<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 1, 2000
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-78813
----------------
DRUGSTORE.COM, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 04-3416255
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
</TABLE>
13920 Southeast Eastgate Way, Suite 300
Bellevue, Washington 98005
(Address of principal executive offices)
(425) 372-3200
(Registrant's telephone number)
----------------
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
The number of shares of common stock, $.0001 par value, outstanding on
November 1, 2000 was 61,219,698.
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<PAGE>
DRUGSTORE.COM, INC.
CONTENTS
PART I--FINANCIAL INFORMATION
<TABLE>
<C> <S> <C>
Item 1. Financial Statements............................................ 3
Condensed Consolidated Balance Sheets as of October 1, 2000 and
January 2, 2000................................................ 3
Condensed Consolidated Statements of Operations for the Three
and Nine Months Ended October 1, 2000 and October 3, 1999...... 4
Condensed Consolidated Statement of Stockholders' Equity for the
Nine Months Ended October 1, 2000.............................. 5
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended October 1, 2000 and October 3, 1999............... 6
Notes To Condensed Consolidated Financial Statements............ 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 17
PART II--OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds....................... 18
Item 4. Submission of Matters to a Vote of Security Holders............. 18
Item 6. Exhibits and Reports on Form 8-K................................ 18
SIGNATURES............................................................... 19
</TABLE>
2
<PAGE>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
DRUGSTORE.COM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
October 1, January 2,
2000 2000
----------- ----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 112,559 $ 26,526
Marketable securities................................ 34,511 106,228
Accounts receivable, less allowance for doubtful
accounts and sales
returns of $194 and $251............................ 6,090 4,273
Inventories.......................................... 6,073 2,862
Prepaid marketing expenses........................... 33,210 8,010
Other current assets................................. 4,108 1,333
--------- ---------
Total current assets................................ 196,551 149,232
Fixed assets, net of accumulated depreciation of
$10,446 and $3,179.................................. 41,606 25,208
Intangible assets, net of accumulated amortization of
$35,485 and $10,673................................. 226,046 200,742
Prepaid marketing expenses........................... 19,396 19,465
Note receivable from officer......................... 282 269
Deposits and other assets............................ 6,604 792
--------- ---------
Total assets........................................ $ 490,485 $ 395,708
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................... $ 18,025 $ 25,788
Accrued compensation................................. 4,291 4,231
Accrued marketing expenses........................... 4,430 8,520
Other current liabilities............................ 2,713 1,245
Current portion of capital lease obligations......... 2,867 2,488
--------- ---------
Total current liabilities........................... 32,326 42,272
Capital lease obligations, less current portion........ 3,326 2,687
Stockholders' equity:
Preferred stock, $.0001 par value:
Series 1 preferred stock
Authorized shares--100,000
Issued and outstanding shares--45,939.89 and none as
of October 1, 2000 and January 2, 2000,
respectively........................................ 22,683 --
Common stock, $.0001 par value, stated at amounts paid
in:
Authorized shares--250,000,000
Issued and outstanding shares--61,205,132 and
43,508,808 as of October 1, 2000 and January 2,
2000, respectively.................................. 712,091 485,377
Deferred stock-based compensation...................... (6,241) (10,770)
Accumulated deficit.................................... (273,700) (123,858)
--------- ---------
Total stockholders' equity............................. 454,833 350,749
--------- ---------
Total liabilities and stockholders' equity............. $ 490,485 $ 395,708
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
DRUGSTORE.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------- ----------------------
October 1, October 3, October 1, October 3,
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales...................... $ 26,480 $ 12,158 $ 73,820 $ 16,360
Costs and expenses:
Cost of sales................ 24,047 14,729 69,795 21,830
Fulfillment and order
processing (1).............. 9,222 5,702 28,111 8,403
Marketing and sales (2)...... 17,081 10,106 61,519 22,372
Technology and content (3)... 6,889 4,232 20,528 10,174
General and administrative
(4)......................... 4,927 3,120 14,682 7,037
Charitable contributions..... -- 3,600 -- 3,600
Amortization of intangible
assets...................... 9,687 5,300 25,063 5,338
Amortization of stock-based
compensation................ 2,709 9,267 10,256 12,850
---------- ---------- ---------- ----------
Total costs and expenses... 74,562 56,056 229,954 91,604
---------- ---------- ---------- ----------
Operating loss................. (48,082) (43,898) (156,134) (75,244)
Interest income, net........... 2,379 1,925 6,292 2,918
---------- ---------- ---------- ----------
Net loss....................... $ (45,703) $ (41,973) $ (149,842) $ (72,326)
========== ========== ========== ==========
Basic and diluted net loss per
share......................... $ (0.80) $ (1.33) $ (2.92) $ (6.54)
========== ========== ========== ==========
Weighted average shares
outstanding used to compute
basic and diluted net loss per
share......................... 57,324,506 31,512,007 51,230,164 11,062,231
========== ========== ========== ==========
</TABLE>
--------
(1) Excludes amortization of stock-based compensation of $251 and $791 for
the three and nine months ended October 1, 2000, respectively, and $271
and $1,003 for the three and nine months ended October 3, 1999,
respectively.
(2) Excludes amortization of stock-based compensation of $194 and $692 for
the three and nine months ended October 1, 2000, respectively, and $1,086
and $1,802 for the three and nine months ended October 3, 1999,
respectively.
(3) Excludes amortization of stock-based compensation of $705 and $2,189 for
the three and nine months ended October 1, 2000, respectively, and $1,041
and $2,212 for the three and nine months ended October 3, 1999,
respectively.
(4) Excludes amortization of stock-based compensation of $1,559 and $6,584
for the three and nine months ended October 1, 2000, respectively, and
$6,869 and $7,833 for the three and nine months ended October 3, 1999,
respectively.
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
DRUGSTORE.COM, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Deferred
----------------- ------------------- Stock-based Accumulated
Shares Amount Shares Amount Compensation Deficit Total
--------- ------- ---------- -------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 2,
2000................... -- $ -- 43,508,808 $485,377 $(10,770) $(123,858) $ 350,749
Issuance of common stock
for cash in secondary
public offering, net of
offering costs of
$6,400................. -- -- 6,000,000 101,600 -- -- 101,600
Issuance of common and
preferred stock for
cash in private
placement, net of
offering costs of
$420................... 45,939.89 22,683 8,101,264 39,580 -- -- 62,263
Issuance of common stock
for marketing services,
intangible asset and
software............... -- -- 1,816,667 35,220 -- -- 35,220
Issuance of warrant to
purchase common stock
for marketing
services............... -- -- -- 9,499 -- -- 9,499
Acquisition of
Beauty.com............. -- -- 1,235,530 37,619 (4,626) -- 32,993
Exercise of stock
options................ -- -- 339,832 242 -- -- 242
Employee stock purchase
plan................... -- -- 200,399 1,853 -- -- 1,853
Deferred stock-based
compensation, net of
cancellations.......... -- -- 2,632 1,101 (1,101) -- --
Amortization of stock-
based compensation..... -- -- -- -- 10,256 -- 10,256
Net loss and
comprehensive loss..... -- -- -- -- -- (149,842) (149,842)
--------- ------- ---------- -------- -------- --------- ---------
Balance at October 1,
2000................... 45,939.89 $22,683 61,205,132 $712,091 $ (6,241) $(273,700) $ 454,833
========= ======= ========== ======== ======== ========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
DRUGSTORE.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
----------------------
October 1, October 3,
2000 1999
---------- ----------
<S> <C> <C>
Operating Activities:
Net loss................................................. $(149,842) $(72,326)
Adjustments to reconcile net loss to net cash used in
operating activities:
Non-cash expenses:
Depreciation.......................................... 8,317 1,974
Marketing and sales................................... 11,900 4,374
Charitable contributions.............................. -- 3,600
Amortization of intangible assets..................... 25,063 5,338
Amortization of stock-based compensation.............. 10,256 12,850
Changes in:
Accounts receivable................................... (1,770) (2,266)
Inventories........................................... (2,264) (2,311)
Prepaid marketing expenses............................ (532) (1,763)
Other current assets.................................. (2,722) (447)
Deposits and other assets............................. (5,812) (1,116)
Accounts payable and accrued expenses................. (19,910) 16,746
Other................................................. (13) (98)
--------- --------
Net cash used in operating activities.................... (127,329) (35,445)
Investing Activities:
Purchases of marketable securities....................... (27,258) --
Sales of marketable securities........................... 98,975 --
Purchase of fixed assets................................. (21,794) (7,893)
Purchase of intangible assets............................ (32) (95)
Business acquisition, net of cash received............... (335) --
--------- --------
Net cash provided by (used in) investing activities...... 49,556 (7,988)
Financing Activities:
Proceeds from sale of common stock....................... 141,180 104,578
Proceeds from exercise of stock options and employee
stock purchase plan..................................... 2,095 85
Proceeds from sale of preferred stock.................... 22,683 84,598
Proceeds from capital lease obligation................... 127 538
Principal payments on capital lease obligations.......... (2,279) (472)
--------- --------
Net cash provided by financing activities................ 163,806 189,327
--------- --------
Net increase in cash and cash equivalents................ 86,033 145,894
Cash and cash equivalents at beginning of period......... 26,526 14,408
--------- --------
Cash and cash equivalents at end of period............... $ 112,559 $160,302
========= ========
Supplemental Cash Flow Information:
Cash paid for interest................................... $ 264 $ 56
Equipment acquired in capital lease agreements........... $ 3,170 $ 945
Issuance of equity instruments in exchange for prepaid
marketing, intangible assets, software and a vendor
agreement............................................... $ 44,719 $238,956
Issuance of common stock in connection with business
acquisition............................................. $ 37,619 $ --
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
DRUGSTORE.COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in conformity with generally accepted accounting principles for
interim financial information and with the instructions for Form 10-Q and
Article 10 of Regulation S-X. Accordingly, certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed, or omitted,
pursuant to the rules and regulations of the Securities and Exchange
Commission. In our opinion, the statements include all adjustments necessary
(which are of a normal and recurring nature) for the fair presentation of the
results of the interim periods presented. These condensed consolidated
financial statements should be read in conjunction with our audited
consolidated financial statements, and accompanying notes, included in the
Company's Annual Report on Form 10-K/A for the year ended January 2, 2000,
filed with the Securities and Exchange Commission, on March 16, 2000. Our
results of operations for any interim period are not necessarily indicative of
the results of operations for any other interim period or for a full fiscal
year.
Reclassifications.
Certain prior period amounts have been reclassified to conform with the
current period presentation.
New Accounting Pronouncements.
In July 1999, the Financial Accounting Standards Board (FASB) announced the
delay of the effective date of Statement of Financial Accounting Standards
133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS
133), to the first quarter of 2001. SFAS 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It
requires companies to recognize all derivatives as either assets or
liabilities on the balance sheet and measure those instruments at fair value.
Gains or losses resulting from changes in the values of those derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting under SFAS 133. The Company does not expect the
adoption of this consensus to have a material impact on its financial
statements.
In March 2000, the Emerging Issues Task Force (EITF) of the FASB reached a
consensus on EITF Issue 00-2, "Accounting for Web Site Development Costs."
This consensus provides guidance on what types of costs incurred to develop a
Web site should be capitalized or expensed. The Company adopted this consensus
in the third quarter of 2000, and it did not have a material impact on the
Company's financial statements.
In May 2000, the EITF reached a consensus on EITF Issue 00-14, "Accounting
for Certain Sales Incentives." This consensus addresses the recognition,
measurement, and income statement classification for sales incentives (such as
discounts, coupons, and rebates) that a company offers to its customers for
use in a single transaction. The Company adopted EITF issue 00-14 in the third
quarter of 2000. Accordingly, expenses related to promotional inventory
included in shipments to customers, formerly classified as marketing and sales
expense, are now classified as cost of sales. All prior periods have been
retroactively reclassified to reflect this modification. The adoption of EITF
Issue No. 00-14 did not impact the Company's net sales, operating losses or
net losses as previously reported.
In July 2000, the EITF reached a consensus on EITF Issue 99-19, "Reporting
Revenue Gross as a Principal versus Net as an Agent." This consensus provides
guidance on whether a company should recognize revenue in the amount of the
gross amount billed to the customer because it has earned revenue from the
sale of the goods or services or whether the company should recognize revenue
based on the net amount retained because, in substance, it has earned a
commission from the vendor-manufacturer of the goods or services on the sale.
As the
7
<PAGE>
DRUGSTORE.COM, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Company's current accounting policies are in accordance with EITF Issue 99-19,
this consensus does not have an impact on the Company's financial statements.
In July 2000, the EITF reached a consensus on EITF Issue 00-10 "Accounting
for Shipping and Handling Fees and Costs." This consensus indicates that
amounts billed to a customer in a sale transaction related to shipping and
handling, if any, represents revenue to the vendor and should be classified as
revenue. As the Company currently classifies shipping fees charged to a
customer in net sales, this did not have an impact on the Company's financial
statements. In September 2000, the EITF reached a final consensus with respect
to the classification of costs related to shipping and handling incurred by
the seller. The Task Force determined that the classification of shipping and
handling costs is an accounting policy decision that should be disclosed. A
company may adopt a policy of including shipping and handling costs in cost of
sales, or if shipping costs or handling costs are significant and are not
included in cost of sales, a company should disclose both the amount(s) of
such costs and the line item(s) on the income statement that include them. The
Company includes costs of shipping in cost of sales; however, in accordance
with this consensus, handling costs, formerly classified in marketing and
sales expense, have been displayed separately as fulfillment and order
processing expenses. Handling costs include distribution center equipment and
packaging supplies; per-unit fulfillment fees charged by third parties; credit
card fees and payroll and expenses for personnel engaged in customer service,
purchasing and fulfillment. All prior periods have been retroactively
reclassified to reflect this modification. The adoption of EITF Issue No. 00-
10 did not impact the Company's net sales, operating losses or net losses as
previously reported.
2. Net Loss Per Share
Net loss per share is computed using the weighted average number of shares
of common stock outstanding less the number of shares subject to repurchase or
contingently issuable pursuant to contractual terms. Shares associated with
stock options, warrants and the convertible preferred stock are not included
in the calculation of diluted net loss per share because they are
antidilutive.
The following table sets forth the computation of basic and diluted net
loss per share for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------- ----------------------
October 1, October 3, October 1, October 3,
2000 1999 2000 1999
---------- ---------- ---------- ----------
(in thousands, except share and per share
data)
<S> <C> <C> <C> <C>
Net loss................... $ (45,703) $ (41,973) $ (149,842) $ (72,326)
========== ========== ========== ==========
Weighted average shares
outstanding............... 58,187,663 32,880,973 52,309,668 12,284,572
Less weighted average
shares subject to
repurchase or contingently
issuable pursuant to
contract terms............ (863,157) (1,368,966) (1,079,504) (1,222,341)
---------- ---------- ---------- ----------
Shares used in computation
of basic and diluted net
loss per share............ 57,324,506 31,512,007 51,230,164 11,062,231
========== ========== ========== ==========
Basic and diluted net loss
per share................. $ (0.80) $ (1.33) $ (2.92) $ (6.54)
========== ========== ========== ==========
</TABLE>
At October 1, 2000 there were 14,261,106 stock options and warrants
outstanding that were excluded from the computation of diluted net loss per
share, as their effect was antidilutive. If the Company had reported net
income, the calculation of these per share amounts would have included the
dilutive effect of these common stock equivalents using the treasury stock
method.
8
<PAGE>
DRUGSTORE.COM, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Business Acquisition and Strategic Agreements
Amazon.com
In January 2000, the Company reached an agreement with Amazon.com, Inc.
(Amazon.com) to provide certain advertising and technical services over a
three-year term for $105.0 million. The consideration included 1,066,667
shares of the Company's common stock with a fair value of $30.0 million issued
immediately in a private placement transaction and minimum cash payments
totaling $75.0 million over the three-year term of the agreement. In July
2000, Amazon.com and the Company agreed to reduce the remaining minimum cash
payments due over the three-year term of the agreement from $75.0 million to
$30.0 million. Additionally, the Company agreed to pay additional amounts in
cash if the advertising services exceed certain performance thresholds in the
second and third year of the agreement. The Company also issued to Amazon.com
a fully vested, nonforfeitable and exercisable warrant to purchase 2.5 million
shares of the Company's common stock at $4.94 per share. The Company estimates
that the fair value of the warrant was $7.3 million and is amortizing the
aggregate minimum value of the total consideration under the agreement of
$67.3 million to primarily marketing and sales expense on a straight-line
basis over the three-year term of the agreement. For the three and ninth month
periods ended October 1, 2000, the Company recognized marketing and sales
expense associated with such agreement of $5.4 million and $9.8 million,
respectively.
Beauty.com
In February 2000, the Company acquired Beauty.com, Inc. (Beauty.com), an
online retailer of prestige beauty products, in exchange for 1,266,289 shares
of the Company's common stock and the assumption of outstanding stock options.
In July 2000, the Company and Beauty.com's founder amended certain provisions
of the initial purchase agreements, including eliminating the contingency on
the issuance of approximately 587,000 shares of the Company's common stock
related to the continued employment of Beauty.com's founder and reducing the
total consideration to 1,235,530 shares of the Company's common stock. The
final purchase price, as amended, was determined to be $37.6 million.
Subsequent to the amendment of the purchase agreements, all of the shares will
have been issued to the former Beauty.com shareholders except for 126,628
shares that will remain in escrow until January 2001 as security for certain
indemnification provisions of the contract. The acquisition has been accounted
for as a purchase, and all identifiable assets were assigned a portion of the
purchase price based on their respective fair values. In connection with the
acquisition and subsequent amendment of the purchase agreements, the Company
recognized approximately $45.1 million of intangible assets allocated to
domain names, customer lists and goodwill based on an independent valuation.
Of the $45.1 million, $10.8 million was recorded in the third quarter of 2000,
including $10.4 million that was reclassified from deferred stock-based
compensation to goodwill as of the date the purchase agreements were amended.
These intangible assets are being amortized over the remaining portion of
their estimated useful lives of three years.
The pro forma consolidated financial information for the nine month periods
ended October 1, 2000 and October 3, 1999, determined as if the Beauty.com
acquisition had occurred on January 1, 1999, would have indicated net sales of
$74.0 million and $16.4 million, net loss of $154.7 million and $88.1 million,
and basic and diluted net loss per share of $3.02 and $7.50, respectively.
This unaudited pro forma information is presented for illustrative purposes
only and is not necessarily indicative of the results that would have been
achieved had the Company and Beauty.com been combined during the specified
periods.
Medibuy
In February 2000, the Company entered into a five-year definitive agreement
with Medibuy.com, Inc. (Medibuy), an e-commerce solution for healthcare supply
procurement, to develop a co-branded e-commerce
9
<PAGE>
DRUGSTORE.COM, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
marketplace targeted at the home healthcare market. Pursuant to this
agreement, the Company is required to pay transaction fees to Medibuy for
goods it sells on the co-branded Web site as well as new customer referral
fees. Medibuy is required to pay drugstore.com a percentage of transaction
fees generated on the co-branded Web site from sellers other than
drugstore.com. Medibuy is also required to spend at least $10.0 million over
the five-year term to promote the co-branded Web site. The agreement may be
terminated early by either party if certain performance requirements are not
met. As of October 1, 2000, no revenues or expenses had been recorded as a
result of this transaction. In connection with this agreement, the Company has
received a warrant to purchase 700,000 shares of Medibuy common stock. As
Medibuy is a privately owned company with a limited operating history, the
Company could not determine the fair value of the warrants; accordingly, such
amounts are not reflected on the Company's condensed consolidated balance
sheet as of October 1, 2000.
WellPoint
In June 2000, the Company entered into a five-year strategic partnership
with WellPoint Health Networks Inc. (WellPoint), a leading health plan owned
pharmacy benefit management company. Pursuant to this agreement, the Company
is designated as WellPoint's preferred Internet pharmacy and drugstore, with
access to WellPoint's members. In exchange, the Company issued WellPoint
750,000 shares of the Company's common stock with a fair value of
approximately $5.0 million and will make certain cash payments to WellPoint
over the five-year term of the agreement. If the 750,000 shares of the
Company's common stock does not have a fair value of $10.0 million at the end
of the second year, the Company is required to pay WellPoint the difference
between the fair value of the stock and $10.0 million, in either cash or the
Company's common stock. The Company recorded the fair value of the stock
issued in connection with this agreement as an intangible asset and is
amortizing the asset over the five-year term of the agreement.
CIGNA
In June 2000, the Company entered a five-year agreement with CIGNA
HealthCare companies (CIGNA), one of the nation's leading providers of health
benefit programs. Pursuant to this agreement, the Company will provide health
and beauty products to CIGNA's plan participants by providing them direct
access to the Company's Web site from the home page of CIGNA's Internet site
or through CIGNA HealthCare's mail order pharmacy. In exchange, the Company
issued CIGNA Healthcare a warrant to purchase 500,000 shares of the Company's
common stock at $7.76 per share. The fair value of such warrant was estimated
at $2.2 million and will be amortized to marketing and sales expense on a
straight-line basis over the five-year term of the agreement.
4. Stockholders' Equity
On March 15, 2000, the Company completed the sale of 6,020,000 shares of
its common stock at $18.00 per share. Of the 6,020,000 shares offered,
6,000,000 were offered by the Company and 20,000 were offered by an existing
stockholder. Net proceeds to the Company aggregated approximately $101.6
million.
In August 2000, the Company completed the sale of approximately 8.1 million
shares of common stock at $4.9375 per share and approximately 46,000 shares of
preferred stock at $493.75 per share. The preferred stock is a participating,
non-voting, preferred instrument that converted into 4,593,989 shares of
common stock on November 10, 2000 upon stockholder approval. Net proceeds to
the Company aggregated approximately $62.3 million.
10
<PAGE>
DRUGSTORE.COM, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Stock Options
The following table summarizes activity under the Company's stock plans:
<TABLE>
<CAPTION>
Outstanding Options
------------------------------------
Shares Available Number of Weighted-Average
for Grant Shares Exercise Price per Share
---------------- ---------- ------------------------
<S> <C> <C> <C>
Outstanding at January
2, 2000................ 4,939,089 5,850,658 $16.49
Plan amendments......... 7,032,404 -- --
Options granted......... (7,554,618) 7,554,618 $11.12
Options exercised....... -- (339,832) $ .71
Options canceled........ 1,804,338 (1,804,338) $13.08
---------- ----------
Outstanding at October
1, 2000................ 6,221,213 11,261,106 $13.91
========== ==========
</TABLE>
As of October 1, 2000, of the total options outstanding, 936,986 were
exercisable with a weighted-average exercise price of $10.74 per share.
On May 4, 2000, the Company's board of directors granted options to
purchase an aggregate of 3,275,700 shares of its common stock to certain of
its existing employees at an exercise price of $7.00 per share. The options
were granted under the Company's 1998 stock plan and will vest over a four-
year period at the rate of one-fourth of the total number of shares subject to
the options six months after the grant date, with the remaining shares vesting
in equal installments at the end of each six-month period thereafter. On May
4, 2000 the closing price of the Company's common stock was approximately
$8.63 per share. Accordingly, during the second quarter of 2000 the Company
recorded deferred stock-based compensation of approximately $5.3 million,
which is being amortized over the vesting period of the options.
On October 12, 2000, the Company's board of directors granted options to
purchase an aggregate of approximately 4.0 million shares of its common stock
to certain of its existing employees at an exercise price of $0.01 per share.
The options were granted under the Company's 1998 stock plan and will vest
over an 18 month period at the rate of 40% of the total number of shares
subject to the options six months after the grant date, with the remaining
shares vesting in equal installments at the end of each six-month period
thereafter. On October 12, 2000 the closing price of the Company's common
stock was approximately $2.69 per share. Accordingly, during the fourth
quarter of 2000 the Company will record deferred stock-based compensation of
approximately $10.7 million, which will be amortized over the vesting period
of the options.
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Special Note Regarding Forward-Looking Statements
This discussion contains forward-looking statements that involve risks and
uncertainties. These statements relate to future events or our future
financial performance. In some cases, you can identify forward-looking
statements by terminology such as may, will, should, expect, plan, intend,
anticipate, believe, estimate, predict, potential or continue, the negative of
such terms or other comparable terminology. These statements are only
predictions. Actual events or results may differ materially. In evaluating
these statements, you should consider various factors, including the risks
outlined in the Factors That May Affect Our Business section of our Form 10-K,
filed with the Securities and Exchange Commission (SEC) on March 16, 2000 and,
from time to time, in other reports we file with the SEC. These factors may
cause our actual results to differ materially from any forward-looking
statement.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of the
forward-looking statements. We are under no duty to update any of the forward-
looking statements after the date of this Quarterly Report on Form 10-Q to
conform such statements to actual results or to changes in our expectations.
Overview
drugstore.com is a leading online drugstore and information site offering A
Very Healthy Way to Shop(TM) for health, beauty, wellness, personal care and
pharmacy products. As of October 1, 2000, we had sold our products to over
1,412,000 customers. We were incorporated in April 1998 and commercially
launched our Web site on February 24, 1999. We designed our store to provide a
convenient, private and informative shopping experience that encourages
consumers to purchase products essential to healthy, everyday living. Our Web
site can be accessed 24 hours a day, seven days a week from anywhere that a
consumer has Internet access. We believe we offer a larger selection of
products than typical store-based retailers, along with a wealth of health-
related information, buying guides and other tools designed to help consumers
make more educated purchasing decisions. Our shopping lists and e-mail
reminders are designed to make it easier for our customers to regularly
purchase their preferred health and beauty products. We believe that our
online store delivers a superior shopping experience.
12
<PAGE>
Results of Operations
Because we commenced commercial operations on February 24, 1999, and have a
short operating history, we believe that period-to-period comparisons are less
meaningful than an analysis of recent quarterly operating results.
Accordingly, we are providing a discussion and analysis of our results of
operations that compares the quarter ended October 1, 2000 to the quarter
ended July 2, 2000.
The following table sets forth unaudited quarterly statement of operations
data for the five quarters ended October 1, 2000. This unaudited quarterly
information has been derived from our unaudited financial statements and, in
the opinion of management, includes all adjustments, consisting only of normal
recurring adjustments necessary for a fair presentation of such information in
accordance with generally accepted accounting principles. The operating
results for any quarter are not necessarily indicative of the operating
results for any future period.
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------------
Oct. 3, Jan. 2, Apr. 2, Jul. 2, Oct. 1,
1999 2000 2000 2000 2000
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net sales.................... $ 12,158 $ 18,488 $ 22,738 $ 24,602 $ 26,480
Costs and expenses:
Cost of sales............... 14,729 21,502 22,881 22,867 24,047
Fulfillment and order
processing................. 5,702 7,582 9,602 9,287 9,222
Marketing and sales......... 10,106 18,243 19,030 25,408 17,081
Technology and content...... 4,232 4,744 6,941 6,698 6,889
General and administrative.. 3,120 4,089 4,806 4,949 4,927
Charitable contributions.... 3,600 -- -- -- --
Amortization of intangible
assets..................... 5,300 5,302 7,222 8,154 9,687
Amortization of stock-based
compensation............... 9,267 2,525 3,343 4,204 2,709
-------- -------- -------- -------- --------
Total costs and expenses... 56,056 63,987 73,825 81,567 74,562
-------- -------- -------- -------- --------
Operating loss............... (43,898) (45,499) (51,087) (56,965) (48,082)
Interest income, net........ 1,925 1,994 1,605 2,308 2,379
-------- -------- -------- -------- --------
Net loss..................... $(41,973) $(43,505) $(49,482) $(54,657) $(45,703)
======== ======== ======== ======== ========
</TABLE>
Net Sales. Net sales includes product sales and charges to customers for
shipping and handling less any allowances for product returns, promotional
discounts and coupons.
Net sales for the third quarter of 2000 were $26.5 million, an 8% increase
over net sales for the second quarter of 2000 of $24.6 million. Our cumulative
customer accounts increased to 1,412,000 at the end of the third quarter of
2000 from 1,222,000 customer accounts at the end of second quarter 2000, an
increase of 190,000 or 16%. Orders from repeat customers also increased during
the third quarter to 65% of total orders compared to 59% in the second quarter
of 2000. Pharmaceutical product sales were 56% of net sales in the third
quarter of 2000, compared to 53% of net sales in the second quarter of 2000.
The increase in net sales was a result of an increase in our customer base and
an increase in our repeat orders as a percentage of total orders. We expect
that our net sales for the fourth quarter of 2000 will be between $29.0
million and $30.0 million and that net sales for 2001 will be between
approximately $135.0 million and $145.0 million. In the future, the level of
our sales will depend on a number of factors including, but not limited to,
the following:
. The number of customers we are able to obtain;
. The frequency of our customers' purchases;
. The quantity and mix of products our customers purchase;
. The 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;
13
<PAGE>
. The extent of reimbursement available from third-party payors;
. The level of customer returns we experience;
. The seasonality that we may experience in our business; and
. The extent and effectiveness of our marketing efforts.
Cost of Sales. Cost of sales includes related cost of products shipped to
customers and outbound and inbound shipping costs. In the third quarter of
2000, the Company adopted Emerging Issues Task Force (EITF) Issue No. 00-14,
"Accounting for Certain Sales Incentives". Accordingly, expenses related to
promotional inventory included in shipments to customers, formerly classified
as marketing and sales expense, are now classified as cost of sales. All prior
periods have been retroactively reclassified to reflect this modification.
Cost of sales as a percentage of net sales improved to 90.8% during the
third quarter of 2000 from 92.9% during the second quarter of 2000. This
improvement was primarily attributable to better buying power for our
pharmaceutical products as a result of our relationship with Rite Aid. We
expect that our cost of sales as a percentage of net sales for the fourth
quarter of 2000 will be approximately 88.5% and that cost of sales as a
percentage of net sales for 2001 will range between approximately 84.0% and
86.0%. Cost of sales as a percentage of net sales will continue to fluctuate
based on a number of factors, including, but not limited to, the following:
. The cost of our products, including the extent of promotional
allowances, payments for joint merchandising activities and purchase
volume discounts that we are able to obtain from suppliers;
. Our pricing strategy relative to the cost of our products, including the
extent to which we offer coupons or promotional discounts;
. The mix of products our customers purchase;
. The mix of consignment service fees vs. product sales;
. The mix of cash payments vs. insurance reimbursement for our pharmacy
products;
. Our shipping pricing strategy relative to the cost of shipping; and
. The extent to which we are able to control product damage, shrinkage and
expiration through inventory management practices.
Fulfillment and Order Processing. In the third quarter of 2000, the Company
adopted EITF Issue No. 00-10, "Accounting for Shipping and Handling Fees and
Costs". Accordingly, handling costs, formerly classified in marketing and
sales expense, have been displayed separately as fulfillment and order
processing expenses. Handling costs include distribution center equipment and
packaging supplies; per-unit fulfillment fees charged by third parties; credit
card fees and payroll and expenses for personnel engaged in customer service,
purchasing and fulfillment. All prior periods have been retroactively
reclassified to reflect this modification. Fulfillment and order processing
expense decreased to $9.2 million in the third quarter of 2000, from $9.3
million in the second quarter of 2000, primarily due to efficiencies gained at
our distribution center during the quarter. 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.
Marketing and Sales. Marketing and sales expenses consist primarily of
advertising and promotional expenditures, and payroll and related expenses for
personnel engaged in marketing and merchandising. Marketing and sales expenses
decreased to $17.1 million in the third quarter of 2000 from $25.4 million in
the second quarter of 2000. The decrease was primarily due to the reduction of
television and radio advertising during the quarter. We expect that our
marketing and sales expenses for 2001 will be between approximately $50.0
million and $60.0 million. Customer acquisition and marketing expenses vary
considerably from quarter to quarter, depending on the timing of our
advertising and promotional campaigns.
Technology and Content. Technology and content expenses consist primarily
of payroll and related expenses for personnel engaged in maintaining and
making minor upgrades and enhancements to our Web site and content. These
expenses also include payroll and related expenses for information technology
personnel, Internet access and hosting charges and Web site content and design
expenses. Technology and content expenses
14
<PAGE>
increased to $6.9 million in the third quarter of 2000 from $6.7 million in
the second quarter of 2000, primarily due to minor system upgrades and
enhancements. Over the next few quarters, we expect technology and content
expenses to remain relatively consistent with the third quarter of 2000.
General and Administrative. General and administrative expenses consist of
payroll and related expenses for executive and administrative personnel,
corporate facility expenses, professional services expenses, and other general
corporate expenses. General and administrative remained constant at $4.9
million for the second and third quarters of 2000. Over the next few quarters,
we expect general and administrative expenses to remain relatively consistent
with the third quarter of 2000.
Amortization of Intangible Assets. Amortization of intangible assets
increased to $9.7 million in third quarter of 2000 from $8.2 million in the
second quarter of 2000, due to the reclassification of approximately $10.4
million of deferred stock-based compensation related to Beauty.com to goodwill
as a result of an amendment to the Beauty.com purchase agreements.
Amortization of Stock-based Compensation. Amortization of stock-based
compensation decreased to $2.7 million in the third quarter of 2000 from $4.2
million in the second quarter of 2000. The decrease was primarily due to the
reclassification of approximately $10.4 million of deferred stock-based
compensation related to Beauty.com to goodwill as a result of an amendment to
the Beauty.com purchase agreements.
On May 4, 2000, our board of directors granted options to purchase an
aggregate of 3,275,700 shares of our common stock to certain of our existing
employees at an exercise price of $7.00 per share. The options were granted
under our 1998 stock plan and will vest over a four-year period at the rate of
one-fourth of the total number of shares subject to the options six months
after the grant date, with the remaining shares vesting in equal installments
at the end of each six-month period thereafter. On May 4, 2000 the closing
price of our common stock was approximately $8.63 per share. Accordingly, in
the second quarter of 2000 we recorded deferred stock-based compensation of
approximately $5.3 million, which is being amortized over the vesting period
of the options.
On October 12, 2000, our board of directors granted options to purchase an
aggregate of approximately 4.0 million shares of our common stock to certain
of our existing employees at an exercise price of $0.01 per share. The options
were granted under our 1998 stock plan and will vest over an 18 month period
at the rate of 40% of the total number of shares subject to the options six
months after the grant date, with the remaining shares vesting in equal
installments at the end of each six-month period thereafter. On October 12,
2000 the closing price of our common stock was approximately $2.69 per share.
Accordingly, during the fourth quarter of 2000 we will record deferred stock-
based compensation of approximately $10.7 million, which will be amortized
over the vesting period of the options.
Deferred stock-based compensation related to stock options and restricted
stock issued to our employees, including the options granted on October 12,
2000, is expected to be recognized as expense for the remainder of fiscal year
2000 and each of the next four fiscal years as follows:
<TABLE>
<CAPTION>
Fiscal Year Amount
----------- --------------
(in thousands)
<S> <C>
Q4 2000................................. $4,661
2001.................................... 9,617
2002.................................... 2,021
2003.................................... 546
2004.................................... 99
</TABLE>
Interest Income, net. Interest income represents earnings on our cash, cash
equivalents and marketable securities net of interest expense associated with
capital lease obligations. Interest income was $2.4 million in the third
quarter of 2000 and $2.3 million in the second quarter of 2000. The increase
is due to an increase in our average outstanding balance of cash, cash
equivalents and marketable securities earning interest during the third
quarter.
15
<PAGE>
Liquidity and Capital Resources
We have incurred net losses of $273.7 million from inception to October 1,
2000. We believe that we will continue to incur operating and net losses for
at least the next four years and possibly longer. As of October 1, 2000 we had
$147.1 million of cash, cash equivalents and marketable securities.
Net cash used in operating activities was $127.3 million for the first nine
months of fiscal 2000. Net cash used in operating activities for this period
primarily consisted of net losses and changes in operating assets and
liabilities partially offset by non-cash expenses.
Net cash provided by investing activities was $49.6 million for the first
nine months of fiscal 2000. Net cash provided by investing activities for this
period primarily consisted of net sales of marketable securities partially
offset by leasehold improvements and purchases of equipment and systems,
including computer equipment, warehouse handling equipment and furniture and
fixtures.
Net cash provided by financing activities was $163.8 million for the first
nine months of fiscal 2000. Net cash provided by financing activities during
the first nine months of fiscal 2000 primarily resulted from the sale of 6.0
million shares of our common stock at $18.00 per share in March 2000 and the
sale of approximately 8.1 million shares of common stock at $4.9375 per share
and approximately 46,000 shares of preferred stock at $493.75 per share in
August of 2000. Net proceeds from these sales to us aggregated approximately
$163.9 million.
Our principal commitments consist of approximately $110.8 million of
obligations through 2012 which are outstanding under capital and operating
leases, marketing agreements with certain Web portals, including Yahoo! and
MSNBC, as well as long-term marketing agreements with Amazon.com and WellPoint
Health Networks Inc. In addition, we have provided letters of credit totaling
approximately $6.0 million as security for leases. These letters of credit are
fully collaterized by an equivalent amount of our cash. As of October 1, 2000,
this cash collateral was classified as long term and included in deposits and
other assets.
We believe that our existing cash, cash equivalents and marketable
securities as of October 1, 2000 will be sufficient to meet our anticipated
needs for working capital and capital expenditures into the first half of
2002. However, any projections of future cash needs and cash flows are subject
to substantial uncertainty. If current cash, cash equivalents and marketable
securities are insufficient to satisfy our liquidity requirements, we may seek
to sell additional equity or debt securities, or to obtain credit facilities
from lenders. We cannot be certain that additional financing will be available
to us on acceptable terms when required, or at all.
New Accounting Pronouncements
In July 1999, the Financial Accounting Standards Board (FASB) announced the
delay of the effective date of Statement of Financial Accounting Standards
133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS
133), to the first quarter of 2001. SFAS 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It
requires companies to recognize all derivatives as either assets or
liabilities on the balance sheet and measure those instruments at fair value.
Gains or losses resulting from changes in the values of those derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting under SFAS 133. We do not expect the adoption
of this consensus to have a material impact on our financial statements.
In March 2000, the Emerging Issues Task Force of the FASB reached a
consensus on EITF Issue 00-2, "Accounting for Web Site Development Costs."
This consensus provides guidance on what types of costs incurred to develop a
Web site should be capitalized or expensed. We adopted this consensus in the
third quarter of 2000, and it did not have a material impact on our financial
statements.
In May 2000, the EITF reached a consensus on EITF Issue 00-14, "Accounting
for Certain Sales Incentives." This consensus addresses the recognition,
measurement, and income statement classification for
16
<PAGE>
sales incentives (such as discounts, coupons, and rebates) that a company
offers to its customers for use in a single transaction. We adopted EITF issue
00-14 in the third quarter of 2000. Accordingly, expenses related to
promotional inventory included in shipments to customers, formerly classified
as marketing and sales expense, are now classified as cost of sales. All prior
periods have been retroactively reclassified to reflect this modification. The
adoption of EITF Issue No. 00-14 did impact on our net sales, operating losses
or net losses as previously reported.
In July 2000, the EITF reached a consensus on EITF Issue 99-19, "Reporting
Revenue Gross as a Principal versus Net as an Agent." This consensus provides
guidance on whether a company should recognize revenue in the amount of the
gross amount billed to the customer because it has earned revenue from the
sale of the goods or services or whether the company should recognize revenue
based on the net amount retained because, in substance, it has earned a
commission from the vendor-manufacturer of the goods or services on the sale.
As our current accounting policies are in accordance with EITF Issue 99-19,
this consensus does not have an impact on our financial statements.
In July 2000, the EITF reached a consensus on EITF Issue 00-10 "Accounting
for Shipping and Handling Fees and Costs." This consensus indicates that
amounts billed to a customer in a sale transaction related to shipping and
handling, if any, represents revenue to the vendor and should be classified as
revenue. As we currently classify shipping fees charged to a customer in net
sales, this did not have an impact our financial statements. In September
2000, the EITF reached a final consensus with respect to the classification of
costs related to shipping and handling incurred by the seller. The Task Force
determined that the classification of shipping and handling costs is an
accounting policy decision that should be disclosed. A company may adopt a
policy of including shipping and handling costs in cost of sales, or if
shipping costs or handling costs are significant and are not included in cost
of sales, a company should disclose both the amount(s) of such costs and the
line item(s) on the income statement that include them. We include costs of
shipping in cost of sales; however, in accordance with this consensus,
handling costs, formerly classified in marketing and sales expense, have been
displayed separately as fulfillment and order processing expenses. Handling
costs include distribution center equipment and packaging supplies; per-unit
fulfillment fees charged by third parties; credit card fees and payroll and
expenses for personnel engaged in customer service, purchasing and
fulfillment. All prior periods have been retroactively reclassified to reflect
this modification. The adoption of EITF Issue No. 00-10 did not impact our net
sales, operating losses or net losses as previously reported.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We have assessed our vulnerability to certain market risks, including
interest rate risk associated with financial instruments included in cash,
cash equivalents and marketable securities. Due to the short-term nature of
these investments and our investment policies and procedures, we have
determined that the risk associated with interest rate fluctuations related to
these financial instruments does not pose a material risk to our company.
17
<PAGE>
PART II--OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(c) Sales of Unregistered Securities During the Quarter
In August 2000, we sold approximately 8.1 million shares of our common
stock at $4.9375 per share and approximately 46,000 shares of preferred stock
at $493.75 per share. The preferred stock is a participating, non-voting,
preferred instrument that converted into 4,593,989 shares of common stock on
November 10, 2000 upon stockholder approval. Total net proceeds to the Company
aggregated approximately $62.3 million. These securities were issued in
private placement transactions under Section 4(2) of the Securities Act, on
the basis that the transactions did not involve any public offering.
Item 4. Submission of Matters to a Vote of Security Holders
On November 10, 2000, we held a special meeting of the stockholders. The
purpose of the meeting was to vote upon a proposal to approve the conversion
by the holders of shares of our outstanding Series 1 preferred stock into
shares of our common stock. This proposal was approved with 48,496,996 votes
for, 175,846 votes against and 28,133 abstentions.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index.
(b) Reports on Form 8-K
Current report on Form 8-K, filed August 7, 2000, regarding a Stock
Purchase Agreement and Preferred Stock Purchase Agreement with several
purchasers. Such purchasers agreed to purchase $62,682,811.65 of Common Stock
and Convertible, Non-Voting Preferred Stock from us.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DRUGSTORE.COM, INC.
(Registrant)
/s/ David E. Rostov
By: _________________________________
David E. Rostov
Vice President, Chief Financial
Officer and Treasurer (principal
financial and chief accounting
officer)
Date: November 15, 2000
19
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
4.1 Form of drugstore.com's common stock certificate (Incorporated by
reference to exhibit 4.1 to drugstore.com's registration statement on
Form S-3/A (file number 333-45266), filed October 2, 2000).
4.2 Amazon.com Warrant dated July 30, 2000 (Incorporated by reference to
exhibit 4.3 to drugstore.com's registration statement on Form S-3
(file number 333-45266), filed September 6, 2000).
4.3 Tel-Drug Agreement dated June 26, 2000 (Incorporated by reference to
exhibit 4.4 to drugstore.com's registration statement on Form S-3
(file number 333-45266), filed September 6, 2000).
10.1 Common Stock Purchase Agreement dated July 30, 2000 (Incorporated by
reference to exhibit 10.1 to drugstore.com's registration statement on
Form S-3 (file number 333-45266), filed September 6, 2000).
10.2 Series 1 Preferred Stock Purchase Agreement dated July 30, 2000
(Incorporated by reference to exhibit 10.2 to drugstore.com's
registration statement on Form S-3 (file number 333-45266), filed
September 6, 2000).
10.3 Amendment No. 1, dated July 29, 2000, to the Agreement between
Amazon.com Commerce Services, Inc. and the Registrant dated January
24, 2000 (Incorporated by reference to exhibit 10.3 to drugstore.com's
registration statement on Form S-3 (file number 333-45266), filed
September 6, 2000).
10.4 Agreement between drugstore.com, inc. and WellPoint Health Networks
Inc. dated June 23, 2000 (Incorporated by reference to exhibit 10.4 to
drugstore.com's registration statement on Form S-3 (file number 333-
45266), filed September 6, 2000).
10.5 Fourth Addendum to Fourth Amended and Restated Investors' Rights
Agreement dated September 29, 2000 (Incorporated by reference to
exhibit 10.7 to drugstore.com's registration statement on Form S-3/A
(file number 333-45266), filed October 2, 2000).
27.1 Financial Data Schedule.
</TABLE>
