or maintain a new Amazon.com Product
Section
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that offers, markets and sells Drugstore Products or Beauty Products, provided,
however that ACI or Amazon.com may offer Drugstore Products and Beauty Products,
excluding with respect to any party other than Amazon.com, prescription
products, in existing or new ACI Product Sections as long as the annual gross
revenue derived from such products does not exceed 15% of the combined annual
gross revenue derived from sales of all products and services offered by the ACI
Product Sections offering such products (excluding the Amazon.com Health and
Beauty Section).
9.2 Amazon.com Health and Beauty Section.
9.2.1 Non-Drugstore Products and Non-Beauty Products. drugstore.com
will not offer for sale from or through the Amazon.com Health and Beauty Section
any products or services that do not constitute a Drugstore Product or a Beauty
Product; provided, however, that drugstore.com may sell such products and
services from or through the Amazon.com Health and Beauty Section so long as the
annual gross revenue derived from the sales of such products and services do not
exceed fifteen percent (15%) of the annual gross revenue derived from the sale
of all products and services offered from or through the Amazon.com Health and
Beauty Section.
9.2.2 Permitted Sales. The Parties may agree from time to time in
writing to offer products or services through the Amazon.com Health and Beauty
Section that do not constitute a Drugstore Product or a Beauty Product,
including cross-promotions of products sold in other Amazon.com Product
Sections, in which case sales of such mutually agreeable products and services
will not be subject to the limitations of Section 9.2.1.
9.3 drugstore.com Site. drugstore.com may not offer for sale from or
through the drugstore.com Site any product or service that does not constitute a
Drugstore Product or a Beauty Product; provided, however, that drugstore.com may
offer such products or services so long as annual gross revenues from sale of
such products and services does not exceed fifteen percent (15%) of the annual
gross revenues derived from sales of all products and services offered from or
through the drugstore.com Site.
9.4 Records; Audit. Each Party will, during the Term and for a period of
one (1) year thereafter, maintain complete and accurate books and records
sufficient to verify its compliance or non-compliance with the provisions of
this Section 9. Each Party (the "Audited Party") will, upon at least thirty
(30) days' prior written request by the other Party (the "Auditing Party"),
allow an independent certified public accounting firm selected by the Auditing
Party and reasonably acceptable to the Audited Party to audit such books and
records at the Audited Party's premises to the extent necessary to verify the
Audited Party's compliance or non-compliance with the provisions of this Section
9; provided, that: (a) any such audit is conducted during normal business hours
and in a manner designed to not unreasonably interfere with the Audited Party's
ordinary business operations; (b) audits may not occur more frequently than once
every twelve (12) months; and (c) each such audit may only cover the period
commencing after the period covered by the last audit conducted pursuant to this
Section, if any. The Auditing Party agrees that any information learned or
disclosed by its auditor in connection with such audit is Confidential
Information of the
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Audited Party. If any such audit reveals any material non-compliance with the
provisions of this Section 9 by the Audited Party, the Audited Party shall,
within ten (10) days of its receipt of an invoice therefor, reimburse the
Auditing Party for all reasonable out-of-pocket fees and expenses incurred by
the Auditing Party in connection with the applicable audit.
Section 10. Term and Termination
10.1 Term. The Term of this Agreement will commence on the date of the
Closing, and unless earlier terminated as provided elsewhere in this Agreement,
will end automatically upon the three (3) year anniversary of the Launch Date.
10.2 Termination for Breach. Without limiting any other rights or
remedies (including, without limitation, any right to seek damages and other
monetary relief and ACI's rights under Section 10.3) that either Party may have
in law or otherwise, either Party may terminate this Agreement if the other
Party materially breaches its obligations hereunder, provided that (a) the non-
breaching Party sends written notice to the breaching Party describing the
breach, and (b) the breaching Party does not cure the breach within thirty (30)
days following its receipt of such notice.
10.3 ACI Termination. In the event that: (a) drugstore.com at any time
engages in any criminal conduct, fraud or other behavior that ACI reasonably
determines is harming or is likely to materially harm the goodwill or reputation
of ACI, Amazon.com or the Amazon.com Site; (b) drugstore.com has consistently
failed to abide by ACI's reasonable requests with respect to the establishment
of technical and customer service requirements or with respect to the
implementation of Phase Two in accordance with the terms of this Agreement and
ACI reasonably determines such failure is causing material harm to Amazon.com
and its customers; or (d) drugstore.com becomes insolvent, admits in writing its
inability to pay debts as they mature, institutes or has instituted against it
any bankruptcy, reorganization, debt arrangement, assignment for the benefit of
creditors, or other proceeding under any bankruptcy or insolvency law or
dissolution, receivership, or liquidation proceeding (and, if such proceeding is
instituted against it, such proceeding is not dismissed within sixty (60) days),
the same shall be deemed a material breach of this Agreement pursuant to Section
10.2, but which is not susceptible to cure, and ACI shall be entitled to
terminate this Agreement upon written notice to drugstore.com.
10.4 drugstore.com Termination. In the event that: (a) ACI or Amazon.com
at any time engages in any criminal conduct, fraud or other behavior that
drugstore.com reasonably determines is harming or is likely to materially harm
the goodwill or reputation of drugstore.com or the drugstore.com Site; (b)
Amazon.com or ACI has consistently failed to abide by drugstore's reasonable
requests with respect to the establishment of the same technical and customer
service requirements Amazon.com requires of drugstore.com or with respect to the
implementation of Phase Two in accordance with the terms of this Agreement and
drugstore.com reasonable determines that such failure is causing material harm
to drugstore.com and its customers, or (c) Amazon.com becomes insolvent, admits
in writing its inability to pay debts as they mature, institutes or has
instituted against it any bankruptcy, reorganization, debt arrangement,
assignment for the benefit of creditors, or other proceeding
-17-
<PAGE>
under any bankruptcy or insolvency law or dissolution, receivership, or
liquidation proceeding (and, if such proceeding is instituted against it, such
proceeding is not dismissed within sixty (60) days), the same shall be deemed a
material breach of this Agreement pursuant to Section 10.2, but which is not
susceptible to cure, and drugstore.com shall be entitled to terminate this
Agreement upon written notice to ACI.
10.5 Effect of Termination.
10.5.1 General. Upon termination of this Agreement, each Party in
receipt, possession or control of the other Party's intellectual or proprietary
property, information and materials (including any Confidential Information)
pursuant to this Agreement must return to the other Party (or at the other
Party's written request, destroy) such property, information and materials.
Except as provided in Section 10.5.2, drugstore.com will promptly upon any
termination of this Agreement pay to ACI a prorated portion of the Quarterly
Payment due for the quarter in which termination is effective. Sections 5
through 8, 10 and 11 (together with all other provisions that reasonably may be
interpreted as surviving termination or expiration of this Agreement) will
survive the termination or expiration of this Agreement.
10.5.2 Liquidated Damages for Breach. Upon termination by ACI for
drugstore.com's breach pursuant to Section 10.2, drugstore.com will immediately
pay ACI, as liquidated damages, and not as a penalty, such amount as mutually
agreed by the Parties. Upon termination by drugstore.com for ACI's breach
pursuant to Section 10.2, ACI will immediately pay, as liquidated damages, and
not as a penalty, such amount as mutually agreed by the Parties. THE PARTIES
ACKNOWLEDGE THAT ACTUAL DAMAGES IN THE EVENT OF ANY MATERIAL BREACH OF THIS
AGREEMENT BY A PARTY WOULD BE EXTREMELY DIFFICULT OR IMPRACTICABLE TO DETERMINE;
THEREFORE, THE PARTIES ACKNOWLEDGE THAT THE LIQUIDATED DAMAGES SPECIFIED IN THIS
SECTION 10.5.2 HAVE BEEN AGREED UPON, AFTER NEGOTIATION, AS (A) THE PARTIES'
REASONABLE ESTIMATE OF JUST COMPENSATION FOR THE DAMAGES THE NON-BREACHING PARTY
WOULD SUFFER AND INCUR BY REASON OF ANY SUCH BREACHES AND (B) TOGETHER WITH
TERMINATION OF THIS AGREEMENT, A PARTY'S EXCLUSIVE REMEDY AGAINST THE PARTY
BREACHING THIS AGREEMENT. EACH PARTY HEREBY IRREVOCABLY WAIVES ALL RIGHTS OR
BENEFITS OF ANY LAW, RULE OR REGULATION, NOW OR HEREAFTER EXISTING, THAT WOULD,
IN THE EVENT OF SUCH PARTY'S MATERIAL BREACH OF THIS AGREEMENT (1) ALLOW SUCH
PARTY TO CLAIM THAT THE LIQUIDATED DAMAGES SPECIFIED IN THIS SECTION 10.5.2 ARE
UNREASONABLE IN AMOUNT OR CONSTITUTE A PENALTY OR (2) REQUIRE ACI TO PROVE
ACTUAL LOSS IN ORDER TO COLLECT THE FULL AMOUNT OF LIQUIDATED DAMAGES.
10.5.3 Construction by Court. To the extent that any court of
competent jurisdiction determines that any provision of this Section 10.5.2 is
for any reason unlawful, invalid, in violation of public policy or otherwise
enforceable in whole or in part, such provision shall be narrowed in scope to
the extent necessary to make the same lawful, valid
-18-
<PAGE>
and enforceable while as nearly as possible reflecting the intent of the parties
as expressed in this Agreement.
Section 11. Miscellaneous
11.1 Independent Contractors. The Parties are entering this Agreement as
independent contractors, and this Agreement will not be construed to create a
partnership, joint venture or employment relationship between them. Neither
Party will represent itself to be an employee or agent of the other or enter
into any agreement or legally binding commitment or statement on the other's
behalf of or in the other's name.
11.2 Nondisclosure. Each Party will protect the Confidential Information
of the other Party from misappropriation and unauthorized use or disclosure, and
at a minimum, will take precautions at least as great as those taken to protect
its own confidential information of a similar nature. Without limiting the
foregoing, the Receiving Party will: (a) use such Confidential Information
solely for the purposes for which it has been disclosed; and (b) disclose such
Confidential Information only to those of its employees, agents, consultants,
and others who have a need to know the same for the purpose of performing this
Agreement and who are informed of and agree to a duty of nondisclosure. The
Receiving Party may also disclose Confidential Information of the Disclosing
Party to the extent necessary to comply with applicable law or legal process,
provided that the Receiving Party uses reasonable efforts to give the Disclosing
Party prompt advance notice thereof. Upon request of the other Party, or in any
event upon any termination or expiration of the Term, each Party shall return to
the other all materials, in any medium, which contain, embody, reflect or
reference all or any part of any Confidential Information of the other Party.
Neither Party shall issue any press release or other public announcement
regarding, or otherwise disclose, this Agreement or the transactions
contemplated herein, or make any filing of this Agreement or other agreements
relating to the transactions contemplated herein, without the consent of the
other; provided, however, that if a party is required by applicable law to
provide public disclosure of this Agreement or the transactions contemplated
herein, such party shall use all reasonable efforts to coordinate the disclosure
with the other party before issuance, including, but not limited to the
submission to the Securities and Commission (and any other applicable regulatory
or judicial authority) of an application for confidential treatment of certain
terms (which terms shall be agreed upon by the Parties) of this Agreement. Each
party shall provide to the other for review a copy of any proposed disclosure of
this Agreement or its terms and any application for confidential treatment prior
to any such disclosure or application is made and the parties shall work
together to mutually approve such disclosure or application.
11.3 Compliance with Laws. In its performance of this Agreement, each
Party will comply with all applicable laws, regulations, orders and other
requirements, now or hereafter in effect, of governmental authorities having
jurisdiction. Except as expressly provided herein, each Party will be
responsible for all costs and expenses incurred by it in connection with the
negotiation, execution and performance of this Agreement.
-19-
<PAGE>
11.4 Tax Treatment.
11.4.1 The Parties acknowledge and agree that this Agreement and the
transactions contemplated hereby are not intended to create any jurisdiction or
authority for any governmental authority to impose any obligation to collect any
sales tax, use tax or similar tax in connection with any sales of products by
either Party or Amazon.com. Accordingly, both Parties, and Amazon.com, agree
to take such action as the other Party may reasonably request (including,
without limitation, execution of affidavits and other documents) to avoid or
curtail the imposition, by reason of this Agreement or the transactions
contemplated hereby, of any such obligation on a Party or Amazon.com, or the
establishment of a nexus for tax purposes sufficient to grant any jurisdiction
the authority to levy any sales tax, use tax or similar tax on sales of products
by a Party or Amazon.com.
11.4.2 Each Party will pay, collect, remit and otherwise be
responsible for such taxes as may be imposed upon such Party with respect to any
product sales, compensation, royalties or transactions under this Agreement.
11.5 Insurance. drugstore.com and Amazon.com will at their expense obtain
and maintain such policy or policies of insurance as is commercially reasonable
for the transactions and business contemplated by this Agreement. Upon request
from a Party, the other Party will furnish to certificates of insurance and such
other documentation relating to such policies reasonably requested.
11.6 Notices. Any notice or other communication under this Agreement
given by either Party to the other Party will be in writing and must be sent to
the intended recipient by registered letter, receipted commercial courier, or
electronically receipted facsimile transmission (acknowledged in like manner by
the intended recipient) at its address specified below its signature at the end
of this Agreement, and in the case of ACI, with a copy to ACI, c/o Amazon.com,
Inc., 1200 12th Avenue South, Suite 1200, Seattle, WA 98144, USA, Facsimile:
206.266.7010, Attn: General Counsel; provided, that no notice of termination of
this Agreement shall be deemed properly given unless sent by registered mail to
such address(es) and to the attention of such officer(s). Either Party may from
time to time change such address or individual by giving the other Party notice
of such change in accordance with this Section 11.4.
11.7 Assignment. drugstore.com may not assign or delegate this Agreement
or any of its rights or obligations hereunder, whether voluntarily,
involuntarily, by operation of law or otherwise, without ACI's prior written
consent not to be unreasonably withheld, except to a wholly-owned subsidiary
that agrees in writing to be bound by all the terms and conditions of this
Agreement or to a corporation resulting from a Change in Control of
drugstore.com that in ACI's reasonable judgment is not a competitor, provided,
however, that if, after consummation of such Change in Control, ACI determines
in its reasonable judgment that such corporation has become a competitor, ACI
may terminate the Agreement. ACI may assign this Agreement to (a) any
corporation resulting from any merger, consolidation, or other reorganization
involving ACI, (b) any of its Affiliates, or (c) any person or entity to which
it transfers all or substantially all of its assets; provided that the assignee
agrees in
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<PAGE>
writing to be bound by all the terms and conditions of this Agreement. Subject
to the foregoing, this Agreement will be binding on and enforceable by the
Parties and their respective successors and permitted assigns.
11.8 Nonwaiver. To be effective, any waiver by a Party of any of its
rights or the other Party's obligations under this Agreement must be made in a
writing signed by the Party to be charged with the waiver. No failure or
forbearance by either Party to insist upon or enforce performance by the other
Party of any of the provisions of this Agreement or to exercise any rights or
remedies under this Agreement or otherwise at law or in equity shall be
construed as a waiver or relinquishment to any extent of such Party's right to
assert or rely upon any such provision, right, or remedy in that or any other
instance; rather the same shall be and remain in full force and effect.
11.9 Counterparts; Transmitted Copies. This Agreement may be executed in
any number of counterparts, each of which will be deemed an original, but all of
which taken together will constitute but one and the same instrument. To
expedite the process of entering into this Agreement, the parties acknowledge
that Transmitted Copies of the Agreement shall be equivalent to original
documents until such time (if any) as original documents are completely executed
and delivered. "Transmitted Copies" shall mean copies which are reproduced or
transmitted via facsimile, or another process of complete and accurate
reproduction and transmission.
11.10 Headings. The headings of sections and subsections of this
Agreement are for convenience of reference only and are not intended to
restrict, affect or otherwise influence the interpretation or construction of
any provision of this Agreement.
11.11 Choice of Law. This Agreement will be interpreted, construed and
enforced in accordance with the laws of the State of Washington, without
reference to its choice of law rules.
11.12 Venue. Each Party hereby irrevocably consents to exclusive personal
jurisdiction and venue in the state and federal courts located in King County,
Washington, with respect to any claim arising out of or related to this
Agreement and each Party agrees not to commence or prosecute any such Claim
other than in the aforementioned courts.
11.13 Conflict with Existing Agreements. To extent a direct conflict
exists during the Term between this Agreement and the Amended and Restated
Technology License and Advertising Agreement, dated August 10, 1998, between
drugstore.com, Amazon.com and Amazon.com D, Inc. (the "Technology License
Agreement"), this Agreement shall supercede the Technology License Agreement;
provided, however, that no license granted by either party to the other in the
Technology License Agreement is superceded. To the extent a conflict exists
during the Term between this Agreement and the Marketing Agreement, between
drugstore.com and Amazon.com (the "Marketing Agreement"), this Agreement shall
supercede the Marketing Agreement. The parties hereby agree that the reference
to "a substantial and sustained marketing efforts" in the Marketing Agreement
shall be deemed met by Section 3 with respect to both Parties.
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<PAGE>
11.14 Entire Agreement. This Agreement (a) represents the entire
agreement between the Parties with respect to the subject matter hereof and
supersedes any previous or contemporaneous oral or written agreements regarding
such subject matter and (b) may be amended or modified only by a written
instrument signed by a duly authorized agent of each Party. No breach of this
Agreement by either Party shall affect the rights or obligations of either Party
under any other Agreement between the Parties; rather, the same will remain in
full force and effect.
-22-
<PAGE>
ACI drugstore.com:
- --- -------------
Amazon.com Commerce Services, Inc. drugstore.com, inc.
By:_________________________________ By:_________________________________
Title:______________________________ Title:______________________________
Date:_______________________________ Date:_______________________________
Notice Address: Notice Address:
ACI drugstore.com, inc.
c/o Amazon.com, Inc. 13920 S.E. Eastgate Way, Suite 300
1200 12th Avenue South, Suite 1200 Bellevue, WA 98005
Seattle, WA 98144 Facsimile: 425.372.3808
Facsimile: 206.266.7010
-23-
<PAGE>
Exhibit A
SITE, TECHNICAL AND CUSTOMER SERVICE STANDARDS
[To Come]
-24-
<PAGE>
EXHIBIT B
PRIVACY POLICY
-25-
<PAGE>
EXHIBIT C
ALLOCATION OF PAYMENTS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Year Advertising Services Intangible Assets
- --------------------------------------------------------------------------------
<S> <C> <C>
1 $ 900,000 $29,100,000
- --------------------------------------------------------------------------------
2 $1,050,000 $33,950,000
- --------------------------------------------------------------------------------
3 $1,200,000 $38,800,000
- --------------------------------------------------------------------------------
</TABLE>
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<PAGE>
PERFORMANCE GUARANTEE OF AMAZON.COM, INC.
----------------------------------------
Amazon.com, Inc. ("Amazon.com") hereby guarantees the full performance of all
obligations of Amazon.com Commerce Services, Inc. ("ACI") pursuant to the
Agreement, dated January 24, 2000, between ACI and drugstore.com (the
"Agreement"), and any obligations of any majority owned (directly or indirectly)
subsidiary of Amazon.com pursuant to the Agreement, and hereby agrees that all
restrictions imposed on ACI under the Agreement will apply to Amazon.com and
each majority owned (directly or indirectly) subsidiary of Amazon.com, subject
to and in accordance with the following:
(a) Amazon.com will only be a guarantor of such obligations and not a party
thereto or to the Agreement;
(b) Upon any alleged breach or default of any such obligation, Amazon.com will
be entitled to assert on its own behalf such defenses as may be asserted by ACI
or its Affiliates with respect thereto; and
(c) drugstore.com acknowledges and agrees that Amazon.com may in its discretion
satisfy its obligations under this guarantee by causing one or more of its
Affiliates to perform its obligations hereunder.
Dated: January 24, 2000
Amazon.com, Inc.
By: Mark Britto
-----------------------------------------------
Its: Vice President, Strategic Alliances
-----------------------------------------------
<PAGE>
EXHIBIT 10.37
STOCK PURCHASE LETTER AGREEMENT
This Stock Purchase Letter Agreement, dated as of January 24, 2000, sets
forth the entire agreement between drugstore.com, inc., a Delaware corporation
("drugstore.com"), and Amazon.com, Inc., a Delaware corporation ("Amazon.com"),
regarding the issuance and sale by drugstore.com of 1,066,667 shares (the
"Amazon.com Shares") of the common stock, par value $0.0001, of drugstore.com
(the "Common Stock") in a private placement transaction. Unless otherwise
defined herein, all capitalized terms shall have the meanings ascribed to them
in the Fourth Amended and Restated Investors' Rights Agreement, dated May 19,
1999, as amended (the "IRA").
A. drugstore.com hereby agrees to issue and sell to Amazon.com, and
Amazon.com, on the basis of the representations and warranties herein contained
and subject to the terms and conditions hereof, hereby agrees to purchase from
drugstore.com, the Amazon.com Shares, at a purchase price of $28.125 per share
(representing the average closing prices of the Common Stock for the five
trading days immediately preceding the date hereof).
Payment for the Amazon.com Shares shall be made by Amazon.com to an account
designated by drugstore.com by wire transfer of immediately available funds in
the amount of $30,000,009.37. Such payment will be made at 9:00 a.m. Seattle
time, on January 24, 2000 (the "Closing Time"). A certificate or certificates
representing the Amazon.com Shares shall be delivered by drugstore.com to
Amazon.com at the Closing Time or as soon as practicable thereafter.
As a condition to the closing of the transaction contemplated by this Stock
Purchase Letter Agreement, at the Closing Time, drugstore.com shall deliver to
Amazon.com a legal opinion of its counsel regarding such transaction in form and
substance reasonably satisfactory to Amazon.com.
B. drugstore.com hereby certifies that the representations and warranties
of drugstore.com attached hereto as Exhibit A are true and correct as of the
date hereof and as of the Closing Time.
C. (i) drugstore.com will use its reasonable best efforts to amend the IRA
to include the Amazon.com Shares in the definition of "Registrable Securities"
contained in Section 1.1(b) of the IRA for all purposes and subject to all
conditions of the IRA.
(ii) drugstore.com shall use its reasonable best efforts to list the
Amazon.com Shares on the Nasdaq National Market as soon as practicable after the
date hereof.
D. (i) Amazon.com hereby confirms that it is an "accredited investor" as
such term is defined in Rule 501 under the Securities Act of 1933, as amended
(the "Act"); that it has read the Private Placement Memorandum dated as of
January 23, 2000 (the "Disclosure Document") attached hereto as Exhibit B and
has had an opportunity to ask questions and obtain answers concerning the
information provided in the Disclosure Document; that the Amazon.com Shares
<PAGE>
are being acquired for investment purposes only for its own account; and that it
has no present intention of selling or otherwise distributing the shares.
Amazon.com further acknowledges that the Amazon.com Shares are "restricted
securities" under applicable federal and state securities laws and that,
pursuant to these laws, Amazon.com must hold the shares indefinitely unless they
are registered with the Securities and Exchange Commission and qualified by
state authorities, or an exemption from such registration and qualification
requirements is available.
(ii) Amazon.com agrees that the certificate or certificates representing
the Amazon.com Shares, and any certificate or certificates delivered in
substitution or exchange therefor, shall bear a legend substantially in the
following form:
"THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT
(A) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THAT ACT OR (B)
UPON RECEIPT BY DRUGSTORE.COM, INC. OF AN OPINION OF COUNSEL, IN FORM AND
SUBSTANCE SATISFACTORY TO DRUGSTORE.COM, INC., STATING THAT AN EXEMPTION
FROM SUCH REGISTRATION IS AVAILABLE."
drugstore.com shall cause such legend to be removed with respect to any
Amazon.com Shares that are transferred pursuant to an effective registration
statement under the Act or pursuant to Rule 144 under the Act.
E. This Agreement and all acts and transactions pursuant hereto and the
rights and obligations of the parties hereto shall be governed, construed and
interpreted in accordance with the laws of the State of Delaware, without giving
effect to principles of conflicts laws.
2
<PAGE>
IN WITNESS WHEREOF, the parties have executed and delivered this Stock
Purchase Letter Agreement as of the date first written above.
DRUGSTORE.COM, INC.
By
-----------------------------------
Title
--------------------------------
AMAZON.COM, INC.
By
-----------------------------------
Title
--------------------------------
3
<PAGE>
Exhibit A
Representations and Warranties of the drugstore.com
drugstore.com (the "Company") represents and warrants to Amazon.com that,
as of the date hereof:
(a) The Disclosure Document, as of its date, does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading, except that (i) the Disclosure Document contains
no disclosure of any kind regarding the transactions contemplated by this Stock
Purchase Agreement or related agreements and (ii) the Disclosure Document
contains disclosure regarding a proposed public offering (the "Offering") by the
Company and certain selling stockholders of shares of Common Stock, and there
can be no assurance that the Offering will occur as contemplated in the
Disclosure Document or at all.
(b) The Company has been duly incorporated, is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, has the corporate power and authority to own its property and to
conduct its business as described in the Disclosure Document and is duly
qualified to transact business and is in good standing in each jurisdiction in
which the conduct of its business or its ownership or leasing of property
requires such qualification, except to the extent that the failure to be so
qualified or be in good standing would not have a material adverse effect on the
Company and its subsidiaries, taken as a whole.
(c) Each subsidiary of the Company has been duly incorporated, is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has the corporate power and authority to own
its property and to conduct its business as described in the Disclosure Document
and is duly qualified to transact business and is in good standing in each
jurisdiction in which the conduct of its business or its ownership or leasing of
property requires such qualification, except to the extent that the failure to
be so qualified or be in good standing would not have a material adverse effect
on the Company and its subsidiaries, taken as a whole; all of the issued shares
of capital stock of each subsidiary of the Company have been duly and validly
authorized and issued, are fully paid and non-assessable and are owned directly
by the Company, free and clear of all liens, encumbrances, equities or claims.
No subsidiary is a "significant subsidiary" as defined in Rule 1-02 of
Regulation S-X under the Securities Act of 1933, as amended (the "Securities
Act").
(d) This Stock Purchase Agreement Letter has been duly authorized,
executed and delivered by the Company.
(e) The authorized capital stock of the Company conforms as to legal
matters to the description thereof contained in the Disclosure Document.
(f) The shares of Common Stock outstanding prior to the issuance of
the Amazon.com Shares have been duly authorized and are validly issued, fully
paid and non-assessable.
1
<PAGE>
(g) The Amazon.com Shares have been duly authorized and, when issued
and delivered in accordance with the terms of this Stock Purchase Letter
Agreement, will be validly issued, fully paid and non-assessable, and the
issuance of such shares will not be subject to any preemptive or similar rights.
(h) The execution and delivery by the Company of, and the performance
by the Company of its obligations under, this Stock Purchase Letter Agreement
will not contravene any provision of applicable law or the certificate of
incorporation or by-laws of the Company or any agreement or other instrument
binding upon the Company or any of its subsidiaries that is material to the
Company and its subsidiaries, taken as a whole, or any judgment, order or decree
of any governmental body, agency or court having jurisdiction over the Company
or any subsidiary, except where such contravention would not singly or in the
aggregate, have a material adverse effect on the Company, and no consent,
approval, authorization or order of, or qualification with, any governmental
body or agency is required for the performance by the Company of its obligations
under this Stock Purchase Letter Agreement, except such as may be required by
securities or Blue Sky laws.
(i) There has not occurred any material adverse change, or any
development involving a prospective material adverse change, in the condition,
financial or otherwise, or in the earnings, business or operations of the
Company and its subsidiaries, taken as a whole, from that set forth in the
Disclosure Document.
(j) There are no legal or governmental proceedings pending or
threatened to which the Company or any of its subsidiaries is a party or to
which any of the properties of the Company or any of its subsidiaries is subject
that are required to be described in the Disclosure Document and are not so
described or any statutes, regulations, contracts or other documents that are
required to be described in the Disclosure Document that are not described as
required.
(k) The Company is not and, after giving effect to the offering and
sale of the Amazon.com Shares and the application of the proceeds thereof, will
not be required to register as an "investment company" as such term is defined
in the Investment Company Act of 1940, as amended.
(l) The Company and its subsidiaries (i) are in compliance with any
and all applicable, federal, state and local laws and regulations relating to
the protection of human health and safety, the environment or hazardous or toxic
substances or wastes, pollutants or contaminants ("Environmental Laws"), (ii)
have received all permits, licenses or other approvals required of them under
applicable Environmental Laws to conduct their respective businesses and (iii)
are in compliance with all terms and conditions of any such permit, license or
approval, except where such noncompliance with Environmental Laws, failure to
receive required permits, licenses or other approvals or failure to comply with
the terms and conditions of such permits, licenses or approvals would not,
singly or in the aggregate, have a material adverse effect on the Company and
its subsidiaries, taken as a whole.
(m) There are no costs or liabilities associated with Environmental
Laws (including, without limitation, any capital or operating expenditures
required for clean-up,
2
<PAGE>
closure of properties or compliance with Environmental Laws or any permit,
license or approval, any related constraints on operating activities and any
potential liabilities to third parties) which would, singly or in the aggregate,
have a material adverse effect on the Company and its subsidiaries, taken as a
whole.
(n) Except as described in the Disclosure Document, there are no
contracts, agreements or understandings between the Company and any person
granting such person the right to require the Company to file a registration
statement under the Securities Act with respect to any securities of the
Company.
(o) Subsequent to the respective dates as of which information is
given in the Disclosure Document, (1) the Company and its subsidiaries have not
incurred any material liability or obligation, direct or contingent, nor entered
into any material transaction not in the ordinary course of business; (2) the
Company has not purchased any of its outstanding capital stock, nor declared,
paid or otherwise made any dividend or distribution of any kind on its capital
stock other than ordinary and customary dividends; and (3) there has not been
any material change in the capital stock, short-term debt or long-term debt of
the Company and its subsidiaries, except in each case as described in the
Disclosure Document and except for the transactions contemplated by this Stock
Purchase Letter Agreement or related agreements.
(p) The Company and its subsidiaries have good and marketable title
in fee simple to all real property and good and marketable title to all personal
property owned by them which is material to the business of the Company and its
subsidiaries, in each case free and clear of all liens, encumbrances and defects
except such as are described in the Disclosure Document or such as do not
materially affect the value of such property and do not interfere with the use
made and proposed to be made of such property by the Company and its
subsidiaries; and any real property and buildings held under lease by the
Company and its subsidiaries are held by them under valid, subsisting and
enforceable leases with such exceptions as are not material and do not interfere
with the use made and proposed to be made of such property and buildings by the
Company and its subsidiaries, in each case except as described in the Disclosure
Document.
(q) Except as described in the Disclosure Document, the Company and
its subsidiaries own or possess, or can acquire on reasonable terms, all
material patents, patent rights, licenses, inventions, copyrights, know-how
(including trade secrets and other unpatented and/or unpatentable proprietary or
confidential information, systems or procedures), Internet domain names,
trademarks, service marks and trade names ("Intellectual Property") currently
employed by them in connection with the business now operated by them; neither
the Company nor any of its subsidiaries has received any notice of infringement
of or conflict with asserted rights of others with respect to any of the
foregoing which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, would have a material adverse affect on the Company
and its subsidiaries, taken as a whole.
(r) No material labor dispute with the employees of the Company or
any of its subsidiaries exists, except as described in the Disclosure Document,
or, to the knowledge of the Company, is imminent; and the Company is not aware
of any existing, threatened or imminent
3
<PAGE>
labor disturbance by the employees of any of its principal suppliers,
manufacturers or contractors that could have a material adverse effect on the
Company and its subsidiaries, taken as a whole.
(s) The Company and its subsidiaries are insured by the insurers of
recognized financial responsibility against such losses and risks and in such
amounts as are prudent and customary in the businesses in which they are
engaged; and neither the Company nor any of its subsidiaries has any reason to
believe that it will not be able to renew its existing insurance coverage as and
when such coverage expires or to obtain similar coverage from similar insurers
as may be necessary to continue its business at a cost that would not have a
material adverse effect on the Company and its subsidiaries, taken as a whole,
except as described in the Disclosure Document.
(t) The Company and its subsidiaries are in material compliance with
all applicable, federal, state and local laws and regulations relating to the
Company's pharmacy operations as described in the Disclosure Document; the
Company and its subsidiaries possess all material certificates, authorizations
and permits issued by the appropriate federal, state, or local regulatory
authorities necessary to conduct their respective business, including being
licensed and in good standing as a pharmacy in the State of Washington and as a
non-resident pharmacy in each state where a license is required by the Company's
current pharmacy operations; to the best knowledge of the Company, RxAmerica,
L.L.C. and Rite Aid Corporation possess all certificates, authorizations and
permits issued by the appropriate federal or state regulatory authorities
necessary to fulfill its obligations to the Company under the Pharmacy Service
Agreement (the "Pharmacy Service Agreement") dated February 8, 1999 and the
Pharmacy Supply and Services Agreement (the "Rite Aid Agreement") dated June 17,
1999, respectively, including being a licensed resident pharmacy in each state
where a license is required; and neither the Company, any of its subsidiaries,
or to the best knowledge of the Company, RxAmerica, L.L.C. or Rite Aid
Corporation, has received any notice of proceedings relating to the revocation
or modification of any such certificate, authorization or permit which, singly
or in the aggregate, if the subject of an unfavorable decision, ruling or
finding, would have a material adverse effect on the Company and its
subsidiaries, taken as a whole, except as described in the Disclosure Document.
(u) The Company and its subsidiaries have not received written notice
of termination of (i) the Pharmacy Service Agreement, (ii) the Rite Aid
Agreement, or (iii) the Service and Supply Agreement dated January 29, 1999
between the Company and Walsh Distribution, Inc.
(v) The Company and each of its subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurance that (1)
transactions are executed in accordance with management's general or specific
authorizations; (2) transactions are recorded as necessary to permit preparation
of financial statements in conformity with generally accepted accounting
principles and to maintain asset accountability; (3) access to assets is
permitted only in accordance with management's general or specific
authorization; and (4) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
4
<PAGE>
(w) The Company has reviewed its operations and that of its
subsidiaries to evaluate the extent to which the business or operations of the
Company or any of its subsidiaries will be or has been affected by the Year 2000
Problem (that is, any significant risk that computer hardware or software
applications used by the Company and its subsidiaries will not, in the case of
dates or time periods occurring after December 31, 1999, function at least as
effectively as in the case of dates or time periods occurring prior to January
1, 2000); as a result of such review, the Company has no reason to believe, and
does not believe, that the Year 2000 Problem will have or has had a material
adverse effect on the condition, financial or otherwise, or on the earnings,
business or operations of the Company and its subsidiaries, taken as a whole, or
result in any material loss or interference with the business or operations of
the Company and its subsidiaries, taken as a whole.
5
<PAGE>
EXHIBIT 10.38
THIRD ADDENDUM TO
FOURTH AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
THIS THIRD ADDENDUM (this "Addendum") dated as of January 24, 2000, to
the Fourth Amended and Restated Investors' Rights Agreement dated as of May 18,
1999 as amended (the "Rights Agreement"), by and among drugstore.com, inc., a
Delaware corporation (the "Company") and the parties listed on Exhibit A hereto
hereby adds certain securities to the definition of "registrable securities"
under the Rights Agreement. Two prior addenda to the Rights Agreement dated as
of June 17, 1999 and July 26, 1999 remain in full force and effect.
RECITALS
A. The Company and Amazon.com, Inc. ("Amazon.com") have entered into
a letter agreement (the "Stock Purchase Letter Agreement"), a copy of which is
attached as Exhibit B hereto, pursuant to which the Company will sell to
Amazon.com and Amazon.com will purchase from the Company 1,066,667 of shares of
the Company's Common Stock in a private placement transaction (the "Amazon
Private Placement"). The Company and the Investors party to the Rights Agreement
are willing to grant Amazon.com registration rights with regard to such shares.
B. Pursuant to Section 5.2 of the Rights Agreement, this Addendum is
being executed by the Company and the holders of at least two-thirds (2/3) of
the Registrable Securities presently outstanding, thereby permitting the Rights
Agreement be amended hereby.
C. Capitalized terms used herein and not defined shall have the
meanings given to them in the Rights Agreement.
AGREEMENT
1. The parties agree that for purposes of Section 1 of the Rights
Agreement, shares of Common Stock of the Company issued to Amazon.com pursuant
to the Amazon Private Placement shall be deemed to be "Registrable Securities"
for all purposes and subject to all conditions of the Rights Agreement.
2. This Addendum shall become effective immediately upon the receipt
of the required two-thirds (2/3) consent. Upon such effectiveness:
(a) all references in any document to the Rights Agreement shall
be deemed to be references to the Rights Agreement as modified by this
Addendum; and
(b) except as specifically modified hereby, the Rights Agreement
shall continue in full force and effect in accordance with the provisions
thereof.
<PAGE>
2
3. This Addendum, which shall be governed, construed and interpreted
in accordance with the laws of the State of California, without giving effect to
principles of conflicts of laws, may be executed in counterparts.
[Signature Page Follows]
<PAGE>
3
The parties have executed this Third Addendum to the Fourth Amended
and Restated Investors' Rights Agreement as of the date first above written.
COMPANY: INVESTORS:
DRUGSTORE.COM, INC., RITE AID CORPORATION,
By: By:
------------------------------- ------------------------------
Peter M. Neupert Name:
President Title:
Address: Address:
13920 SE Eastgate Way 30 Hunter Lane
Suite 300 Camp Hill, PA 17011
Bellevue, WA 98005
GENERAL NUTRITION COMPANIES, INC.
By:
------------------------------
Name:
Title:
Address:
300 6th Avenue
Pittsburgh, PA 17011
VULCAN VENTURES INCORPORATED,
By:
------------------------------
Name:
Title:
Address:
110 110th Avenue NE, Suite 550
Bellevue, WA 98004
<PAGE>
4
KLEINER PERKINS CAUFIELD & BYERS
VIII, L.P.,
By: KPCB VIII Associates, L.P., its
General Partner
By:
------------------------------
a General Partner
Address:
2750 Sand Hill Road
Menlo Park, CA 94025
KPCB VIII FOUNDERS FUND, L.P.,
By: KPCB VIII Associates, L.P., its
General Partner
By:
------------------------------
a General Partner
Address:
2750 Sand Hill Road
Menlo Park, CA 94025
KPCB LIFE SCIENCES ZAIBATSU FUND II,
L.P.
By: KPCB VII Associates, L.P., its
General Partner
By:
------------------------------
a General Partner
Address:
2750 Sand Hill Road
Menlo Park, CA 94025
<PAGE>
5
AMAZON.COM, INC.
By:
------------------------------
Name:
Title:
Address:
1516 2nd Avenue
Seattle, WA 98101
PETER M. NEUPERT
---------------------------------
Peter M. Neupert
Address:
13920 SE Eastgate Way, Suite 300
Bellevue, WA 98005
DRUGSTORE.COM FOUNDATION
By:
------------------------------
Name:
Title:
Address:
13920 SE Eastgate Way, Suite 300
Bellevue, WA 98005
MAVERON EQUITY PARTNERS, L.P.
By:
------------------------------
Name:
Title:
Address:
800 Fifth Ave., Suite 4100
Seattle, WA 98104
<PAGE>
6
LIBERTY DS, INC.
By:
------------------------------
Name:
Title:
Address:
9197 South Peoria Street
Englewood, CO 80112
DAVID WHORTON
---------------------------------
David Whorton
Address:
c/o Kleiner Perkins Caufield
& Byers
2750 Sand Hill Road
Menlo Park, CA 94025
<PAGE>
7
EXHIBIT A
INVESTORS
Name and Address
- ----------------
Rite Aid Corporation
30 Hunter Lane
Camp Hill, PA 17011
General Nutrition Companies, Inc.
300 6th Avenue
Pittsburgh, PA 15222
Vulcan Ventures Incorporated
110th Avenue Northeast, Suite 550
Bellevue, WA 98004
Kleiner Perkins Caufield & Byers VIII
2750 Sand Hill Road
Menlo Park, CA 94025
KPCB VIII Founders Fund, L.P.
2750 Sand Hill Road
Menlo Park, CA 94025
KPCB Life Sciences Zaibatsu Fund II, L.P.
2750 Sand Hill Road
Menlo Park, CA 94025
David Whorton
c/o Kleiner Perkins Caufield & Byers
2750 Sand Hill Road
Menlo Park, CA 94025
Amazon.com, Inc.
1516 2nd Avenue
Seattle, WA 98101
Attn: General Counsel
Peter M. Neupert
13920 SE Eastgate Way, Suite 300
Bellevue, WA 98005
Maveron Equity Partners, L.P.
800 Fifth Avenue, Suite 4100
Seattle, WA 98104
<PAGE>
8
Liberty DS, Inc.
9197 South Peoria Street
Englewood, CO 80112
drugstore.com Foundation
Attn: Alesia L. Pinney
13920 SE Eastgate Way, Ste. 300
Bellevue, WA 98005
<PAGE>
Exhibit 21.1
LIST OF SUBSIDIARIES OF THE REGISTRANT
DS Pharmacy, Inc., a Delaware corporation
DS Distribution, Inc., a Delaware corporation
DS Non-Pharmaceutical Sales, Inc., a Delaware corporation
DSGC Idaho, Inc., a Idaho corporation
<PAGE>
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Consolidated Financial Data" and "Experts" and to the use of our report dated
January 21, 2000, except as to Note 10, as to which the date is February 2,
2000, in the Registration Statement (Form S-1) and related Prospectus of
drugstore.com, inc. for the registration of 6,020,000 shares of its common
stock.
/s/ Ernst & Young LLP
Seattle, Washington
February 7, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-02-2000
<PERIOD-START> JAN-01-1999
<PERIOD-END> JAN-02-2000
<CASH> 26,526
<SECURITIES> 106,228
<RECEIVABLES> 4,524
<ALLOWANCES> 251
<INVENTORY> 2,862
<CURRENT-ASSETS> 149,232
<PP&E> 28,387
<DEPRECIATION> 3,179
<TOTAL-ASSETS> 395,708
<CURRENT-LIABILITIES> 42,272
<BONDS> 2,687
0
0
<COMMON> 485,377
<OTHER-SE> (134,628)
<TOTAL-LIABILITY-AND-EQUITY> 395,708
<SALES> 34,848
<TOTAL-REVENUES> 34,848
<CGS> 38,440
<TOTAL-COSTS> 38,440
<OTHER-EXPENSES> 117,151
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 124
<INCOME-PRETAX> (115,831)
<INCOME-TAX> 0
<INCOME-CONTINUING> (115,831)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (115,831)
<EPS-BASIC> (6.13)
<EPS-DILUTED> (6.13)
</TABLE>
<PAGE>
Exhibit 99.1
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
ON FINANCIAL STATEMENT SCHEDULE
We have audited the financial statements of drugstore.com, inc. as of
January 2, 2000 and December 31, 1998 and for the year ended January 2, 2000
and the period from April 2, 1998 (inception) to December 31, 1998, and have
issued our report thereon dated January 21, 2000, except as to Note 10, as to
which the date is February 2, 2000 (included elsewhere in this Registration
Statement). Our audits also included the financial statement schedule listed
in Item 16(b) of this Registration statement. This schedule is the
responsibility of the Company's management. Our responsibility is to express
an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Seattle, Washington
February 7, 2000
