<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement
[_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(E)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S) 240.14a-11(c) or (S) 240.14a-12
drugstore.com, inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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Notes:
<PAGE>
[LOGO OF DRUGSTORE.COM]
May 12, 2000
Dear Stockholder:
You are cordially invited to attend the annual meeting of the stockholders
(the "Annual Meeting") of drugstore.com, inc., a Delaware corporation, to be
held on Wednesday, June 21, 2000 at 9:00 AM Pacific Time, at Embassy Suites
Hotel, Diplomat Room, 3225--158th Avenue Southeast, Bellevue, Washington
98008-6401.
At the Annual Meeting, you will be asked to consider and vote upon the
following:
1. The election of our directors;
2. A proposal to amend our 1998 stock plan to provide for an increase in
the number of shares of our common stock available for issuance
thereunder; and
3. The ratification of the appointment of Ernst & Young LLP as our
independent auditors for the 2000 fiscal year.
The attached Proxy Statement presents the details of these proposals.
Our board of directors has unanimously approved proposals (1), (2) and (3)
above and recommends that you vote FOR each proposal's approval and adoption.
Your participation and vote is important. The election of directors will not
be effected without the affirmative vote of a plurality of the outstanding
common stock present, in person or by proxy, and voting at the Annual Meeting.
The adoption of the proposals to amend our 1998 stock plan and to ratify the
appointment of Ernst & Young LLP as our independent auditors will not be
effected without the affirmative vote of at least a majority of the
outstanding common stock present, in person or by proxy, and voting at the
Annual Meeting.
For further information regarding the matters to be voted on at the Annual
Meeting, I urge you to carefully read the accompanying Proxy Statement, dated
May 12, 2000. If you have more questions about these proposals or would like
additional copies of the Proxy Statement, you should contact David E. Rostov,
Chief Financial Officer of drugstore.com, inc., 13920 Southeast Eastgate Way,
Suite 300, Bellevue, Washington 98005; telephone: (425) 372-3200. Even if you
plan to attend the Annual Meeting in person, please complete, sign, date, and
promptly return the enclosed proxy card in the enclosed postage-prepaid
envelope. This will not limit your right to attend or vote at the Annual
Meeting.
Sincerely,
/s/ Peter M. Neupert
Peter M. Neupert
Chairman of the Board, President and
Chief Executive Officer
The accompanying Proxy Statement is dated May 12, 2000 and is first being
mailed to stockholders on or about May 19, 2000.
<PAGE>
[LOGO OF DRUGSTORE.COM]
----------------
NOTICE OF THE ANNUAL MEETING OF STOCKHOLDERS
June 21, 2000
----------------
To the Stockholders of
DRUGSTORE.COM, INC.:
NOTICE IS HEREBY GIVEN that the 2000 annual meeting of the stockholders (the
"Annual Meeting") of drugstore.com, inc., a Delaware corporation, will be held
on Wednesday, June 21, 2000 at 9:00 AM Pacific Time, at Embassy Suites Hotel,
Diplomat Room, 3225--158th Avenue Southeast, Bellevue, Washington 98008-6401.
The Annual Meeting will be held for the following purposes:
1. To elect our directors to serve a one-year term;
2. To consider and act upon a proposal to amend our 1998 stock plan to
provide for an increase in the number of shares of our common stock
available for issuance thereunder;
3. To ratify the appointment of Ernst & Young LLP as our independent
auditors for the 2000 fiscal year; and
4. To transact such other business as may properly come before the Annual
Meeting and any adjournment(s) thereof.
Only stockholders of record at the close of business on May 4, 2000 are
entitled to notice of and to vote at the Annual Meeting.
All stockholders are cordially invited to attend the Annual Meeting in
person. However, to ensure your representation at the Annual Meeting, you are
urged to complete, sign, date and return the enclosed proxy card as promptly
as possible in the postage-prepaid envelope enclosed for that purpose. Any
stockholder attending the Annual Meeting may vote in person, even though the
stockholder has previously returned a proxy.
By Order of the Board of Directors
of drugstore.com, inc.
/s/ Mark L. Silverman
Mark L. Silverman
Vice President, Business
Development, General Counsel and
Secretary
Bellevue, Washington
May 12, 2000
YOUR VOTE IS IMPORTANT
In order to ensure your representation at the Annual Meeting, you are
requested to complete, sign and date the enclosed proxy as promptly as
possible and return it in the enclosed envelope.
<PAGE>
[LOGO OF DRUGSTORE.COM]
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
To be held on Wednesday June 21, 2000
INFORMATION CONCERNING SOLICITATION AND VOTING
General
This Proxy Statement is being furnished by our board of directors to holders
of our common stock, par value $0.0001 per share, in connection with the
solicitation of proxies by our board of directors for use at the annual
meeting of our stockholders (the "Annual Meeting") to be held on Wednesday,
June 21, 2000 at 9:00 AM Pacific Time, at Embassy Suites Hotel, Diplomat Room,
3225--158th Avenue Southeast, Bellevue, Washington 98008-6401 and at any
adjournment or postponement thereof. The purposes of the Annual Meeting are
set forth in this proxy statement and in the accompanying Notice of Annual
Meeting of Stockholders.
Our complete mailing address is drugstore.com, inc., 13920 Southeast
Eastgate Way, Suite 300, Bellevue, Washington 98005, and our telephone number
is (425) 372-3200.
This Proxy Statement and the accompanying form of proxy are first being
mailed to our stockholders on or about May 19, 2000.
Stockholders Entitled to Vote; Vote Required
Our board of directors has fixed the close of business on May 4, 2000 as the
record date for the determination of the stockholders entitled to notice of
and to vote at the Annual Meeting (the "Record Date"). Accordingly, only
holders of record on the Record Date will be entitled to notice of, and to
vote at, the Annual Meeting. As of the Record Date, there were outstanding and
entitled to vote 52,171,395 shares of our common stock, constituting all of
our voting stock. As of the Record Date, there were approximately 253 holders
of record of our common stock. Each holder of record of our common stock on
the Record Date is entitled to one vote per share, which may be cast either in
person or by properly executed proxy, at the Annual Meeting. A plurality of
the shares present in person or represented by proxy at the meeting and
actually cast will elect the directors. Holders of common stock are not
allowed to cumulate their votes in the election of directors. All other
matters submitted to a vote of stockholders require the affirmative vote of a
majority of the outstanding shares present at the meeting and entitled to vote
for approval. A complete list of stockholders entitled to vote at the Annual
Meeting will be available for inspection by any stockholder for any purpose
germane to the Annual Meeting for 10 days prior to the Annual Meeting during
ordinary business hours at our headquarters located at 13920 Southeast
Eastgate Way, Suite 300, Bellevue, Washington 98005. The presence, in person
or by properly executed proxy, of the holders of a majority of the outstanding
shares of our common stock entitled to vote at the Annual Meeting is necessary
to constitute a quorum at the Annual Meeting.
Shares of our common stock represented in person or by proxy will be counted
for the purpose of determining whether a quorum is present at the Annual
Meeting. Shares that abstain from voting, and shares held in a street name by
a broker nominee who indicates on a proxy that it does not have discretionary
authority to vote as to a particular matter ("Broker Non-Votes"), will be
treated as shares that are present and entitled to vote at the Annual Meeting
for purposes of determining whether a quorum exists. In the election of
directors, an abstention or Broker Non-Vote will have no effect on the
outcome. For all other matters to be voted on, abstentions will be treated as
votes AGAINST a particular matter and Broker Non-Votes will not be considered
as shares entitled to vote on a particular matter and, accordingly, will have
no effect on the outcome of the vote with respect to a particular matter.
<PAGE>
Proxies
This Proxy Statement is being furnished to you in connection with the
solicitation of proxies by, and on behalf of, our board of directors for use
at the Annual Meeting, and is accompanied by a form of proxy.
All shares of our common stock that are entitled to vote and are represented
at the Annual Meeting by properly executed proxies received prior to or at the
Annual Meeting, and not revoked, will be voted at the Annual Meeting in
accordance with the instructions indicated on such proxies. If no instructions
are indicated (other than in the case of Broker Non-Votes), such proxies will
be voted as recommended by our board of directors.
If any other matters are properly presented at the Annual Meeting for
consideration, including, among other things, consideration of a motion to
adjourn such Annual Meeting to another time and/or place (including, without
limitation, for the purposes of soliciting additional proxies), the persons
named in the enclosed forms of proxy and acting thereunder will have
discretion to vote on such matters in accordance with their judgment.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by (i) filing
with our Secretary, at or before the taking of the vote at the Annual Meeting,
a written notice of revocation bearing a later date than the proxy, (ii) duly
executing a letter and delivering it to us before the taking of the vote at
the Annual Meeting or (iii) attending the Annual Meeting and voting in person
(although attendance at the Annual Meeting will not in and of itself
constitute a revocation of the proxy). Any written notice of revocation or
subsequent proxy should be sent to drugstore.com, inc., 13920 Southeast
Eastgate Way, Suite 300, Bellevue, Washington 98005, Attention: Secretary, or
hand delivered to our Secretary at or before the taking of the vote at the
Annual Meeting.
We will pay the cost of soliciting proxies. In addition to solicitation by
use of the mails, proxies may be solicited from our stockholders by our
directors, officers and employees in person or by telephone, telegram or other
means of communication. Such directors, officers and employees will not be
additionally compensated, but may be reimbursed for reasonable out-of-pocket
expenses in connection with such solicitation. Arrangements will be made with
brokerage houses, custodians, nominees and fiduciaries for forwarding of proxy
materials to beneficial owners of shares held of record by such brokerage
houses, custodians, nominees and fiduciaries and for reimbursement of their
reasonable expenses incurred in connection therewith.
PROPOSAL NO. 1--ELECTION OF DIRECTORS
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. Each executive officer serves until his or her successor has
been duly elected and qualified. There are no family relationships among any
of our directors, officers and key employees of drugstore.com.
Each member of our board of directors is eligible for re-election at the
Annual Meeting for an additional one-year term. The persons named as proxies
in the enclosed form of proxy intend to vote your proxy for the re-election of
our directors, unless otherwise directed. If, contrary to our expectations, a
nominee should become unavailable for any reason, votes may be cast pursuant
to the accompanying form of proxy for a substitute nominee designated by the
board of directors.
Nominees
Peter M. Neupert, 44, 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
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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 is also a director of Avenue A, Inc. Mr. Neupert
holds an M.B.A. from the Amos Tuck School of Business at Dartmouth College and
a B.A. from Colorado College.
Jeffrey P. Bezos, 36, has served as a director of drugstore.com since August
1998. Mr. Bezos, a founder of Amazon.com, Inc., has served as Chairman of the
Board of Directors of Amazon.com since its founding in 1994, Chief Executive
Officer of Amazon.com since May 1996, President of Amazon.com from its
founding 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, 54, 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 Ventro, Inc. 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, 48, 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/WebMD Corporation, Intuit, Inc., Epicor Softwear
Corporation, Homestore.com, Martha Stewart Living Omnimedia, Inc., Lightspan
Partnership, 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, 35, 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 Bill and Melinda 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, 53, 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 served
Fred Meyer Stores in various capacities since 1973. Ms. Sammons received her
B.A. in French and a secondary-level teaching certificate from Marylhurst
College (now Marylhurst University).
William D. Savoy, 35, 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 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 a
director of Charter Communications, Inc., Go2Net, Inc., Harbinger
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Corporation, High Speed Access Corporation, Metricom, Inc., RCN Corporation,
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, 46, 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. Beginning on June 1, 2000, Mr. Schultz will serve as
Chairman of the Board and Chief Global Strategist 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.
Board Of Directors' Meeting And Committees
Our board of directors held seven meetings during fiscal 1999 and took
actions twelve times by unanimous written consent. Our board has an audit
committee and a compensation committee. Our compensation committee has a stock
option subcommittee and an ESPP subcommittee.
Compensation Committee. The compensation committee of the board of directors
reviews and makes recommendations to the board regarding all forms of
compensation and benefits provided to our officers. In addition, the
compensation committee establishes and reviews general policies relating to
the compensation and benefits of all of our employees. The current members of
the compensation committee are Peter M. Neupert and 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. The Compensation Committee took action by unanimous written consent two
times during fiscal year 1999.
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. In fiscal year 1999 Peter M.
Neupert was 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. In fiscal year
1999 Peter M. Neupert was 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. The
Audit Committee also recommends to our board of directors the independent
public accountants to be selected to conduct the annual audit of our accounts.
Brook H. Byers and William D. Savoy were the members of the audit committee
for the fiscal year 1999. The Audit Committee met one time during fiscal year
1999.
No director attended fewer than 80% of the aggregate number of meetings of
the board of directors and meetings of the committees of the board on which he
or she served during fiscal year 1999 except for Mrs. Gates who attended two
of the four meetings of the board of directors that have occurred since she
was elected to the board of directors.
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
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board and committee meetings. Under our 1998 stock plan, non-employee
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 non-employee 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.
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, as defined by the Securities Exchange Act of 1934,
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.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT STOCK OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of May 4, 2000 by:
. each stockholder known by us to own beneficially more than 5% of our
common stock;
. each director and director nominee;
. the Chief Executive Officer and the three other highest paid executive
officers; and
. all directors and executive officers as a group.
As of May 4, 2000, we had 52,171,395 shares of common stock outstanding and
253 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 May 4,
2000 are deemed outstanding, while such shares are not deemed outstanding for
purposes of computing the ownership percentage 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. The
address for individuals that beneficially own 5% or more of our common stock
is the same as the address of the entity affiliated with such individual
indicated in the applicable footnote.
<TABLE>
<CAPTION>
Percentage of
Number of Shares of Common Stock
Name and Address of Beneficial Owner Common Stock Beneficially Owned
- ------------------------------------ ------------------- ------------------
<S> <C> <C>
Amazon.com, Inc.(1).................... 12,355,745 23.7%
1516 2nd Avenue
Seattle, WA 98101
Rite Aid Corporation(2)................ 9,334,746 17.9
30 Hunter Lane
Camp Hill, PA 17011
Kleiner Perkins Caufield & Byers(3).... 7,033,271 13.5
2750 Sand Hill Road
Menlo Park, CA 94025
General Nutrition Investment 2,947,853 5.7
Company(4)............................
1002 South 63rd Avenue At Buckeye
Phoenix, AZ 15222
</TABLE>
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<TABLE>
<CAPTION>
Percentage of
Number of Shares of Common Stock
Name and Address of Beneficial Owner Common Stock Beneficially Owned
- ------------------------------------ ------------------- ------------------
<S> <C> <C>
Vulcan Ventures, Incorporated(5)...... 2,266,289 4.3
110 110th Avenue NE, Suite 550
Bellevue, WA 98004
Peter M. Neupert(6)................... 1,964,812 3.8
13920 Southeast Eastgate Way, Suite
300
Bellevue, WA 98005
Maveron Equity Partners, L.P.(7)...... 1,187,183 2.3
Jeffrey P. Bezos(1)................... 12,355,745 23.7
Brook H. Byers(3)..................... 7,033,271 13.5
L. John Doerr(3)...................... 7,033,271 13.5
Melinda French Gates.................. -- --
Mary Sammons(8)....................... 9,334,746 17.9
William Savoy(5)...................... 2,276,289 4.4
Howard Schultz(7)..................... 1,187,183 2.3
Kal Raman(9).......................... 63,087 *
David E. Rostov(10)................... 49,005 *
Mark L. Silverman(11)................. 53,252 *
All directors and executive officers 34,317,890 65.5
as a group (12 persons)(12)..........
</TABLE>
- --------
* Less than 1%
(1) Includes 1,066,667 shares of common stock issued and sold to Amazon.com,
Inc. 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 May 4, 2000, 682,500 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 91,666 shares
subject to options exercisable within 60 days of May 4, 2000.
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(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
May 4, 2000.
(10) Includes 1,000 shares held by Mr. Rostov as custodian for his two
children and 22,500 shares subject to options exercisable within 60 days
of May 4, 2000.
(11) Includes 20,500 shares subject to options exercisable within 60 days of
May 4, 2000.
(12) Includes 199,916 shares subject to options held by the directors and
officers exercisable within 60 days of May 4, 2000.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
Composition of the Committee
During fiscal year 1999, our compensation committee consisted of Peter M.
Neupert and Howard Schultz. Mr. Schultz is an "outside director" within the
meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended,
and a "non-employee director" within the meaning of Rule 16b-3 of the
Securities Exchange Act of 1934, as amended. As an officer of drugstore.com,
Mr. Neupert does not satisfy the definitions of "outside director" and "non-
employee director." Consequently, as discussed below, the entire board of
directors determines Mr. Neupert's compensation.
Our compensation committee has a stock option subcommittee that has the
authority to grant stock options to individuals who are not executive officers
or directors of drugstore.com and an ESPP subcommittee that administers our
1999 employee stock purchase plan. Mr. Neupert is the sole member of both
subcommittees.
Compensation Philosophy
We offer compensation packages designed to attract and retain outstanding
employees, to encourage and reward the achievement of corporate goals and to
align employee financial interests with long-term stockholder value. Our
compensation policy is to offer a package including a competitive salary, an
incentive bonus based upon individual performance goals and competitive
benefits. We also encourage broad-based employee ownership of drugstore.com
common stock through employee stock purchase and stock option programs in
which most employees are eligible to participate.
Our compensation policy for executive officers is similar to that for other
employees, and is designed to promote continued performance and attainment of
corporate and personal goals. Executive officers receive total compensation
packages in line with their responsibilities and expertise.
Cash-Based Compensation
The salaries of the executive officers, other than the chief executive
officer, are determined annually by the compensation committee with reference
to several surveys of salaries paid to executives with similar
responsibilities at comparable companies in the high technology industry. Each
executive officer, other than the chief executive officer, is eligible to
receive a cash bonus at the discretion of the compensation committee based
upon individually established performance goals.
Stock-Based Compensation
We seek to align the long-term interests of our executive officers (and
other employees) with those of our stockholders. As a result, each executive
officer receives a significant stock option grant when he or she joins the
company or is promoted to executive officer. Stock-based compensation is
determined annually by the
7
<PAGE>
compensation committee with reference to several surveys of equity
compensation awarded to executives with similar responsibilities at comparable
companies in the high technology industry. Grant sizes are determined based on
various subjective factors primarily relating to the responsibilities of the
individual officers, their anticipated contributions to our success and prior
option grants. We intend to grant additional stock options to executive
officers from time-to-time based on performance and potential. The
compensation committee establishes goals as an incentive for superior
individual, group, and corporate performance.
Ongoing Review
The compensation committee will evaluate our compensation policies on an
ongoing basis to determine whether they enable us to attract, retain and
motivate key personnel. To meet these objectives, we may from time to time
increase salaries, award additional stock options or provide other short- and
long-term incentive compensation to executive officers.
Policy Regarding Section 162(m) of the Internal Revenue Code
We are subject to Section 162(m) of the Internal Revenue Code of 1986, as
amended, which limits the deductibility of certain compensation payments to
our executive officers in excess of $1 million. Section 162(m) also provides
for certain exemptions to the limitations on deductibility, including
compensation that is "performance based" within the meaning of Section 162(m).
As discussed above, because of the composition of our compensation committee,
we currently cannot avail ourselves of the "performance-based" compensation
exception of Section 162(m).
Peter M. Neupert
Howard Schultz
BOARD OF DIRECTORS' REPORT ON COMPENSATION OF
THE CHIEF EXECUTIVE OFFICER
The entire board of directors (other than Mr. Neupert) annually reviews and
approves the compensation of Peter M. Neupert, the Chief Executive Officer. In
making its decisions, the board uses the same policies and goals that are used
by the compensation committee in determining compensation for other executive
officers. The terms of Mr. Neupert's compensation are set forth in his offer
letter. For 1999, Mr. Neupert received a base salary of $249,184 and a bonus
of $250,000. The board of directors believes Mr. Neupert is paid a reasonable
salary, and his bonus is based on the same corporate financial goals as our
other executive officers. In addition, Mr. Neupert is a significant
stockholder in drugstore.com, and to the extent his performance as chief
executive officer translates into an increase in the value of our common
stock, all stockholders, including him, share the benefits.
Jeffrey P. Bezos
Brook H. Byers
L. John Doerr
Melinda French Gates
Mary Sammons
William D. Savoy
Howard Schultz
8
<PAGE>
PERFORMANCE GRAPH
The following graph compares the cumulative total return to stockholders for
drugstore.com, inc., the Nasdaq Stock Market Index-U.S. and the Morgan Stanley
High Technology Index. The graph assumes that $100 was invested in our common
stock and in each index on July 27, 1999, the date of our IPO, assuming
reinvestment of dividends. No dividends have been declared or paid on our
common stock. Stockholder returns over the indicated period should not be
considered indicative of future stockholder returns.
Comparison of 8-month Cumulative Total Return* Among drugstore.com, inc.,
the Nasdaq Stock Market (U.S.) Index and the Morgan Stanley High Technology
Index
[PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
Nasdaq Stock
Market Morgan Stanley High
Date drugstore.com, inc. (U.S.) Technology Index
- ---- ------------------- ------------ -------------------
<S> <C> <C> <C>
7/27/99.................... $100 $100 $100
12/31/99................... $201 $150 $150
</TABLE>
- --------
* $100 invested on 7/27/99 in stock or index including reinvestment of
dividends.
9
<PAGE>
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
Annual Compensation
Compensation Awards
----------------- 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 $123,794 $ 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, 1998 44,217 5,255 150,000 101
Marketing
and Store Development
</TABLE>
- --------
(1) Represents a 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.
10
<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 Annual
Number of Options Rates of Stock
Securities Granted to Appreciation For
Underlying Employees 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.
11
<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 Value of Unexercised
Securities Underlying In-the-Money
Unexercised Options Options at Fiscal
Number of at Fiscal Year-End (#) Year-End (1)
Shares Acquired Value ------------------------- -------------------------
Name on Exercise Realized Unexercisable Exercisable Unexercisable Exercisable
- ---- --------------- ---------- ------------- ----------- ------------- -----------
<S> <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.
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 May 4, 2000, our right to
repurchase has lapsed with respect to 577,500 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 prior to the transaction, 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 150,000 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.
12
<PAGE>
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 150,000
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 at drugstore.com or if his employment is terminated
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 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 continued
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.
13
<PAGE>
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,
Inc. 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 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 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 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.
(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
14
<PAGE>
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 General Nutrition Companies, Inc., 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 General Nutrition Companies,
Inc. 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.
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 other's 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 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 board
of directors.
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'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
15
<PAGE>
relationship, we have created a separate part of our Web site called the GNC
LiveWell Store, which is dedicated to selling on 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.
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.
We have entered into offer letters with several of our executive officers.
See "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 and Chief Operating Officer. 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.
PROPOSAL NO. 2--APPROVAL OF AMENDMENT OF THE 1998 STOCK PLAN
On May 4, 2000, our board of directors amended, subject to stockholder
approval, the number of shares of common stock reserved for issuance under our
1998 stock plan. Currently, there are 11,000,000 shares of common stock
reserved for issuance under our 1998 stock plan. The amendment provides for an
increase in the number of shares reserved for issuance, to:
. 18,000,000 shares (an increase of 7,000,000 shares), plus
. an automatic annual increase, beginning on the first day of our fiscal
year starting in 2001, equal to (i) the lesser of (a) 5% of the
outstanding shares of common stock as of the end of the immediately
preceding fiscal year and (b) 6,000,000 shares or (ii) a lesser amount
determined by the plan administrator; provided that any shares from any
such increase in previous years that are not actually issued will be
added to the aggregate number of shares available for issuance under the
1998 stock plan.
16
<PAGE>
This amendment is being submitted for approval by the affirmative vote of
the holders of a majority of the shares represented, in person or by proxy,
and voting at the Annual Meeting. The following is a description of the
material features of our 1998 stock plan. A copy of our 1998 stock plan may be
obtained upon written request to David E. Rostov, our Chief Financial Officer,
at the address listed on page 1.
General Description of the 1998 Stock Plan
Our 1998 stock plan provides for the grant of incentive stock options under
Section 422 of the Internal Revenue Code 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. As of May 4, 2000, options to purchase
10,453,309 shares of common stock were outstanding at a weighted average
exercise price of $15.2382 per share, 8,000 shares had been issued pursuant to
restricted stock purchase agreements, 449,533 shares had been issued upon
exercise of outstanding options, and 97,158 shares remained available for
future grant. The closing price of the drugstore.com common stock on May 4,
2000 was $8.6250.
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. The board of directors authorizes awards under
the 1998 stock plan for our executive officers and non-employee directors.
Awards to all other employees are determined by the stock option subcommittee
of our compensation committee in amounts that it deems appropriate based on
each employee's position and responsibilities and the number of newly hired
employees. For this reason, it is not possible to determine the benefits or
amounts of the awards that will be received by any particular employees or
group of employees in the future.
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.
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.
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). 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, however, if such termination is due to the
disability of the optionee, the option will remain exercisable for 12 months.
Upon an optionee's death, options will remain exercisable for 6 months. In no
event will an option remain exercisable later than the expiration of the
option's term.
No option may be transferred by the optionee other than by will or the laws
of descent or distribution, provided, however, that the administrator may in
its discretion provide for the transferability of nonstatutory stock options
granted under the 1998 stock plan if the common stock is listed or approved
for listing on a national
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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 1998 stock plan will terminate in July 2008 unless it is earlier
terminated by the board of directors.
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 the event of a stock split, reverse stock split, stock dividend,
combination, recapitalization or reclassification of our common stock, the
board of directors may, but is not required to, proportionately adjust the
number of shares underlying any outstanding stock options and the exercise
price per share of such outstanding stock options.
Federal Income Tax Consequences
The material U.S. federal income tax consequences to drugstore.com and to
any person granted an award under the 1998 stock plan who is subject to
taxation in the United States under existing applicable provisions of the
Internal Revenue Code of 1986, as amended, and underlying Treasury Regulations
are substantially as follows. The following summary does not address state,
local or foreign tax consequences and it is based on present law and
regulations as in effect as of the date hereof.
Nonstatutory Stock Options. No income will be recognized by an optionee upon
the grant of a nonstatutory stock option. Upon the exercise of a nonstatutory
stock option, the optionee will recognize taxable ordinary income in an amount
equal to the excess of the fair market value at the time of exercise of the
shares acquired over the exercise price and the optionee's tax basis in the
shares will equal the fair market value on the date of exercise. Upon a later
sale of those shares, the optionee will have capital gain or loss equal to the
difference between the amount realized on such sale and the tax basis of the
shares sold. Furthermore, this capital gain or loss will be long-term capital
gain or loss if the shares are held for more than one year before they are
sold. Certain additional rules apply if the exercise price for a nonstatutory
stock option is paid in previously owned shares or other securities.
Incentive Stock Options. No income will be recognized by an optionee upon
the grant of an incentive stock option. The rules for the tax treatment of a
nonstatutory option also apply to an incentive stock option that is exercised
more than three months after the optionee's termination of employment (or more
than 12 months thereafter in the case of permanent and total disability, as
defined in the 1998 stock plan).
Upon the exercise of an incentive stock option during employment or within
three months after the optionee's termination of employment (12 months in the
case of permanent and total disability), for regular tax purposes the optionee
will recognize no ordinary income at the time of exercise (although the
optionee will have income for alternative minimum income tax purposes at that
time equal to the excess of the fair market value of the shares over the
exercise price). If the acquired shares are sold or exchanged after the later
of (i) one year from the date of exercise of the option and (ii) two years
from the date of grant of the option, the difference between the amount
realized by the optionee on that sale or exchange and the option exercise
price will be taxed to the optionee as long-term capital gain or loss. If the
shares are disposed of in an arms' length sale before such holding period
requirements are satisfied, then the optionee will recognize taxable ordinary
income in the year of
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disposition in an amount equal to the excess of the fair market value of the
shares received on the exercise date over the exercise price (or, if less, the
excess of the amount realized on the sale of the shares over the exercise
price), and the optionee will have short-term or long-term capital gain or
loss, as the case may be, in an amount equal to the difference between (i) the
amount realized by the optionee upon the disposition of the shares and (ii)
the exercise price paid by the optionee increased by the amount of ordinary
income, if any, so recognized by the optionee.
drugstore.com Deduction. In all the foregoing cases, we will be entitled to
a deduction at the same time and in the same amount as the participant
recognizes ordinary income, subject to certain limitations. Among these
limitations is Section 162(m) of the Internal Revenue Code. Certain
performance-based compensation is not subject to the Section 162(m) limitation
on deductibility. Stock options and restricted stock and performance share
awards can qualify for this performance-based exception if they meet the
requirements set forth in Section 162(m) and Treasury Regulations promulgated
thereunder. The 1998 stock plan has been drafted to allow (but not require)
compliance with those performance-based criteria; however, due to the current
composition of the compensation committee, grants under the plan are not made
in compliance with Section 162(m).
Our board of directors unanimously approved the amendment of the 1998 stock
plan and recommends that stockholders vote FOR this amendment.
The affirmative vote of a majority of the shares represented, in person or
by proxy, and voting at the Annual Meeting (at which a quorum is present) is
required to approve this amendment.
PROPOSAL NO. 3--RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
Our board of directors, upon the recommendation of our audit committee, has
appointed Ernst & Young LLP as our independent auditors, to audit our
consolidated financial statements for the 2000 fiscal year. This appointment
is being presented to the stockholders for ratification at the Annual Meeting.
Ernst & Young LLP has served as our independent auditors since 1998.
Representatives of Ernst & Young LLP are expected to be present at the meeting
and will be given the opportunity to make a statement should they desire to do
so, and are expected to be available to respond to appropriate questions from
the stockholders.
Our board of directors unanimously approved the appointment of Ernst & Young
LLP as our independent auditors for the 2000 fiscal year and recommends that
stockholders vote FOR ratification of the appointment of Ernst & Young LLP.
The affirmative vote of a majority of the shares represented, in person or
by proxy, and voting at the Annual Meeting (at which a quorum is present) is
required to ratify the board of directors' selection of Ernst & Young LLP. If
the appointment is not ratified, the board of directors will seek other
independent auditors.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under Section 16(a) of the Securities and Exchange Act of 1934, as amended,
our directors, executive officers, and any persons holding more than ten
percent of our common stock are required to report to the Securities and
Exchange Commission and the Nasdaq National Market their initial ownership of
our stock and any subsequent changes in that ownership. Based on a review of
Forms 3, 4 and 5 under the Securities Exchange Act furnished to us, we believe
that during fiscal year 1999, our officers, directors and holders of more than
10 percent of our common stock filed all Section 16(a) reports on a timely
basis.
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OTHER MATTERS
We know of no other matters that are likely to be brought before the Annual
Meeting. If, however, other matters not now known or determined properly come
before the Annual Meeting, the persons named as proxies in the enclosed proxy
card or their substitutes will vote such proxy in accordance with their
discretion with respect to such matters.
DEADLINE FOR RECEIPT OF STOCKHOLDER PROPOSALS FOR 2001 ANNUAL MEETING
If you want us to consider including a proposal in next year's proxy
statement, you must deliver it in writing to us at drugstore.com, inc., 13920
Southeast Eastgate Way, Suite 300, Bellevue, Washington 98005, Attention:
Secretary, no later than January 3, 2001. All proposals must comply with the
requirements of Rule 14a-8 under the Securities Exchange Act of 1934, as
amended.
In addition, our Bylaws include advance notice provisions that require
stockholders desiring to bring nominations or other business before an annual
stockholders meeting to do so in accordance with the terms of the advance
notice provisions. These advance notice provisions require that, among other
things, stockholders give timely written notice to our Secretary not more than
120, or less than 90, days prior to the date of the annual meeting as
determined under our Bylaws. We reserve the right to reject, rule out of order
or take other appropriate action with respect to any proposal that does not
comply with these and other applicable requirements.
ANNUAL REPORT
A copy of our combined annual report to stockholders and annual report on
form 10-K for the fiscal year ended January 2, 2000 accompanies this proxy
statement. An additional copy will be furnished without charge to beneficial
stockholders or stockholders of record upon request to David E. Rostov, Chief
Financial Officer of drugstore.com, inc., 13920 Southeast Eastgate Way, Suite
300, Bellevue, Washington 98005 or upon calling (425) 372-3200.
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PROXY
drugstore.com, inc.
PROXY FOR 2000 ANNUAL MEETING OF STOCKHOLDERS
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
OF DRUGSTORE.COM, INC.
The undersigned stockholder of drugstore.com, inc., a Delaware corporation,
hereby appoints Peter M. Neupert and Mark L. Silverman as proxies for the
undersigned, with full power of substitution, to attend the 2000 Annual Meeting
of Stockholders of drugstore.com, inc. to be held on Wednesday, June 21, 2000 at
9:00 AM Pacific Time, at Embassy Suites Hotel, Diplomat Room, 3225 - 158th
Avenue Southeast, Bellevue, Washington 98008-6401, and at any adjournment(s) or
postponement(s) thereof, to cast on behalf of the undersigned all votes that the
undersigned is entitled to cast at such meeting and otherwise to represent the
undersigned at the meeting, with the same effect as if the undersigned were
present. The undersigned hereby revokes any proxy previously given with respect
to such shares.
Shares represented by this proxy will be voted as directed by the stockholder.
If no such directions are indicated, the proxies will have authority to vote FOR
the nominees for director and FOR the proposals.
The undersigned acknowledges receipt of the Notice of Annual Meeting of
Stockholders and the accompanying Proxy Statement.
SEE REVERSE SEE REVERSE
SIDE SIDE
. FOLD AND DETACH HERE .
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Please mark
[X] votes as in
this example.
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE
SPECIFICATIONS MADE. IF THIS PROXY IS EXECUTED BUT NO SPECIFICATION IS MADE, THE
SHARES REPRESENTED BY THIS PROXY WILL BE VOTED FOR THE NOMINEES FOR DIRECTOR AND
FOR THE FOLLOWING PROPOSALS AND OTHERWISE IN THE DISCRETION OF THE PROXIES AT
THE MEETING OR ANY ADJUSTMENT(S) OR POSTPONEMENT(S) THEREOF.
1. Election of Directors:
WITHHELD
FOR THE FROM THE
NOMINEES NOMINEES
[ ] [ ]
Nominees: 01 Peter M. Neupert 05 Melinda French Gates
02 Jeffrey P. Bezos 06 Mary Sammons
03 Brook H. Byers 07 William D. Savoy
04 L. John Doerr 08 Howard Schultz
INTRUCTIONS: To withhold authority to vote for any individual nominee, write
that nominee's name on the space provided below.
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2. Approval of an amendment to the 1998 Stock Plan to provide for an increase
in the number of shares of common stock available for issuance thereunder.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
3. Ratification of appointment by the Company's Board of Directors of Ernst &
Young LLP to serve as the Company's independent auditors for the 2000 fiscal
year.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
MARK HERE IF YOU PLAN TO [ ]
ATTEND THE MEETING
MARK HERE FOR ADDRESS [ ]
CHANGE AND NOTE BELOW
PLEASE MARK, SIGN, DATE AND PROMPTLY RETURN THIS PROXY
IN THE ENCLOSED ENVELOPE.
Signature: ______________________________________ Date: _____________________
Please sign exactly as name appears hereon and date. If the shares are held
jointly, each holder should sign. When signing as an attorney, executor,
administrator, trustee, guardian or as an officer signing for a corporation,
please give full line under signature.
. FOLD AND DETACH HERE.
