Prospectus Summary
You should read the following summary together with the more detailed information regarding our company and the common stock being sold in this offering and our Consolidated Financial Statements and Notes to Consolidated Financial Statements appearing elsewhere in this prospectus.
drugstore.com is a leading online drugstore: a retail store and information site for health, beauty, wellness, personal care and pharmacy products. As of January 2, 2000 we had sold our products to approximately 695,000 customers. We designed our store to provide a convenient, private and informative shopping experience that encourages consumers to purchase products essential to healthy, everyday living. We believe that our online store delivers a superior customer experience, making buying What Every Body Needs(TM) less of a chore.
International Data Corporation estimates that worldwide business-to-consumer sales over the Internet will increase from approximately $11 billion in 1998 to approximately $93 billion by 2002. The Internet has also become an important personal tool for accessing health and medical information. According to a recent Forrester Research report, 32% of online consumers shop for healthcare products online.
We believe there is a significant market opportunity for an online store that can offer consumers an enhanced shopping experience for health, beauty, wellness, personal care and pharmacy products. We seek to attract and retain consumers by emphasizing the following key attributes:
. Convenience. We feature 24 hour a day access to our user-friendly Web store, direct home or office delivery, a personalized shopping list and confidential access to a personal medication profile.
. Selection. We believe we offer a significantly greater number of products than are available in a typical traditional chain drugstore.
. Information. We have assembled a broad array of product information to assist customers in making informed buying decisions. We offer full product packaging information, extensive drug information, customer reviews of products, and a Solutions area which includes buying guides, reference information, interactive shopping advisors and articles on beauty trends and products.
. Communication. We can communicate with customers on a regular basis through the convenience of e-mail. We also offer our popular "Ask Your Pharmacist" and "Ask Your Beauty Expert" features.
. Privacy. Consumers can shop in the privacy of their own homes or offices and can obtain answers to questions that they might otherwise be uncomfortable asking in public.
. Pharmacy. We employ licensed pharmacists and are able to ship prescription products to all 50 U.S. states and we offer customers the opportunity to order refills of their existing Rite Aid prescriptions on our Web site for pick-up at conveniently located Rite Aid stores nationwide.
Our objective is to become one of the world's leading retailers of health, beauty, wellness, personal care and pharmacy products. Key elements of our strategy include: strengthening the drugstore.com brand, continuously improving our Web store and service, taking advantage of repeat purchasing patterns, developing technologies to enhance our offerings and capitalize on the benefits of the Internet, improving the efficiency of our distribution activities and developing strategic relationships. In addition, we will also continue to make significant investments in technology and distribution.
Consistent with our strategy, in June 1999 we entered into strategic relationships with Rite Aid Corporation and General Nutrition Companies, Inc. (GNC). Benefits of our Rite Aid relationship include additional revenue and traffic generated by Rite Aid customers who visit our Web site, the pharmacy benefit coverage provided by the insurance companies and pharmacy benefit management companies (PBMs) with which Rite Aid has a relationship, including PCS Health Systems, Inc., the co-promotion and co-branding activities that we have undertaken and our ability to offer customers the opportunity to order refills of their existing Rite Aid prescriptions on our Web site for pick up at Rite Aid stores nationwide or delivery to the customer's home or office. The benefits of our GNC relationship include the opportunity to be the exclusive online provider of GNC-branded products and each party's co-promotion of products in traditional and online marketing efforts.
We face many risks and challenges in our business. Some consumers may prefer to shop at traditional retail stores, especially consumers who do not have easy access to the Internet or who need products immediately. As part of our relationship with Rite Aid, we have agreed not to operate physical stores. An investment in our common stock involves risks and uncertainties, including the fact that we are an early stage company in a new market and that we expect continuing losses for the foreseeable future. See "Risk Factors" below for further information.
Recent Developments
Operating Results for the Fourth Quarter of Fiscal 1999. For the quarter ended January 2, 2000, our net sales were $18.5 million, a $6.3 million, or 51.6%, increase over the immediately preceding quarter, reflecting an increase in sales of both pharmaceutical and non-pharmaceutical products. These increases were due to an increase in new customers as well as an increase in repeat orders. Total costs and expenses for the quarter ended January 2, 2000 were approximately $64.0 million, a $7.9 million, or 14.1%, increase over the immediately preceding quarter. The increase in costs and expenses primarily reflects increases in fulfillment-related expenses due to the increase in order volume, as well as increases in other marketing and sales expenses relating to our ongoing customer acquisition and corporate branding campaigns. Our net loss for the quarter ended January 2, 2000 was $43.5 million, or $1.02 per share, compared to $42.0 million, or $1.04 per share (on a pro forma basis to give effect to the conversion of all of our preferred stock into common stock at the time of our initial public offering as if such conversion occurred at the beginning of the period), for the immediately preceding quarter.
Strategic Agreement with, and Investment by, Amazon.com. On January 24, 2000, we entered into an agreement with Amazon.com to integrate various shopping features of our Web sites and to create a persistent drugstore.com shopping presence as the exclusive health and beauty product section on Amazon.com's Web site. This integration and shopping presence will enable Amazon.com's significant customer base to access our Web site from the Amazon.com Web site for purchases of health, beauty, wellness, personal care and pharmaceutical products. The benefits of this agreement are expected to include an increase in traffic and revenue generated by Amazon.com customers who visit our Web site as well as various advertising and promotional initiatives the parties have agreed to undertake. The parties will also work to implement additional features on Amazon.com's Web site designed to improve customer shopping experiences, including integrated search and browse capabilities and a shared shopping basket. We agreed to pay Amazon.com a total of $105 million over the three-year term of the agreement, of which $30 million was paid at the time the agreement was executed. Concurrently with this agreement, we sold Amazon.com 1,066,667 shares of our common stock in a private placement transaction for $28.125 per share, or approximately $30 million in the aggregate. All of the proceeds to us from this private placement transaction were paid to Amazon.com to satisfy our initial payment obligations under the commercial agreement, of which $27 million reflects a prepayment of amounts due for the first year following the launch of the drugstore.com health and beauty product section on Amazon.com's Web site.
Acquisition of Beauty.com. On February 2, 2000, we acquired Beauty.com, Inc., a leading online retailer of prestige beauty products, and entered into an agreement to retain the employment of its founder, Roger Barnett, for a total of 1,266,289 shares of drugstore.com common stock (approximately $40.4 million based on the price of our common stock on January 12, 2000, the date the transaction was announced). Beauty.com offers prestige brands, including specialty lines exclusive to the site, and has ongoing relationships with a team of industry experts. Roger Barnett, the founder of Beauty.com, will continue as president of Beauty.com following the acquisition. We believe that the acquisition of Beauty.com will accelerate the expansion of our product offerings in the prestige beauty market and enhance our ability to enter into relationships with prestige beauty product vendors. We will account for the acquisition as a purchase.
Distribution Center. In January 2000, we began limited operations at our own 290,000 square foot distribution center in New Jersey, and we are in the process of transitioning our distribution capabilities for pharmaceutical and non-pharmaceutical products from third party distributors to our center. We continue to rely primarily on third party distributors to fill customer orders, although we expect that the transition to our own distribution facility will be completed by the end of the second quarter of 2000. We believe that operating our own distribution center will allow us to achieve greater control over the distribution process and help us to ensure adequate supplies of products to our customers. In connection with opening our distribution center, we also opened our own pharmacy as part of our arrangement with Rite Aid. Operating our own distribution facility will require us to increase inventory levels substantially and establish a significant number of direct relationships with manufacturers in the near term.