<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 12, 1997
REGISTRATION NO. 333-24341
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT
NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
PEAPOD, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 7389 36-4118175
(STATE OR OTHER (PRIMARY STANDARD (IRS EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
1033 UNIVERSITY PLACE
EVANSTON, ILLINOIS 60201
(847) 492-8900
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
JOHN C. WALDEN
EXECUTIVE VICE PRESIDENT
FINANCE AND BUSINESS DEVELOPMENT
PEAPOD, INC.
1033 UNIVERSITY PLACE
EVANSTON, ILLINOIS 60201
(847) 492-8900
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPIES TO:
JOHN J. SABL PHILIP J. NIEHOFF
SIDLEY & AUSTIN MAYER BROWN & PLATT
ONE FIRST NATIONAL PLAZA 190 S. LASALLE ST.
CHICAGO, ILLINOIS 60603 CHICAGO, ILLINOIS 60603
(312) 853-7567 (312) 701-7843
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an Offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same Offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same Offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MAY 12, 1997
PROSPECTUS
SHARES
LOGO
COMMON STOCK
--------
All of the shares of common stock (the "Common Stock") offered hereby are
being sold by Peapod, Inc. (the "Company").
Prior to this Offering, there has not been a public market for the Common
Stock of the Company. It is currently estimated that the initial public
offering price will be between $ and $ per share. See "Underwriting"
for information relating to the factors considered in determining the initial
public offering price. Application has been made for quotation of the Common
Stock on The Nasdaq National Market under the symbol "PPOD".
--------
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
--------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share $ $ $
Total(3) $ $ $
- ------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
(1) For information regarding indemnification of the Underwriters, see
"Underwriting."
(2) Before deducting expenses payable by the Company estimated at $ .
(3) Certain stockholders of the Company (the "Selling Stockholders") have
granted the Underwriters a 30-day option to purchase up to an aggregate of
additional shares of Common Stock solely to cover over-allotments,
if any. See "Underwriting." If such option is exercised in full, the total
Price to Public, Underwriting Discounts and Commissions, and Proceeds to
Selling Stockholders will be $ , $ and $ ,
respectively.
--------
The shares of Common Stock are being offered by the several Underwriters
named herein, subject to prior sale, when, as and if received and accepted by
them and subject to certain conditions. It is expected that certificates for
the shares of Common Stock offered hereby will be available for delivery on or
about , 1997, at the office of Smith Barney Inc., 333 West 34th
Street, New York, New York 10001.
--------
SMITH BARNEY INC.
WILLIAM BLAIR & COMPANY
J.P. MORGAN & CO.
, 1997
<PAGE>
Caption: Powerful Shopping Software.
Peapod computer screen in Chicago market.
Caption: Peapod shoppers have online access to over 20,000 grocery, drug
and general merchandise items through Peapod's relationships with leading
retailers in each market.
Peapod computer screen with grocery aisles.
Caption: Peapod members can shop by browsing aisles, using one or more
personal shopping lists, or conducting word searches based on brand or
product category.
Peapod computer screen with cereal choices and electronic coupon.
Caption: Through Peapod's interactive marketing services, marketers are
precisely targeting advertising and promotional programs in innovative
ways, and generating behavioral research data that would be difficult to
otherwise obtain.
Peapod computer screen with nutritional information for a cereal product.
Caption: Peapod members can quickly sort items in any product category by a
wide variety of variables, such as price, unit price, sale items, kosher
and nutritional values.
Peapod computer screen with payment methods.
Caption: Prior to submitting an order, a Peapod member reviews their order,
issues personalized shopping or delivery instructions, and selects a
payment method and a convenient delivery or pick-up time.
Photo of customer at computer.
Caption: Peapod members can shop around the clock with access from home or
the office via direct dial-up or the Internet.
Photo of Peapod Shopper picking produce.
Caption: Peapod in store shoppers pick each individual order to the
specifications provided by the Peapod member. Members may provide item-by-
item shopping instructions on issues such as how fine their coffee should
be ground, how ripe the bananas should be and what to do if an item is
unavailable.
Photos of (i) delivery person in front of van delivering groceries to home of
customer and (ii) grocery order being loaded into pick-up customer's vehicle.
Caption: Peapod members can have their groceries delivered right to their
door or they can drive by a convenient Peapod fulfillment location and
pick-up their order.
Photo of member service representatives.
Caption: Peapod members are supported by a fully staffed Technical Support
group as well as by the Peapod Member Care organization to respond quickly
to any and all service issues.
Caption: Superior Customer Service
Caption: By attracting loyal consumers through its compelling online shopping
system and personalized service, Peapod opens a valuable new sales channel to
its grocery retail partners and constructs a national online network designed
to offer superior interactive media and research services to consumer goods
companies.
Peapod logo.
Computer screen with grocery aisles.
Caption: FOR THE CONSUMER, Peapod provides "Smart Shopping for Busy People"
through a user-friendly highly functional virtual supermarket and
personalized shopping, delivery or pick-up and customer services.
Retailer logos.
Caption: FOR THE RETAILER, Peapod provides its online sales channel, which
is designed to enable the retailer to gain incremental revenues and profits
by capturing an increased share of the grocery purchases of existing
customers and by attracting new loyal customers.
(i) Computer screen with cereal choices and electronic coupon and (ii)
computer screen with payment methods.
Caption: FOR THE CONSUMER GOODS COMPANY, Peapod provides a forum for
targeted interactive advertising and promotion and extensive product
research by linking together members from multiple markets into a national
online network and collecting substantial data regarding members'
attitudes, purchasing behavior and demographics.
The Company has U.S. registrations for the "Peapod" service mark and the
"Smart Shopping for Busy People" slogan. All other trademarks or service marks
appearing in this Prospectus are trademarks or service marks of the respective
companies that utilize them.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVERALLOTMENT, ENTERING STABILIZING BIDS, EFFECTING SYNDICATE
COVERING TRANSACTIONS, AND IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Except as otherwise noted, all information in
this Prospectus assumes no exercise of the Underwriters' over-allotment option.
See "Underwriting." In addition, except as otherwise noted, all information in
this Prospectus gives effect to the Conversion (as defined below). The Company
is a successor to a business originally founded in 1989 as a Delaware
corporation and operated since 1992 through an Illinois limited partnership
("Peapod LP") . The original Delaware corporation ("Old Peapod" or the "General
Partner") has served as the general partner of Peapod LP. In December 1996, the
Company was incorporated in Delaware. In a conversion (the "Conversion") that
will be effected prior to the consummation of the Offering (i) all of the
equity interests in Peapod LP will be transferred to the Company in exchange
for shares of Common Stock, (ii) Peapod LP will dissolve, (iii) all
of the assets and liabilities of Peapod LP will be transferred to the Company
and (iv) outstanding options and warrants for equity interests in Peapod LP
will be converted into options and warrants for shares of Common Stock. The
transfer of the assets and liabilities of Peapod LP to the Company will be
recorded by the Company at the historical carrying values of Peapod LP. As used
in this Prospectus, references to "Peapod" or the "Company" prior to the
Conversion means Peapod LP and its predecessor, and thereafter, Peapod, Inc.
THE COMPANY
Peapod(R) is the leading interactive, online grocery shopping and delivery
company and a provider of targeted media and research services. Founded in
1989, Peapod believes it is the only company currently providing an integrated,
comprehensive service designed to address the distinct needs of online
consumers, grocery retailers and consumer goods companies. By attracting loyal
consumers through its compelling online shopping system and personalized
service, Peapod opens a valuable new sales channel to its grocery retail
partners and constructs a national online network designed to offer superior
interactive media and research services to consumer goods companies. Peapod's
proprietary technology, which has been developed and refined through the
Company's operating experience, provides the Company a competitive advantage in
serving the complex needs of consumers, retailers and consumer goods companies.
For the consumer, Peapod provides "Smart Shopping for Busy People(R)" through
a user-friendly, highly functional virtual supermarket and personalized
shopping, delivery or pick-up, and customer services. With Peapod, members are
able to avoid the hassles typically associated with grocery shopping and enjoy
a more pleasant and productive shopping experience. Members can choose among a
variety of shopping methods, access up-to-date product and pricing information
and sort items in any product category by a wide variety of nutritional and
other variables.
For the retailer, Peapod provides its online sales channel, which is designed
to enable the retailer to gain incremental revenues and profits by capturing an
increased share of the grocery purchases of existing customers and by
attracting new loyal customers. Peapod's systems link with those of the
retailer, which allow it to create multiple, customized online stores that
conform to local merchandising, pricing and promotional strategies. Peapod's
systems and employees also provide constant feedback to retailers on out-of-
stock inventory and the quality of perishable items. Moreover, Peapod's
interactive marketing capabilities allow the retailer to experiment with
creative merchandising and promotions and execute local marketing strategies.
For the consumer goods company, Peapod provides a forum for targeted
interactive advertising and promotion and extensive product research by linking
together members from multiple markets into a national online network and
collecting substantial data regarding members' attitudes, purchasing behavior
and demographics. In addition, Peapod's growing membership base, of which
approximately three-quarters are upper middle class consumers and approximately
three-quarters are women, has an attractive demographic profile which is
difficult to reach through other direct-response media channels.
3
<PAGE>
The Company's objective is to substantially expand its online grocery
shopping channel in the United States and to be a preferred venue for national
and local online marketing programs and research for consumers goods companies.
The Company's growth strategies include the following:
. Build Peapod Brand Identity and Awareness. The Company intends to build
brand identity through the functionality, quality, convenience and value of
the services it offers. Peapod also intends to aggressively market its
services, through promotions and advertising, as a means to further
establish brand name recognition.
. Provide a Superior Member Experience. The Company is committed to providing
its members with a superior experience in all aspects of its services. The
Peapod solution provides members with user-friendly, highly-functional and
cost-effective shopping tools, convenient delivery and pick-up services and
a host of customer support and other services designed to ensure member
satisfaction.
. Expand Into New Geographic Markets and Further Penetrate Existing Markets.
The Company plans to increase revenues and realize economies by aggressively
expanding into new metropolitan markets and increasing penetration in
existing markets. The Company believes that it can achieve competitive
advantages in its various markets as the first mover to build a substantial
online membership base and operating scale.
. Build Interactive Marketing Services; Leverage Database. Peapod has
pioneered, in partnership with consumer goods companies, innovative
interactive marketing services consisting of advertising, promotion and
market research services. Peapod intends to continue using the combination
of its database and online shopping channel to create new services tailored
to its interactive marketing clients.
. Work with Retail Partners in Evolving Retail Model. Peapod has developed a
range of technical, management and fulfillment services which can be adapted
to meet a retail partner's needs and Peapod's marketing strategies. The
Company has begun assisting its retail partners in expanding their role in
the fulfillment of member orders. Peapod also is working closely with its
retail partners in evolving the product distribution and order fulfillment
model in order to reduce costs, improve quality and enhance scaleability. In
addition, Peapod has initiated efforts to license its technology to
retailers on an international basis and in select U.S. markets.
. Leverage Peapod's Membership and Technology into Other Online Services. The
Company recently entered into agreements with retailers to offer an online
wine store and an online gift and specialty products center. Peapod intends
to create additional online stores by establishing relationships with non-
grocery retailers to offer services and products that appeal to Peapod's
membership base. These offerings are expected to enhance Peapod's member
data profiles and expand the interactive marketing services opportunities
available to the Company. The Company further intends to make its broader
"Smart Shopping For Busy People" service accessible on a national basis via
the Internet.
As of March 31, 1997, Peapod had 43,200 members, an increase of 246% since
January 1996. Peapod currently offers its online grocery service in seven
metropolitan markets (Chicago, San Francisco/San Jose, Columbus, Boston,
Houston, Atlanta and Dallas), five of which have opened since September 1996.
Most recently the Company opened in Atlanta and Dallas in March and May 1997,
respectively, and Peapod expects to open in Austin in June 1997. As of March
31, 1997, Peapod's service areas encompassed approximately 5,057,000
households, or approximately 5% of U.S. households. The Company's current
retail partners include four of the five largest national supermarket chains.
Peapod commenced offering interactive marketing services in late 1995 and
currently has agreements to provide interactive marketing services to a number
of national consumer goods companies, including Anheuser-Busch, Incorporated,
Bristol-Myers Squibb Company, Frito-Lay, Inc., The Gillette Company (USA) Inc.,
Helene Curtis, Inc., The J.M. Smucker Company, Kellogg Company, Kraft Foods,
Inc., Nestle U.S.A., Inc., Novus Services, Inc. (Discover Card), Ore-Ida Foods,
Inc., Ralston Purina Company and Tropicana Products, Inc. Customers for the
Company's research products have included ConAgra, Inc., Johnson & Johnson, and
Procter & Gamble Co.
4
<PAGE>
THE OFFERING
<TABLE>
<C> <S>
Common Stock Offered by the Company.............................. shares
Common Stock to be Outstanding Immediately After the Offering(1). shares
Use of Proceeds.................................................. For expansion into new
geographic markets and
further penetration of
existing markets, and
for additional working
capital and other gen-
eral corporate purposes,
including the develop-
ment of new products and
services. See "Use of
Proceeds."
Proposed Nasdaq National Market Symbol........................... PPOD
</TABLE>
- --------
(1) Excludes (i) shares of Common Stock reserved for issuance upon the
exercise of outstanding options and warrants, (ii) shares of Common
Stock reserved for issuance pursuant to stock options being granted as of
the consummation of the Offering and (iii) additional shares of Common
Stock reserved for issuance under the Company's 1997 Long-Term Incentive
Plan. See "Management--Stock Plans."
Peapod, Inc. was incorporated in Delaware in December 1996 and is the
successor to a business founded in 1989. Its principal place of business is
located at 1033 University Place, Evanston, Illinois 60201, and its telephone
number is (847) 492-8900. The Company's home page is located on the Internet's
World Wide Web (the "Web") at http://www.peapod.com.
5
<PAGE>
SUMMARY FINANCIAL AND OPERATING DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------------------------- ----------------
1992(1) 1993 1994 1995 1996 1996 1997
------- ------- ------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:(2)
Revenues:(3)
Grocery sales, net of
returns.............. $ 1,186 $ 2,893 $ 6,745 $ 12,731 $ 22,015 $ 4,984 $ 9,216
Interactive marketing
services............. -- -- -- 163 1,069 194 425
Member and retailer
services............. 307 812 1,601 3,049 6,088 1,156 3,063
------- ------- ------- -------- -------- ------- -------
Total revenues........ 1,493 3,705 8,346 15,943 29,172 6,334 12,704
Groceries sold, net of
returns................ (1,186) (2,893) (6,745) (12,731) (22,015) (4,984) (9,216)
Other costs and
expenses............... (1,335) (2,463) (5,918) (9,796) (17,187) (3,126) (6,555)
------- ------- ------- -------- -------- ------- -------
Operating loss.......... (1,028) (1,651) (4,317) (6,584) (10,030) (1,776) (3,067)
Net loss................ (1,042) (1,676) (4,347) (6,592) (9,566) (1,777) (2,947)
Pro forma net loss per
share(4)............... $ $
Shares used to compute
pro forma net loss per
share(4)...............
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
------------------------------------------------------- ---------------
1992 1993 1994 1995 1996 1997
-------- ---------- ---------- ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:(2)
Markets(5).............. 1 2 2 2 4 6
Members(6).............. 1,200 3,000 7,900 12,500 33,300 43,200
Orders (for the period
ended)................. 12,000(1) 28,600 70,300 124,100 201,100 84,600
Households in service
area(7)................. 524,500 1,083,400 1,917,000 2,204,200 3,581,000 5,057,000
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1997
-------------------------------------
ACTUAL(2) PRO FORMA(8) AS ADJUSTED(9)
--------- ------------ --------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents..... $ 9,343 $ 9,343 $
Working capital............... 4,372 4,372
Total assets.................. 13,919 13,919
Long-term obligations......... 710 710
Total owners' equity.......... 6,034 6,034
</TABLE>
- -------
(1) Peapod LP was formed on June 1, 1992 at which time substantially all of the
assets, liabilities and operations of Old Peapod were transferred to Peapod
LP. Prior to the transfer, the operations of the Company were conducted by
Old Peapod, which subsequently served as the general partner of Peapod LP.
In order to present comparative statement of operations data and orders for
fiscal year 1992, the results of operations of Old Peapod from January 1,
1992 through May 31, 1992 have been combined with the results of operations
of Peapod LP from June 1, 1992 through December 31, 1992.
(2) Represents the financial and operating information of Peapod LP, the
predecessor entity to the Company. Prior to the Conversion, the Company had
not begun significant operations. Prior to the consummation of the
Offering, the assets, liabilities and operations of Peapod LP will be
transferred to the Company.
(3) Groceries sold, net of returns, represent the actual costs of groceries
purchased and charged to members. Interactive marketing services include
fees from advertising, promotions and research. Member and retailer
services include fees from members and retail partners related to the
Company's online services and grocery and delivery operations.
(4) Reflects the Conversion and options and warrants assumed outstanding under
Securities and Exchange Commission Staff Accounting Bulletin No. 83, as
discussed in Note 5 of Notes to Financial Statements beginning on page F-6.
(5) Represents the number of metropolitan markets served.
(6) Represents the number of households and businesses subscribing to the
Peapod services.
(7) Represents the number of households in areas that can be served from
Peapod's existing fulfillment centers (i.e., the facilities at which member
orders are shopped and packed for delivery or pick-up).
(8) Represents the pro forma balance sheet data assuming the Conversion
occurred as of March 31, 1997.
(9) Adjusted to give effect to the sale of shares of Common Stock
offered by the Company hereby as of March 31, 1997 at an assumed initial
public offering price of $ per share and the application of the
estimated net proceeds therefrom. See "Use of Proceeds" and
"Capitalization."
6
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, prospective
investors should carefully consider the following factors in evaluating an
investment in the shares of Common Stock offered hereby. All statements, trend
analysis and other information contained in this Prospectus relative to
markets for the Company's products and trends in the Company's operations or
financial results, as well as other statements including words such as
"anticipate," "believe," "plan," "estimate," "expect" and "intend" and other
similar expressions, constitute forward-looking statements. These forward-
looking statements are subject to business and economic risks, including but
not limited to those discussed in "Risk Factors," and actual results may
differ materially from those contemplated by forward-looking statements.
DEVELOPING MARKET; FUTURE RELIANCE ON THE INTERNET
The market for online commerce is rapidly evolving. As is typical for new
and rapidly evolving industries, demand and market acceptance for recently
introduced services and products in online commerce are subject to a high
level of uncertainty. The Company's success will depend to a substantial
extent on the willingness of consumers to increase their use of online
services as a method to buy groceries and other products and services, the
acceptance by advertisers and retailers of the Company's online service as a
significant means to market and sell its products and services, and the use by
such companies of data and research compiled by the Company. Moreover, the
Company's growth will depend, in part, on the extent to which an increasing
number of consumers own or have access to personal computers or other systems
that can access online services or the Internet.
Although most of the Company's members currently access Peapod's service
through the Company's proprietary dial-up network, the percentage of members
who access Peapod's service through the Internet is expected to grow
substantially. The Internet has experienced, and is expected to continue to
experience, substantial growth in the number of users and amount of traffic,
resulting in some cases in substantial delays for users. The Internet could
lose its viability due to delays in the development or adoption of new
standards and protocols to handle increased levels of Internet activity, or
due to increased governmental regulation. There can be no assurance that the
infrastructure (e.g., reliable network backbone) or complementary services
(e.g., secure transaction processing) necessary to make the Internet a viable
commercial marketplace will develop, or, if developed, that the Internet will
become a viable commercial marketplace for products and services such as those
offered, or to be offered, by the Company through the Internet. If the
necessary infrastructure or complementary services are not developed, or if
the Internet does not become a viable commercial marketplace, the Company's
business, results of operations or financial condition could be materially and
adversely affected. See "Business."
SIGNIFICANT FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company may experience significant fluctuations in future quarterly
operating results from a number of factors, including (i) the timing and
nature of expansion efforts in both new and existing markets, (ii) the
introduction of new products or services and the market response to those
introductions, (iii) the timing and nature of sales transactions for
interactive marketing and other products and services, (iv) relationships with
retailers, (v) seasonal trends, (vi) changes in pricing policies or service
offerings, (vii) changes in the level of marketing and other operating
expenses to support future growth, (viii) competitive factors and (ix) general
economic conditions. Consequently, quarterly revenues and operating results
may fluctuate significantly, and the Company believes that period-to-period
comparisons of results will not necessarily be meaningful and should not be
relied upon as an indication of future performance. Furthermore, due to the
foregoing factors, among others, it is likely that the Company's future
quarterly operating results from time to time may not meet the expectations of
research analysts or investors, which may have an adverse effect on the price
of the Common Stock. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
LIMITED OPERATING HISTORY; LOSSES
The Company has a limited operating history and has incurred losses since
its inception. Although it was founded in 1989, most of the Company's growth
has occurred since September 1995. Given the substantial development,
marketing and other expenditures relating to the Company's planned expansion
program, among
7
<PAGE>
other factors, the Company expects to have losses for the foreseeable future.
To operate profitably, the Company must accomplish some of the following
objectives: (i) increase grocery sales volume by adding new members, retaining
existing members and increasing member usage, (ii) successfully acquire market
share in interactive marketing services, (iii) develop and realize additional
revenue sources, such as additional transactional, advertising and
informational services and licensing and (iv) reduce costs of fulfillment.
There can be no assurance that the Company will be successful in meeting these
objectives or that the Company will be able to achieve or sustain
profitability.
MANAGEMENT OF GROWTH
The Company's recent growth has placed, and is expected to continue to
place, a significant strain on the Company's managerial, operational,
technical and financial resources. As of March 31, 1997, the Company had 225
full-time and 1,075 part-time employees, as compared to 90 full-time and 450
part-time employees at December 31, 1995. During this period, the number of
the Company's members grew from 12,500 to 43,200. The Company expects
operating expenses and staffing levels to increase substantially in the future
as the Company expands into new markets and increases penetration in existing
markets. To manage its growth, the Company must expand its operational and
technical capabilities, increase, train and manage its employee base and
manage multiple relationships with various retailers and other third parties.
There can be no assurance that the Company will be able to manage its
expanding operations effectively. Any failure of the Company to implement
effective management and operating systems, add resources on a cost-effective
basis or effectively manage the Company's expansion could have a material
adverse effect on the Company's business, results of operations or financial
condition. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Overview" and "Business--Growth Strategies."
RISK OF SYSTEMS DISRUPTION
The Company's information and other systems, including its proprietary dial-
up network, could be vulnerable to, among other factors, disruptions caused by
system failures, power losses, communication problems or natural disasters. In
addition, the Company's services may be vulnerable to break-ins and similar
disruptive problems. Further, weaknesses in communications media, such as the
Internet, may compromise the security of confidential electronic information
exchanged with members. Disruptions of service or security breaches could
cause losses to the Company, reduce member satisfaction in the Company's
services or otherwise have a material adverse effect on the Company's
business, results of operations or financial condition. To date, the Company
has not experienced material disruptions of services or security breaches.
However, there can be no assurance that such problems will not occur in the
future. See "--Developing Market; Future Reliance on the Internet" and
"Business--Technology."
DEPENDENCE ON RETAIL PARTNERS
The Company's grocery operations are dependent on the retailers in each of
the metropolitan markets the Company serves. These retail partners provide not
only the products sold by the Company, but also, in certain cases, many of the
fulfillment services (i.e., shopping, packing and delivering member orders)
necessary to serve the Company's members. Consequently, factors affecting its
retail partners, such as labor disputes or supply problems, could have a
material adverse effect on the Company's business, results of operations or
financial condition.
A substantial part of the marketing efforts for the Company's grocery
services are conducted through cooperative marketing efforts with most of the
Company's retail partners. Peapod typically enters into agreements with its
retail partners that specify levels of cooperative marketing support to
Peapod. The extent and effectiveness of these cooperative marketing efforts in
a given metropolitan market are important to the Company's success in that
market. If cooperative marketing efforts are not effective to acquire or
retain members, the Company's business, results of operations or financial
condition could be materially and adversely affected.
8
<PAGE>
To date, the Company has entered into exclusive agreements with a single
grocery retailer in each of its metropolitan markets with terms of up to five
years. However, a number of these agreements can be terminated earlier by
either party. The termination or expiration of agreements with one or more
retail partners and the failure to replace any such retail relationship on a
timely basis and on terms satisfactory to the Company, could have a material
adverse effect on the Company's business, results of operations or financial
condition. Furthermore, the Company's expansion into new metropolitan markets
for grocery services and the expansion of product offerings to include non-
grocery items is dependent on the establishment of acceptable agreements with
additional retailers. The Company's Chicago market, serviced through its
relationship with Jewel Food Stores ("Jewel/Osco"), accounted for
approximately two-thirds of the Company's revenues in 1996 and approximately
one-half of the Company's revenues for the first quarter of 1997. The
Company's current agreement with Jewel/Osco expires in 2000 but is terminable
by the retailer upon short notice. There can be no assurance that the Company
will be able to maintain satisfactory relationships with its retail partners.
See "Business--Peapod Services--Grocery Retailer Alliances."
RELIANCE ON KEY PERSONNEL; ABILITY TO ATTRACT AND RETAIN QUALIFIED PERSONNEL
The Company's success will depend upon the efforts and abilities of its
senior management and key employees, including its executive officers.
Furthermore, the Company's future success will depend on the ability of the
Company's management to retain key managers and employ additional qualified
senior managers. The loss of any of the Company's key employees, or the
failure to attract or retain additional qualified personnel, could have a
material adverse effect on the Company's business, results of operations or
financial condition. See "Management."
The Company's operations require that it attract, train and retain
substantial numbers of new personnel. Certain metropolitan markets served by
the Company have tight labor markets. In addition, the Company employs a large
number of part-time employees to perform fulfillment services, which employees
generally have a high rate of turnover. The Company's software and service
development efforts also require highly-trained employees. If the Company were
unable to recruit or retain a sufficient number of qualified employees, or the
costs of compensation or employee benefits were to increase substantially, the
Company's business, results of operations or financial condition could be
materially and adversely affected. See "Business--Peapod Services" and "--
Employees."
COMPETITION
The traditional grocery retailing market is extremely competitive. The
Company competes with a number of providers of grocery products and services,
including traditional grocery retailers, other interactive or Internet-based
grocery providers, and providers that fulfill orders obtained via telephone or
facsimile. The Company also competes with many other companies that implement
advertising, promotions and research programs for consumer goods companies.
Many of the Company's competitors are larger and have substantially greater
resources than the Company. In addition, the Company believes that this
competition will intensify as more grocery retailers, online marketing
services and information services companies offer competitive services. See
"Business--Competition."
The Company also competes to retain members once they have registered for
Peapod's services. Generally, online subscriber attrition rates, or the rates
at which subscribers cancel an online service, are high. The Company
aggressively markets its service to reduce member attrition and increase
member usage. See "Business--Growth Strategies" and "--Marketing and
Promotion." However, there can be no assurance that these marketing
initiatives will be successful. High rates of member attrition could have a
material adverse effect on the Company's business, results of operations or
financial condition. The Company's average annual member retention rates
(computed by averaging annual retention rates as of the end of each month) for
1995 and 1996 were 62% and 66%, respectively. This retention data is based on
a limited operating history and reflects primarily experience in the Chicago
market as well as a variety of promotion and pricing policies. This historical
data is not necessarily indicative of future retention rates. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation."
9
<PAGE>
DEPENDENCE ON INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The Company's success and ability to compete are dependent upon its
proprietary systems and technology. The Company relies on trademark, trade
secret and copyright laws to protect its proprietary rights. The Company has
no patents. The Company has U.S. registrations for the "Peapod" service mark
and associated logos and for Peapod's "Smart Shopping for Busy People" slogan.
The Company also has registered copyrights, or has applied for copyright
registration, for its proprietary software, Web site and certain marketing
materials. Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of the Company's services or
to obtain and use information that the Company regards as proprietary.
Policing unauthorized use of the Company's proprietary rights is difficult. In
addition, litigation may be necessary in the future to enforce or protect the
Company's intellectual property rights or to defend against claims of
infringement or invalidity. Misappropriation of the Company's intellectual
property or potential litigation could have a material adverse effect on the
Company's business, results of operations or financial condition. See
"Business--Intellectual Property and Other Proprietary Rights."
RAPID TECHNOLOGICAL CHANGE; RISKS ASSOCIATED WITH NEW PRODUCTS AND SERVICES
Online commerce is characterized by rapidly changing technology. The
Company's software and systems require continual improvement in order to meet
the demand by the Company's customers for new features and capabilities. The
Company's future success will depend upon its ability to introduce new
products and services and to add new features and enhancements that keep pace
with technological and market developments. The development of new services
and products and the enhancement of existing services and products entails
significant technical risks. There can be no assurance that the Company will
be successful in (i) maintaining and improving its software and systems, (ii)
effectively using new technologies, (iii) adapting its services and products
to emerging industry standards or (iv) developing, introducing and marketing
service and product enhancements or new services and products. Furthermore
there can be no assurance that the Company will not experience difficulties
that could delay or prevent the successful development, introduction or
marketing of these services and products, or that its new service and product
enhancements will adequately meet the requirements of the marketplace and
achieve market acceptance. If the Company is unable, for technical or other
reasons, to develop and introduce new services and products or enhancements of
existing services and products in a timely manner in response to changing
market conditions or customer requirements, or if new services and products do
not achieve market acceptance, the Company's business, results of operations
or financial condition could be materially and adversely affected. See
"Business--Technology."
REGULATION; PRIVACY ISSUES
The online services industry is new and rapidly changing, and federal and
state regulation relating to the Internet and online services is evolving. The
Company is aware of certain industry requests of the Federal Communications
Commission (the "FCC") to review the impact of Internet usage on U.S.
telecommunications service providers, in particular, the generally lower cost
structure for data transmission versus voice transmission. FCC regulatory
review and rulemaking could result in new regulation of the Internet and
online industry, changes in current rules governing telecommunications or
both. In turn, this could result in increased telecommunications costs for the
Internet and online industry. These or other regulatory initiatives could have
a material adverse effect on the Company's business, results of operation or
financial condition.
There has been a growing concern about privacy and the collection,
distribution and use of information about individuals, and the Company is
subject to various federal and state regulations concerning such activities.
Although the Company's compliance with such federal and state regulations has
not had a material adverse effect on the Company, no assurance can be given
that additional federal or state laws or regulations (including antitrust and
consumer privacy laws) will not be enacted or applied to the Company or
certain of its customers, in particular, users of interactive marketing
services. Any such guidelines, laws or regulations could adversely affect the
ability of the Company or its clients to collect, distribute or use consumer
information, or could otherwise have a material adverse effect on the
Company's business, results of operations or financial condition. The Company
has adopted policies to address certain privacy concerns, including
restricting access to its database, limiting the type of information that the
Company provides to third parties, requiring each employee to sign a
10
<PAGE>
nondisclosure and confidentiality agreement, and implementing data security
systems at the Company's data center. Additionally, pursuant to the terms of
the Company's membership agreement, each member consents to the Company's use
of the data generated by members on an aggregate basis. However, there can be
no assurance that such policies and arrangements will be effective, and to the
extent that they are not effective, the Company's business, results of
operations or financial condition could be materially and adversely affected.
NEED FOR ADDITIONAL CAPITAL
The Company may need to procure additional financing over time, the amount
and timing of which will depend on a number of factors including the pace of
expansion of the Company's markets and customer base, services offered and
development efforts and the cash flow generated by its operations. The Company
cannot predict the extent to which it will require additional financing. There
can be no assurance regarding the availability or terms of additional
financing the Company may be able to procure over time. Any future debt
financing or issuance of preferred stock by the Company would be senior to the
rights of the holders of Common Stock, and any future issuance of Common Stock
would result in the dilution of the then existing stockholders' proportionate
equity interests in the Company.
ANTI-TAKEOVER EFFECT OF CHARTER AND STATUTORY PROVISIONS
Certain provisions of the Company's Restated Certificate of Incorporation
and Restated By-Laws and certain sections of the Delaware General Corporation
Law, including those which authorize the Company's Board of Directors to issue
shares of preferred stock and to establish the voting rights, preferences and
other terms thereof without further action by stockholders, may be deemed to
have an anti-takeover effect and may discourage takeover attempts not first
approved by the Board of Directors (including takeovers which some
stockholders may deem to be in their best interests). These provisions could
delay or frustrate the removal of incumbent directors or the assumption of
control by an acquirer, even if such removal or assumption of control would be
beneficial to stockholders. These provisions also could discourage or make
more difficult a merger, tender offer or proxy contest, even if such events
would be beneficial to the interest of stockholders. Such provisions include,
among other things (i) a classified Board of Directors serving staggered
three-year terms, (ii) the elimination of stockholder voting by consent, (iii)
a provision providing that only the President or Board of Directors may call
special meetings of stockholders, (iv) the removal of directors without cause
only by the holders of at least 75% of the shares entitled to vote, (v) a
provision permitting the Board of Directors to take into account factors in
addition to potential economic benefits to stockholders and (vi) certain
advance notice requirements for stockholder proposals and nominations for
election to the Board of Directors. The Company will be subject to Section 203
of the Delaware General Corporation Law which, in general, imposes
restrictions upon certain acquirers (including their affiliates and
associates) of 15% or more of the Company's Common Stock.
In addition, the Board of Directors plans to adopt a stockholders rights
plan prior to the consummation of the Offering which may discourage or prevent
takeover attempts not first approved by the Board of Directors (including
takeovers which certain stockholders may deem to be in their best interests).
See "Description of Capital Stock--Delaware Law and Certain Charter and By-Law
Provisions" and "--Rights."
OWNERSHIP BY MANAGEMENT AND PRINCIPAL STOCKHOLDERS
After consummation of the Offering, Mr. Andrew Parkinson and Mr. Thomas
Parkinson, two of the Company's senior executive officers, will beneficially
own approximately % of the outstanding shares of Common Stock and, together
with other executive officers, directors and certain stockholders affiliated
with directors, will beneficially own approximately % of the outstanding
shares of Common Stock. By virtue of such holdings and if, and to the extent,
such stockholders act in concert (although no agreement or arrangement exists
requiring them to do so), such stockholders will have substantial influence
over the election of directors and other matters, including the outcome of
certain fundamental corporate transactions (such as certain mergers and sales
of assets) requiring stockholder approval. There is no cumulative voting for
the election of directors or other matters. See "Stock Ownership."
11
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of Common Stock in the public market
after the Offering could adversely affect the market price of Common Stock. In
addition to the shares of Common Stock offered hereby,
shares owned by current stockholders are eligible for sale in the public
market 90 days after the Offering and substantially all of the remaining
shares of the Common Stock owned by current stockholders of the Company (i.e.,
of the other outstanding shares) will be eligible for sale
in the public market beginning 180 days after the date of this Prospectus.
Holders of approximately shares of Common Stock, including all
executive officers, directors and certain stockholders who will hold shares of
Common Stock after the Offering, have agreed not to publicly offer, sell or
otherwise dispose of any shares of Common Stock owned by them for 180 days
from the date of this Prospectus without the consent of Smith Barney Inc.
However, Smith Barney Inc. may, in its sole discretion and at any time without
notice, release all or any portion of the securities subject to such lock-up
agreements. Upon the later of the expiration of such agreements or such dates,
pursuant to Rule 144 under the Securities Act of 1933, as amended (the
"Securities Act"), such stockholders may sell such shares without
registration, subject to certain limitations, including limitations on volume
of sales. If such stockholders should sell or otherwise dispose of a
substantial amount of Common Stock in the public market, the prevailing market
price for the Common Stock could be adversely affected. See "Shares Eligible
for Future Sale."
ABSENCE OF A PUBLIC TRADING MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Common Stock,
and there can be no assurance that an active market will develop upon
consummation of the Offering. The offering price of the Common Stock will be
determined by negotiations among the Company, the Selling Stockholders and
representatives of the Underwriters, and may not be indicative of the market
price of the Common Stock after the Offering. See "Underwriting" for a
description of the factors considered in determining the initial public
offering price of the Common Stock. The trading price of the Common Stock also
could be subject to significant fluctuations in response to variations in
quarterly operating results, the gain or loss of significant contracts,
changes in management or new products or services offered by the Company or
its competitors, general trends in the industry, changes in financial
estimates by research analysts and other events or factors. In addition, the
stock market has experienced price and volume fluctuations which have
particularly affected the market price of many companies in similar industries
and which often have been unrelated to the operating performance of these
companies. These market fluctuations may adversely affect the market price of
the Common Stock.
DILUTION
Purchasers of the Common Stock in the Offering will incur an immediate
substantial dilution in the net tangible book value per share of Common Stock.
Based on an assumed initial public offering price of $ per share, as of
March 31, 1997 such dilution, on a pro forma basis, would have been $
per share. See "Dilution."
12
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of
Common Stock offered by the Company are estimated to be approximately
$ , assuming an initial public offering price of $ and after
deducting the estimated underwriting discounts and commissions and offering
expenses payable by the Company. The Company intends to use a majority of such
proceeds for expansion into new geographic markets and further penetration in
existing markets, with the remainder being used for additional working capital
purposes, including the development of new products and services, and other
general corporate purposes. Pending such uses, the net proceeds will be
invested in investment grade, interest-bearing securities.
In the event the Underwriters exercise the over-allotment option, the
Company will not receive any proceeds from the sale of Common Stock sold by
the Selling Stockholders.
DIVIDEND POLICY
The Company has not paid cash dividends on its Common Stock. The Company
does not anticipate paying cash dividends on its Common Stock in the
foreseeable future. Any payment of cash dividends in the future will depend
upon the financial condition, capital requirements and earnings of the
Company, limitations on dividend payments pursuant to the terms of debt
agreements and such other factors as the Board of Directors may deem relevant.
CAPITALIZATION
The following table sets forth the current obligations under capital lease
and capitalization of the Company as of March 31, 1997 (i) on a pro forma
basis to give effect to the Conversion and (ii) as adjusted to reflect the
issuance and sale of shares of Common Stock offered by the Company
at an assumed initial public offering price of $ per share, less
estimated underwriting discounts and commissions and offering expenses payable
by the Company, and the application of the estimated net proceeds therefrom.
See "Use of Proceeds." This table should be read in conjunction with the
financial statements, including the notes thereto, appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1997
---------------------
PRO FORMA AS ADJUSTED
--------- -----------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Current obligations under capital lease.................. $ 350 $
====== ======
Obligations under capital lease, less current
obligations............................................. $ 360 $
Owners' equity:
Preferred Stock, $.01 par value (5,000,000 shares
authorized; no shares issued or outstanding).......... -- --
Common Stock, $.01 par value (50,000,000 shares
authorized; shares issued and outstanding,
pro forma; shares issued and outstanding,
as adjusted)(1).......................................
Additional paid-in capital.............................
Accumulated deficit....................................
------ ------
Total owners' equity................................. 6,034
------ ------
Total capitalization................................. $6,394 $
====== ======
</TABLE>
- --------
(1) Excludes (i) shares of Common Stock reserved for issuance upon
the exercise of outstanding options and warrants, (ii)
shares of Common Stock reserved for issuance pursuant to stock options
being granted as of the consummation of the Offering and (iii)
additional shares of Common Stock reserved for issuance under the
Company's 1997 Long-Term Incentive Plan. See "Management--Stock Plans."
13
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of March 31, 1997,
after giving effect to the Conversion, was $ , or approximately
$ per share of Common Stock. Pro forma net tangible book value per
share of Common Stock is equal to the Company's total pro forma tangible
assets less total liabilities, divided by the total number of shares of Common
Stock outstanding assuming the consummation of the Conversion. After giving
effect to the sale of the shares of Common Stock offered by the
Company hereby at an assumed initial public offering price of $ per share,
after deducting the estimated underwriting discounts and commissions and
offering expenses payable by the Company, the pro forma as adjusted net
tangible book value of the Company at such date would have been approximately
$ or approximately $ per share. This represents an immediate
increase in net tangible book value of $ per share to existing
stockholders and an immediate dilution of $ per share to new purchasers
of shares in the Offering. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share. $
Pro forma net tangible book value per share of
Common Stock before the Offering ............ $
Increase per share attributable to new
investors....................................
----------
Pro forma as adjusted net tangible book value
per share of Common Stock after the Offering...
----------
Dilution per share to new investors............. $ (1)
==========
</TABLE>
- --------
(1) Based on the assumptions set forth above, the dilution per share to new
investors would be $ if all options and warrants outstanding
immediately prior to the Offering were exercised.
The following table summarizes as of March 31, 1997, on a pro forma as
adjusted basis after giving effect to the Conversion and the Offering, the
difference between existing stockholders and new investors with respect to the
number of shares of Common Stock purchased from the Company, the total cash
consideration paid to the Company, and the average price per share paid by
existing stockholders and by the purchasers of the shares offered by the
Company hereby (at an assumed initial public offering price of $ per share):
<TABLE>
<CAPTION>
TOTAL AVERAGE
SHARES PURCHASED CONSIDERATION PRICE
----------------- --------------- PER
NUMBER(1) PERCENT AMOUNT PERCENT SHARE
--------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Existing stockholders............. % $ % $
New investors.....................
----- ----- ------- -----
Total........................... 100.0% $ 100.0%
===== ===== ======= =====
</TABLE>
- --------
(1) Excludes (i) shares of Common Stock reserved for issuance upon
the exercise of outstanding options and warrants at a weighted average
exercise price of $ , (ii) shares of Common Stock reserved
for issuance pursuant to stock options being granted as of the
consummation of the Offering and (iii) additional shares of
Common Stock reserved for issuance under the Company's 1997 Long-Term
Incentive Plan. See "Management--Stock Plans." Because a number of options
and warrants were previously granted with an exercise price below the
initial public offering price, the exercise of such options will result in
further dilution to new investors.
14
<PAGE>
SELECTED FINANCIAL AND OPERATING DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected statement of operations and balance sheet data set forth below
have been derived from the historical financial statements of Peapod LP. The
historical financial statements of Peapod LP as of December 31, 1995 and 1996
and for the years ended December 31, 1994, 1995 and 1996 have been audited by
KPMG Peat Marwick LLP, independent certified public accountants, whose report
thereon appears elsewhere in this Prospectus. The statement of operations and
balance sheet data set forth below as of December 31, 1992 and 1993, as well
as the balance sheet data as of December 31, 1994, have been derived from
Peapod LP's unaudited internal financial statements and reflect all
adjustments which management considers necessary for a fair and consistent
presentation of the results of operations for those periods. The selected
financial and operating data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements and related notes thereto appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------------------- ----------------
1992(1) 1993 1994 1995 1996 1996 1997
------- ------- ------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:(2)
Revenues:(3)
Grocery sales, net of
returns.............. $ 1,186 $ 2,893 $ 6,745 $ 12,731 $ 22,015 $ 4,984 $ 9,216
Interactive marketing
services............. -- -- -- 163 1,069 194 425
Member and retailer
services............. 307 812 1,601 3,049 6,088 1,156 3,063
------- ------- ------- -------- -------- ------- -------
Total revenues........ 1,493 3,705 8,346 15,943 29,172 6,334 12,704
Groceries sold, net of
returns................ (1,186) (2,893) (6,745) (12,731) (22,015) (4,984) (9,216)
Other costs and
expenses............... (1,335) (2,463) (5,918) (9,796) (17,187) (3,126) (6,555)
------- ------- ------- -------- -------- ------- -------
Operating loss.......... (1,028) (1,651) (4,317) (6,584) (10,030) (1,776) (3,067)
Net loss................ (1,042) (1,676) (4,347) (6,592) (9,566) (1,777) (2,947)
Pro forma net loss per
share(4)............... $ $
Shares used to compute
pro forma
net loss per share(4)..
</TABLE>
<TABLE>
<CAPTION>
AS OF
AS OF DECEMBER 31, MARCH 31,
------------------------------------------------------- ----------
1992 1993 1994 1995 1996 1997
-------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:(2)
Markets(5).............. 1 2 2 2 4 6
Members(6).............. 1,200 3,000 7,900 12,500 33,300 43,200
Orders (for the period
ended)................. 12,000(1) 28,600 70,300 124,100 201,100 84,600
Households in service
area(7)................ 524,500 1,083,400 1,917,000 2,204,200 3,581,000 5,057,000
BALANCE SHEET DATA:(2)
Cash and cash
equivalents............ $ 230 $ 644 $ 2,254 $ 2,466 $ 13,039 $ 9,343
Working capital
(deficit).............. (349) 175 902 438 7,356 4,372
Total assets............ 905 1,556 3,465 4,531 16,528 13,919
Long-term obligations... 168 239 327 532 672 710
Total owners' equity.... 71 559 1,435 1,413 8,403 6,034
</TABLE>
- -------
(1) Peapod LP was formed on June 1, 1992 at which time substantially all of
the assets, liabilities and operations of Old Peapod were transferred to
Peapod LP. Prior to the transfer, the operations of the Company were
conducted by Old Peapod, which subsequently served as the general partner
of Peapod LP. In order to present comparative statement of operations data
and orders for fiscal year 1992, the results of operations of Old Peapod
from January 1, 1992 through May 31, 1992 have been combined with the
results of operations of Peapod LP from June 1, 1992 through December 31,
1992.
(2) Represents the financial and operating information of Peapod LP, the
predecessor entity to the Company. Prior to the Conversion, the Company
had not begun significant operations. Prior to the consummation of the
Offering, the assets, liabilities and operations of Peapod LP will be
transferred to the Company.
(3) Groceries sold, net of returns, represent the actual costs of groceries
purchased and charged to members. Interactive marketing services include
fees from advertising, promotions and research. Member and retailer
services include fees from members and retail partners related to the
Company's online services and grocery and delivery operations.
(4) Reflects the Conversion and options and warrants assumed outstanding under
Securities and Exchange Commission Staff Accounting Bulletin No. 83, as
discussed in Note 5 of Notes to Financial Statements beginning on page F-
6.
(5) Represents the number of metropolitan markets served.
(6) Represents the number of households and businesses subscribing to the
Peapod services.
(7) Represents the number of households in areas that can be served from
Peapod's existing fulfillment centers (i.e., the facilities at which
member orders are shopped and packed for delivery or pick-up).
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the Company's
financial statements, including the notes thereto, appearing elsewhere in this
Prospectus. All statements, trend analysis and other information contained in
this Prospectus relative to markets for the Company's products and trends in
the Company's operations or financial results, as well as other statements
including words such as "anticipate," "believe," "plan," "estimate," "expect"
and "intend" and other similar expressions, constitute forward-looking
statements. These forward-looking statements are subject to business and
economic risks, including but not limited to those discussed in "Risk
Factors," and actual results may differ materially from those contemplated by
the forward-looking statements.
OVERVIEW
Peapod is the leading interactive, online grocery shopping and delivery
company and a provider of targeted media and research services. Peapod
believes it is the only company currently providing an integrated,
comprehensive service designed to address the distinct needs of online
consumers, grocery retailers and consumer goods companies. By attracting loyal
consumers through its compelling online shopping system and personalized
service, Peapod opens a valuable new sales channel to its grocery retail
partners and constructs a national network designed to offer superior
interactive marketing services to consumer goods companies. Peapod's
proprietary technology, which has been developed and refined through the
Company's operating experience, provides the Company a competitive advantage
in serving the complex needs of consumers, retailers and consumer goods
companies.
History of Growth. Peapod was founded in 1989, and since that time has
pioneered the online grocery shopping industry. In 1990, Peapod introduced its
first version of online shopping software and began serving members in a
suburban Chicago test market out of a single fulfillment center (i.e.,
facility where member orders are shopped and packed for delivery or pick-up).
From 1990 through 1992, the Company concentrated on enhancing its software and
developing efficient operating processes. In 1993, the Company began a gradual
expansion of its Chicago service area and commenced operations in the San
Francisco area. Thereafter, the Company (i) further enhanced its software and
refined its operating processes to support the multi-area operations, (ii)
strengthened its retailer relationships, (iii) raised additional capital from
the sale of private equity to support its growth and (iv) expanded its Chicago
and San Francisco service areas. In September 1995, the Company released an
improved three-tier software architecture, which included Version 4.0 of its
end-user shopping software and allowed the Company to begin selling and
executing its interactive marketing services. See "Business--Technology."
Coinciding with this release, the Company commenced, in cooperation with its
Chicago retail partner, its first broad-based media campaign in the Chicago
market, incorporating radio and newspaper advertising. During 1995, Peapod's
net membership grew by 4,600, of which 4,300 joined in the fourth quarter.
During the first half of 1996, membership continued to grow. The Company
commenced an aggressive geographic expansion program, beginning operations in
Columbus and Boston in September 1996, further expanding its service areas in
Chicago and San Francisco/San Jose and entering into agreements to open in
Houston, Atlanta, Dallas and Austin in 1997. Due to ongoing marketing efforts
and late 1996 geographic expansion, Peapod's membership expanded from 12,500
to 33,300 in 1996. The Company's average annual member retention rates
(computed by averaging annual retention rates as of the end of each month) for
1995 and 1996 were 62% and 66%, respectively. This retention data is based on
a limited operating history and reflects primarily experience in the Chicago
market as well as a variety of promotion and pricing policies. This historical
data is not necessarily indicative of future retention rates.
Components of Revenues. The Company generally receives monthly membership
fees from members. In addition, members generally pay a fixed fee per order
plus a percentage of the dollar value of each grocery order. The member pays
for all groceries at the time of delivery or pick-up by check, credit card or
electronic debit from the member's checking account. Additional surcharges are
applicable for processed film or prescription pick-up, last minute orders or
PinPoint delivery times, which mandate delivery within a shorter delivery
window
16
<PAGE>
than standard delivery times. Grocery retailers pay the Company both fixed and
variable fees. Variable fees, paid on a monthly basis, are calculated as a
percentage of total monthly grocery sales. Grocery retailers also provide the
Company with a variety of management fees, based on geographic expansion and
levels of exclusivity. The Company's fees from members and retailers vary by
market and may change over time. See "Business--Growth Strategies," and "--
Peapod Services."
The Company commenced offering interactive marketing services in late 1995
and currently has agreements to provide interactive marketing services to a
number of national consumer goods and service companies, including Anheuser-
Busch, Incorporated, Bristol-Myers Squibb Company, Frito-Lay, Inc., The
Gillette Company (USA) Inc., Helene Curtis, Inc., The J. M. Smucker Company,
Kellogg Company, Kraft Foods, Inc., Nestle U.S.A., Inc., Novus Services, Inc.
(Discover Card), Ore-Ida Foods, Inc., Ralston Purina Company and Tropicana
Products, Inc. To date, substantially all of Peapod's interactive marketing
sales have been made through sponsorship agreements under which the Company
provides a variety of bundled interactive marketing products and services. The
Company has a relationship with a national marketing research organization to
develop and market custom and syndicated research applications. Customers for
the Company's research products have included ConAgra, Inc., Johnson & Johnson
and Procter & Gamble Co. See "Business--Peapod Services--Interactive Marketing
Services."
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain operating
data derived from the statements of operations of the Company expressed as a
percentage of total revenues for such periods:
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL REVENUES
-------------------------------------
QUARTERS
YEARS ENDED ENDED MARCH
DECEMBER 31, 31,
--------------------- -------------
1994 1995 1996 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues:
Grocery sales, net of returns........ 80.8 % 79.9 % 75.5 % 78.7 % 72.5 %
Interactive marketing services....... -- 1.0 3.7 3.1 3.4
Member and retailer services......... 19.2 19.1 20.8 18.2 24.1
----- ----- ----- ----- -----
Total revenues....................... 100.0 100.0 100.0 100.0 100.0
Costs and expenses:
Groceries sold, net of returns....... 80.8 79.9 75.5 78.7 72.5
Grocery operations................... 39.1 32.4 27.9 24.5 30.7
General and administrative........... 17.6 11.0 10.0 7.7 6.5
Marketing and selling................ 6.8 9.6 13.7 9.6 9.7
System development and maintenance... 3.9 6.1 5.1 5.6 3.0
Depreciation and amortization........ 3.5 2.3 2.2 1.9 1.7
----- ----- ----- ----- -----
Total costs and expenses............. 151.7 141.3 134.4 128.0 124.1
----- ----- ----- ----- -----
Operating loss......................... (51.7) (41.3) (34.4) (28.0) (24.1)
Other income (expense)................. (0.4) -- 1.6 -- 0.9
----- ----- ----- ----- -----
Net loss............................... (52.1)% (41.3)% (32.8)% (28.0)% (23.2)%
===== ===== ===== ===== =====
</TABLE>
FIRST QUARTER OF 1997 COMPARED TO FIRST QUARTER OF 1996
Grocery sales, net of returns. Grocery sales, net of returns, which are the
actual costs of groceries purchased by members, increased by 84.9% from
$4,984,000 in the quarter ended March 31, 1996 to $9,216,000 in the quarter
ended March 31, 1997. This increase was principally due to an 82.7% increase
in the number of orders and a 1.0% increase in the size of the average grocery
order. The total number of orders increased from 46,300 in the quarter ended
March 31, 1996 to 84,600 in the quarter ended March 31, 1997. Total membership
at March 31, 1996 and 1997 was 15,200 and 43,200, respectively. Increases in
the Company's membership base resulted largely from the introduction of the
Peapod service in 4 new markets, Columbus, Boston, Houston and Atlanta, as
well as increased penetration in the Chicago and San Francisco/San Jose
markets.
17
<PAGE>
Interactive marketing services. Revenues from interactive marketing services
include fees paid by consumer goods companies for interactive advertising,
promotion and research services. Fees from such services increased by 118.7%
from $194,000 in the quarter ended March 31, 1996 to $425,000 in the quarter
ended March 31, 1997.
Member and retailer services. Member and retailer services include
subscription, service and other fees paid by members and retail partners
related to Peapod's online shopping and delivery operations. Fees from such
services increased 165.0% from $1,156,000 in the quarter ended March 31, 1996
to $3,063,000 in the quarter ended March 31, 1997. This increase is
attributable to (i) additional fees paid by new and existing retailers, (ii)
higher grocery volumes and orders quantities and (iii) the increasing size of
the Company's membership base.
Groceries sold, net of returns. The Company purchases groceries for its
account on behalf of its members. The actual cost of groceries are
subsequently charged to the member. Groceries sold, net of returns increased
from $4,984,000 in the quarter ended March 31, 1996 to $9,216,000 in the
quarter ended March 31, 1997 commensurate with the increase in grocery sales,
net of returns.
Grocery operations. Grocery operations expenses include (i) the direct costs
relating to the shopping, packing and delivery of member orders, (ii) salaries
and overhead expenses of each fulfillment center, (iii) salaries and overhead
expenses for each metropolitan market and (iv) salaries and overhead expenses
for certain centralized field support functions such as training, database
merchandising and customer support. Grocery operations expenses increased
151.2%, from $1,554,000 in the quarter ended March 31, 1996 to $3,903,000 in
the quarter ended March 1997. The increase is attributable to (i) the direct
costs of shopping, packing and delivering member orders, (ii) salaries and
overhead expenses of new fulfillment centers, (iii) salaries and overhead
expenses for four new markets, (iv) salaries and overhead expenses for
customer support functions, and (v) new training and human resource functions
created to assist in the rapid opening of new markets and new fulfillment
stores.
At March 31, 1997, Peapod fulfilled member orders from 41 fulfillment
centers across six metropolitan markets compared to 14 fulfillment centers
across two metropolitan markets at March 31, 1996. Two metropolitan markets
and 14 fulfillment centers were added in the quarter ended March 31, 1997
compared to no new metropolitan markets or fulfillment centers in the quarter
ended March 31, 1996.
General and administrative. General and administrative expenses, which
include corporate staff, accounting and human resource functions, increased
69.5% from $488,000 in the quarter ended March 31, 1996 to $827,000 in the
quarter ended March 31, 1997. The increase resulted primarily from an increase
in corporate staff to support the Company's growth and expenses relating to
the planned relocation of the Company's headquarters.
Marketing and selling. Marketing and selling expenses include the cost of
member acquisition and retention marketing, such as radio advertising and
direct mail, as well as certain costs relating to interactive marketing
services. The Company expenses all such costs as incurred. Marketing and
selling expenses increased by 102.4% from $611,000 in the quarter ended March
31, 1996 to $1,236,000 in the quarter ended March 31, 1997. The increase in
marketing and selling is attributable to (i) increased marketing spending to
support four market openings and expansion of the service areas in existing
markets, (ii) the cost of member acquisition marketing programs in existing
markets and (iii) additional marketing personnel to support the growth in
membership and interactive marketing services.
System development and maintenance. System development and maintenance
expenses, which include new product development as well as the maintenance and
enhancement of existing systems, increased 5.9% from $355,000 in the quarter
ended March 31, 1996 to $376,000 in the quarter ended March 31, 1997. This
increase resulted from higher staffing and associated expenses to support the
Company's growth. In 1996, Peapod began work on version 5.0 of its end-user
software. In the quarter ended March 31, 1997, the Company capitalized
$151,000 of these development costs compared to no capitalized development
costs in the quarter ended March 31, 1996.
Depreciation and amortization. Depreciation and amortization increased 79.8%
from $118,000 in the quarter ended March 31, 1996 to $212,000 in the quarter
ended March 31, 1997. This increase is the result of equipment added to
support new members, new fulfillment centers and new employees.
18
<PAGE>
Other income (expense). Other income (expense) includes interest paid on
subordinated debentures, notes payable and capital leases and interest earned
on cash balances. Interest expense decreased from $20,000 in the quarter ended
March 31, 1996 to $15,000 in the quarter ended March 31, 1997. Interest income
increased from $19,000 in the quarter ended March 31, 1996 to $135,000 in the
quarter ended March 31, 1997 as a result of an increase in interest income
resulting from the investment of proceeds from the issuance of equity in 1996.
.
1996 COMPARED TO 1995
Grocery sales, net of returns. Grocery sales, net of returns increased 72.9%
from $12,731,000 in 1995 to $22,015,000 in 1996. This increase was principally
due to a 62.0% increase in the number of orders and a 6.8% increase in the
size of the average grocery order. The total number of orders increased from
124,100 in 1995 to 201,100 in 1996. Total membership at December 31, 1995 and
1996 was 12,500 and 33,300, respectively. Increases in the Company's
membership base resulted largely from increased penetration and geographic
coverage in Chicago and San Francisco/San Jose and the introduction of the
Peapod service in two new markets, Columbus and Boston.
Interactive marketing services. Revenues from interactive marketing
services, which the Company commenced providing in late 1995, increased from
$163,000 in 1995 to $1,069,000 in 1996.
Member and retailer services. Revenues from member and retailer services
increased 99.6% from $3,049,000 in 1995 to $6,088,000 in 1996. This increase
was primarily due to (i) higher grocery volumes and order quantities, (ii)
higher contractual fees paid by retail partners, including those related to
the introduction of the Peapod service in Columbus and Boston and (iii) the
increasing size of the Company's membership base.
Groceries sold, net of returns. Groceries sold, net of returns increased
from $12,731,000 in 1995 to $22,015,000 in 1996 commensurate with the increase
in grocery sales, net of returns.
Grocery operations. Grocery operations expenses increased 57.5% from
$5,168,000 in 1995 to $8,141,000 in 1996. The increase resulted largely from
the 62.0% increase in the number of orders and the increased number of
fulfillment centers. Grocery operations expenses as a percent of total
revenues declined from 32.4% in 1995 to 27.9% in 1996, reflecting labor
efficiencies and the favorable effect increased volume has on overhead costs.
At December 31, 1996, Peapod fulfilled member orders from 27 fulfillment
centers compared to 14 such centers at the end of 1995. In 1996, ten
fulfillment centers were added in two new markets, Columbus and Boston, and
three additional centers were added in Peapod's existing markets, Chicago and
San Francisco/San Jose.
General and administrative. General and administrative expenses increased
65.7% from $1,762,000 in 1995 to $2,919,000 in 1996. This increase reflected
(i) the hiring of additional administrative personnel to support member,
fulfillment center and market growth, (ii) the hiring in the fourth quarter of
1996 personnel to oversee product introductions and (iii) a one-time severance
charge of $400,000 in the third quarter of 1996. General and administrative
costs decreased from 11.0% of revenues in 1995 to 10.0% of revenues in 1996.
Marketing and selling. Marketing and selling expenses increased by 159.9%
from $1,533,000 in 1995 to $3,984,000 in 1996. The increase in marketing and
selling expenses was attributable to (i) broad-based member acquisition
marketing programs that were initiated in September 1995, (ii) increased
marketing spending to support two new market openings in the third and fourth
quarters and expanded geographic coverage in the Chicago and San Francisco/San
Jose markets and (iii) increased staff to support the increase in interactive
marketing services.
System development and maintenance. System development and maintenance
expenses increased 54.7% from $964,000 in 1995 to $1,492,000 in 1996. This
increase resulted primarily from higher staffing and associated expenses
required to support the Company's growth. System development and maintenance
decreased from 6.1% of revenues in 1995 to 5.1% of revenues in 1996. In 1996,
Peapod began work on Version 5.0 of its end-user software. In 1996, the
Company capitalized $148,000 of these development expenses.
19
<PAGE>
Depreciation and amortization. Depreciation and amortization increased 76.2%
from $370,000 in 1995 to $651,000 in 1996. This increase resulted from
computer and other equipment added to support the Company's growth.
Other income (expense). Interest expense increased from $68,000 in 1995 to
$72,000 in 1996. This increase in expense was more than offset by an increase
in interest income resulting from investment of proceeds from the issuance of
equity in 1996. Interest income increased from $61,000 in 1995 to $537,000 in
1996.
1995 COMPARED TO 1994
Grocery sales, net of returns. Grocery sales, net of returns increased 88.7%
from $6,745,000 in 1994 to $12,731,000 in 1995. This increase was principally
due to a 76.6% increase in the number of orders and a 6.9% increase in the
size of the average grocery order. The total number of orders increased from
70,300 in 1994 to 124,100 in 1995. Total membership at December 31, 1994 and
1995 was 7,900 and 12,500, respectively. Increases in the Company's membership
base resulted largely from broad-based marketing which commenced in September
1995, and, to a lesser extent, the increase in geographic coverage in Chicago.
Interactive marketing services. The Company began providing interactive
marketing services in late 1995. Revenues derived from such services amounted
to $163,000.
Member and retailer services. Revenues from member and retailer services
increased 90.4% from $1,601,000 in 1994 to $3,049,000 in 1995. This increase
was due primarily to higher grocery volumes and order quantities and higher
contribution from the Company's retail partner in Chicago.
Groceries sold, net of returns. Groceries sold, net of returns increased
from $6,745,000 in 1994 to $12,731,000 in 1995 commensurate with the increase
in grocery sales, net of returns.
Grocery operations. Grocery operations expenses increased 58.4% from
$3,263,000 in 1994 to $5,168,000 in 1995. The increase resulted largely from
(i) the 88.7% increase in grocery sales, (ii) the impact that six fulfillment
centers opened in 1994 had on 1995 results and (iii) the addition of two
fulfillment centers in September 1995. Grocery operations expenses as a
percent of total revenues declined from 39.1% in 1994 to 32.4% in 1995,
reflecting labor efficiencies and the favorable effect increased volume had on
overhead costs.
General and administrative. General and administrative expenses increased
20.3% from $1,465,000 in 1994 to $1,762,000 in 1995. The increase resulted
primarily from an increase in corporate staff to support the Company's growth.
Marketing and selling. Marketing and selling expenses increased 168.2% from
$572,000 in 1994 to $1,533,000 in 1995. The increase in marketing and selling
expenses was attributable to aggressive member acquisition programs beginning
in September 1995, including significant media advertising, packaging and
distribution costs of the Company's Version 4.0 end-user software and
additional marketing personnel. The Company also began incurring expenses
relating to interactive marketing services in 1995.
System development and maintenance. System development and maintenance
expenses increased 193.4% from $329,000 in 1994 to $964,000 in 1995. This
increase resulted largely from the increase in employees to maintain and
improve current systems and develop the Version 4.0 end-user software.
Depreciation and amortization. Depreciation and amortization increased 27.3%
from $290,000 in 1994 to $370,000 in 1995. This increase resulted from
computer and other equipment added to support the Company's growth.
Other income (expense). Interest expense increased from $57,000 in 1994 to
$68,000 in 1995. This increase in expense was partially offset by an increase
in interest income resulting from the investment of proceeds from the issuance
of equity in 1995. Interest income increased from $26,000 in 1994 to $61,000
in 1995.
20
<PAGE>
QUARTERLY RESULTS AND SEASONALITY
The following table sets forth certain unaudited quarterly financial
information for the nine quarters ended March 31, 1997. In the opinion of
management, this information has been prepared on the same basis as the
audited financial statements appearing elsewhere in this Prospectus, and all
necessary adjustments, consisting only of normal recurring adjustments, have
been included in the amounts stated below to present fairly the unaudited
quarterly results when read in conjunction with the financial statements and
related notes thereto appearing elsewhere in this Prospectus. The operating
results for any quarter are not necessarily indicative of the operating
results for any future period.
<TABLE>
<CAPTION>
QUARTER
1995 QUARTER ENDED 1996 QUARTER ENDED ENDED
------------------------------------ ----------------------------------- MAR. 31,
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 1997
------- ------- -------- -------- ------- ------- -------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Grocery sales, net of
returns............... $ 3,167 $ 2,971 $ 2,800 $ 3,793 $ 4,984 $ 5,025 $ 4,818 $ 7,188 $ 9,216
Interactive marketing
services.............. -- -- -- 163 194 207 284 384 425
Member and retailer
services.............. 696 685 790 878 1,156 1,190 1,803 1,939 3,063
------- ------- ------- -------- ------- ------- ------- ------- -------
Total revenues......... 3,863 3,656 3,590 4,834 6,334 6,422 6,905 9,511 12,704
Costs and expenses:
Groceries sold, net of
returns............... 3,167 2,971 2,800 3,793 4,984 5,025 4,818 7,188 9,216
Grocery operations..... 1,163 1,174 1,254 1,577 1,554 1,660 2,038 2,889 3,903
General and
administrative........ 385 330 477 570 488 574 1,071 786 827
Marketing and selling.. 211 276 365 681 611 923 809 1,641 1,237
System development and
maintenance........... 171 217 249 327 355 334 455 348 376
Depreciation and
amortization.......... 55 77 105 132 118 150 174 209 212
------- ------- ------- -------- ------- ------- ------- ------- -------
Total costs and
expenses.............. 5,152 5,045 5,250 7,080 8,110 8,666 9,365 13,061 15,771
------- ------- ------- -------- ------- ------- ------- ------- -------
Operating loss.......... $(1,289) $(1,389) $(1,660) $( 2,246) $(1,776) $(2,244) $(2,460) $(3,550) $(3,067)
======= ======= ======= ======== ======= ======= ======= ======= =======
Markets (at end of
quarter)............... 2 2 2 2 2 2 4 4 6
Members (at end of
quarter)............... 8,000 7,700 8,200 12,500 15,200 17,700 21,200 33,300 43,200
Orders.................. 31,800 29,300 27,200 35,800 46,300 45,500 43,700 65,600 84,600
</TABLE>
The Company has found that orders increase in times of adverse weather
conditions. As a result, the Company has historically generated higher
revenues in the fourth and first quarters in its colder climate markets.
Conversely, members tend to reduce orders in the summer months largely as a
result of vacation schedules and better weather. For these reasons, the
Company's marketing efforts tend to be concentrated during the fourth and
first quarters. The Company believes that the impact of this seasonality has
been mitigated to some extent by the Company's rapid expansion.
Certain expenses relating to the expansion into new markets and the addition
of new fulfillment centers generally precede revenues relating to such
expansion. For example, grocery operations expenses increased substantially in
the third and fourth quarters of 1996 as operations commenced in two new
markets and in 13 new fulfillment centers. Grocery operations expenses also
increased in the first quarter of 1997 as the Company commenced operation in
two new markets and 14 new fulfillment centers. However, only a portion of the
contractual fees from retail partners related to new markets are recognized at
the time these markets are opened. Most of the increase in member and retailer
services revenues from both the second to the third quarter of 1996, and from
the fourth quarter of 1996 to the first quarter of 1997, is attributable to
such fees.
The Company may experience significant fluctuations in future quarterly
operating results from a number of factors, including (i) the timing and
nature of expansion efforts in both new and existing markets, (ii) the
introduction of new products or services and the market response to those
introductions, (iii) the timing and nature of sales transactions for
interactive marketing and other products and services, (iv) relationships with
retailers, (v) seasonal trends, (vi) changes in pricing policies or service
offerings, (vii) changes in the level of marketing and other operating
expenses to support future growth, (viii) competitive factors and (ix) general
economic conditions. Consequently, quarterly revenues and operating results
may fluctuate significantly, and the Company believes that period-to-period
comparisons of results will not necessarily be meaningful and should not be
relied upon as an indication of future performance.
21
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities increased to $3,359,000 in the first
quarter of 1997 compared to $836,000 in the first quarter of 1996. This
increase was primarily attributable to net loss from operations and changes in
the timing of the Company's receivables and payables from certain retailers.
Cash used in operating activities decreased from $5,472,000 in 1995 to
$4,503,000 in 1996. Cash used in operating activities was primarily
attributable to the net loss from operations, partially offset by increases in
current liabilities and deferred service fees. The Company receives payment
from members at the time of delivery and generally pays its retail partners on
15 day terms. In addition, the Company generally receives payment for
interactive marketing services and certain retailer fees in advance of
providing the related services. As of March 31, 1997, the Company had
$9,343,000 in cash and cash equivalents. The Company uses its working capital
to fund ongoing operations, marketing programs and geographic expansion and to
further develop its products and services.
In 1995 and 1996, the Company sold equity to strategic and other private
equity investors which generated net cash proceeds of $22,866,000. In
addition, the Company has from time to time entered into capital lease
agreements for certain technology equipment. The Company believes that the net
proceeds from the Offering, along with current cash and cash equivalents, will
be sufficient to fund its working capital and capital expenditure requirements
for at least the next 12 months. The Company may need to procure additional
financing over time, the amount and timing of which will depend on a number of
factors, including the pace of expansion of the Company's membership base,
services offered, development efforts and the cash flow generated by its
operations. The Company does not have any commitments for additional
financing. See "Risk Factors--Need for Additional Capital."
The Company believes that inflation has not had a material effect on its
results of operations.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share" ("EPS"). Implementation of SFAS No. 128 is required
for the periods ending after December 15, 1997. The standard establishes new
methods for comparing and presenting EPS and replaces the presentation of
primary and fully-diluted EPS with basic and diluted EPS. The new methods
under this standard are not expected to have a significant impact on the
Company's EPS amounts.
22
<PAGE>
BUSINESS
THE COMPANY
Peapod is the leading interactive, online grocery shopping and delivery
company and a provider of targeted media and research services. Founded in
1989, Peapod believes it is the only company currently providing an
integrated, comprehensive service designed to address the distinct needs of
online consumers, grocery retailers and consumer goods companies. Peapod's
"Smart Shopping for Busy People" solution provides consumers with time savings
and convenience through a user-friendly, highly functional virtual
supermarket, and personalized shopping, delivery and customer services. By
establishing a relationship with the Company, grocery retailers gain access to
Peapod's online sales channel. This channel is designed to enable the retailer
to gain incremental revenues and profits by capturing an increased share of
the purchases of existing customers and by attracting new loyal customers.
Peapod provides consumer goods companies with a forum for targeted interactive
advertising, high-impact electronic couponing and extensive product research
by linking together members from multiple markets into a national online
network and collecting substantial data regarding members' motives, purchasing
behavior and demographics.
Peapod's proprietary technology is central to its business model. Peapod's
sophisticated customer interface enables its members to shop at home or at
work in a personalized manner with the benefit of more extensive product and
price information than is otherwise practically available. In addition,
Peapod's systems efficiently link with its retail partners' systems, providing
real-time pricing and promotional information to its members. Peapod has
designed its fulfillment management applications on the basis of many years of
picking, packing and delivering grocery orders to incorporate operating
methods that are cost-efficient and ensure high quality. Peapod's database
creates extensive member profiles by collecting data from multiple sources,
including online shopping behavior, purchase histories, online attitudinal
surveys and demographic data that it may purchase from other parties. On the
basis of this data, Peapod's proprietary targeting engine delivers customized,
one-to-one advertising and promotions.
The Company believes that its proprietary technology and operating
experience provide it several competitive advantages. Peapod's technology
integrates the complex requirements of online shopping, grocery retailing and
fulfillment, and interactive marketing, which enables Peapod to derive revenue
from consumers, grocery retailers and consumer goods companies. The Company's
technology and operating processes for shopping, packing and delivering
products, as well as its customer support capabilities, have been refined over
its years of experience to be efficient and ensure high levels of customer
service. The Company believes that it can gain first-mover advantages by
quickly expanding its metropolitan markets and service areas, aggressively
increasing membership and order volume and building operating scale.
Peapod's success to date is built upon the high-quality and personalized
service of its "Smart Shopping for Busy People" solution. Peapod's membership
base has more than tripled since January 1996. As of March 31, 1997, Peapod
had 43,200 members and offered its online grocery service in six metropolitan
markets: Chicago, San Francisco/San Jose, Columbus, Boston, Houston and
Atlanta. Peapod opened in Dallas in May 1997 and expects to open in Austin in
June 1997.
INDUSTRY TRENDS
Interactive grocery services is an emerging business category that
represents the convergence of three significant industries: online commerce,
grocery retailing and interactive marketing services.
Online Commerce. In recent years, a growing number of users have conducted
an increasing amount of commerce over new interactive media, including online
services offered via proprietary networks and the Internet. International Data
Corporation ("IDC") estimates that the number of U.S. households subscribing
to proprietary and Internet online services will grow from over 14 million in
1995 to over 42 million in 2000. IDC estimates that the total value of goods
purchased over the Web grew from $318 million in 1995 to an annualized run
rate of $5.4 billion in December 1996, and is expected to reach $95 billion by
the year 2000. The emergence of these new interactive media is driving the
development and adoption of content and commerce applications that offer
convenience and value to consumers, as well as unique, cost-effective
marketing opportunities to businesses.
23
<PAGE>
Grocery Retailing. The U.S. retail supermarket business represented
approximately $311.7 billion in revenues in 1995, according to Progressive
Grocer's 1996 Marketing Guidebook. Recent sales growth in the industry has
only slightly exceeded inflation, while competition is intense and margins
continue to be narrow. At the same time, consumers are increasingly time
constrained and searching for conveniences to make their daily living easier.
A recent survey by Andersen Consulting suggests that approximately 30% of
consumers would pay a service fee for information, electronic ordering, such
as by computer, fax or phone, and grocery delivery services.
As a result of these factors, supermarket operators are searching for
innovative ways to differentiate their stores through additional consumer
services, while at the same time seeking opportunities to enhance their
profits. Many such operators are implementing or beginning to experiment with
online shopping and home delivery. A survey of supermarket operators cited in
a September 1995 Supermarket Business estimated that supermarket home shopping
sales are minuscule, but would represent approximately 5.5% of total grocery
sales by the year 2000. However, many grocery retailers recognize that
creating an online grocery shopping and delivery service lies outside their
traditional expertise.
Marketing Services. The Company believes that advertising expenditures by
consumer packaged goods companies in 1996 were in excess of $45 billion. IDC
estimates that interactive advertising spending will grow from $280 million in
1996 to $2.3 billion by the year 2000. The Company believes that services that
are able to target consumers with personalized advertising, and offer precise
feedback on the impact of advertising, will have a competitive advantage in
the interactive advertising market.
According to NCH Promotional Services, consumer packaged goods manufacturers
spend approximately $7.0 billion annually on free-standing insert ("FSI")
coupon programs. Coupon promotion programs are an important means for consumer
goods companies to generate additional demand for their products, but these
coupon programs are expensive with a substantial portion of the expenditures
consisting of distribution and handling costs. Furthermore, coupons reach the
consumer through a variety of channels and generally not at the time the
consumer is shopping. Due to the largely anonymous nature of coupon programs,
it is difficult to target their use and measure their effectiveness.
The total market for information and research regarding consumer goods was
estimated to generate approximately $4.4 billion in revenues in 1995,
according to The Veronis, Suhler & Associates Communications Industry
Forecast. Consumer packaged goods manufacturers have historically gathered
much of their market information regarding consumer purchase behavior from
scanner data. Because scanner data generally captures only product movement
without association with particular purchasers, it has limited utility as a
tool for measuring consumer purchase intent or as a basis for targeted
marketing. Many retailers have implemented loyalty card programs. However,
such programs capture varying degrees of information about particular
purchasers and products. Because of the lack of uniform practices, consumer
goods companies generally find it impractical to utilize such information for
national promotional programs.
THE PEAPOD SOLUTION
By attracting loyal consumers through its compelling online shopping system
and high-quality, personalized service, Peapod opens a valuable new sales
channel to its grocery retail partners and constructs a national online
network in order to offer superior interactive media and research services to
consumer goods companies.
For the consumer, Peapod provides "Smart Shopping for Busy People" through a
user-friendly, highly functional virtual supermarket and personalized
shopping, delivery and customer services. With Peapod, members are able to
avoid the hassles typically associated with grocery shopping. Rather than
driving to the store and waiting in check-out lines, members shop at any time
of the day or night with their personal computers, and schedule delivery or
pick-up at a convenient time. In addition, members can choose among a variety
of shopping methods, including browsing the aisles, conducting word or
category searches, and using personal lists of frequently-purchased items. In
order to enable the consumer to shop "smarter" and more efficiently, Peapod
makes available, at the member's fingertips, up-to-date product information,
including product availability,
24
<PAGE>
pricing and promotions, and keeps a running online tally of the member's bill.
In addition, Peapod's database contains detailed nutritional information on
grocery products. As a result, members can sort items in any product category
by a wide variety of variables, such as pricing information, sale items,
kosher and nutritional content (e.g., fat, calories, cholesterol and sodium).
Peapod provides further service to its members in the form of electronic and
telephonic member support and technical assistance and honors "The Peapod
Promise," a guarantee of superior service and satisfaction with each order.
See "--Peapod Services--Consumer Services."
For the retailer, Peapod provides its online sales channel, which is
designed to enable retailers to increase incremental revenues and profits by
capturing an increased share of the grocery purchases of existing customers
and by attracting new loyal customers. For example, in Chicago, the Company
believes that a majority of the grocery revenue generated by Peapod is
incremental to Jewel/Osco. The Company believes that the average order size is
five to six times the average in-store order size. Although members may not,
in the aggregate, be purchasing more consumer goods for their households,
Peapod believes that they purchase household and other goods from Peapod's
retail partners that they historically had purchased elsewhere. The Company
believes that retailers are also attracted to Peapod because of the retailer's
prospects for generating revenue growth without large investments in real
estate. In addition, Peapod's systems and employees provide constant feedback
to retailers on out-of-stock inventory and the quality of perishable items.
Moreover, Peapod's interactive marketing capabilities allow the retailer to
experiment with creative merchandising and promotions and execute local
marketing strategies. See "--Peapod Services--Grocery Retailer Alliances."
For the consumer goods company, Peapod provides a forum for targeted
interactive advertising, electronic couponing and extensive product research
by linking together members from multiple markets into a national online
network and collecting substantial data regarding members' attitudes,
purchasing behavior and demographics. Peapod's systems capture exposures,
mouse clicks, redemptions and sales and can report that information to
consumer goods companies for complete reporting of the impact of a marketing
program. In addition, Peapod's growing membership base has an attractive
demographic profile which is difficult to reach through other direct-response
media channels. Approximately three-quarters of Peapod's members are upper
middle class and approximately three-quarters are women. By contrast, Cyber-
Atlas recently estimated that women comprised 32% of Internet users in 1996.
See "--Peapod Services--Interactive Marketing Services."
As of March 31, 1997, Peapod offered its online grocery service in six
metropolitan markets, and conducted delivery operations from 41 fulfillment
centers covering 5,057,000 households, or approximately 5% of U.S. households.
As of such date, Peapod's service areas encompassed approximately 1,607,000
households in Chicago, 851,000 households in San Francisco/San Jose, 389,000
households in Columbus, 1,224,000 households in Boston, 907,000 households in
Houston, and 79,000 households in Atlanta. Peapod opened in Dallas in May
1997, expects to open in Austin in June 1997 and is in the process of
significantly increasing its Atlanta service area.
GROWTH STRATEGIES
The Company's objective is to substantially expand its online grocery
shopping channel in the United States and to be a preferred venue for national
and local online marketing programs and research for consumers goods
companies. The Company's growth strategies include the following:
Build Peapod Brand Identity and Awareness. The Company intends to build
brand identity through the functionality, quality, convenience and value of
the services it offers. Peapod also intends to aggressively market its
services, through promotions and advertising, as a means to further establish
brand name recognition.
Provide a Superior Member Experience. The Company is committed to providing
its members with a superior experience in all aspects of its services. The
Company's "Smart Shopping for Busy People" solution provides members with
user-friendly, highly-functional and cost-effective shopping tools, convenient
delivery and pick-up services with "The Peapod Promise" of superior service
and satisfaction, and a host of customer support and other services designed
to ensure member satisfaction. This enables Peapod to attract new members,
retain existing members, increase member usage, and increase its share of
members' household purchases.
25
<PAGE>
To better serve consumers, Peapod gathers consumer preference information on
individuals. As Peapod learns more about its members from this information
over time, it plans to develop more personalized services to individual
members to enhance member loyalty.
Expand into New Geographic Markets and Further Penetrate Existing Markets.
The Company plans to increase revenues and realize economies of scale by
aggressively expanding into new metropolitan markets and increasing
penetration in existing markets. From January 1996 through March 31, 1997,
Peapod more than tripled its membership base to 43,200 by further penetrating
its existing markets. In addition, beginning in September 1996, the Company
opened five new markets in Columbus, Boston, Houston, Atlanta and Dallas, and
expects to open in Austin in June 1997. When determining new markets in which
to expand, the Company considers numerous factors, including size, population
density, prevalence of personal computer users, demographic composition,
market conditions, the availability of a major, high-quality grocery retailer,
as well as other general economic factors. Peapod currently intends to focus
primarily on the top 40 metropolitan markets in the United States. The Company
believes that it can achieve competitive advantages in its various markets as
the first mover to build a substantial online membership base and operating
scale. To take advantage of economies in fulfillment and advertising, Peapod
plans to penetrate its markets quickly by opening multiple fulfillment centers
in each of its new metropolitan markets.
Peapod believes that substantial opportunities also exist to increase
membership and orders in existing markets. In late 1995, Peapod initiated its
first major marketing program, which included radio and newspaper advertising.
Since that time, Peapod's Chicago membership base has increased 233% and its
order volume has increased 148%. The Company has expanded this marketing
program into other markets and is currently testing television advertising in
Chicago.
Build Interactive Marketing Services; Leverage Database. Peapod has
pioneered, in partnership with consumer goods companies, innovative
interactive marketing services consisting of advertising, promotion and market
research services. Peapod intends to continue using the combination of its
database and online shopping channel to create new products and services
tailored to its interactive marketing clients. As Peapod's membership
increases, the Company believes that consumer goods companies will
increasingly view Peapod's interactive membership services as a powerful
advertising venue as well as a valuable, cost-effective research tool. The
Company has a relationship with The M/A/R/C Group, a national marketing
research organization, to develop and market custom and syndicated research
applications to bring the value-added research benefits of Peapod to consumer
goods companies.
Work with Retail Partners in Evolving Retail Model. Peapod has developed a
range of technical, management and fulfillment services which can be adapted
to meet a retail partner's needs and Peapod's marketing strategies. The
Company has begun assisting its retail partners in expanding their role in the
fulfillment of member orders. For example, under Peapod's fulfillment partners
program in Houston, the shopping, packing, and delivery services for members
are provided by employees of the retail partner. Peapod has initiated efforts
to license its technology to retailers on an international basis and in select
U.S. markets.
Peapod also intends to work closely with its retail partners in evolving the
product distribution and order fulfillment model in order to reduce costs,
improve quality and enhance volume scalability. For example, Peapod currently
is developing hand-held scanning technology for the order picking and packing
functions and is working with its retail partners to develop specialized
distribution centers to lower distribution channel costs and to improve
profitability and quality of distribution for its retail partners. Future cost
savings may enable Peapod to lower charges to members, thereby further
increasing the attractiveness of the Peapod service to new and existing
customers.
Leverage Peapod's Membership and Technology into Other Online Services. The
Company intends to create additional online stores by establishing
relationships with non-grocery retailers to offer services and products that
appeal to Peapod's membership base, support its "Smart Shopping for Busy
People" solution and offer Peapod meaningful co-marketing and other revenue
opportunities. These offerings are expected to enhance
26
<PAGE>
Peapod's member data profiles and expand the interactive marketing services
opportunities available to the Company. In addition, Peapod believes that its
systems, including the end-user interface and database engines, are the most
advanced systems available for high-volume, online shopping transactions.
Peapod believes that its general expertise, in conjunction with the attractive
demographic profile of its membership base, may be valuable in a variety of
online shopping contexts. Peapod recently entered into contracts with
Geerlings & Wade, Inc., a national direct marketer of premium wines, and
Firefly Greetings, L.L.C., a provider of personal greeting cards and other
specialty products. Under these contracts, Peapod will create online stores
through which its members can shop utilizing customized versions of the Peapod
shopping application. These companies have agreed to pay Peapod development,
management and transactional fees. The Company has commenced development work
with respect to these online store projects and plans to introduce these new
services in connection with the release of the next version of the Peapod
software. See "Technology--Proprietary Consumer Software." The Company further
intends to make its broader "Smart Shopping for Busy People" service
accessible on a national basis via the Internet.
PEAPOD SERVICES
Consumer Services
Peapod's "Smart Shopping for Busy People" solution provides consumers with
time savings and convenience through its user-friendly, highly functional and
information-rich virtual supermarket and personalized shopping, delivery and
customer services. Peapod's online programming allows members to shop any time
of day or night, schedule delivery or pick-up and submit their orders
electronically. Members register for Peapod online via software downloaded
directly from Peapod's Web site (http://www.peapod.com) or obtained on a free
installation diskette available through direct mail or upon telephone request
(1-800-5-Peapod).
Peapod is accessible through a proprietary dial-up network or the Internet.
Its shopping system is highly functional, offering members a variety of
shopping methods and productivity tools to create a shopping experience based
on each member's personal preferences. Peapod members can shop by browsing
aisles (moving logically from general product category to individual items),
using one or more personal lists (containing compilations of frequently-
purchased goods which can quickly be reviewed and considered for purchase), or
conducting word searches based on brand or product category (which is
particularly helpful for coupon redemption or purchasing recipe ingredients).
Through the use of these tools, members can place desired items into a
"virtual" shopping basket. In addition, members can provide personal shopping
instructions on any individual item, such as ripeness of fruit or substitution
preferences for out-of-stock items, or send comments or questions to Peapod,
the grocery retailer or a specific consumer goods company.
The Peapod "Smart Shopping" software also contains information and functions
which the Company believes improve the quality of the shopping experience.
Members can sort items in any product category by a wide variety of variables,
such as pricing information, sale items, kosher and nutritional content (e.g.,
fat, calories, cholesterol and sodium). The Company maintains pricing and
merchandising links with its retail partners, which enable prices, sales and
promotions to be updated on a real-time basis to reflect accurate information
from the member's local fulfillment center. Peapod's user interface easily
accommodates a variety of media displays, such as electronic coupons and
information modules, which support cost-savings and "smart shopping." The
Company believes that its customer interface provides the most functional
interactive online shopping service currently available.
Prior to submitting an order, a member selects a payment method and a
convenient delivery time period. Peapod carefully manages the number of
deliveries in each period to avoid service problems that could result from
over-scheduling. Peapod centrally collects each order and electronically
transmits it to the location where the order is filled. To streamline the
picking process, orders are organized according to the layouts in each
fulfillment center. Shopping specialists collect the ordered goods, including
fresh produce selected by specially-trained produce shoppers, and meat, fish
and delicatessen items that are custom selected by the retailer's own experts.
Shopping specialists also provide a quality check on prices and discounts, and
review personal
27
<PAGE>
instructions specified by the member, including substitution preferences for
out-of-stock items. Packers organize and store goods prior to delivery, and a
driver delivers the goods, ensures customer satisfaction and collects non-
electronic payment and paper coupons. Drivers use their own vehicles or vans
leased by Peapod.
Although Peapod shops, packs and delivers the majority of its orders, the
Company is actively developing a range of service options that meet the
varying needs of its members. For example, the Company has recently begun to
offer in its Houston market a "drive-through pick-up" option which reduces the
cost to members and creates additional scheduling flexibility by allowing
members to pick up their own orders. The Company plans to incorporate this
option in existing and future markets.
The Company makes "The Peapod Promise," the guarantee of superior service
and satisfaction with each order, to all members. Peapod monitors member
satisfaction through the continuous, closed-loop communication and
accountability designed into its program. Peapod believes that it is able to
provide superior, personalized service by monitoring member orders, from sign-
on and order placement through delivery and payment, and by providing numerous
points of electronic, telephonic and personal communication to its members
throughout the process. Peapod also believes that providing high-quality
technical support and customer service is an important element of the value it
provides to its members. Accordingly, Peapod offers members free technical
support and toll-free customer service seven days per week.
To increase the efficiency and quality of the consumer services its offers,
Peapod has developed a detailed set of field operating standards and
procedures. The Company supports these standards and procedures through
extensive employee training and incentive programs. The Company has carefully
prepared and documented its employee training programs, and developed
incentive plans to provide employees with recognition for consistently
superior performance at each level of its operations. "Peapod University" is
the Company's training program for all fulfillment personnel of the Company
and certain of its retail partners. Shoppers, packers, drivers and managers
undergo hours of formal training, and a separate program is conducted for
produce shoppers to provide expertise in ensuring produce quality and
freshness.
Peapod's typical members are females between the ages of 30 and 54,
households with children, dual income households and other busy people. The
income levels of Peapod's membership base cover a wide range, with a median
income exceeding $60,000 per year. The average Peapod order is $110 which the
Company believes is five to six times the in-store average. Since 1995, the
Company has retained two-thirds of its members on an annual basis. This
retention data is based on a limited operating history and reflects primarily
experience in the Chicago market as well as a variety of promotion and pricing
policies. This historical data is not necessarily indicative of future
retention rates.
As of March 31, 1997, Peapod had 43,200 members and offered its online
grocery service in six markets: Chicago, San Francisco/San Jose, Columbus,
Boston, Houston and Atlanta. Peapod opened in Dallas in May 1997 and expects
to open in Austin in June 1997.
Grocery Retailer Alliances
Peapod's ability to offer online shopping and delivery services to consumers
depends on its product sourcing, fulfillment and marketing arrangements with
grocery retail partners. Peapod enters into a contract with a single major
supermarket chain in each of its metropolitan markets. Peapod strives to
choose retail partners that have a reputation for high-quality and the ability
to support aggressive marketing efforts for the service. The Company's current
retail partners include four of the five largest national supermarket chains.
Its retail partners are: in Chicago, Jewel/Osco (a division of American Stores
Company); in San Francisco/San Jose, Safeway, Inc.; in Columbus, The Kroger
Company; in Boston, The Stop & Shop Supermarket Company; in Houston, Randalls
Food & Drug Inc.; and in Atlanta, Brunos, Inc.
28
<PAGE>
Peapod strives to be the solution of choice for online shopping and
fulfillment services by offering varying levels of service and support
depending on the particular grocery retailer's needs. In all cases, Peapod
provides its online shopping systems, including the application and the system
hosting and network management services necessary to operate the service. The
Company also implements its proprietary merchandising link which allows
retailers to electronically transmit to Peapod, on a real-time basis, product
and pricing changes. Peapod's proprietary database of over 40,000 products,
including product descriptions and detailed nutritional information
incorporates the retailers' branded or regional products. Peapod further
offers its management expertise, operating processes and systems relative to
fulfillment operations. These operations are complex due to high transaction
volumes, a large part-time workforce and the requirements for high levels of
customer service. Peapod further provides retailers with transaction
processing, electronic billing, collection services and customer service for
the online consumer. Retailers also benefit substantially from Peapod's
expertise in the marketing strategies and programs that are effective in
acquiring and retaining online grocery shopping members and from the
centralized call center that Peapod operates to provide member support and
technical assistance. Peapod believes that it is able to offer grocery
retailers a superior online shopping channel at a total cost that is
significantly less than would be required for a retailer attempting to develop
and manage its own service.
Peapod currently offers retailers several flexible programs. For example,
Peapod offers its most comprehensive services under its full service program,
which Peapod currently operates for its retail partners in the Chicago, San
Francisco/San Jose, Columbus, Boston and Atlanta markets. Under this program,
Peapod employees perform complete fulfillment services, including shopping,
packing and delivering groceries. Peapod's retail partners provide access to
their retail stores within a particular metropolitan area for use as
fulfillment centers. Each fulfillment center serves members within its
immediate vicinity. In the partners fulfillment program, which Peapod
currently operates in its Houston market, the shopping, packing and delivery
services for members are provided by the retailer's employees, who are
recruited, trained and managed by Peapod field management staff. The Company
also expects that it will make available to select retailers, through its
Split Pea Software division, a non-exclusive licensing and system management
program. Under this program, Peapod would provide software, hosting and
network management services, while the retailer would manage, under a private
label, the marketing, fulfillment, transaction processing and customer service
components. Peapod anticipates that the differing requirements of grocery
retailers will require it to continue to be flexible in its service offerings.
Under its retail agreements, the Company's retail partners generally pay the
Company various fixed and transaction-based fees and provide annual marketing
support to the Company which is used to advertise and promote the Peapod
service. A number of these agreements are terminable prior to expiration by
either party with short notice, but in some cases the retail partner must pay
a substantial termination fee to Peapod. Jewel/Osco was the Company's original
retail partner and served as a test fulfillment center in 1990. Peapod's
Chicago market, serviced through the Company's agreement with Jewel/Osco,
accounted for approximately two-thirds of the Company's revenues in 1996 and
approximately one-half of its revenues in the first quarter of 1997. Due to
the addition of four new retailers since September 1996 and the Company's
planned expansion, the Company expects the percentage of revenues derived from
the Chicago market to decline.
Interactive Marketing Services
Peapod's software is designed to easily accommodate a variety of media and
promotional events, and is supported by a database containing extensive
information about the shopping behavior and preferences of its members that
the Company believes is not readily available from other sources. This has
enabled Peapod to pioneer, in partnership with consumer goods companies,
innovative interactive marketing services that consist of advertising,
promotion and market research services. The Company commenced offering
interactive marketing services in late 1995 and currently has agreements to
provide interactive marketing services to a number of national consumer goods
and service companies, including Anheuser-Busch, Incorporated, Bristol-Myers
Squibb Company, Frito-Lay, Inc., The Gillette Company (USA) Inc., Helene
Curtis, Inc., Kellogg Company, Kraft Foods, Inc., Nestle U.S.A., Inc., Novus
Services, Inc. (Discover Card), Ore-Ida Foods, Inc., Ralston Purina
29
<PAGE>
Company, The J.M. Smucker Company and Tropicana Products, Inc. Consumer goods
companies and other users of interactive marketing services are attracted by
the appealing demographic profile of Peapod's membership base and the
capabilities of Peapod's integrated database and medium. Peapod offers a
medium that can reach this captive audience more directly and that the Company
believes will increase in value as Peapod's membership base expands.
Peapod's database and membership profile, in conjunction with its
proprietary targeting engine, enable it to deliver highly-targeted, one-to-one
advertising and promotion, such as electronic couponing, as well as conduct
cost-effective, high-quality marketing research. See "--Technology." Peapod's
systems provide total accountability for every marketing event executed on the
Peapod system so that exposures, mouse clicks, redemptions and sales are all
captured for complete reporting of the impact of a marketing program. The
accurate and comprehensive marketing feedback is a valuable tool for consumer
goods companies for pre-testing and refining marketing programs for execution
in more traditional media.
The Company can also provide consumer goods companies with improved research
and data products. Peapod believes that the nature of its database, which
maintains extensive and detailed data tied to individual purchasers, enables
it to provide improved research and data products without the high cost of
traditional research. Additionally, Peapod's captive audience allows the
Company to create and maintain highly-targeted research panels at a cost the
Company believes to be substantially lower than the consumer panels of current
research firms.
The following are examples of interactive marketing services provided by
Peapod:
Banner Advertising. The standard Peapod advertising unit is a banner or
half-banner ad that runs in the product's home screen and other high-traffic
areas. Because the banner ad includes a direct link to the brand's online
shelf location or information module, a member can quickly purchase the
advertiser's product.
Enhanced Content Advertising. Peapod's flexible format allows additional
content in the form of an information module to be added to more fully
explain, in an exciting interactive format, the many uses of an advertiser's
products. For example, a major national consumer goods manufacturer sponsors
an interactive recipe planning module that promotes usage of the sponsor's
brand ingredients and allows automatic addition of these ingredients to the
member's "virtual" shopping basket. A Peapod member can review a menu of time-
saving topics, select and view a list of recipes, examine individual recipes
containing the sponsor's products and then quickly purchase those products as
part of the member's grocery order. Through this program, the sponsor is able
to provide helpful information to consumers at the time purchase decisions are
being made. In addition, the sponsor can test which recipes are viewed by
members and which ones result in incremental sales.
Electronic Couponing. Peapod's database and membership profile enable it to
deliver highly-targeted, one-to-one promotion programs such as electronic
coupons. These programs can be offered to all users or targeted to specific
members, such as consumers of competing products. Furthermore, the electronic
coupons eliminate much of the printing, distribution and expense normally
associated with paper coupons.
Stimulus-Response Testing. Through Peapod's stimulus-response testing, a
consumer goods company can accurately target communication and promotion
programs, such as those described above, in innovative ways, thereby
generating research data that would be difficult to otherwise obtain. Stimuli
(i.e., incentives) can be delivered online with subsequent purchase behavior
among test and control households tracked to calculate a return on investment
for the sponsor's program. Through such a program, a consumer goods company
can discover, among other things, how much incentive is needed to draw
customers away from the competition and which tactics can maintain or increase
purchases of the brand by current customers. Consumer goods companies can use
this methodology to test alternative coupon events and tie-in promotions
(e.g., offering a free jar of jelly with the purchase of several loaves of
bread) as well as point-of-sale, direct mail and FSI promotion programs, and
new product concepts. For example, sponsors have tested the impact of
delivering an everyday-low-price
30
<PAGE>
message exclusively to consumers planning on buying competitive brands. In
another example, a sponsor experimented with innovative media placements. This
sponsor created a virtual display including an electronic coupon program for a
personal care product in the high-traffic Peapod produce aisle, a placement
that would have been difficult to implement in a traditional retail
environment. This placement led to a substantial increase in use of this
product by Peapod members.
Information Research Services. The Company has a relationship with The
M/A/R/C Group, a national marketing research organization, to develop and
market custom and syndicated research applications to bring the value-added
research benefits of Peapod to consumer goods companies. Customers for such
research products include ConAgra, Inc., Johnson & Johnson and Procter &
Gamble Co. A custom online survey tool has recently been developed that the
Company believes will allow qualitative, attitudinal insights from highly-
targeted consumer groups to be gathered quickly and efficiently, and linked to
data on shopping behavior.
The Company is also developing, in conjuction with The M/A/R/C Group,
syndicated research tools by utilizing Peapod's membership pool. The first
such report is entitled Online vs. In-Line and identifies the characteristics
and motives of online shoppers. Peapod believes that the nature of its
database, which maintains extensive and detailed data tied to individual
purchasers, enables it to provide improved research and data products without
the cost of scanning and demographic research. Additionally, Peapod's
membership base allows the Company to create and maintain highly-targeted
research panels at a cost the Company believes to be substantially lower than
the consumer panels of current research firms.
To date, substantially all of Peapod's interactive marketing sales have been
made through sponsorship agreements under which the Company provides a variety
of bundled interactive marketing products and services. In 1997, the Company
began offering individual interactive marketing services such as banner ads
and electronic coupon programs on a shorter-term basis, in a manner more
similar to typical advertising and promotion programs.
TECHNOLOGY
Proprietary Consumer Software. Peapod's consumer software is based upon a
three-tiered architecture, which positions Peapod at the forefront of Internet
computing. The first tier, the client layer, resides on the member's computer.
The client layer utilizes instructions from the application server in order to
create the user's interface, run the application, and return input to the
Peapod server. The remaining tiers, the application and the database, are
centrally maintained and manage all of the logic and data associated with the
Peapod application, including members' personalized shopping lists.
Peapod believes that there are many advantages of its proprietary "thin
client" architecture. First, Peapod believes that its overall application
performance is strong relative to other consumer network applications with
comparable levels of interactivity. A key factor in the performance of a
network application is the utilization of the generally narrow bandwidth
connection between the consumer's computer and the server, whether via the
Internet or direct dial-up. Peapod makes efficient use of this bandwidth by
performing certain processing on the member's computer and by exchanging only
application-relevant information between a member's computer and the Peapod
server.
Peapod also believes that its three-tiered architecture offers a high degree
of scalability. Efficient interaction between the Peapod server and the
member's computer and client-side processing of certain application activities
reduce the processing requirements of Peapod's servers. In addition, the
partitioning of the application and the database enables Peapod to isolate and
optimize the differing processing requirements of these layers. As the Peapod
membership base grows and the number of simultaneous users increases, Peapod
can integrate additional application servers without impacting the rest of the
application architecture.
31
<PAGE>
Peapod's "thin client" architecture also provides Peapod with a great deal
of application functionality and flexibility. Because the application logic
and data is maintained centrally, Peapod can dynamically change much of the
content and appearance of the consumer software without having to modify the
client software on the member's computer. For example, during 1996, Peapod
introduced Internet e-mail features to its members without any related
modifications to the client software residing on members' computers. The
centralized application logic and data also enables Peapod to present
interactive marketing events or to customize the appearance of the application
among individual members. See "--Proprietary Targeting Engine."
The next version of the Peapod software, Version 5.0, will be based on
Microsoft's ActiveX technology and will be designed to offer an even greater
level of integration with the Web. For example, Peapod will be able to
incorporate Web site content, such as HTML documents or Shockwave animated
images, into its consumer interface. An interactive marketing client, for
instance, might choose to directly link its Peapod advertising and promotion
activity with its other Web presences. Additionally, as new consumer
technologies emerge and mature, such as Sun's Java programming language or
inexpensive Internet appliances, Peapod can quickly adapt its consumer
software to support those platforms.
Access. The software may be downloaded to the member's computer via the
Internet or from a Peapod diskette. Members can then access the Peapod servers
via direct dial-up or the Internet. The Peapod client software currently
supports both the Microsoft Windows and Macintosh user platforms.
Proprietary Targeting Engine. One key attribute of the Peapod application is
its ability to target various forms of redeemable content, such as
advertisements, electronic coupons, online surveys and product samples, to
various members based on a range of defined criteria. Peapod has developed the
Universal Event Processor, a flexible, high-performance database application,
to manage the targeting and redemption of these events. The flexibility of
this targeting and redemption capability enables Peapod to offer sophisticated
advertising and market research services to its consumer goods and retailer
clients. For example, Peapod can target an electronic coupon with varying
redemption values to different sets of members with similar purchasing
attributes in order to measure the relative effectiveness of the incentives.
See "--Interactive Marketing Services."
Business Support Applications. Peapod has designed and integrated several
business support systems with its shopping application in order to facilitate
the administration of the Peapod services. The Peapod fulfillment management
applications, installed at each of Peapod's fulfillment centers, enable Peapod
field operations managers to access and print member orders according to store
layout, manage delivery time availability and update the store-specific
product offerings. The Peapod accounting systems provide for the billing,
processing and collection functions associated with the transactions on the
Peapod service, including an electronic link of the processing of member
credit card payments and funds transfer. The member services and technical
support systems provide Peapod's telephone representatives with real-time
access to customer information, including order and online activity
information, allowing for responsive service to the various member needs. The
next release of the fulfillment management applications is being designed to
incorporate hand-held scanning technology to enhance and streamline the order
picking and packing functions and electronically integrate the actual member
order with the Peapod accounting systems.
MARKETING AND PROMOTION
Consumer Marketing. Until September 1995, Peapod relied largely on word-of-
mouth and point-of-purchase displays for member acquisition. Since that time,
Peapod has initiated promotional plans focused on radio and newspaper
advertising, direct mailings of starter kit diskettes and a variety of other
programs. The Company is testing television advertising in the Chicago market.
Much of Peapod's advertising is conducted on a cooperative basis with the
Company's retail partners, with both parties contributing financial and
management resources to member acquisition programs. In building consumer
awareness of its service, especially in newer areas, Peapod's advertising
focuses on co-branding its service with the name recognition of its retail
partners.
32
<PAGE>
The Company's marketing objectives include, in addition to member
acquisition, increases in member usage, grocery order size and member
retention. Peapod has recently implemented several marketing programs offering
free gifts and service discounts to select members, and anticipates that it
will test a number of other incentives in an effort to increase member usage
and grocery order size. Additionally, Peapod intends to develop member
management programs designed to reward its loyal members and improve the
experience of its new members. The Company believes that over time the
extensive database and one-to-one marketing capabilities of its online system
will provide it with opportunities to tailor its services to the unique needs
of its members, and thereby improve membership satisfaction.
Retailer Marketing. The Company seeks to identify, and enter into an
agreement with, a high-quality grocery retailer in each of its metropolitan
markets. The Company has a separate sales and client service function that
focuses on securing relationships with grocery retailers. Senior management,
field management personnel and employees in other functional areas are
involved in providing ongoing corporate support to its retail partners.
Examples of support include, in addition to field operations management,
production of periodic out-of-stock reports indicating stocking problems in
specific stores, cross-functional planning for new market and fulfillment
center openings, and general management of Peapod's relationship with its
grocery retail partners.
Interactive Marketing Services. Peapod's interactive marketing services
personnel provide sales and client service support to consumer goods companies
and other advertisers. In 1996, the Company entered into an alliance with
ActMedia, Inc. ("ActMedia"), a subsidiary of Heritage Media Corporation,
pursuant to which ActMedia is selling certain media and promotional products
on Peapod's behalf to ActMedia's packaged goods clients. In addition, the
Company has a relationship with The M/A/R/C Group, a national marketing
research organization, to develop and market custom and syndicated research
applications to bring the value-added benefits of Peapod to consumer goods
companies. Peapod also has alliances with certain other interactive
advertising agencies to assist Peapod in its sales efforts. Peapod also
advertises its services in trade publications.
COMPETITION
The grocery retailing market is extremely competitive. The Company competes
with a number of providers of grocery products and services, including
traditional grocery retailers, other interactive or Internet-based grocery
providers, and providers that fulfill orders obtained via telephone or
facsimile. The Company also competes with many other companies that seek to
implement advertising, promotions and research programs for consumer goods
companies. Many of the Company's competitors are larger and have substantially
greater resources than the Company. In addition, the Company believes that
this competition will intensify as more grocery retailers, online marketing
services and information services companies seek to offer services in
competition with the Company.
Companies operating in the electronic (computer, facsimile or phone) grocery
shopping and delivery business compete on several factors, including the ease
of use, functionality and reliability of the shopping and ordering system,
product selection, price, the reliability and professionalism of delivery
operations and other customer services, and general brand awareness. The
Company has not experienced significant competition to date from other
electronic grocery and delivery services in any of its markets, other than
Boston where several less expensive, warehouse-based delivery services have
recently emerged. In competing against such services Peapod emphasizes its
user-friendly and functional online shopping system, its substantially greater
product selection, and the brand awareness being generated through its
cooperative marketing efforts with its retail partner.
The Company believes that most large grocery retailers will initiate online
shopping and delivery programs over time due to the large potential size of
this online sales and distribution channel, as well as the retailers' need to
defend their traditional customer base. Additionally, new retailers are likely
to emerge with warehouse-based distribution models in an attempt to lead the
development of the new channel. Although Peapod would like to form alliance
relationships with many of these grocery retailers, and believes that its
offerings are superior
33
<PAGE>
to those of other existing third party shopping service providers, some
retailers may choose to develop and operate their own systems. Alternatively,
retailers may seek to align with other parties that can develop online
software, manage the technology infrastructure or perform fulfillment
services. These relationships may, over time, give rise to new and significant
competitors for the Company. Further competitors may arise from large
technology companies that, in conjunction with grocery retailers or
independently, develop online grocery shopping systems. Because of the large
capital investments required in order to develop online grocery shopping and
delivery systems and to operate the service, the Company believes that large,
well-capitalized retailers or technology companies pose the most significant
long-term competitive threat.
With respect to interactive marketing services, the Company competes with
many other companies that seek to sell and execute advertising, promotions and
research programs to consumer goods companies. This market is extremely
competitive and includes advertising and promotional agencies, companies
implementing FSI coupon programs and in-store promotions, and traditional
consumer product research businesses. These companies also cover a variety of
media, including print, television or online. Companies in this market compete
on the basis of audience size for media exposure, demographics of the
audience, effectiveness in generating sales, quality of research data and
analysis, cost, and other factors. The online medium is in the early stages of
growth as a forum for advertising, promotion and research. The Company
believes that this medium, and in particular online grocery shopping services,
offer opportunities to impact sales of consumer products to a greater degree
than traditional media and promotions, and to perform higher quality and more
cost-effective research. See "--Interactive Marketing Services."
EMPLOYEES
As of March 31, 1997, the Company had 225 full-time and 1,075 part-time
employees. Substantially all of the part-time employees serve in grocery
picking, packing, delivery, and customer support positions. Of the Company's
full-time employees, approximately 110 are in field operations, with the
remainder in information technology, sales and marketing, and general and
administrative functions. None of the Company's employees is represented by a
collective bargaining unit. The Company considers its relations with its
employees to be good.
PROPERTIES
The Company's principal offices are located currently in Evanston, Illinois
and occupy approximately 13,500 square feet. Peapod intends to exercise its
right to terminate its current lease and to move its principal offices to
29,700 square feet of office space in Skokie, Illinois in the summer of 1997.
This new lease is scheduled to expire in December 2004 and is renewable for an
additional five-year period. The Company also leases office space in six
cities to cover each of its metropolitan markets, including offices in
Chicago, San Francisco, Columbus, Boston, Houston and Atlanta for terms of
between one month and four years, which combined occupy approximately 6,500
square feet.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The Company believes that its success and ability to compete is dependent
upon its proprietary systems and technology. The Company relies on a
combination of copyright, trademark and trade secret laws as well as
confidentiality agreements and other measures to establish and protect its
proprietary rights. The Company does not have any patents. The Company has
U.S. registrations for the "Peapod" service mark and associated logos and for
Peapod's "Smart Shopping for Busy People" slogan. The Company has registered
copyrights, or has applied for copyright registration, with respect to its Web
site, software and certain marketing materials. While the Company relies on
trademark, trade secret and copyright laws to protect its proprietary rights,
the Company believes that the technical and creative skills of its personnel,
high-quality service standards, continued development of its proprietary
systems and technology, and brand name recognition are more important to
establish and maintain a leadership position and strengthen its brand.
34
<PAGE>
As part of its confidentiality procedures, the Company generally enters into
agreements with its employees, retail partners and strategic partners and
limits access to and distribution of its software, documentation and other
proprietary information. There can be no assurance that steps taken by the
Company will prevent misappropriation of its technology or that agreements
entered into for that purpose will be enforceable. Despite the Company's
efforts to protect its proprietary rights, unauthorized parties may attempt to
copy aspects of the Company's services or to obtain and use information that
the Company regards as proprietary. Policing unauthorized use of the Company's
proprietary rights is difficult. Any misappropriation of the Company's
technology or development of competitive technologies could have a material
adverse effect on the Company's business, results of operations or financial
condition. The Company could incur substantial costs in protecting and
enforcing its intellectual property. Moreover, the Company may in the future
receive notices from third parties claiming the infringement by the Company's
software or other aspects of the Company's business. While the Company is not
currently subject to any such claims, any future claim, with or without merit,
could result in significant litigation costs and diversion of resources
including the attention of management, and could have a material adverse
effect on the Company's business, results of operations or financial
condition.
LEGAL PROCEEDINGS
The Company is not involved in any legal proceedings that management
believes would have a material adverse effect on the Company's financial
condition or results of operations.
35
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning each of the
Company's executive officers and directors.
<TABLE>
<CAPTION>
NAME AGE POSITION(S) WITH THE COMPANY
---- --- ----------------------------
<S> <C> <C>
Andrew B. Parkinson (1).......... 39 Chairman, President and Chief Executive
Officer and Director
Thomas L. Parkinson (1).......... 37 Executive Vice President-Chief
Technology Officer and Director
John C. Walden................... 37 Executive Vice President-Finance and
Business Development
Timothy M. Dorgan................ 44 Executive Vice President-Interactive
Marketing Services
John A. Furton................... 33 Senior Vice President-Field Support and
Retailer Services
Tasso H. Coin (2)(3)............. 61 Director
Steven M. Friedman (2)........... 42 Director
Trygve E. Myhren (2)............. 60 Director
Seth L. Pierrepont (3)........... 46 Director
</TABLE>
- --------
(1) Messrs. Andrew and Thomas Parkinson are brothers.
(2) Member of the Compensation Committee.
(3) Member of the Audit Committee.
Messrs. Friedman, Myhren and Pierrepont were elected directors pursuant to
certain agreements between the Company and certain stockholders of the
Company. The provisions of such agreements relating to the election of
directors are expected to terminate upon consummation of the Offering.
Mr. Andrew B. Parkinson is a co-founder of the Company and has been its
President and Chief Executive Officer and a director since its founding in
1989. Prior to the founding of the Company, Mr. Parkinson held various brand
and product management positions with Kraft Foods, Inc. and Procter & Gamble
Co. Mr. Parkinson holds a BA in Economics from Wesleyan University.
Mr. Thomas L. Parkinson is a co-founder of the Company and has been its
Executive Vice President-Chief Technology Officer and a director since its
founding in 1989. He has had primary responsibility for directing consumer
product development and technology research and development since the
Company's founding and he is the principal architect of Peapod's software.
Prior to founding the Company in 1989, Mr. Parkinson held various field sales
and sales management positions with Procter & Gamble Co. Mr. Parkinson holds a
Masters in Industrial Design from Pratt Institute and a BA in Design from
Wesleyan University.
Mr. John C. Walden joined Peapod in 1996 as Executive Vice President-Finance
and Business Development. He is responsible for the Company's finance,
accounting, legal, business development and product management functions.
Prior to joining Peapod, Mr. Walden was Director, Media Ventures for Ameritech
Corporation where he effected and managed investments in interactive media
companies. Mr. Walden served as a director of Peapod in 1995 as Ameritech
Corporation's designee. From 1990 to 1994, he held a variety of executive
management positions with Storage Technology Corporation, a computer storage
system manufacturer, and a predecessor, XL/Datacomp, Inc., a computer
distribution company, including Vice President and General Manager, Vice
President-Corporate Development and Strategy, and General Counsel. Mr. Walden
holds a Masters in Management from Kellogg Graduate School of Management,
Northwestern University; a JD from Illinois Institute of Technology, Chicago-
Kent College of Law; and a BS in Finance from the University of Illinois.
36
<PAGE>
Mr. Timothy M. Dorgan joined Peapod in 1994 in his current role. As
Executive Vice President-Interactive Marketing Services, Mr. Dorgan is
responsible for the overall development and management of the Company's
interactive marketing and research services. Prior to joining Peapod, from
1992 to 1994, Mr. Dorgan served as President of Ketchum Advertising-Chicago, a
multi-national advertising agency. From 1987 to 1992, Mr. Dorgan was President
and Chief Operating Officer of Noble & Associates, an advertising and
marketing services firm specializing in food products. Mr. Dorgan holds a BS
in Communications from the University of Illinois.
Mr. John A. Furton is a co-founder of the Company and joined the Company in
1990. Since 1996, he has served in the role of Senior Vice President-Field
Support and Retailer Services in which he has responsibility for retailer
sales and client services and centralized support for fulfillment operations.
Prior to his current position, Mr. Furton was responsible for the Company's
fulfillment services as Vice President of Operations. Prior to joining Peapod,
from 1986 to 1990, Mr. Furton held various positions in information systems
consulting with Kraft Foods, Inc. and Michigan Bell Telephone Company. Mr.
Furton holds a BS in Computer Science and Software Engineering from Michigan
Technological University.
Mr. Tasso H. Coin has been a director of Peapod since 1992. He is President
of Tasso H. Coin Investment Development Company, a private investment and
advisory firm specializing in services for growth companies. Mr. Coin was a
founder of the Chicago law firm now known as Cowen, Crowley, Nord & Staub and
co-founder of AmBank Financial Services Inc., a bank holding Company. Mr. Coin
holds a JD from the University of Iowa, and a BA in Business Administration
from Augustana College.
Mr. Steven M. Friedman became a director in 1996. He is a general partner of
Eos Partners SBIC, L.P., an investment partnership, which he co-founded in
1994. From 1988 to 1993, Mr. Friedman was a principal and a general partner of
Odyssey Partners L.P., an investment partnership, which he joined in 1983. He
is a member of the board of directors of Forstmann & Company, Inc., Eagle Food
Centers, Inc. and The Caldor Corporation. Mr. Friedman holds an MBA and a BA
from the University of Chicago and a JD from Brooklyn Law School.
Mr. Trygve E. Myhren became a director in 1995. He was President and Chief
Operating Officer and a director of The Providence Journal Company, a
diversified media firm, from 1990 to 1996. From 1975 until 1988, Mr. Myhren
was employed by American Television and Communications Corporation, the cable
television subsidiary of Time, Inc. (now Time/Warner Cable), and he served as
Chairman and Chief Executive Officer from 1981 to 1988. Mr. Myhren was a
member of the board of the National Cable Television Association from 1981 to
1991 and served as its Chairman in 1986 and 1987. Mr. Myhren currently serves
on the board of Continental Cablevision, Inc. and Advanced Marketing Services,
Inc. Mr. Myhren holds an MBA from the Amos Tuck School at Dartmouth and a BA
from Dartmouth College.
Mr. Seth L. Pierrepont has been a director of Peapod since 1992. Mr.
Pierrepont also served as the Company's Director of Marketing during 1993. He
is President of Sage Venture Management Incorporated, a private investment and
advisory services firm specializing in developing businesses. Prior to
founding Sage in 1990, Mr. Pierrepont was a Managing Director of Continental
Illinois Venture Corporation. Mr. Pierrepont holds an MBA from Columbia
University and a BA from the University of Pennsylvania.
BOARD OF DIRECTORS
The business of the Company is managed under the direction of the Company's
Board of Directors. The Board of Directors is presently composed of six
directors. Following the Offering, the directors will be divided into three
classes with staggered three-year terms (except for the first term of Class I
and Class II directors, which will be one and two-year terms, respectively).
Messrs. Andrew B. Parkinson and Tasso H. Coin will be in Class I and will
stand for election at the annual meeting of stockholders to be held in 1998.
Messrs. Thomas L. Parkinson and Seth L. Pierrepont will be in Class II and
will stand for election at the annual meeting of stockholders to be held in
1999, and Messrs. Steven M. Friedman and Trygve E. Myhren will be in Class III
and will stand for election at the annual meeting of stockholders to be held
in 2000. Officers of the Company are elected at each annual meeting of the
Board of Directors and serve at the discretion of the Board.
37
<PAGE>
The Company's Board of Directors has established a Compensation Committee
and an Audit Committee. The Compensation Committee reviews and recommends the
compensation arrangements for all officers, approves such arrangements for
other senior level employees and administers and takes such other action as
may be required in connection with certain compensation and incentive plans of
the Company (including the grant of stock options). The Audit Committee
recommends the firm to be appointed as independent accountants to audit
financial statements and to perform services related to the audit, reviews the
scope and results of the audit with the independent accountants, reviews with
management and the independent accountants the Company's year-end operating
results and considers the adequacy of the internal accounting procedures.
COMPENSATION OF DIRECTORS
Directors who are officers or employees of the Company do not receive
compensation for serving as directors. Non-employee directors receive fees of
$1,000 per in-person meeting of the Board of Directors, $500 per telephonic
meeting of the Board of Directors lasting more than one hour, $750 per in-
person meeting of a committee of the Board of Directors and $375 per
telephonic meeting of a committee lasting more than one hour. All directors
are reimbursed for out-of-pocket expenses incurred in connection with
attendance at meetings of the Board of Directors and meetings of committees of
the Board of Directors. In addition, all directors have been eligible to
participate in the Company's Director Unit Purchase Plan under which directors
were able to purchase equity interests in the Company at a discount to fair
market value. See "Stock Plans--Other Plans."
In connection with the Offering, the Company has adopted the 1997 Long-Term
Incentive Plan. See
"--Stock Plans." Pursuant to this plan, on the date of the closing of the
Offering (or, if later, on the date on which a person is first elected or
begins to serve as a non-employee director) each non-employee director will be
granted a nonqualified option to purchase shares of Common Stock which
will vest one-third each on the first, second and third anniversaries thereof
and, on the date of each annual meeting of stockholders of the Company, each
person who is a non-employee director immediately after such annual meeting of
stockholders will be granted a nonqualified option to purchase shares of
Common Stock which will vest six months after the date of grant. The per share
exercise price of such options will be equal to the fair market value of the
Common Stock on the date of grant of such option.
EXECUTIVE COMPENSATION
Summary Compensation. The following summary compensation table sets forth
compensation for services awarded to, earned by or paid for services rendered
to the Company in all capacities during the year ended December 31, 1996 by
the Company's Chief Executive Officer and each of the Company's other four
most highly compensated executive officers (the "Named Executives").
SUMMARY COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION COMPENSATION AWARDS
----------------- NUMBER OF SHARES
NAME AND CAPACITY SERVED SALARY BONUS UNDERLYING OPTIONS
------------------------ -------- -------- -------------------
<S> <C> <C> <C>
Andrew B. Parkinson...................... $120,000 $ 26,700
President and Chief Executive Officer(2)
Thomas L. Parkinson...................... 120,000 27,330
Executive Vice President-Content &
Consumer Product Development
John C. Walden........................... 147,115 130,725
Executive Vice President-Finance and
Business Development
Timothy M. Dorgan........................ 115,000 17,466
Executive Vice President-Interactive
Marketing Services
John A. Furton........................... 104,375 16,301
Senior Vice President-Field Support and
Retailer Services
</TABLE>
- --------
(1) All other compensation in the form of perquisites and other personal
benefits has been omitted because the aggregate amount of such perquisites
and other personal benefits constituted the lesser of $50,000 or 10% of
the total annual salary and bonus of the Named Executive for such year.
38
<PAGE>
(2) Mr. Andrew Parkinson's compensation historically has been paid by Old
Peapod, the general partner of Peapod LP.
Option Information. The following table sets forth certain information
regarding the option grants made pursuant to the Company's option plans during
the fiscal year ending December 31, 1996, to each of the Named Executives.
OPTION GRANTS IN FISCAL 1996
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT
ASSUMED ANNUAL
RATES OF STOCK
% OF TOTAL PRICE
NUMBER OF OPTIONS APPRECIATION
SECURITIES GRANTED TO FOR OPTION
UNDERLYING EMPLOYEES TERM(4)
OPTIONS IN FISCAL EXERCISE EXPIRATION ---------------
NAME GRANTED YEAR(1) PRICE(2) DATE(3) 5% 10%
- ---- ---------- ---------- ---------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Andrew B. Parkinson..... 3.8% $ 1/1/05 $37,734 $95,625
Thomas L. Parkinson..... 3.8 1/1/05 37,734 95,625
John C. Walden.......... 3.8 6/1/05 37,734 95.625
Timothy M. Dorgan....... 5.7 1/1/05 56,601 143,437
John A. Furton.......... 3.8 1/1/05 37,734 95,625
</TABLE>
- --------
(1) Based on an aggregate of shares subject to options granted to
employees during fiscal 1996.
(2) Options were granted at an exercise price equal to the estimated fair
market value of the Peapod LP partnership units at the date of grant.
(3) The term of each option is generally nine years from the date of grant.
However, options may terminate before their expiration dates if the
optionee's status as an employee is terminated.
(4) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission and do not
represent the Company's estimate or projection of the future Common Stock
price.
FISCAL YEAR END OPTION VALUE
No options were exercised by the Named Executives during the fiscal year
ending December 31, 1996. The following tables sets forth for each of the
Named Executives, certain information concerning the value of unexercised
options at the end of fiscal 1996.
<TABLE>
<CAPTION>
NUMBER OF NET VALUES OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Andrew B. Parkinson.........
Thomas L. Parkinson.........
John C. Walden..............
Timothy M. Dorgan...........
John A. Furton..............
</TABLE>
MANAGEMENT BONUSES
Each of the Named Executives is eligible to receive an annual bonus based on
the achievement of individual and corporate goals.
STOCK PLANS
Long-Term Incentive Plan. In connection with the Offering, the Board of
Directors and stockholders of the Company approved the 1997 Long-Term
Incentive Plan (the "1997 Plan"). Under the 1997 Plan, the Company may grant
incentive stock options ("ISOs") within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), or nonqualified
options. The 1997 Plan also provides for the grant of stock appreciation
rights ("SARs"), bonus stock awards which are vested upon grant, stock awards
which may be
39
<PAGE>
subject to a restriction period or specified performance measures or both, and
performance shares. Performance shares are rights, contingent upon the
attainment of performance measures within a specified performance period, to
receive one share of Common Stock, which may be restricted. A total of
shares of Common Stock have been reserved for issuance under the
1997 Plan, subject to adjustment in the event of a stock split, stock dividend
or other changes in capital structure. No grants may be made under the 1997
Plan after ten years after its effective date. All directors, officers and
approximately employees are eligible to participate in the 1997 Plan.
The maximum number of shares of Common Stock with respect to which options or
SARs, stock awards or performance share awards, or a combination thereof may
be granted during any calendar year to any participant in the 1997 Plan is
, subject to adjustment in the event of a stock split, stock
dividend or other change in capital structure.
The 1997 Plan will be administered by the Compensation Committee. Subject to
the terms of the 1997 Plan, the Compensation Committee is authorized to select
eligible non-employee directors, officers and other key employees and to
determine the form, amount and timing of each award to such person and, if
applicable, the number of shares of Common Stock, the number of SARs and the
number of performance shares subject to the awards granted thereunder, the
exercise price or base price associated with the award, the time and
conditions of exercise, and all other terms and conditions of such award.
Options granted to employees under the 1997 Plan may be ISOs or nonqualified
options. The purchase price of shares of Common Stock purchasable upon
exercise of an option will be determined by the Compensation Committee at the
time of grant, but may not be less than 100% of the fair market value of such
shares of Common Stock on the date of grant. The aggregate fair market value
(determined as of the date the option is granted) of the stock with respect to
which ISOs are exercisable for the first time by the optionee in any calendar
year (under the 1997 Plan and any other incentive stock option plan of the
Company) may not exceed $100,000. ISOs granted under the 1997 Plan may not be
exercised after ten years from the date of grant. In the case of any eligible
employee who owns or is deemed to own stock possessing more than 10% of the
total combined voting power of all classes of stock of the Company, the
exercise price of any ISOs granted under the 1997 Plan may not be less than
110% of the fair market value of the Common Stock on the date of grant, and
the exercise period may not exceed five years from the date of grant. Options
granted under the 1997 Plan are not transferable by the optionee other than by
will or under the laws of descent and distribution except that, if the
optionee dies prior to exercising his option, the estate of the deceased
optionee may exercise all options in full until the expiration of one year
from the date of death or, if earlier, the termination of the option.
The Compensation Committee has made grants under the 1997 Plan, effective
upon commencement of the Offering, of bonus stock awards and options to
purchase Common Stock to the Named Executives as follows: Mr. A. Parkinson
( shares), Mr. T. Parkinson ( shares), Mr. Walden (
shares), Mr. Dorgan ( shares) and Mr. Furton ( shares). Each
such stock option will have a per share exercise price equal to the initial
public offering price, and will become exercisable in cumulative annual
installments of % of the shares subject to option beginning on the first
anniversary of the date of grant, and will expire ten years after the
commencement date of the Offering.
Employee Stock Purchase Plan. An employee stock purchase plan also has been
approved by the Board of Directors and the stockholders of the Company
pursuant to which up to shares of Common Stock may be purchased by
full-time employees who have at least one year of service with the Company.
Under this plan, purchases can be made on a quarterly basis at the lower of
85% of the fair market value at the beginning or end of the quarter. Shares so
purchased by an employee will not be delivered to the employee (and,
consequently, may not be sold by the employee) until the end of the calendar
year in which the purchase is made.
Other Plans. In prior years, Peapod LP adopted certain plans pursuant to
which certain executive officers, directors, advisors and employees were
granted options to purchase Peapod LP limited partnership units (the "Units").
The Executive Incentive Unit Option Plan and the Bonus Unit Option Plan were
adopted in 1993. Options under these plans generally vest over a five-year
period and expire eight to ten years from the date of grant. Peapod LP also
had Executive Option Purchase Plans covering the years 1992 through 1995;
Executive Unit Purchase Plans covering the years 1992 through 1997; and a
Director Unit Purchase Plan covering the years
40
<PAGE>
1995 through 1997. Options were granted under the Executive Option Purchase
Plans at fair market value as determined by the Board of Directors. Units were
purchased under the unit purchase plans at prices which ranged from 80% to 85%
of the fair market value of the Units as determined by the Board of Directors.
Options purchased under the Executive Option Purchase Plans vested immediately
upon the date of grant.
No additional grants of options or purchases of shares may be made under any
of the plans described under "--Other Plans."
EMPLOYMENT AND SEVERANCE AGREEMENTS
The Company has entered into employment agreements and severance agreements
with each of the Named Executives. The agreements set forth compensation
arrangements, including base salaries and minimum targets for annual bonuses,
and provide for the review of these arrangements annually. The agreements
expire in 2002, and are renewable thereafter for one-year terms. The Company
may terminate a Named Executive's employment with or without "cause," as
defined in such agreements, and a Named Executive may terminate his employment
for any reason, including "good reason," as defined in such agreements. Upon
termination by the Company without "cause," or termination by the employee for
"good reason," such Named Executive is entitled to severance payments equal to
his base salary and bonus for 18 months. In the event there is a "change in
control," as defined in the severance agreements, prior to such termination,
the Named Exective is entitled to a lump sum severance payment equal to his
base salary and bonus for two years, and the vesting of all of such Named
Executive stock options will be accelerated so that all such stock options
become immediately exercisable. The current annual salary rates under the
employment agreements for the Company's Named Executives are as follows: Mr.
A. Parkinson $140,000; Mr. T. Parkinson, $140,000; Mr. Walden, $154,500; Mr.
Dorgan, $121,900; and Mr. Furton, $118,450. Under the terms of the agreements,
annual salaries may not be reduced; however increases in annual salaries are
at the discretion of the Board of Directors. The Named Executives and other
senior managers have entered into agreements with the Company containing
confidentiality, non-competition and non-solicitation provisions between the
Company and such employees for the terms set forth in each agreement.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1996, Mr. Tasso H. Coin and Ms. M. Catherine Jaros, a former director
of the Company, comprised the Compensation Committee of the Board of
Directors.
The Company had an advisory agreement with Mr. Tasso H. Coin, who also
serves as a director of the Company, pursuant to which Mr. Coin had provided
certain advisory services to the Company and had received advisory fees in the
form of cash or shares of Common Stock. This advisory agreement was terminated
as of May 1, 1997. Mr. Coin's advisory fees from the Company are as follows:
$52,500 in 1997; $90,000 in 1996; $134,612 in 1995; and $294,954 in 1994.
During such periods, portions of Mr. Coin's advisory fees were paid in the
form of shares of Common Stock (such shares being valued for this purpose at
the then estimated fair market value, less a 15% to 20% discount). See "Stock
Plans--Other Plans."
In 1997, the Company entered into an agreement with Firefly Greetings,
L.L.C. ("Firefly"), a provider of personal greeting cards and other specialty
products, pursuant to which Peapod will create an online store through which
its members can shop for Firefly products utilizing a customized version of
the Peapod application. Mr. Tasso H. Coin, a director of the Company, is a
minority stockholder of, and a consultant to, Firefly. Under the agreement,
Firefly has agreed to pay Peapod development, management and transactional
fees.
CERTAIN TRANSACTIONS
REGISTRATION RIGHTS
The Company has granted to Messrs. Andrew and Thomas Parkinson and to
certain stockholders (the "Holders") certain rights (the "Registration
Rights") to require the Company to take action to register under the
Securities Act the sale of shares of Common Stock (the "Registrable Shares")
held by them. The number of such registrations which the Company is obligated
to effect is limited to four registrations in the aggregate. Such Registration
Rights, as well as rights granted to Mr. Tasso Coin, a director of the
Company, provide (the "Piggyback Rights") that in the event the Company
proposes to register any of its securities under the Securities
41
<PAGE>
Act at any time or times, subject to certain limitations, the Company will use
its best efforts to include the Registrable Shares and a pro rata portion of
Mr. Coin's shares in such registration upon the request of the Holders or Mr.
Coin. Shares sold by the Selling Stockholders in the event the Underwriters'
over-allotment option is exercised are being included in the registration in
which this Prospectus is included pursuant to Piggyback Rights. The Company is
generally required to bear the expenses of all such registrations, except
underwriting discounts and commissions. The Company also has agreed to
indemnify the Purchasers and their controlling persons against certain
liabilities, including liabilities under the Securities Act. After the
Offering, shares of Common Stock of the Company ( shares if the
over-allotment option is exercised in full) will be subject to Registration
Rights or Piggyback Rights.
OTHER
The Conversion. Prior to the consummation of the Offering, the Conversion
will be effected in which (i) all of the equity interests in Peapod LP will be
transferred to the Company in exchange for shares of Common Stock, (ii)
Peapod LP will dissolve, (iii) all of the assets and liabilities of Peapod LP
will be transferred to the Company and (iv) outstanding options for equity
interests in Peapod LP will be converted into options for shares of Common
Stock. The share numbers set forth below reflect the exchange in the
Conversion of Units for shares of Common Stock and of options to purchase
Units for options to purchase Common Stock.
Management Fees. Pursuant to Peapod LP's limited partnership agreement,
Peapod LP has been required to pay an annual management fee to the General
Partner which has historically been used to pay the salary of the Company's
Chief Executive Officer, Mr. Andrew Parkinson, and other General Partner
expenses. The current management fee is approximately $14,600 per month.
Peapod LP paid management fees to the General Partner of $175,000 in 1996,
$150,000 in 1995 and $125,000 in 1994. Peapod LP's limited partnership
agreement and the management fees payable thereunder will terminate upon the
Conversion.
Advisory Fees. The Company had an advisory agreement with Mr. Tasso H. Coin,
who also serves as a director of the Company, pursuant to which Mr. Coin
provided certain advisory services to the Company and received advisory fees
in the form of cash or shares of Common Stock. See "Management--Compensation
Committee Interlocks and Insider Participation." The Company also had an
advisory agreement with Mr. Seth L. Pierrepont, who serves as a director of
the Company, pursuant to which Mr. Pierrepont provided certain advisory
services to the Company and received compensation in the form of cash, options
or shares of Common Stock. The agreement was terminated on December 31, 1996.
In 1996, Mr. Pierrepont received a total of $66,000 in advisory fees,
including $30,000 paid in connection with the termination of the advisory
agreement. In connection with the termination of the advisory agreement in
1996, the Company also accelerated the vesting of certain options to purchase
shares of Common Stock at an exercise price of $ per share. Mr.
Pierrepont also received advisory fees in each of 1995 and 1994, which
advisory fees totaled less than $60,000 in each such years. During such
periods, portions of Mr. Coin's and Mr. Pierrepont's advisory fees have been
paid in the form of shares of Common Stock (such shares being valued for this
purpose at the then estimated fair market value, less a 15% to 20% discount).
Certain Stockholders and Certain Directors. The Company was involved in the
following transactions with 5% stockholders: (i) on October 1, 1994, Tribune
National Marketing Company ("TNMC") purchased shares of Common Stock
for an aggregate price of $1,388,496; (ii) on November 1, 1995, Ameritech
Corporation, TNMC and Providence Journal Company each purchased shares
of Common Stock for an aggregate price of $246,324 pursuant to the exercise of
preemptive rights set forth in each of their purchase agreements; and (iii) on
April 19, 1996 TNMC and Providence Journal Company each purchased
shares of Common Stock for an aggregate price of $1,000,002.
The Company leases office equipment from Ameritech Credit Corporation, an
affiliate of Ameritech Corporation, pursuant to leases scheduled to expire in
1999. The aggregate monthly rental payment for all equipment leased under
these arrangements is $22,303.
The Company has an agreement to provide online shopping services for a
greeting card distributor. Mr. Tasso H. Coin, a director of the Company, is a
minority stockholder of, and a consultant to, such company. See "--
Compensation Committee Interlocks and Insider Participation."
42
<PAGE>
STOCK OWNERSHIP
The following table sets forth certain information regarding beneficial
ownership of the Common Stock, before and after giving effect to the sale of
the shares of Common Stock offered hereby, by (i) each person who is known by
the Company to own beneficially more than 5% of the outstanding shares of
Common Stock, (ii) each director of the Company, (iii) each of the Named
Executives and (iv) all directors and executive officers of the Company as a
group.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO THE OFFERING(1)(2) SHARES AFTER THE OFFERING(1)(2)(3)
------------------------------ BEING ------------------------------
NAME NUMBER PERCENT OFFERED(2) NUMBER PERCENT
- ---- --------------- -------------- ---------- --------------- --------------
<S> <C> <C> <C> <C> <C>
A.H. Belo Corp.
400 South Record St.
Communications Center
Dallas, TX 75202........ %
Tribune Company
435 North Michigan
Avenue
Chicago, Illinois 60611.
Ameritech Corporation(4)
30 South Wacker Drive
Chicago, Illinois 60606.
CIBC Wood Gundy
Ventures, Inc.
425 Lexington Avenue
New York, NY 10017......
Andrew B. Parkinson(5)+.
Thomas L. Parkinson(6)+.
John C. Walden(7).......
Timothy M. Dorgan(8)....
John A. Furton(9).......
Tasso H. Coin(10).......
Steven M. Friedman(11)..
Trygve E. Myhren........
Seth Pierrepont(12).....
All executive officers
and directors as a
group (9 persons).......
</TABLE>
- --------
+ The mailing address of each of these individuals is c/o the Company, 1033
University Place, Suite 375, Evanston, Illinois 60201.
*Less than 1%.
(1) Each stockholder possesses sole voting and investment power with respect
to the shares listed, except as otherwise indicated. In accordance with
the rules of the Securities and Exchange Commission, shares subject to
stock options which are currently exercisable or which become exercisable
within 60 days after the date hereof, are deemed to be beneficially owned
by the person or entity holding such option for purposes of computing such
person's or such entity's percentage ownership, but are not treated as
outstanding for the purpose of computing the percentage of any other
person or entity. The inclusion in the table of shares listed as
beneficially owned does not constitute an admission of beneficial
ownership.
(2) Number of shares deemed outstanding includes shares
outstanding as of the date hereof and any shares subject to options held
by the person or entity in question that are currently exercisable or
43
<PAGE>
exercisable within 60 days after the date of this Prospectus. Number of
shares deemed outstanding after the Offering includes the
shares of Common Stock which are being offered by the Company hereby.
(3) If the Underwriters' over-allotment option is exercised in full, the
following Selling Stockholders will sell pursuant to such option the
number of shares of Common Stock set forth opposite their names and, after
the Offering, will beneficially own the number and percentage of shares of
Common Stock set forth opposite their names:
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
AFTER THE OFFERING
SHARES TO -----------------------
NAME BE SOLD NUMBER PERCENT
---- --------- ---------- ----------
<S> <C> <C> <C>
</TABLE>
(4) Includes shares of Common Stock issuable pursuant to currently
exercisable warrants.
(5) Includes shares of Common Stock issuable pursuant to options
that are exercisable within 60 days after the date of this Prospectus.
(6) Includes shares of Common Stock issuable pursuant to options
that are exercisable within 60 days after the date of this Prospectus.
Includes shares of Common Stock held by Thomas L. Parkinson for
the benefit of minor children of Andrew B. Parkinson, with respect to
which shares Thomas L. Parkinson has sole voting power.
(7) Includes shares of Common Stock issuable pursuant to options
that are exercisable within 60 days after the date of this Prospectus.
(8) Includes shares of Common Stock issuable pursuant to options
that are exercisable within 60 days after the date of this Prospectus.
(9) Includes shares of Common Stock issuable pursuant to options
that are exercisable within 60 days after the date of this Prospectus.
(10) Includes shares of Common Stock issuable pursuant to options
that are exercisable within 60 days after the date of this Prospectus.
Includes shares beneficially owned by Tasso H. Coin, which shares
are held by American Bank of Rock Island as Trustee of the Tasso H. Coin
Investment Development Profit Sharing Trust, with respect to which shares
American Bank of Rock Island has sole voting power. Mr. Coin disclaims
beneficial ownership of such shares.
(11) Steven M. Friedman is a general partner of Eos Partners, L.P., and
accordingly may be attributed beneficial ownership of the shares owned by
Eos Partners, L.P. Mr. Friedman disclaims beneficial ownership of the
shares beyond his ownership interests in Eos Partners, L.P.
(12) Includes shares of Common Stock issuable pursuant to options
that are exercisable within 60 days after the date of this Prospectus.
Includes shares held by William T. Comfort, Jr. and John Pierrepont, as
Trustees of various trusts for the benefit of the children of Seth L.
Pierrepont, with respect to which shares Mr. Pierrepont disclaims
beneficial ownership.
44
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company's Restated Certificate of Incorporation (the "Charter") provides
that the authorized capital stock of the Company consists of 55,000,000 shares
of capital stock, consisting of 50,000,000 shares of Common Stock, par value
$.01 per share and 5,000,000 shares of Preferred Stock, par value $.01 per
share, issuable in series, including shares of Series A Preferred Stock,
par value $.01 per share.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of Common Stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared by the Board of Directors out of
funds legally available therefor, subject to any preferential dividend rights
of outstanding Preferred Stock. Upon the liquidation, dissolution or winding
up of the Company, the holders of Common Stock are entitled to receive ratably
the net assets of the Company available after the payment of all debts and
other liabilities and subject to the prior rights of holders of any
outstanding Preferred Stock. Holders of Common Stock have no preemptive,
subscription, redemption or conversion rights. The outstanding shares of
Common Stock are, and the shares offered by the Company in the Offering will
be, when issued and paid for, fully paid and nonassessable.
PREFERRED STOCK
The Charter provides that the Board of Directors is authorized, subject to
certain limitations prescribed by law, without further stockholder approval,
to issue from time to time up to an aggregate of 5,000,000 shares of Preferred
Stock in one or more series and to fix or alter the designations, preferences,
rights and any qualifications, limitations or restrictions of the shares of
each such series thereof, including the dividend rights, dividend rates,
conversion rights, voting rights, terms of redemption (including sinking fund
provisions), redemption price or prices, liquidation preferences and the
number of shares constituting any series or designations of such series. The
issuance of Preferred Stock may have the effect of delaying, deferring or
preventing a change of control of the Company. The rights, preferences and
privileges of holders of Common Stock are subject to, and may be adversely
affected by, the rights of the holders of shares of any series of Preferred
Stock which the Company may designate and issue in the future. The Company has
no present plans to issue any shares of Preferred Stock except as described
under "--Rights."
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law ("DGCL"). Subject to certain exceptions, Section 203
prohibits a publicly-held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years
after the date of the transaction in which the person became an interested
stockholder, unless the interested stockholder attained such status with the
approval of the Board of Directors or unless the business combination is
approved in a prescribed manner. A "business combination" includes mergers,
asset sales and other transactions resulting in a financial benefit to the
interested stockholder which is not shared pro rata with the other
stockholders of the Company. Subject to certain exceptions, an "interested
stockholder" is a person who, together with affiliates and associates, owns,
or within the past three years did own, 15% or more of the corporation's
voting stock.
The Charter provides for the division of the Board of Directors into three
classes as nearly equal in size as possible with staggered three-year terms.
See "Management--Board of Directors." Any director may be removed only with
cause and then only by the vote of a majority of the shares entitled to vote
for the election of directors.
The Charter empowers the Board of Directors, when considering a tender offer
or merger or acquisition proposal, to take into account factors in addition to
potential economic benefits to stockholders. Such factors
45
<PAGE>
may include (i) the comparison of the proposed consideration to be received by
stockholders in relation to the then current market price of the Company's
capital stock, the estimated current value of the Company in a freely
negotiated transaction and the estimated future value of the Company as an
independent entity, (ii) the impact of such a transaction on the employees,
suppliers and customers of the Company and its effect on the communities in
which the Company operates and (iii) the ability of the Company to fulfill its
objectives under applicable statutes and regulations.
The Charter provides that any action required or permitted to be taken by
the stockholders of the Company may be taken only at a duly called annual or
special meeting of the stockholders and that special meetings may be called
only by the Chairman, President or a majority of the Board of Directors of the
Company. These provisions could have the effect of delaying until the next
annual stockholders meeting, stockholder actions which are favored by the
holders of the outstanding voting securities of the Company. These provisions
may also discourage another person or entity from making a tender offer for
the Company's Common Stock, because such person or entity, even if it acquired
all or a majority of the outstanding voting securities of the Company, would
be able to take action as a stockholder (such as electing new directors or
approving a merger) only at a duly called stockholders meeting, and not by
written consent.
The DGCL provides generally that the affirmative vote of a majority of the
shares entitled to vote on any matter is required to amend a corporation's
certificate of incorporation or by-laws, unless a corporation's certificate of
incorporation or by-laws, as the case may be, requires a greater percentage.
The Charter requires the affirmative vote of the holders of at least 75% of
the outstanding voting stock of the Company to amend or repeal any of the
foregoing Charter provisions, and to reduce the number of authorized shares of
Common Stock and Preferred Stock. A 75% vote is required to amend or repeal
the Company's Amended and Restated By-Laws (the "By-Laws"). The By-Laws may
also be amended or repealed by a majority vote of the Board of Directors. Such
stockholder vote would be in addition to any separate class vote that might in
the future be required pursuant to the terms of any Preferred Stock that might
be outstanding at the time any such amendments are submitted to stockholders.
The By-Laws provide that for nominations for the Board of Directors or for
other business to be properly brought by a stockholder before an annual
meeting of stockholders, the stockholder must first have given timely notice
thereof in writing to the Secretary of the Company. To be timely, a
stockholder's notice generally must be delivered not later than 90 days in
advance of the anniversary date of the release of the Company's proxy
statement to stockholders in connection with the prior year's annual meeting
of stockholders. The notice must contain, among other things, certain
information about the stockholder delivering the notice and, as applicable,
background information about each nominee or a description of the proposed
business to be brought before the meeting. The Company's By-Laws also provide
that special meetings of stockholders may be called only by the Chairman,
President or a majority of the Board of Directors. Business transacted at a
special meeting is limited to the purposes for which the meeting is called.
The foregoing provisions could have the effect of making it more difficult
for a third party to acquire, or discouraging a third party from attempting to
acquire, control of the Company.
The Charter contains certain provisions permitted under the DGCL relating to
the liability of directors. These provisions eliminate a director's liability
for monetary damages for a breach of fiduciary duty, except in certain
circumstances involving certain wrongful acts, such as the breach of a
director's duty of loyalty or acts or omissions which involve intentional
misconduct or a knowing violation of law. The Charter and By-Laws also contain
provisions indemnifying the directors and officers of the Company to the
fullest extent permitted by the DGCL. The Company believes that these
provisions will assist the Company in attracting and retaining qualified
individuals to serve as directors.
RIGHTS
The Board of Directors intends to adopt a stockholders rights plan prior to
the consummation of the Offering. Under the stockholders rights plan, each
share of Common Stock will have associated with it one
46
<PAGE>
preferred share purchase right (a "Right"). The terms of the Rights will be
set forth in a Rights Agreement between the Company and .
Under certain circumstances described below, each right would entitle the
holders thereof to purchase one one-hundredth of a share of Series A Junior
Participating Preferred Stock for a price of $ per one one-hundredth of a
share. The Rights are not presently exercisable and are transferable only with
the related shares of Common Stock. The Rights will not become exercisable or
be evidenced by separate certificates or traded separately from the Common
Stock prior to the occurrence of certain triggering events described below. In
such an event, separate Rights certificates would be issued and distributed
representing one right for each share of Common Stock. There is no present
market for the Rights separate from the Common Stock and the Company cannot
predict whether a trading market would develop with respect to the Rights if
the Rights ever become exercisable.
The Rights would become exercisable at the specified exercise price upon the
earliest to occur of (i) 10 Business Days after the first public announcement
that any person or group (other than an Exempt Person) has acquired (an
"Acquiring Person") Beneficial Ownership of 15% or more of the Company's
outstanding shares of Common Stock and (ii) 10 Business Days (unless delayed
by the Board of Directors) after any person or group (other than an Exempt
Person) has commenced, or announced the intention to commence, a tender or
exchange offer which would, upon its consummation, result in such person or
group being the Beneficial Owner of 15% or more of the Company's outstanding
shares of Common Stock (each a "Triggering Event"). Rights may not be
exercised following the occurrence of an event described below under "Flip-In"
prior to the expiration of the Company's right to redeem the Rights. Rights
certificates will be distributed when the Rights become exercisable. An
"Exempt Person" includes the Company and certain related entities.
Flip-In. After the Rights become exercisable (unless the Triggering Event is
the commencement or the announcement of a tender or exchange offer as
described in (ii) in the immediately preceding paragraph), the holders of the
Rights (other than an Acquiring Person and certain transferees therefrom)
would be entitled to purchase shares of Common Stock of the Company at a 50%
discount. After the occurrence of a Flip-In event, the Rights of an Acquiring
Person and such transferees become void.
Flip-Over. In the event that, on or after the date on which an Acquiring
Person has become such: (i) the Company merges into or consolidates with an
Interested Stockholder or, unless all holders of the outstanding shares of
Common Stock of the Company are treated the same, any other person (with
limited designated exceptions), (ii) an Interested Stockholder or, unless all
holders of the outstanding shares of Common Stock of the Company are treated
the same, any other person (with limited designated exceptions) merges into
the Company or (iii) the Company sells or transfers 50% or more of its
consolidated assets or earning power to an Interested Stockholder or, unless
all holders of the outstanding shares of Common Stock of the Company are
treated the same, any other person (with limited designated exceptions), the
holders of the Rights (other than Rights which have become void) would be
entitled to purchase common shares of the acquirer (or a person affiliated
therewith) at a 50% discount. In general, an Interested Stockholder is an
Acquiring Person and certain persons affiliated, associated or acting on
behalf of or in concert therewith.
Redemption of Rights. The Rights may be redeemed, as a whole, at a
redemption price of $.01 per Right, subject to adjustment, at the direction of
the Board of Directors, at any time prior to the earliest of (i) 10 Business
Days after the first public announcement that any person (other than the
Company and certain related entities) has become an Acquiring Person, (ii) the
occurrence of any transaction described under "Flip-Over" and (iii) the date
of final expiration of the Rights. Under certain circumstances set forth in
the proposed Rights Agreement, the decision to redeem the Rights requires the
concurrence of at least a majority of the disinterested directors, after the
occurrence of an event described under "Flip-In" and prior to the occurrence
of a transaction described "Flip-Over," to redeem the Rights in whole, but not
in part, at the Redemption Price, but only (i) if the person who is the
Acquiring Person shall have reduced its Beneficial Ownership of the then
outstanding shares Common Stock of the Company to less than 10% or (ii) in
connection with the transaction described under "Flip-Over" which does not
involve an Interested Stockholder and in which all holders of the Common Stock
of the Company are treated the same.
47
<PAGE>
Exchange of Shares for Rights. At any time after any person or group shall
have become an Acquiring Person and before any person (other than an Exempt
Person), together with its affiliates and associates, shall have become the
Beneficial Owner of 50% or more of the outstanding shares of the Common Stock
of the Company, the Board of Directors may direct the exchange of shares of
Common Stock (or Preferred Shares) for all or any part of the Rights (other
than Rights which have become void) at the exchange rate of one share of
Common Stock (or one one-hundredth of a Preferred Share) per Right, subject to
adjustment.
TERMS OF SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
The Series A Junior Participating Preferred Stock (the "Preferred Shares")
which would be issuable upon exercise of the Rights (should the rights become
exercisable) would not be redeemable. Each Preferred Share would entitle the
holder thereof to receive a preferential quarterly dividend equal to 100 times
the aggregate per share amount of all cash dividends, plus 100 times the
aggregate per share amount (payable in kind) of all non-cash dividends and
other distributions (other than in shares of Common Stock), declared on the
Common Stock during such quarter, adjusted to give effect to any dividend on
the Common Stock payable in shares of Common Stock or any subdivision,
combination or reclassification of the Common Stock (a "Dilution Event"). Each
Preferred Share would entitle the holder thereof to 100 votes on all matters
submitted to a vote of the stockholders of the Company, voting together as a
single class with the holders of the Common Stock and the holders of any other
class of capital stock having general voting rights, adjusted to give effect
to any Dilution Event. In the event of liquidation of the Company, the holder
of each Preferred Share would be entitled to receive a preferential
liquidation payment equal to 100 times the aggregate per share amount to be
distributed to the holders of the Common Stock, adjusted to give effect to any
Dilution Event, plus an amount equal to accrued and unpaid dividends and
distributions on such Preferred Share, whether or not declared, to the date of
such payment. In the event of any merger, consolidation or other transaction
in which the outstanding shares of Common Stock of the Company are exchanged
for or converted into other capital stock, securities, cash and/or other
property, each Preferred Share would be similarly exchanged or converted into
100 times the per share amount applicable to the Common Stock, adjusted to
give effect to any Dilution Event.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock will be
.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have shares of
Common Stock outstanding. Of these shares, the shares sold in the
Offering will be freely tradeable without restriction or further registration
under the Securities Act, except that any shares purchased by "affiliates" of
the Company, as that term is defined in Rule 144 ("Rule 144") under the
Securities Act ("Affiliates"), generally may be sold only in compliance with
the limitations of Rule 144 described below.
SALE OF RESTRICTED SHARES
The remaining shares of Common Stock are deemed "restricted
securities" (the "Restricted Shares") under Rule 144 because they were
originally issued and sold by the Company in private transactions in reliance
upon exemptions from the Securities Act. Under Rule 144, substantially all of
these remaining Restricted Shares will become eligible for resale 90 days
after the date the Company becomes subject to the reporting requirements of
the Securities and Exchange Act of 1934, as amended (the "Exchange Act")
(i.e., 90 days after the consummation of the Offering), and may be resold
prior to such date only in compliance with the registration requirements of
the Securities Act or pursuant to a valid exemption therefrom; and
approximately of such shares are subject to Lock-up Agreements.
48
<PAGE>
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an Affiliate, who has beneficially
owned Restricted Shares for at least one year (one year for sales of shares
meeting certain limitations) is entitled to sell within any three-month
period, a number of such shares that does not exceed the greater of (i) one
percent of the then outstanding shares of Common Stock (approximately
shares immediately after the Offering) or (ii) the average weekly trading
volume in the Common Stock in the over-the-counter market during the four
calendar weeks preceding the date on which notice of such sale is filed. In
addition, under Rule 144(k), a person who is not an Affiliate and has not been
an Affiliate for at least three months prior to the sale and who has
beneficially owned Restricted Shares for at least two years, may resell such
shares without compliance with the foregoing requirements. In meeting the one
and two-year holding periods described above, a holder of Restricted Shares
can include the holding periods of a prior owner who was not an Affiliate. The
holding period will include the period during which the person held
convertible securities of the Company or stock of the Company.
LOCK-UP AGREEMENTS
All executive officers and directors and certain stockholders of the
Company, who, after the Offering, will hold in the aggregate approximately
shares of Common Stock and options to purchase shares of
Common Stock, have agreed, pursuant to lock-up agreements, that they will not,
without the prior written consent of Smith Barney Inc., offer, sell, contract
to sell or otherwise dispose of any shares of Common Stock beneficially owned
by them for a period of 180 days after the date of this Prospectus, except
pursuant to bona fide gifts to persons who agree in writing to be bound by the
provisions of the lock-up agreements.
STOCK OPTIONS
Certain shares issued or issuable upon the exercise of options granted prior
to the date of this Prospectus also may be issuable for sale in the public
market pursuant to Rule 701 under the Securities Act. In general, Rule 701
permits resales of shares issued pursuant to certain compensatory benefit
plans and contracts commencing at the end of the 90-day period referred to
under "--Sale of Restricted Shares," in reliance upon certain provisions of
Rule 144. If all of the requirements of Rule 701 are satisfied, an additional
shares of Common Stock, and an additional shares of Common
Stock upon the expiration of the 180-day lock-up period described above under
"--Lock-up Agreements," in each case issuable upon the exercise of currently
outstanding options which are vested or will vest within 60 days, will be
eligible for sale in the public market.
The Company intends to file a registration statement under the Securities
Act to register all shares of Common Stock issuable pursuant to the Company's
1997 Plan. See "Management--Stock Plans." Subject to the completion of the
180-day period described above, shares of Common Stock issued after the
effective date of such registration statement upon the exercise of awards
issued under such plan generally will be eligible for sale in the public
market.
REGISTRATION RIGHTS
The Company has granted to certain officers and certain stockholders the
right to require the Company to register their stock under the Securities Act.
See "Certain Transactions."
49
<PAGE>
UNDERWRITING
Upon the terms and subject to the conditions stated in the Underwriting
Agreement dated the date hereof, each Underwriter named below (the
"Underwriters") has severally agreed to purchase, and the Company has agreed
to sell to such Underwriter, shares of Common Stock which equal the number of
shares set forth opposite the name of such Underwriter below:
<TABLE>
<CAPTION>
NUMBER
OF
UNDERWRITERS SHARES
------------ --------
<S> <C>
Smith Barney Inc....................................................
William Blair & Company, L.L.C......................................
J.P. Morgan Securities Inc..........................................
--------
Total.............................................................
========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares are subject to
approval of certain legal matters by counsel and to certain other conditions.
The Underwriters are obligated to take and pay for all shares of Common Stock
offered hereby (other than those covered by the over-allotment option
described below) if any such shares are taken.
The Underwriters, for whom Smith Barney Inc., William Blair & Company,
L.L.C. and J.P. Morgan Securities Inc., are acting as the representatives (the
""Representatives''), propose initially to offer part of the shares of Common
Stock directly to the public at the public offering price set forth on the
cover page of this Prospectus and part to certain dealers at a price which
represents a concession not in excess of $ per share under the public
offering price. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $ per share to certain other dealers. After the
initial public offering, the public offering price and such concessions may be
changed by the Representatives. The Representatives have informed the Company
that the Underwriters do not intend to confirm sales to any accounts over
which they exercise discretionary authority.
The Selling Stockholders have granted to the Underwriters an option,
exercisable for 30 days from the date of this Prospectus, to purchase up to
additional shares of Common Stock at the price to public set forth
on the cover page of this Prospectus minus the underwriting discounts and
commissions. The Underwriters may exercise such option solely for the purpose
of covering over-allotments, if any, in connection with the Offering of the
shares offered hereby. To the extent such option is exercised, each
Underwriter will be obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares as the number of
shares set forth opposite each Underwriter's name in the preceding table bears
to the total number of shares listed in such table.
The Company, its executive officers, directors and certain stockholders,
holding in the aggregate shares of the Common Stock have agreed that,
for a period of 180 days from the date of this Prospectus, they will not,
without the prior written consent of Smith Barney Inc., offer, sell, contract
to sell, or otherwise dispose of, any shares of Common Stock or any securities
convertible into, or exercisable or exchangeable for, Common Stock.
Prior to the Offering, there has been no public market for the Common Stock.
Consequently, the initial public offering price for the shares of Common Stock
has been determined by negotiations among the Company, the Selling
Stockholders and the Representatives. Among the factors considered in
determining such price were
50
<PAGE>
the history of, and prospects, for the Company's business and the industry in
which it competes, an assessment of the Company's management and the present
state of the Company's development, the past operating results of the Company
and the trend of such operating results, the prospects for earnings of the
Company, the current state of the economy in the United States and the current
level of economic activity in the industry in which the Company competes and
in related or comparable industries, and currently prevailing conditions in
the securities markets, including current market valuations of publicly traded
companies which are comparable to the Company.
The Company, the Selling Stockholders and the Underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act.
At the request of the Company approximately shares of Common Stock
offered hereby are being reserved for sale to certain persons, including
Peapod employees and others who have a business relationship with the Company.
Smith Barney Inc. has from time to time provided investment banking services
to the Company for which it has received customary fees. Travelers Insurance
Company owns shares of Common Stock, representing % of the
outstanding Common Stock after the Offering.
In connection with this offering and in compliance with applicable law, the
Underwriters may overallot (i.e., sell more Common Stock than the total amount
shown on the list of Underwriters and participations which appears above) and
may effect transactions which stabilize, maintain or otherwise affect the
market price of the Common Stock at levels above those which might otherwise
prevail in the open market. Such transactions may include placing bids for the
Common Stock or effecting purchases of the Common Stock for the purpose of
pegging, fixing or maintaining the price of the Common Stock or for the
purpose of reducing a syndicate short position created in connection with the
Offering. A syndicate short position may be covered by exercise of the option
described above rather than by open market purchases. In addition, the
contractual arrangements among the Underwriters include a provision whereby,
if, prior to termination of price and trading restrictions, the
Representatives purchase Common Stock in the open market for the account of
the underwriting syndicate and the securities purchased can be traced to a
particular Underwriter or member of the selling group, the underwriting
syndicate may require the Underwriter or selling group member in question to
purchase the Common Stock in question at the cost price to the syndicate or
may recover from (or decline to pay to) the Underwriter or selling group
member in question, the selling concession applicable to the securities in
question. The Underwriters are not required to engage in any of these
activities and any such activities, if commenced, may be discontinued at any
time.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company and the Selling Stockholders by Sidley & Austin, Chicago,
Illinois. Certain legal matters in connection with the Offering will be passed
upon for the Underwriters by Mayer, Brown & Platt, Chicago, Illinois.
EXPERTS
The financial statements of New Peapod , Inc. as of December 31, 1996 and
for the period from December 5, 1996 (inception) through December 31, 1996
appearing in this Prospectus and in the Registration Statement, have been
audited by KPMG Peat Marwick LLP, independent public accountants, as set forth
in their report thereon appearing elsewhere in this Prospectus and in the
Registration Statement, and are included in reliance upon such report given
upon the authority of said firm as experts in auditing and accounting.
The financial statements of Peapod LP as of December 31, 1995 and 1996 and
for each of the three years in the period ended December 31, 1996 appearing in
this Prospectus and in the Registration Statement, have been audited by KPMG
Peat Marwick LLP, independent public accountants, as set forth in their report
thereon appearing elsewhere in this Prospectus and in the Registration
Statement, and are included in reliance upon such report given upon the
authority of said firm as experts in auditing and accounting.
51
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), a Registration Statement on Form S-1 (including all amendments
thereto, the "Registration Statement") under the Securities Act with respect
to the Common Stock offered hereby. As permitted by the rules and regulations
of the Commission, this Prospectus omits certain information contained in the
Registration Statement. For further information with respect to the Company
and the Common Stock offered hereby, reference is hereby made to the
Registration Statement and to the exhibits and schedules filed therewith.
Statements contained in this Prospectus regarding the contents of any
agreement or other document filed as an exhibit to the Registration Statement
are not necessarily complete, and in each instance reference is made to the
copy of such agreement filed as an exhibit to the Registration Statement, each
such statement being qualified in all respects by such reference. The
Registration Statement, including the exhibits and schedules thereto, may be
inspected at the public reference facilities maintained by the Commission at
Room 204, Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC 20549;
Citicorp Center, 500 West Madison Street, Chicago, Illinois 60661; and Seven
World Trade Center, New York, New York 10048; and copies of all or any part
thereof may be obtained from such office upon payment of the prescribed fees.
The Commission maintains a Web site (http://www.sec.gov) that contains
reports, proxy and information statements and other information regarding
registrants, such as the Company, that file electronically with the
Commission.
Upon completion of the Offering, the Company will be subject to the
information requirements of the Exchange Act of 1934, and, in accordance
therewith, will file reports, proxy statements and other information with the
Commission. Such reports, proxy material and other information concerning the
Company will be available for inspection and copying at prescribed rates at
the public reference facilities maintained by the Commission at the addresses
set forth above and will be available on the Commission's Web site
(http://www.sec.gov).
52
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
New Peapod, Inc.
Independent Auditors' Report............................................. F-2
Balance Sheets as of December 31, 1996 and March 31, 1997 (Unaudited) and
Pro Forma Balance Sheet as of March 31, 1997 (Unaudited) ............... F-3
Statement of Operations for the period from December 5, 1996 (inception)
through December 31, 1996 and Pro Forma Statement of Operations for the
year ended December 31, 1996 (Unaudited)................................ F-4
Statement of Operations for the three months ended March 31, 1997
(Unaudited) and Pro Forma Statement of Operations for the three months
ended March 31, 1997 (Unaudited)........................................ F-5
Notes to Financial Statements............................................ F-6
Peapod LP
Independent Auditors' Report............................................. F-9
Balance Sheets as of December 31, 1995 and 1996 and March 31, 1997
(Unaudited)............................................................. F-10
Statements of Operations for the years ended December 31, 1994, 1995 and
1996 and the three months ended March 31, 1996 and 1997 (Unaudited)..... F-11
Statements of Partners' Capital for the years ended December 31, 1994,
1995 and 1996 and the three months ended March 31, 1997 (Unaudited)..... F-12
Statements of Cash Flows for the years ended December 31, 1994, 1995 and
1996 and the three months ended March 31, 1996 and 1997 (Unaudited)..... F-13
Notes to Financial Statements............................................ F-14
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
New Peapod, Inc.:
We have audited the accompanying balance sheet of New Peapod, Inc. as of
December 31, 1996, and the related statement of operations for the period from
December 5, 1996 (inception) through December 31, 1996. These financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of New Peapod, Inc. as of
December 31, 1996 and the results of its operations for the period from
December 5, 1996 (inception) through December 31, 1996, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Chicago, Illinois
May 9, 1997
F-2
<PAGE>
NEW PEAPOD, INC.
BALANCE SHEETS
DECEMBER 31, 1996 AND MARCH 31, 1997
PRO FORMA BALANCE SHEET
MARCH 31, 1997
<TABLE>
<CAPTION>
DECEMBER 31,
1996 MARCH 31, 1997 (UNAUDITED)
------------ --------------------------------------
NEW NEW PEAPOD, INC.
PEAPOD, INC. PEAPOD, INC. PEAPOD LP PRO FORMA
------------ ------------ ----------- ------------
ASSETS
------
<S> <C> <C> <C> <C>
Cash and cash equivalents.. $ -- $ -- $ 9,343,378 $ 9,343,378
Receivables, net of bad
debt allowance............ -- -- 1,183,014 1,183,014
Prepaid expenses........... -- -- 585,724 585,724
Other current assets....... -- -- 178,091 178,091
------- ------- ----------- -----------
Total current assets... -- -- 11,290,207 11,290,207
Property and equipment:
Computer equipment and
software................ -- -- 2,832,070 2,832,070
Service equipment and
other................... -- -- 799,330 799,330
------- ------- ----------- -----------
Property and equipment, at
cost...................... -- -- 3,631,400 3,631,400
Accumulated depreciation. -- -- (1,448,483) (1,448,483)
------- ------- ----------- -----------
Net property and equipment. -- -- 2,182,917 2,182,917
Capitalized software
development costs......... -- -- 299,029 299,029
Goodwill, net of
accumulated amortization.. -- -- 146,091 146,091
Other assets............... -- -- 788 788
------- ------- ----------- -----------
Total assets........... $ -- $ -- $13,919,032 $13,919,032
======= ======= =========== ===========
<CAPTION>
LIABILITIES AND OWNERS'
EQUITY
-----------------------
<S> <C> <C> <C> <C>
Current liabilities:
Accounts payable......... $ -- $ -- $ 2,968,488 $ 2,968,488
Accrued compensation..... -- -- 887,688 887,688
Other accrued
liabilities............. -- -- 1,297,139 1,297,139
Current deferred service
fees.................... -- -- 1,414,164 1,414,164
Current obligations under
capital lease........... -- -- 350,377 350,377
------- ------- ----------- -----------
Total current
liabilities........... -- -- 6,917,856 6,917,856
Deferred service fees...... -- -- 607,383 607,383
Obligations under capital
lease, less current
obligations............... -- -- 360,069 360,069
------- ------- ----------- -----------
Total liabilities...... -- -- 7,885,308 7,885,308
Owners' equity:
Partners' capital........ -- -- 6,033,724
Preferred Stock, $.01 par
value, authorized
5,000,000 shares, none
issued and outstanding.. -- --
Common Stock, $.01 par
value, 50,000,000 shares
authorized, 100 shares
issued and outstanding
at December 31, 1996 and
March 31, 1997.......... 1 1
Additional paid-in
capital................. 999 999
Accumulated deficit...... (1,000) (1,000)
------- ------- ----------- -----------
Total owners' equity... -- -- 6,033,724 6,033,724
------- ------- ----------- -----------
Total liabilities and
owners' equity........ $ -- $ -- $13,919,032 $13,919,032
======= ======= =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
NEW PEAPOD, INC.
STATEMENT OF OPERATIONS
PERIOD FROM DECEMBER 5, 1996 (INCEPTION) THROUGH DECEMBER 31, 1996
PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
NEW PEAPOD, INC.
PEAPOD, INC. PEAPOD LP* PRO FORMA
------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Revenues:
Grocery sales, net of returns......... $ -- $22,015,468 $22,015,468
Interactive marketing services........ -- 1,069,335 1,069,335
Member and retailer services.......... -- 6,087,742 6,087,742
------- ----------- -----------
Total revenues...................... -- 29,172,545 29,172,545
Costs and expenses:
Groceries sold, net of returns........ -- 22,015,468 22,015,468
Grocery operations.................... -- 8,141,184 8,141,184
General and administrative............ 1,000 2,918,876 2,919,876
Marketing and selling................. -- 3,984,166 3,984,166
System development and maintenance.... -- 1,492,126 1,492,126
Depreciation and amortization......... -- 650,954 650,954
------- ----------- -----------
Total costs and expenses............ 1,000 39,202,774 39,203,774
------- ----------- -----------
Operating loss.......................... (1,000) (10,030,229) (10,031,229)
Other income (expense):
Interest expense...................... -- (72,388) (72,388)
Interest income....................... -- 537,110 537,110
------- ----------- -----------
Net loss................................ $(1,000) $(9,565,507) $(9,566,507)
======= =========== ===========
Pro forma net loss per share............ $
===========
</TABLE>
- --------
*Represents the results of operations of Peapod LP for the year ended December
31, 1996.
See accompanying notes to financial statements.
F-4
<PAGE>
NEW PEAPOD, INC.
STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997
(UNAUDITED)
PRO FORMA STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
NEW PEAPOD, INC.
PEAPOD, INC. PEAPOD LP PRO FORMA
------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Revenues:
Grocery sales, net of returns......... $ -- $ 9,216,332 $ 9,216,332
Interactive marketing services........ -- 425,024 425,024
Member and retailer services.......... -- 3,062,746 3,062,746
----- ----------- -----------
Total revenues...................... -- 12,704,102 12,704,102
Costs and expenses:
Groceries sold, net of returns........ -- 9,216,332 9,216,332
Grocery operations.................... -- 3,903,123 3,903,123
General and administrative............ -- 826,734 826,734
Marketing and selling................. -- 1,236,416 1,236,416
System development and maintenance.... -- 376,233 376,233
Depreciation and amortization......... -- 212,143 212,143
----- ----------- -----------
Total costs and expenses............ -- 15,770,981 15,770,981
----- ----------- -----------
Operating loss.......................... -- (3,066,879) (3,066,879)
Other income (expense):
Interest expense...................... -- (15,204) (15,204)
Interest income....................... -- 134,996 134,996
----- ----------- -----------
Net loss................................ $ -- $(2,947,087) $(2,947,087)
===== =========== ===========
Pro forma net loss per share............ $
===========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
NEW PEAPOD, INC.
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION AND COMMON STOCK OFFERING
New Peapod, Inc. ("Company") is a Delaware corporation and was incorporated
on December 5, 1996. The Company will change its name to Peapod, Inc. in
conjunction with an initial public offering ("Offering") of Common Stock.
The Company was formed to effect an initial public offering of approximately
shares of Common Stock and to operate an interactive online
grocery shopping and delivery service subsequent to the Conversion described
below and elsewhere in this Prospectus. Prior to the completion of the
Offering, (i) the Company will exchange shares of Common Stock for
all of the equity interests in Peapod LP ("Partnership"), (ii) Peapod LP will
dissolve, (iii) the assets and liabilities of Peapod LP will be transferred to
the Company and (iv) outstanding warrants and options for equity interests in
Peapod LP will be exchanged for warrants and options for shares of the
Company's Common Stock at the same exchange ratio as used in the exchange of
the Company's Common Stock for the equity interests in Peapod LP, with no
other changes in the terms of such warrants and options. The transfer of the
assets and liabilities of Peapod LP to the Company will be recorded by the
Company at the historical carrying values of Peapod LP. The financial
statements of the Partnership are included elsewhere herein. The Company has
not yet begun significant operations.
(2) COMMON STOCK ISSUANCE
On December 11, 1996, 100 shares of the Company's Common Stock were issued
to Andrew Parkinson, Chief Executive Officer of Peapod LP, for services
rendered to the Company with an estimated fair value of $1,000.
On May 8, 1997, the Company amended its certificate of incorporation,
increasing the number of authorized shares of Common Stock to 50,000,000,
changing the par value to $.01 and authorizing 5,000,000 shares of $.01 par
value Preferred Stock. In addition, the Company declared a 100-to-1 Common
Stock split. These changes have been reflected retroactively in the
accompanying financial statements.
(3) INCOME TAXES
Income tax expense of $0 for the period ended December 31, 1996 differs from
the amount of income tax benefit computed by applying the federal statutory
tax rate of 34 percent to pretax loss due to nonutilization of net operating
losses. The gross deferred tax asset relating to the net operating loss of
$340 has been reduced to $0 by the establishment of a valuation allowance.
(4) INTERIM FINANCIAL STATEMENTS
The accompanying unaudited interim financial statements reflect all
adjustments which, in the opinion of management, are necessary for the fair
presentation of the results of the interim period presented.
(5) PRO FORMA PRESENTATION (UNAUDITED)
On April 1, 1997, the Company filed a registration statement with the
Securities and Exchange Commission for the Offering of shares of
Common Stock. As described in this Prospectus, prior to the completion of the
Offering, (i) all of the equity interests in Peapod LP ("Partnership") will be
transferred to the Company in exchange for Common Stock, (ii) Peapod LP will
dissolve, (iii) the assets and liabilities of Peapod LP will be transferred to
the Company and (iv) outstanding warrants and options for equity interests in
Peapod LP will be converted into warrants and options for shares of the
Company's Common Stock. The Company will change its name to Peapod, Inc. in
conjunction with the Offering.
The March 31, 1997 pro forma balance sheet is presented to give effect to
the conversion of all outstanding partnership units into shares of
Common Stock. Prior to the Conversion, the net losses of the
F-6
<PAGE>
NEW PEAPOD, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Partnership were allocated to the partners and reflected in partners' capital.
At the time of the Conversion, partners' capital will be reclassified into
Common Stock and additional paid-in capital. The pro forma statement of
operations for 1996 reflects the Company's operations from December 5, 1996
(inception) through December 31, 1996 and the operations of the Partnership
for the twelve months ended December 31, 1996.
The pro forma statement of operations for the three months ended March 31,
1997 reflects the operations of the Company and the Partnership for such three
month period.
Subsequent to the Conversion, shares of Common Stock will be
issued and outstanding and warrants and options will be outstanding as
indicated in the information below.
Warrant activity for the years ended December 31, 1994, 1995 and 1996 and
the three months ended March 31, 1997 is summarized below:
<TABLE>
<CAPTION>
SHARES WEIGHTED
OF AVERAGE
COMMON EXERCISE EXERCISE
STOCK PRICE PRICE
-------- -------- ----------
<S> <C> <C> <C>
Outstanding on January 1, 1994.................. $ $ -
Granted.........................................
Exercised.......................................
--------
Outstanding on December 31, 1994................
Granted.........................................
Exercised.......................................
--------
Outstanding on December 31, 1995................
Granted.........................................
--------
Outstanding on December 31, 1996................
Outstanding on March 31, 1997................... $ $
========
</TABLE>
Information on options for shares of Common Stock is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, THREE MONTH
---------------------------------------------------- PERIOD ENDED
1994 1995 1996 MARCH 31, 1997
---------------- ---------------- ------------------ ----------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- -------- ------- -------- --------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of the period.......... $ $ $ $
Granted.................
Forfeited...............
Exercised...............
------- ------- ---------
Outstanding at end of
period................. $ $ $ $
======= ===== ======= ===== ========= ===== === =====
Options exercisable at
period end............. $ $ $ $
======= ===== ======= ===== ========= ===== === =====
</TABLE>
The following table summarizes information about stock options outstanding
at March 31, 1997:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE OPTIONS CONTRACTUAL EXERCISE OPTIONS EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
-------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ - years $ $
--------- -------
years $ $
========= ========== ===== ======= =====
</TABLE>
F-7
<PAGE>
NEW PEAPOD, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
In connection with the Conversion (i) the Company is adopting the 1997 Long-
Term Incentive Plan pursuant to which options and other awards for up to
shares of Common Stock may be granted to the Company's employees,
directors and consultants and (ii) the management agreement between the
Partnership and its general partner will be terminated.
The pro forma net loss per share is computed based on the weighted average
of shares outstanding during 1996, and shares for the
three months ended March 31, 1997, assuming the Conversion occurred at January
1, 1996.
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No.
83, common stock warrants and stock options issued during the twelve months
immediately preceding the offering date (using the treasury stock method and
an assumed initial public offering price per share of $ ) have been
included in the calculation of Common Stock as if they were outstanding for
the entire period presented. Other common equivalent shares from stock options
and warrants are excluded from the computation because their effect is
antidilutive.
F-8
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Partners of Peapod LP:
We have audited the accompanying balance sheets of Peapod LP ("Partnership")
as of December 31, 1995 and 1996, and the related statements of operations,
partners' capital and cash flows for each of the years in the three-year
period ended December 31, 1996. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Peapod LP as of December
31, 1995 and 1996, and the results of its operations and its cash flows for
each of the years in the three-year period ended December 31, 1996, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Chicago, Illinois
February 7, 1997
F-9
<PAGE>
PEAPOD LP
BALANCE SHEETS
DECEMBER 31, 1995 AND 1996 AND MARCH 31, 1997
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- MARCH 31,
1995 1996 1997
---------- ----------- -----------
(UNAUDITED)
ASSETS
------
<S> <C> <C> <C>
Cash and cash equivalents................ $2,466,191 $13,038,680 $ 9,343,378
Receivables, net of bad debt allowance of
$27,265 and $41,608 as of December 31,
1995 and 1996, respectively, and $61,779
as of March 31, 1997.................... 186,077 535,091 1,183,014
Prepaid expenses......................... 139,721 449,267 585,724
Other current assets..................... 244,156 189,402 178,091
---------- ----------- -----------
Total current assets................. 3,036,145 14,212,440 11,290,207
Property and equipment:
Computer equipment and software........ 1,537,101 2,492,507 2,832,070
Service equipment and other............ 399,011 764,418 799,330
---------- ----------- -----------
Property and equipment, at cost.......... 1,936,112 3,256,925 3,631,400
Accumulated depreciation............... (642,538) (1,247,238) (1,448,483)
---------- ----------- -----------
Net property and equipment............... 1,293,574 2,009,687 2,182,917
Capitalized software development costs... -- 148,454 299,029
Goodwill, net of accumulated amortization
of $95,907 and $134,864 as of December
31, 1995 and 1996, respectively, and
$144,603 as of March 31, 1997........... 194,787 155,830 146,091
Other assets............................. 6,582 1,947 788
---------- ----------- -----------
Total assets......................... $4,531,088 $16,528,358 $13,919,032
========== =========== ===========
<CAPTION>
LIABILITIES AND PARTNERS' CAPITAL
---------------------------------
<S> <C> <C> <C>
Current liabilities:
Accounts payable....................... $1,660,543 $ 3,370,423 $ 2,968,488
Accrued compensation................... 347,149 1,078,705 887,688
Other accrued liabilities.............. 392,343 875,396 1,297,139
Current deferred service fees.......... 39,996 1,199,827 1,414,164
Current obligations under capital
lease................................. 157,808 332,490 350,377
---------- ----------- -----------
Total current liabilities............ 2,597,839 6,856,841 6,917,856
Deferred service fees.................... 146,672 929,445 607,383
Subordinated debentures.................. 125,000 -- --
Obligations under capital lease, less
current obligations..................... 249,017 339,529 360,069
---------- ----------- -----------
Total liabilities.................... 3,118,528 8,125,815 7,885,308
Total partners' capital.................. 1,412,560 8,402,543 6,033,724
---------- ----------- -----------
Total liabilities and partners'
capital............................. $4,531,088 $16,528,358 $13,919,032
========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-10
<PAGE>
PEAPOD LP
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND
THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
------------------------------------- ------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Grocery sales, net of
returns.............. $ 6,745,130 $12,730,673 $22,015,468 $ 4,984,278 $ 9,216,332
Interactive marketing
services............. -- 162,699 1,069,335 194,326 425,024
Member and retailer
services............. 1,601,266 3,049,279 6,087,742 1,155,645 3,062,746
----------- ----------- ----------- ----------- -----------
Total revenues...... 8,346,396 15,942,651 29,172,545 6,334,249 12,704,102
Costs and expenses:
Groceries sold, net of
returns.............. 6,745,130 12,730,673 22,015,468 4,984,278 9,216,332
Grocery operations.... 3,262,578 5,167,847 8,141,184 1,553,803 3,903,123
General and
administrative....... 1,464,751 1,761,590 2,918,876 487,681 826,734
Marketing and selling. 571,621 1,532,983 3,984,166 610,788 1,236,416
System development and
maintenance.......... 328,739 964,496 1,492,126 355,423 376,233
Depreciation and
amortization......... 290,280 369,527 650,954 118,017 212,143
----------- ----------- ----------- ----------- -----------
Total costs and
expenses........... 12,663,099 22,527,116 39,202,774 8,109,990 15,770,981
----------- ----------- ----------- ----------- -----------
Operating loss.......... (4,316,703) (6,584,465) (10,030,229) (1,775,741) (3,066,879)
Other income (expense):
Interest expense...... (56,524) (68,472) (72,388) (19,842) (15,204)
Interest income....... 26,180 61,016 537,110 18,549 134,996
----------- ----------- ----------- ----------- -----------
Net loss................ $(4,347,047) $(6,591,921) $(9,565,507) $(1,777,034) $(2,947,087)
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-11
<PAGE>
PEAPOD LP
STATEMENTS OF PARTNERS' CAPITAL
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND THE THREE MONTHS ENDED MARCH
31, 1997
<TABLE>
<CAPTION>
GENERAL PARTNER LIMITED PARTNERS TOTAL
----------------------- ---------------------- -----------------------
UNITS AMOUNT UNITS AMOUNT UNITS AMOUNT
--------- ------------ --------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1994................... 3,187,500 $ (1,946,806) 1,879,866 $ 2,505,712 5,067,366 $ 558,906
Restatement of beginning
of year net syndication
costs.................. -- -- -- (105,073) -- (105,073)
Issuance of limited
partnership units, net
of syndication costs... -- -- 1,743,141 3,708,671 1,743,141 3,708,671
Issuance of limited
partnership units upon
exercise of warrants... -- -- 694,248 1,388,496 694,248 1,388,496
Issuance of warrants.... -- -- -- 112 -- 112
Issuance of options for
services rendered...... -- -- -- 155,610 -- 155,610
Issuance of limited
partnership units for
services rendered...... -- -- 43,547 75,574 43,547 75,574
Allocation of net loss.. -- (2,387,334) -- (1,959,713) -- (4,347,047)
--------- ------------ --------- ----------- ---------- -----------
Balance at December 31,
1994................... 3,187,500 (4,334,140) 4,360,802 5,769,389 7,548,302 1,435,249
Sale of units owned by
General Partner........ (67,401) -- 67,401 -- -- --
Issuance of limited
partnership units, net
of syndication costs... -- -- 2,007,722 6,454,041 2,007,722 6,454,041
Repurchase of limited
partnership units...... -- -- (13,453) (43,722) (13,453) (43,722)
Issuance of limited
partnership units upon
exercise warrants...... -- -- 1,250 2,788 1,250 2,788
Issuance of options for
services rendered...... -- -- -- 99,658 -- 99,658
Issuance of limited
partnership units for
services rendered...... -- -- 20,550 56,467 20,550 56,467
Allocation of net loss.. -- (2,473,575) -- (4,118,346) -- (6,591,921)
--------- ------------ --------- ----------- ---------- -----------
Balance at December 31,
1995................... 3,120,099 (6,807,715) 6,444,272 8,220,275 9,564,371 1,412,560
Sale of units owned by
General Partner........ (13,806) -- 13,806 -- -- --
Issuance of limited
partnership units, net
of syndication costs... -- -- 2,876,000 16,231,748 2,876,000 16,231,748
Issuance of limited
partnership units for
services rendered and
at a discount.......... -- -- 86,341 323,742 86,341 323,742
Allocation of net loss.. -- (2,522,398) -- (7,043,109) -- (9,565,507)
--------- ------------ --------- ----------- ---------- -----------
Balance at December 31,
1996................... 3,106,293 (9,330,113) 9,420,419 17,732,656 12,526,712 8,402,543
Issuance of limited
partnership units for
services rendered and
at a discount
(unaudited)............ -- -- 89,080 578,268 89,080 578,268
Allocation of net loss
(unaudited)............ -- (725,877) -- (2,221,210) -- (2,947,087)
--------- ------------ --------- ----------- ---------- -----------
Balance at March 31,
1997 (unaudited)....... 3,106,293 $(10,055,990) 9,509,499 $16,089,714 12,615,792 $ 6,033,724
========= ============ ========= =========== ========== ===========
</TABLE>
See accompanying notes to financial statements.
F-12
<PAGE>
PEAPOD LP
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------------- ------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss.............. $(4,347,047) $(6,591,921) $(9,565,507) $(1,777,034) $(2,947,087)
Adjustments to
reconcile net loss to
net cash used in
operating activities:
Depreciation and
amortization....... 290,280 369,527 650,954 118,017 212,143
Units and options
issued for services
rendered........... 231,184 156,125 146,151 110,860 428,295
Write-off of patent
application costs.. -- 18,653 -- -- --
Loss on disposition
of fixed assets.... -- 3,084 2,359 -- --
Changes in operating
assets and
liabilities:
(Increase)
decrease in
receivables...... (78,545) (76,444) (349,014) 65,104 (647,923)
(Increase) in
prepaid expenses. (25,169) (78,045) (309,546) (31,975) (136,457)
(Increase)
decrease in other
current assets... (78,579) (147,316) 54,754 177,245 11,312
Increase
(decrease) in
accounts payable. 756,680 494,055 1,709,880 290,094 (401,936)
Increase
(decrease) in
accrued
compensation..... 106,878 184,526 731,556 16,406 12,292
Increase
(decrease) in
other accrued
liabilities...... 149,071 172,059 483,053 (103,211) 218,434
Increase
(decrease) in
deferred service
fees............. (75,000) 24,168 1,942,604 298,334 (107,725)
----------- ----------- ----------- ----------- -----------
Net cash used in
operating
activities...... (3,070,247) (5,471,529) (4,502,756) (836,160) (3,358,652)
Cash flows from
investing activities:
Property and equipment
purchased, net....... (336,320) (629,833) (823,662) (212,857) (254,475)
Capitalized software
development costs.... -- -- (148,454) -- (150,575)
Proceeds from sale of
property and
equipment............ 1,000 700 -- -- --
Patent costs.......... (4,476) -- -- -- --
----------- ----------- ----------- ----------- -----------
Net cash used in
investing
activities...... (339,796) (629,133) (972,116) (212,857) (405,050)
Cash flows from
financing activities:
Proceeds from issuance
of limited
partnership units,
net of syndication
costs................ 3,708,671 6,454,041 16,409,339 180,834 149,973
Proceeds from issuance
of limited
partnership units
upon exercise of
warrants............. 1,388,496 2,788 -- -- --
Repurchase of limited
partnership units.... -- (43,722) -- -- --
Proceeds from issuance
of warrants.......... 112 -- -- -- --
Proceeds from issuance
of subordinated
debentures........... 750,000 -- -- -- --
Repayment of
subordinated
debentures........... (800,000) -- (125,000) (25,000) --
Proceeds from issuance
of notes payable..... 480,000 1,025,000 -- -- --
Payments on notes
payable.............. (493,049) (1,025,000) -- -- --
Payments on capital
lease obligations.... (14,135) (100,255) (236,978) (58,622) (81,573)
----------- ----------- ----------- ----------- -----------
Net cash provided
by financing
activities...... 5,020,095 6,312,852 16,047,361 97,212 68,400
----------- ----------- ----------- ----------- -----------
Net (decrease) increase
in cash............... 1,610,052 212,190 10,572,489 (951,805) (3,695,302)
Cash and cash
equivalents at
beginning of period... 643,949 2,254,001 2,466,191 2,466,191 13,038,680
----------- ----------- ----------- ----------- -----------
Cash and cash
equivalents at end of
period................ $ 2,254,001 $ 2,466,191 $13,038,680 $ 1,514,386 $ 9,343,378
=========== =========== =========== =========== ===========
Supplemental disclosure
of cash flows
information--interest
paid.................. $ 51,767 $ 67,506 $ 71,571 $ 13,859 $ 9,481
Supplemental disclosure
of noncash investing
and financing
activity--equipment on
capital leases........ 172,217 314,655 502,172 -- 120,000
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-13
<PAGE>
PEAPOD LP
NOTES TO FINANCIAL STATEMENTS
(1) DESCRIPTION OF THE PARTNERSHIP
Peapod LP ("Partnership"), an Illinois limited partnership, was formed on
June 1, 1992 as the successor to the business developed by Old Peapod
("General Partner"), the general partner of the Partnership.
The Partnership is an interactive online grocery shopping and delivery
service, which as of December 31, 1996 operated in the Chicago, Illinois, San
Francisco/San Jose, California, Columbus, Ohio and Boston, Massachusetts
metropolitan markets.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Grocery sales are recognized when the grocery order is delivered to the
customer. Interactive marketing services are recognized over the life of the
contract as services are provided. Member and retailer services consist of
grocery retailer fees and fees from consumers. Grocery retailer fees include
contractual fees and performance-based fees. Contractual fees are recognized
on a straight-line basis over the life of the contract and performance-based
fees are recognized when the performance criteria are met. Fees from consumers
are recognized as services are provided.
Member Acquisition Costs
Member acquisition costs are expensed as incurred.
Cash and Cash Equivalents
Cash and cash equivalents are comprised of highly liquid investments with
original maturities of less than three months.
Property and Equipment
Property and equipment is recorded at cost and depreciated on a straight-
line basis over the estimated useful lives of the related assets, generally
four to five years. Leasehold improvements are amortized over the shorter of
the lease term or the estimated useful lives of the assets.
Capitalized Software Development Costs
Software development costs are capitalized in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 86, which requires capitalization
of certain costs incurred subsequent to the determination of technological
feasibility. The Partnership has determined that technological feasibility
occurs in its product development cycle when a working model exists.
Capitalization ceases and product amortization commences upon the general
release of the product. Amortization is computed on a product-by-product
basis, using the lesser of the product's estimated useful life or a period
based on anticipated revenues. The Partnership capitalized $148,454 in
development costs in 1996 and amortized $85,597 in 1994. There was no
amortization in 1995 or 1996.
Goodwill
Goodwill is being amortized on a straight-line basis over its estimated
useful life of eight years.
F-14
<PAGE>
PEAPOD LP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Income Taxes
No provision is made for income taxes, as the Partnership is not directly
subject to taxation. The Partnership's net loss is allocated to and included
in the income tax returns of its partners. The pro forma impact of the
partnership's conversion to a corporation has not been presented as such
income tax amounts are not deemed significant.
Stock Option Plans
Prior to January 1, 1996, the Partnership accounted for its unit option
plans in accordance with the provisions of Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. As such, compensation expense would be recorded on the date
of grant only if the fair market value of the underlying units exceeded the
exercise price. On January 1, 1996, the Partnership adopted SFAS No. 123,
Accounting for Stock-Based Compensation, which permits entities to recognize
as expense over the vesting period the fair value of all equity-based awards
on the date of grant. Alternatively, SFAS No. 123 allows entities to continue
to apply the provisions of APB Opinion No. 25 and provide pro forma
disclosures for employee unit option grants made in 1995 and future years as
if the fair-value based method defined in SFAS No. 123 had been applied. The
Partnership has elected to continue to apply the provisions of APB Opinion No.
25 and apply the pro forma disclosure provisions of SFAS No. 123.
Financial Instruments
The fair values of the Partnership's financial instruments do not materially
vary from the carrying values of such instruments.
Long-Lived Assets
Long-lived assets to be held and used are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount be
evaluated. Impairment is measured by comparing the carrying value to the
estimated and discounted future cash flows expected to result from the use of
the assets and their eventual disposition. The Partnership has determined that
as of December 31, 1996, there has been no impairment in the carrying values
of long-lived assets.
Use of Estimates
Management of the Partnership has made a number of estimates and assumptions
relating to the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications
Certain prior year balances have been reclassified to conform with the
current year presentation.
Interim Financial Statements
The accompanying unaudited interim financial statements reflect all
adjustments which, in the opinion of management, are necessary for the fair
presentation of the results of the interim periods presented. All such
adjustments are of a normal recurring nature.
F-15
<PAGE>
PEAPOD LP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(3) SUBORDINATED DEBENTURES
At December 31, 1995 and 1996, subordinated debentures consisted of the
following:
<TABLE>
<CAPTION>
1995 1996
-------- -------
<S> <C> <C>
Debenture due on March 30, 1997, bearing interest at 12%.. $ 50,000 --
Debenture due on March 30, 1997, bearing interest at prime
plus 2% and 10.5% at December 31, 1995 adjusted annually
at February 1, subordinate to the $50,000 debenture noted
above.................................................... 25,000 --
Debenture due on May 30, 1998, bearing interest at prime
plus 2%, with interest through May 29, 1995 at 8% and 11%
at December 31, 1995 adjusted annually at May 29,
subordinate to the $50,000 debenture noted above......... 50,000 --
-------- -------
$125,000 --
======== =======
</TABLE>
(4) OPTIONS FOR LIMITED PARTNERSHIP UNITS
Peapod LP has two partnership unit option plans providing for the issuance
of options to eligible employees, directors, advisors and consultants. These
plans permit Peapod LP to issue options on terms that the Partnership
determines are appropriate, subject to a maximum term of 10 years. Such terms
include exercise price, number of units, vesting dates and other terms.
The Partnership applies APB Opinion No. 25 and related interpretations in
accounting for its plans. All options under the plans have been granted at
exercise prices not less than estimated fair market value at the date of the
grant. Accordingly, no compensation cost has been recognized for its fixed
unit option plans. Had compensation cost for the Partnership's unit option
plans been determined consistent with SFAS No. 123, the Partnership's net loss
would have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Net loss available to partners
As reported.................................. $(6,591,921) $(9,565,507)
Pro forma for SFAS No. 123................... (6,750,362) (9,827,192)
</TABLE>
Under the option plans, the exercise price of each option equals the
estimated fair market value of the Partnership's units on the date of grant.
For purposes of calculating the compensation costs consistent with SFAS No.
123, the fair value of each grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in fiscal 1995 and 1996, respectively: no expected
dividend yield; expected volatility of 20 percent; risk free interest rates of
6.4% and 6.5% in 1995 and 1996, respectively, and expected lives of seven
years.
A third plan provided for the issuance of options to eligible employees,
advisors and consultants in lieu of compensation. This plan was terminated
effective December 31, 1995. During the years ended December 31, 1994 and
1995, expense was recorded of $155,610 and $99,658, respectively.
F-16
<PAGE>
PEAPOD LP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Additional information on units subject to options is as follows:
<TABLE>
<CAPTION>
1994 1995 1996
------------------ ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
-------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 852,500 $1.58 861,849 $1.63 1,448,446 $2.20
Granted................. 129,349 2.01 590,097 3.03 285,000 6.00
Forfeited............... (120,000) 1.67 (3,500) 2.36 (102,500) 3.78
Exercised............... -- -- --
-------- --------- ---------
Outstanding at end of
year................... 861,849 $1.63 1,448,446 $2.20 1,630,946 $2.77
======== ===== ========= ===== ========= =====
Options exercisable at
year end............... 668,349 $1.59 858,336 $1.79 1,116,172 $2.11
======== ===== ========= ===== ========= =====
</TABLE>
The following table summarizes information about unit options outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE OPTIONS CONTRACTUAL EXERCISE OPTIONS EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
-------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$1.33--1.80 688,844 6.45 years $1.52 675,844 $1.52
2.00--2.50 303,505 6.22 2.17 217,621 2.14
3.00--3.25 373,597 6.90 3.25 170,957 3.24
6.00 265,000 8.10 6.00 51,750 6.00
--------- ---------
1,630,946 6.78 years $2.77 1,116,172 $2.11
========= ========== ===== ========= =====
</TABLE>
F-17
<PAGE>
PEAPOD LP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(5) WARRANTS FOR LIMITED PARTNERSHIP UNITS
Partnership unit warrant activity for the years ended December 31, 1994,
1995 and 1996 are summarized below:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE EXERCISE
UNITS PRICE PRICE
-------- -------- ----------
<S> <C> <C> <C>
Outstanding on January 1, 1994................. 716,541 $1.98 $1.33-2.00
Granted........................................ 32,083 2.24 2.23-2.25
Exercised...................................... (694,248) 2.00 2.00
--------
Outstanding on December 31, 1994............... 54,376 1.92 1.33-2.25
Granted........................................ 11,500 3.25 3.25
Exercised...................................... (1,250) 2.23 2.23
--------
Outstanding on December 31, 1995............... 64,626 2.15 1.33-3.25
Granted........................................ 3,215 7.00 7.00
--------
Outstanding on December 31, 1996............... 67,841 $2.38 1.33-7.00
======== =====
</TABLE>
(6) COMMITMENTS AND CONTINGENCIES
Capital Leases
Peapod LP has capitalized certain computer equipment acquired through
capital leases. The future minimum lease payments as of December 31, 1996 are
as follows:
<TABLE>
<S> <C>
1997............................................................ $380,867
1998............................................................ 279,667
1999............................................................ 81,744
--------
742,278
Less amount representing interest............................... 70,259
--------
672,019
Less current obligations........................................ 332,490
--------
$339,529
========
</TABLE>
Costs and related accumulated amortization for equipment under capital
leases totaled $219,541 and $47,821, respectively, as of December 31, 1994;
$534,196 and $142,038, respectively, as of December 31, 1995; and $999,065 and
$298,424, respectively, as of December 31, 1996. Amortization expense totaled
$33,358, $94,217 and $184,490 for the years ended December 31, 1994, 1995 and
1996, respectively.
Operating Leases
The Company leases its office facilities under operating leases. Rent
expense on operating leases totaled $103,804, $155,730 and $237,797 for the
years ended December 31, 1994, 1995 and 1996, respectively. Total future
minimum lease payments under operating leases as of December 31, 1996 are as
follows:
<TABLE>
<S> <C>
1997............................................................. $308,655
1998............................................................. 294,198
1999............................................................. 286,138
2000............................................................. 52,320
2001............................................................. 13,080
--------
$954,391
========
</TABLE>
F-18
<PAGE>
PEAPOD LP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(7) RELIANCE ON CERTAIN RELATIONSHIPS
The business of the Partnership is dependent upon contracts with a grocery
retailer in each metropolitan market where the Partnership is doing business.
The continuation and the favorable renegotiation of each of its existing
contracts with grocery retailers and the negotiation of acceptable contracts
with retailers in new markets are material to the Partnership.
(8) PARTNERSHIP AGREEMENT AND LIQUIDATION PREFERENCES
Management Fees
In accordance with the Partnership Agreement, a management fee is payable to
the General Partner by the Partnership. For the years ended December 31, 1994,
1995 and 1996, the amount charged to general and administrative expenses
totaled $125,000, $150,000 and $175,000, respectively. At December 31, 1994,
1995 and 1996, $119,299, $478 and $13,788 of this management fee is payable to
the General Partner. As of December 31, 1996, future annual commitments under
the Partnership Agreement are $175,000.
Allocations and Distributions
Pursuant to the terms of the Partnership agreement, the net profits and
losses are to be allocated among the partners pro rata, based upon the number
of units held by each partner. In addition, if the number of units held by any
partner changes during the fiscal year, the allocation is to be adjusted in
proportion to the number of units and the number of full months during the
year that the units were held.
Distributions of cash or assets will be made from time to time and when
reasonably practicable, as determined by the General Partner.
Liquidation Preference
Certain holders of limited partner units issued in 1996 have a liquidation
preference over all other holders of limited and general partner units.
(9) PARTNERSHIP UNIT PROGRAMS
Peapod LP adopted a program where certain executives and advisors receive
units of the Partnership in lieu of compensation. The program allows these
executives and advisors to receive units at 80% of the estimated fair market
value during 1994 and 85% of the estimated fair market value during 1995 and
1996. Expense was recognized based on the estimated fair market value of the
partnership units at the date of issuance.
In 1995, Peapod LP adopted a director purchase plan whereby each director of
the Partnership was eligible to purchase units of the Partnership at 85% of
the estimated fair market value, up to $50,000 annually. Expense was
recognized based on the discount from estimated fair market value of the
partnership units at the date of issuance.
During the year ended December 31, 1994, 43,547 units were issued, and
$75,574 of expense was reflected in the financial statements. In addition,
8,040 units were issued on January 1, 1995 for compensation of 1994 services.
Expense of $17,929 was reflected in the financial statements for the year
ended December 31, 1994.
During the year ended December 31, 1995, 20,550 units were issued and
$38,538 of expense was reflected in the financial statements. In addition,
70,656 units were issued on January 1, 1996 for compensation of 1995 services
and under the director purchase plan. Expense of $102,038 was reflected in the
financial statements for the year ended December 31, 1995.
F-19
<PAGE>
PEAPOD LP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
During the year ended December 31, 1996, 86,341 units were issued and
$44,115 of expense was reflected in the financial statements. In addition,
45,292 units were issued on January 1, 1997 for compensation of 1996 services
and under the director purchase plan. Expense of $221,757 was reflected in the
financial statements for the year ended December 31, 1996.
(10) EMPLOYEE BENEFIT PLAN
Effective September 1, 1995, the Partnership implemented a 401(k) Savings
Plan ("Plan"). Qualified employees may participate in the Plan by contributing
up to 15% of their gross wages. The Partnership may elect to make matching
contributions at the discretion of the Board of Directors of the General
Partner. The Partnership has made no contributions through December 31, 1996.
(11) SYNDICATION COSTS
Prior to 1994, the Partnership capitalized syndication costs and amortized
them on a straight-line basis over five years. As of January 1, 1994, the
Partnership modified its method of accounting for syndication costs to reflect
them as a reduction from the proceeds of the issuance of limited partnership
units. The net capitalized syndication costs at December 31, 1993 of $105,073
were restated to reflect a reduction of limited partners' capital. This
modification did not have a material effect on the Partnership's results of
operations or financial position for all periods presented.
F-20
<PAGE>
[Photo of Peapod delivery person holding bag of groceries. Caption: "Smart
Shopping for Busy People.SM"]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR BY ANY OF THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT RE-
LATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THOSE TO WHICH
IT RELATES IN ANY STATE TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE SUCH OF-
FER IN SUCH STATE. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY
THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 7
Use of Proceeds........................................................... 13
Dividend Policy........................................................... 13
Capitalization............................................................ 13
Dilution.................................................................. 14
Selected Financial and Operating Data..................................... 15
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 16
Business.................................................................. 23
Management................................................................ 36
Certain Transactions...................................................... 41
Stock Ownership........................................................... 43
Description of Capital Stock.............................................. 45
Shares Eligible for Future Sale........................................... 48
Underwriting.............................................................. 50
Legal Matters............................................................. 51
Experts................................................................... 51
Additional Information.................................................... 52
Index to Financial Statements............................................. F-1
</TABLE>
------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EF-
FECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SHARES
PEAPOD, INC.
COMMON STOCK
LOGO
--------
PROSPECTUS
, 1997
--------
SMITH BARNEY INC.
WILLIAM BLAIR & COMPANY
J.P. MORGAN & CO.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses (other than underwriting discount and expenses) payable by the
Company in connection with the sale of the Common Stock offered hereby
(including the Common Stock which may be issued pursuant to an over-allotment
option) are as follows:
<TABLE>
<CAPTION>
AMOUNT
----------
<S> <C>
SEC registration fee.......................................... $17,424.25
NASD filing fee............................................... 6,250.00
Nasdaq National Market fee.................................... *
Printing and engraving expenses............................... *
Legal fees and expenses....................................... *
Accounting fees and expenses.................................. *
Blue Sky fees and expenses (including legal fees and
expenses).................................................... *
Transfer agent and registrar fees and expenses................ *
Miscellaneous................................................. *
----------
Total..................................................... $ *
==========
</TABLE>
- --------
*To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Delaware General Corporation Law and the Company's Charter and By-Laws
provide for indemnification of the Company's directors and officers for
liabilities and expenses that they may incur in such capacities. In general,
directors and officers are indemnified with respect to actions taken in good
faith in a manner reasonably believed to be in, or not opposed to, the best
interests of the Company, and with respect to any criminal action or
proceeding, actions that the indemnitee had no reasonable cause to believe
were unlawful. Reference is made to the Company's Charter and By-Laws filed as
Exhibits 3.1 and 3.2 hereto, respectively.
The Company has entered into indemnity agreements with each of its directors
and executive officers that require the Company to advance expenses to each
such director and officer in the event that a claim is brought against such
director or officer with respect to an action for which the Company is
obligated to provide indemnification under the Company's Charter and By-Laws.
The Underwriting Agreement provides that the Underwriters are obligated,
under certain circumstances, to indemnify directors, officers and controlling
persons of the Company against certain liabilities, including liabilities
under the Securities Act. Reference is made to the form of Underwriting
Agreement filed as Exhibit 1 hereto.
The Company may purchase directors and officers liability insurance, which
would provide coverage against certain liabilities including liabilities under
the Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In the three years preceding the filing of this registration statement, the
Company sold the following securities which were not registered under the
Securities Act:
On January 1, 1994, the Company sold an aggregate of 29,502 limited
partnership units in Peapod LP ("Units") under its 1993 Executive Unit
Purchase Plan for the aggregate price of $35,402 to certain employees and a
director.
On January 1, 1994, the Company sold an aggregate of 160,669 options to
purchase Units ("Options") under its 1993 Executive Option Purchase Plan for
the aggregate price of $160,669 to certain employees and directors.
II-1
<PAGE>
On July 1, 1994, the Company sold 14,045 Units for an aggregate price of
$25,000 to a director under its 1994 Executive Unit Purchase Plan.
On August 1, 1994 and September 1, 1994, the Company sold an aggregate of
183,906 Units for an aggregate price of $410,110 to certain individuals and
investment entities.
On September 14, 1994, the Company sold 1,559,235 Units to Ameritech
Corporation for an aggregate price of $3,477,094.
On October 1, 1994, the Company sold 694,248 Units to Tribune National
Marketing Company for an aggregate price of $1,388,496.
On October 11, 1994, the Company sold 38,262 Options for an aggregate price
of $44,894 to an employee under its 1994 Executive Option Purchase Plan (the
"1994 Option Purchase Plan").
On November 4, 1994, the Company sold warrants to purchase an aggregate of
15,208 Units to Comdisco for an aggregate price of $37,499.
On January 1, 1995, the Company sold (i) an aggregate of 79,587 Options
under its 1994 Option Purchase Plan for an aggregate price of $106,803 to
certain employees and directors, (ii) an aggregate of 8,040 Units under its
1994 Executive Unit Purchase Plan for an aggregate price of $14,311 to certain
employees and (iii) 4,815 Units to an individual for an aggregate price of
$15,649.
On March 31, 1995, the Company sold an aggregate of 4,279 Options under its
1995 Executive Option Purchase Plan (the "1995 Option Purchase Plan") for an
aggregate price of $9,336 to certain employees and a director.
On April 1, 1995, the Company sold an aggregate of 8,478 Units under its
1995 Executive Unit Purchase Plan (the "1995 Unit Purchase Plan") for an
aggregate price of $21,619 to certain employees and directors.
On July 1, 1995, the Company sold 2,106 Units for an aggregate amount of
$5,813 under its 1995 Unit Purchase Plan to an affiliate of a director. The
Company also sold 1,250 Units for an aggregate price of $2,788 to an
investment entity pursuant to the exercise of its warrant right.
On July 1, 1995 and August 1, 1995, the Company sold an aggregate of 216,296
Units for an aggregate price of $702,962 to certain individuals and investment
entities.
On July 27, 1995, the Company sold 1,559,235 Units to Providence Journal
Company for an aggregate price of $5,067,514.
On August 15, 1995, the Company sold 14,808 Options under its 1995 Option
Purchase Plan for an aggregate price of $35,001 in foregone compensation to an
employee, pursuant to a severance agreement.
On October 1, 1995, the Company sold 1,926 Units under its 1995 Unit
Purchase Plan to an affiliate of a director for an aggregate price of $5,316.
On November 1, 1995, the Company sold an aggregate of 227,376 Units to
Tribune National Marketing Company, Ameritech Corporation and Providence
Journal Company for an aggregate price of $738,972. The Company also sold
warrants to purchase an aggregate of 11,500 Units to Ameritech Credit
Corporation for an aggregate price of $37,375.
On December 31, 1995, the Company sold an aggregate of 23,405 Options under
its 1995 Option Purchase Plan for an aggregate price of $55,321 to certain
employees and directors.
II-2
<PAGE>
On January 1, 1996, the Company sold (i) an aggregate of 24,426 Units under
its 1995 Unit Purchase Plan for an aggregate price of $67,416 to certain
employees and a director and (ii) an aggregate of 56,033 Units under its
Director Unit Purchase Plan for an aggregate price of $177,590 to certain
directors.
On March 1, 1996, the Company sold 998 Units to the Providence Journal
Company for an aggregate price of $3,244.
On December 1, 1996, the Company sold 5,882 Units pursuant to its 1996
Executive Unit Purchase Plan (the "1996 Unit Purchase Plan") to a director for
an aggregate price of $29,998.
On January 1, 1997, the Company sold (i) an aggregate of 35,489 Units under
its 1996 Unit Purchase Plan for an aggregate price of $180,994 to certain
employees and (ii) an aggregate of 14,845 Units under its Director Unit
Purchase Plan for an aggregate price of $47,995 to certain directors.
On February 1, 1997, the Company sold an aggregate of 16,803 Units under its
Director Unit Purchase Plan for an aggregate of $99,978 to certain directors.
On February 15, 1997, the Company sold an aggregate of 21,943 Units under
its 1997 Unit Purchase Plan for an aggregate price of $130,561 to certain
employees.
On April 11, 1994, the Company sold subordinated debentures and warrant
rights to purchase a total of 5,000 Units to Samuel Parkinson, Brant Smith and
John Traeger for an aggregate amount of $200,000.
On April 18, 1994, the Company sold subordinated debentures and warrant
rights to purchase a total of 1,250 Units to Anne L. Fawcett and Helen P. Hall
for an aggregate amount of $50,000.
On May 4, 1994, the Company sold subordinated debentures and warrant rights
to purchase a total of 1,250 Units to P-J Investments for an aggregate amount
of $50,000.
On May 9, 1994, the Company sold subordinated debentures and warrant rights
to purchase a total of 625 Units to Lynn J. Nord for an aggregate amount of
$25,000.
On May 12, 1994, the Company sold subordinated debentures and warrant rights
to purchase a total of 625 Units to Peter M. Gaines for an aggregate amount of
$25,000.
On June 14, 1994, the Company sold subordinated debentures and warrant
rights to purchase a total of 7,500 Units to Alis & Co. and the Howard H. Cohn
Trust for an aggregate amount of $300,000.
On July 5, 1994, the Company sold subordinated debentures and warrant rights
to purchase a total of 1,250 Units to Nickel Plate Ventures, L.P. for an
aggregate amount of $50,000.
On July 6, 1994, the Company sold subordinated debentures and warrant rights
to purchase a total of 625 Units to Ned M. Cole, Jr. for an aggregate amount
of $25,000.
On July 13, 1994, the Company sold subordinated debentures and warrant
rights to purchase a total of 625 Units to David Hoffman for an aggregate
amount of $25,000.
No underwriter was involved in any of the above-referenced sales.
On April 19, 1996, the Company sold an aggregate of 2,875,002 Units for an
aggregate price of $17,250,012 to the following investors: Benaroya Capital
Company (166,667 Units), Providence Journal Company (166,667 Units), Montreaux
Equity Management LP (133,333 Units), Eos Partners SBIC, L.P. (416,667 Units),
The Travelers Insurance Company (416,667 Units), ELI-Pod, Inc. (416,667
Units), Tribune National Marketing Company (166,667 Units), Glenbrook
Partners, L.P. (41,667 Units), CIBC Wood Gundy Ventures, Inc. (916,667 Units)
and Berkman Associates, L.P. (33,333 Units). Smith Barney Inc. was the
principal underwriter for the offering and received underwriting commissions
of $762,500.
II-3
<PAGE>
All sales to Tribune National Marketing Company, Ameritech Corporation and
Providence Journal Company were made in reliance on Section 4(2) of the
Securities Act of 1933, as amended (the "Securities Act") as sales to
sophisticated investors capable of evaluating the risks of the purchase, with
access to all relevant information, who have made appropriate written
representations of investment intent and have received legended securities.
All sales to employees or directors under Unit Purchase Plans or Option
Purchase Plans were made in reliance on Rule 701 promulgated under the
Securities Act pursuant to a written compensatory benefit plan provided to
each participant.
All other sales referred to above were made in reliance on Rule 505 or 506
of Regulation D to persons reasonably believed to be Accredited Investors (as
defined in Regulation D) who have made appropriate written representations of
investment intent and have received legended securities.
II-4
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
1.1 --Form of Underwriting Agreement
3.1 --Form of Restated Certificate of Incorporation of the Company
3.2 --Form of Restated By-Laws of the Company
4.1 --Form of Stockholders Rights Plan
4.2 --Certificate of Designation of Series A Junior Participating
Preferred Stock (included in Exhibit 4.1 to this Registration
Statement)
5.1 --Opinion of Sidley & Austin
10.1 --Conversion Agreement
10.2 --Lease of the Company's new principal offices to be located in
Skokie, Illinois
10.3 --Agreement dated September 1, 1995 between Jewel Food Stores,
Inc. and Peapod LP (subject to a request for confidential
treatment pursuant to Rule 406 of the Securities Act).
10.4 --Form of Employment Agreement between the Company and Andrew B.
Parkinson
10.5 --Form of Employment Agreement between the Company and Thomas L.
Parkinson
10.6 --Form of Employment Agreement between the Company and John C.
Walden
10.7 --Form of Employment Agreement between the Company and Timothy M.
Dorgan
10.8 --Form of Employment Agreement between the Company and John A.
Furton
10.9 --Form of Severance Agreement between the Company and each of
Andrew B. Parkinson, Thomas L. Parkinson, John P. Walden, Timothy
M. Dorgan and John A. Furton.
10.10 --Amended and Restated Investors Agreement, dated April 1, 1997,
among the Company and certain investors.
10.11 --Form of Unitholders Agreement among Peapod LP, the General
Partners and certain investors.
10.12 --Form of Parkinson Registration Rights Agreement among the
Company, Andrew B. Parkinson and Thomas L. Parkinson.
10.13 --Form of Tasso H. Coin Registration Rights Agreement between the
Company and Tasso H. Coin.
10.14 --Form of 1997 Long-Term Incentive Plan
10.15 --Form of Employee Stock Purchase Plan
10.16 --Form of Indemnification Agreement between the Company and each
of its directors and executive officers
11 --Statement re: computation of per share earnings
23.1 --Consent of KPMG Peat Marwick LLP
23.2 --Consent of Sidley & Austin (included in Exhibit 5.1)
24.1 --Powers of Attorney (included on signature page)
</TABLE>
(b) Financial Statement Schedules
None of the schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are required
under the related instructions or are inapplicable, and therefore have been
omitted.
II-5
<PAGE>
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to provisions described in Item 14 above, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned registrant hereby undertakes (1) to provide to the
underwriters at the closing specified in the underwriting agreement
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser; (2) that for
purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of a
registration statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective; and (3) that for the
purpose of determining any liability under the Securities Act, each post-
effective amendment that contains a form of prospectus shall be deemed to be a
new registration statement relating to the securities offered therein, and the
Offering of such securities at that time shall be deemed to be the initial
bona fide Offering thereof.
II-6
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT TO REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN CHICAGO, ILLINOIS ON
MAY 12, 1997.
Peapod, Inc.
/s/ Andrew B. Parkinson
By: _________________________________
Andrew B. Parkinson
President
POWER OF ATTORNEY AND SIGNATURES
WE, THE UNDERSIGNED OFFICERS AND DIRECTORS OF PEAPOD, INC., HEREBY SEVERALLY
CONSTITUTE AND APPOINT ANDREW B. PARKINSON AND JOHN C. WALDEN, AND EACH OF
THEM SINGLY, OUR TRUE AND LAWFUL ATTORNEYS, WITH FULL POWER TO THEM AND EACH
OF THEM SINGLY, TO SIGN FOR US IN OUR NAMES IN THE CAPACITIES INDICATED BELOW,
ALL PRE-EFFECTIVE AND POST-EFFECTIVE AMENDMENTS TO THIS REGISTRATION
STATEMENT, INCLUDING ANY FILINGS PURSUANT TO RULE 462(B) UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, AND GENERALLY TO DO ALL THINGS IN OUR NAMES AND ON
OUR BEHALF IN SUCH CAPACITIES TO ENABLE PEAPOD, INC. TO COMPLY WITH THE
PROVISIONS OF THE SECURITIES ACT OF 1933, AS AMENDED, AND ALL REQUIREMENTS OF
THE SECURITIES AND EXCHANGE COMMISSION.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
TO REGISTRATION STATEMENT HAS BEEN SIGNED ON MAY 12, 1997 BY THE FOLLOWING
PERSONS IN THE CAPACITIES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE(S)
--------- --------
<S> <C>
/s/ Andrew B. Parkinson Chairman, President and Chief Executive
___________________________________________ Officer (principal executive officer) and
Andrew B. Parkinson Director
/s/ Thomas L. Parkinson Executive Vice President, Chief Technology
___________________________________________ Officer and Director
Thomas L. Parkinson
/s/ John C. Walden Executive Vice President, Finance and
___________________________________________ Business Development (principal financial
John C. Walden officer)
/s/ Earl W. Rachowicz Vice President and Controller (principal
___________________________________________ accounting officer)
Earl W. Rachowicz
</TABLE>
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
*1.1 --Form of Underwriting Agreement
3.1 --Form of Restated Certificate of Incorporation of the Company
3.2 --Form of Restated By-Laws of the Company
*4.1 --Form of Stockholders Rights Plan
*4.2 --Certificate of Designation of Series A Junior Participating
Preferred Stock (included in Exhibit 4.1 to this Registration
Statement)
*5.1 --Opinion of Sidley & Austin
*10.1 --Conversion Agreement
10.2 --Lease of the Company's new principal offices to be located in
Skokie, Illinois
10.3 --Agreement dated September 1, 1995 between Jewel Food Stores, Inc.
and Peapod LP (subject to a request for confidential treatment
pursuant to Rule 406 of the Securities Act).
--Form of Employment Agreement between the Company and Andrew B.
*10.4 Parkinson
--Form of Employment Agreement between the Company and Thomas L.
*10.5 Parkinson
*10.6 --Form of Employment Agreement between the Company and John C. Walden
--Form of Employment Agreement between the Company and Timothy M.
*10.7 Dorgan
*10.8 --Form of Employment Agreement between the Company and John A. Furton
*10.9 --Form of Severance Agreement between the Company and each of Andrew
B. Parkinson, Thomas L. Parkinson, John P. Walden, Timothy M. Dorgan
and John A. Furton.
*10.10 --Amended and Restated Investors Agreement, dated April 1, 1997, among
the Company and certain investors.
*10.11 --Form of Unitholders Agreement among Peapod LP, the General Partners
and certain investors.
*10.12 --Form of Parkinson Registration Rights Agreement among the Company,
Andrew B. Parkinson and Thomas L. Parkinson.
*10.13 --Form of Tasso H. Coin Registration Rights Agreement between the
Company and Tasso H. Coin
*10.14 --Form of 1997 Long-Term Incentive Plan
*10.15 --Form of Employee Stock Purchase Plan
*10.16 --Form of Indemnification Agreement between the Company and each of
its directors and executive officers
*11 --Statement re: computation of per share earnings
23.1 --Consent of KPMG Peat Marwick LLP
*23.2 --Consent of Sidley & Austin (included in Exhibit 5.1)
24.1 --Powers of Attorney (included on signature page)
</TABLE>
- --------
*To be filed by amendment
II-8
<PAGE>
RESTATED CERTIFICATE OF INCORPORATION
OF NEW PEAPOD, INC.
(Incorporated on December 5, 1996)
NEW PEAPOD, INC., a corporation organized and existing under and by virtue
of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY:
FIRST: Pursuant to Section 245 and 242 of the General Corporation Law of
the State of Delaware (the "Delaware Law"), the Certificate of Incorporation, as
amended, of NEW PEAPOD, INC., a Delaware corporation (the "Corporation"), is
hereby restated and amended to read in its entirety as follows:
"RESTATED CERTIFICATE
OF INCORPORATION
----------------
FIRST: The name of the Corporation is NEW PEAPOD, INC.
SECOND: The address of the registered office of the Corporation in the
State of Delaware is 1209 Orange Street, City of Wilmington, County of New
Castle. The name of the registered agent of the Corporation at such address is
The Corporation Trust Company.
THIRD: The nature of the business or purposes to be conducted or promoted
is to engage in any lawful act or activity for which corporations may be
organized under the General Corporation Law of the State of Delaware.
FOURTH: The total number of shares of all classes of stock which the
Corporation shall have authority to issue is 55,000,000, of which 50,000,000
shares shall be Common Stock with a par value of $.01 per share (the "Common
Stock") and of which 5,000,000 shares shall be Preferred Stock with a par value
of $.01 per share, issuable in series (the "Preferred Stock");
Every share of common stock of the Corporation issued as of the date and
time that this Restated Certificate of Incorporation
<PAGE>
becomes effective (including any shares held by the Corporation as treasury
shares) shall automatically be converted into 100 validly issued, fully paid and
nonassessable shares of Common Stock. Each share of Common Stock into which
shares are so converted shall have a par value of $.01. Upon the effectiveness
of this Restated Certificate of Incorporation, each certificate representing one
or more shares of common stock of the Corporation immediately prior to such
effectiveness shall represent a number of shares of Common Stock (rounded down
to the nearest share) equal to the shares evidenced thereby prior to such
effectiveness multiplied by 100. As soon as practicable thereafter, the
Corporation shall ask the holders of certificates representing shares of common
stock of the Corporation immediately prior to such effectiveness to deliver such
certificates to the Corporation or to its agent, and, upon the receipt thereof,
the Corporation shall distribute, or cause its agent to distribute, to each such
holder a certificate or certificates representing the number of shares of Common
Stock (rounded down to the nearest share) previously evidenced by the
certificates so tendered multiplied by 100. Until such time as the Corporation
has distributed a new certificate or certificates in exchange for a certificate
or certificates tendered by a holder pursuant to this paragraph, the certificate
or certificates being tendered by such holder shall be deemed to represent and
shall represent a number of shares equal to the number of shares of common stock
of the Corporation previously evidenced by such certificate(s) multiplied by
100.
No fractional shares of Common Stock shall be issued. In lieu of any
fractional shares to which the holder would otherwise be entitled, the
Corporation shall pay cash equal to the product of such fraction (determined
based on the aggregate number of shares held by such holder) multiplied by the
fair market value of a share of Common Stock as determined by the Board of
Directors in good faith.
The designations and the powers, preferences and rights of the capital
stock and the qualifications, limitations or restrictions thereof are as
follows:
A. COMMON STOCK PROVISIONS
1. Voting Rights. Except as otherwise required by law or expressly provided
herein, the holder of each share of Common Stock shall have one vote on each
matter submitted to a vote of the stockholders of the Corporation.
2. Dividend Rights. Subject to provisions of law and preferences of any
Preferred Stock and except as otherwise provided herein, the holders of the
Common Stock shall be entitled to receive dividends at such times and in such
amounts
-2-
<PAGE>
as may be determined by the Board of Directors of the Corporation.
3. Liquidation Rights. In the event of any liquidation, dissolution or
winding up of the Corporation, whether voluntary or involuntary, after payment
or provision for payment of the debts and other liabilities of the Corporation
and the preferential amounts to which the holders of any Preferred Stock shall
be entitled upon liquidation, the holders of Common Stock, shall be entitled to
share ratably in the remaining assets of the Corporation.
B. PREFERRED STOCK
1. Authorization. The Board of Directors of the Corporation is authorized
to issue the Preferred Stock in one or more series at such time or times and for
such consideration or considerations as the Board of Directors may determine.
Each series shall be so designated as to distinguish the shares thereof from the
shares of all other series and classes. Except as otherwise provided in this
Restated Certificate of Incorporation, different series of Preferred Stock shall
not be construed to constitute different classes of shares for the purpose of
voting by classes.
2. Provisions. The Board of Directors is expressly authorized to fix and
determine as to each series established:
(a) the maximum number of shares to constitute such series and the
distinctive designation thereof;
(b) the dividend rate, if any, on the shares of such series, the conditions
and dates upon which such dividends shall be payable, the preference or relation
which such dividends shall bear to the dividends payable on any other class or
classes or on any other series of capital stock, and whether such dividends
shall be cumulative or noncumulative;
(c) whether the shares of such series shall be subject to redemption by the
Corporation or by the holders thereof and, if made subject to redemption, the
times, prices and other terms and conditions of such redemption;
(d) the rights of the holders of shares of such series upon the
liquidation, dissolution or winding up of the Corporation;
(e) whether or not the shares of such series shall be subject to the
operation of a retirement or sinking fund and, if so, the extent to and manner
in which any such retirement or sinking fund shall be applied to the purchase or
redemption of the shares of such series for retirement or to other corporate
purposes and the terms and provisions relative to the operation thereof;
-3-
<PAGE>
(f) the terms and conditions, if any, on which shares may be converted or
exchanged;
(g) whether the shares of such series shall have voting rights, in addition
to any voting rights provided by law, and, if so, the terms of such voting
rights;
(h) the limitations and restrictions, if any, to be effective while any
shares of such series are outstanding upon the payment of dividends or making of
other distributions on, and upon the purchase, redemption or other acquisition
by the Corporation of, Common Stock or any other class or classes of capital
stock of the Corporation ranking junior to the shares of such series either as
to dividends or upon liquidation;
(i) the conditions or restrictions, if any, upon the creation of
indebtedness of the Corporation or upon the issue of any additional capital
stock (including additional shares of such series or of any other series or of
any other class) ranking on a parity with or prior to the shares of such series
as to dividends or upon liquidation; and
(j) such other preferences, powers, qualifications, rights and privileges,
all as the Board of Directors may deem advisable and are not inconsistent with
law and the provisions of this Restated Certificate of Incorporation.
Such preferences, powers, relative participating, optional or other special
rights and qualifications, limitations or restrictions thereof shall be stated
in a resolution or resolutions adopted by the Board of Directors to create such
series, and a certificate of said resolution or resolutions (a "Certificate of
Designation") shall be filed in accordance with the General Corporation Law of
the State of Delaware.
3. Liquidation, Dissolution or Winding Up. In the event of any liquidation,
dissolution or winding up of the Corporation, before any payment or distribution
of the assets of the Corporation (whether capital or surplus) shall be made to
or set apart for the holders of any class or classes of capital stock of the
Corporation ranking junior to the Preferred Stock upon liquidation, the holders
of the shares of the Preferred Stock shall be entitled to receive payment at the
rate fixed in the resolution or resolutions adopted by the Board of Directors
providing for the issue of such series, plus (if dividends on shares of such
series of Preferred Stock shall be cumulative) an amount equal to all dividends
(whether or not earned or declared) accumulated to the date of final
distribution to such holders; but they shall be entitled to no further payment.
If, upon any liquidation, dissolution or winding up of the Corporation, the
assets of the Corporation, or the proceeds thereof, distributable among the
holders of the shares of the Preferred Stock shall be insufficient to pay in
full the preferential amount aforesaid,
-4-
<PAGE>
then such assets, or the proceeds thereof, shall be distributed among such
holders ratably in accordance with the respective amounts which would be payable
on such shares if all amounts payable thereon were paid in full.
4. Voting Rights. Except as shall be otherwise stated and expressed herein
or in the resolution or resolutions of the Board of Directors providing for the
issue of any series and except as otherwise required by law, the holders of
shares of Preferred Stock shall have, with respect to such shares, no right or
power to vote on any question or in any proceeding or to be represented at, or
to receive notice of, any meeting of stockholders.
FIFTH: The Corporation is to have perpetual existence.
SIXTH: The following provisions are included for the management of the
business and the conduct of the affairs of the Corporation, and for further
definition, limitation and regulation of the powers of the Corporation and of
its Board of Directors and stockholders:
1. The Board of Directors of the Corporation is expressly authorized to
adopt, amend or repeal the By-laws of the Corporation, subject to any limitation
thereof contained in the By-laws. The stockholders shall also have the power to
adopt, amend or repeal the By-laws of the Corporation; provided, however, that,
in addition to any vote of the holders of any class or series of capital stock
of the Corporation required by law or by this Restated Certificate of
Incorporation, the affirmative vote of the holders of at least seventy-five
percent (75%) of the voting power of all of the then outstanding shares of the
capital stock of the Corporation entitled to vote generally in the election of
directors, voting together as a single class, shall be required to adopt, amend
or repeal any provision of the By-laws of the Corporation.
2. Upon the consummation of an initial public offering of Common Stock (the
"Initial Public Offering Date"), stockholders of the Corporation may not
thereafter take any action by written consent in lieu of a meeting.
3. Special meetings of stockholders may be called at any time only by the
Chairman of the Board of Directors, the President or a majority of the Board of
Directors. Business transacted at any special meeting of stockholders shall be
limited to matters relating to the purpose or purposes stated in the notice of
meeting.
4. The books of the Corporation may be kept at such place within or without
the State of Delaware as the By-laws of the Corporation may provide or as may be
designated from time to time by the Board of Directors of the Corporation.
-5-
<PAGE>
5. Election of directors need not be by written ballot unless the By-laws
of the Corporation so provide.
SEVENTH:
1. Number of Directors. The number of directors which shall constitute the
whole Board of Directors shall be determined by resolution of a majority of the
Board of Directors. The number of directors may be decreased at any time and
from time to time by a majority of the directors then in office, but only to
eliminate vacancies existing by reason of the death, resignation, removal or
expiration of the term of one or more directors. The directors shall be elected
at the annual meeting of stockholders by such stockholders as have the right to
vote on such election. Directors need not be stockholders of the Corporation.
2. Classes of Directors. Following the Initial Public Offering Date, the
Board of Directors shall be divided into three classes: Class I, Class II and
Class III. No one class shall have more than one director more than any other
class. Each initial director in Class I shall serve for a term ending on the
date of the annual meeting next following the Initial Public Offering Date; each
initial director in Class II shall serve for a term ending on the date of the
second annual meeting next following the Initial Public Offering Date; and each
initial director in Class III shall serve for a term ending on the date of the
third annual meeting next following the Initial Public Offering Date.
3. Terms of Office. Except as provided in the preceding paragraph 2,
following the Initial Public Offering Date, each director shall serve for a term
ending on the date of the third annual meeting following the annual meeting at
which such director was elected.
4. Allocation of Directors Among Classes in the Event of Increases or
Decreases in the Number of Directors. In the event of any increase or decrease
in the authorized number of directors, (a) each director then serving as such
shall nevertheless continue as director of the class of which he or she is a
member until the expiration of such director's current term or his or her prior
death, retirement or resignation and (b) the newly created or eliminated
directorships resulting from such increase or decrease shall be apportioned by
the Board of Directors among the three classes of directors so as to ensure that
no one class has more than one director more than any other class. No decrease
in the number of directors constituting the whole Board of Directors shall
shorten the term of an incumbent director.
5. Removal. Following the Initial Public Offering Date, any one or more or
all of the directors may be removed only with
-6-
<PAGE>
cause, and then only by the holders of at least a majority of the shares then
entitled to vote at an election of directors.
6. Stockholder Nominations and Introduction of Business, Etc. Following the
Initial Public Offering Date, advance notice of stockholder nominations for
election of directors and other business to be brought by stockholders before a
meeting of stockholders shall be given in the manner provided in the By-laws of
the Corporation.
EIGHTH: A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the General Corporation Law of the
State of Delaware, or (iv) for any transaction from which the director derived
an improper personal benefit. If the General Corporation Law of the State of
Delaware is amended to authorize corporate action further eliminating or
limiting the personal liability of directors, then the liability of a director
of the Corporation shall be eliminated or limited to the fullest extent
permitted by the General Corporation Law of the State of Delaware, as so
amended. Any repeal or modification of this Article Eighth by the stockholders
of the Corporation shall not adversely affect any right or protection of a
director of the Corporation existing at the time of such repeal or modification.
NINTH: Each person who is or was a director or officer of the Corporation,
and each person who serves or served at the request of the Corporation as a
director or officer of another enterprise, shall be indemnified by the
Corporation in accordance with, and to the fullest extent authorized by, the
General Corporation Law of Delaware as it may be in effect from time to time.
The right of indemnity provided herein shall not be deemed exclusive of any
other rights to which any person may be entitled under any By-law, agreement,
vote of stockholders or directors, or otherwise. The Corporation may provide
indemnification to any such person, by agreement or otherwise, on such terms and
conditions as the Board of Directors may approve. Any agreement for
indemnification of any director, officer, employee or other person may provide
indemnification rights which are broader or otherwise differ from those set
forth herein. In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to adopt, amend or
repeal the By-laws of the Corporation regarding the manner and conditions under
which indemnification shall be provided hereunder by the Corporation and the
extent thereof from time to time as deemed appropriate by the Board of Directors
in the best interests of the Corporation.
-7-
<PAGE>
TENTH: The Board of Directors of the Corporation, when evaluating any offer
of another party to (a) make a tender or exchange offer for any equity security
of the Corporation; (b) merge or consolidate the Corporation with another
Corporation; or (c) purchase or otherwise acquire all or substantially all of
the properties and assets of the Corporation may, in connection with the
exercise of its judgment in determining what is in the best interests of the
Corporation and its stockholders, give due consideration to all factors the
directors deem relevant, including without limitation (i) the effects upon the
employees, suppliers, customers, creditors and others having similar relations
with the Corporation, upon the communities in which the Corporation conducts its
business or on such other constituencies of the Corporation as the Board of
Directors considers relevant under the circumstances; (ii) not only the
consideration being offered (after taking into account taxes) in relation to the
then current market price for the Corporation's outstanding shares of capital
stock, but also the Board of Directors' estimate of the (A) future value of the
Corporation (including the unrealized value of its properties and assets) as an
independent going concern and (B) the current value of the Corporation in a
freely negotiated transaction; (iii) the purpose of the Corporation, and any of
its subsidiaries, to provide quality products and services on a long term basis;
(iv) whether the proposed transaction might violate federal or state laws; and
(v) the long-term as well as short-term interests of the Corporation and its
stockholders, including the possibility that such interests may be best served
by the continued independence of the Corporation. If, on the basis of such
factors, the Board of Directors so determines that a proposal or offer to
acquire or merge the Corporation, or to sell its assets, is not in the best
interests of the Corporation, it may reject the proposal or offer. If the Board
of Directors determines to reject any such proposal or sale, the Board of
Directors shall have no obligation to facilitate, to remove any barriers to, or
to refrain from impeding the proposal or offer except as may be required by
applicable law. Except to the extent required by applicable law, the
consideration of any or all of such factors shall not be a violation of the
business judgment rule or of any duty of the directors to the stockholders or a
group of stockholders, even if the directors reasonably determine that any such
factor or factors outweigh the financial or other benefits to the Corporation or
a shareholder or group of stockholders.
ELEVENTH: The Corporation has elected to be governed by Section 203 of the
General Corporation Law of Delaware.
TWELFTH: The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Restated Certificate of Incorporation, in
the manner now or hereafter prescribed by statute, and all rights conferred upon
the stockholders herein are granted subject to this reservation; provided,
however, that, following the Initial Public Offering Date, in addition to any
vote of the holders of any class or
-8-
<PAGE>
series of capital stock of the Corporation required by law, this Restated
Certificate of Incorporation or a Certificate of Designation with respect to a
series of Preferred Stock, the affirmative vote of the holders of shares of
voting stock of the Corporation representing at least seventy-five percent (75%)
of the voting power of all of the then outstanding shares of the capital stock
of the Corporation entitled to vote generally in the election of directors,
voting together as a single class, shall be required to (i) reduce or eliminate
the number of authorized shares of any capital stock set forth in Article Fourth
or (ii) amend or repeal or adopt any provision inconsistent with Articles Sixth,
Seventh, Eighth, Ninth, Tenth, Eleventh, and this Article Twelfth of this
Restated Certificate of Incorporation."
SECOND: The Board of Directors of the Corporation, at a meeting duly called
at which a quorum existed, duly adopted resolutions proposing and approving the
Restated Certificate of Incorporation of the Corporation and directing that such
Restated Certificate of Incorporation be submitted to the stockholders of the
Corporation to consider and adopt the same.
THIRD: Pursuant to Section 228 of the Delaware Law, the adoption of the
Restated Certificate of Incorporation was consented to in writing by a majority
of the holders of the voting power of all shares of capital stock of the
Corporation entitled to vote thereon.
FOURTH: The Restated Certificate of Incorporation was duly adopted in
accordance with the provisions of the General Corporation Law of the State of
Delaware, including Section 242 thereof.
-9-
<PAGE>
IN WITNESS WHEREOF, NEW PEAPOD, INC. has caused this Certificate to be
signed by its President, and its corporate seal to be hereunto affixed and
attested by its Secretary this __ day of ____________, 1997.
NEW PEAPOD, INC.
By:
--------------------------
Andrew B. Parkinson
President
[SEAL]
ATTEST:
- ----------------------
Secretary
-10-
<PAGE>
RESTATED BY-LAWS
OF
PEAPOD, INC.
ARTICLE I
STOCKHOLDERS MEETINGS
---------------------
Section 1.1 Annual Meetings.
An annual meeting of stockholders shall be held for the election of
directors at such date, time and place as may be fixed by resolution of the
Board of Directors from time to time.
Section 1.2 Special Meetings. Special meetings of stockholders for any
purpose or purposes may be called at any time only by the Chairman of the Board,
if any, the President, the Board of Directors or by a majority of the Board of
Directors, and by no other person. The business transacted at a special meeting
of stockholders shall be limited to the purpose or purposes for which such
meeting is called, except as otherwise determined by the Board of Directors or
the chairman of the meeting.
Section 1.3 Notice of Meetings. A written notice of each annual or
special meeting of stockholders shall be given stating the place, date and time
of the meeting, and, in the case of a special meeting, the purpose or purposes
for which the meeting is called. Unless otherwise provided by law, the
Certificate of Incorporation or these By-laws, as such may be amended or
restated from time to time, such notice of meeting shall be given not less than
ten nor more than 60 days before the date of the meeting to each stockholder of
record entitled to vote at such meeting. If mailed, such notice shall be deemed
to be given when deposited in the mail, postage prepaid, directed to the
stockholder at such stockholder's address as it appears on the records of the
Corporation.
Section 1.4 Adjournments. Any annual or special meeting of stockholders
may be adjourned from time to time to reconvene at the same or some other place,
and notice need not be given of any such adjourned meeting if the date, time and
place thereof are announced at the meeting at which the adjournment is taken. At
the adjourned meeting any business may be transacted which might have been
transacted at the original meeting. If the adjournment is for more than 30 days,
or if after the adjournment a new record date is fixed for the adjourned
meeting, a notice of the adjourned meeting shall be given to each stockholder of
record entitled to vote at the adjourned meeting in accordance with Section 1.3.
<PAGE>
Section 1.5 Quorum. Except as otherwise provided by law, the Certificate
of Incorporation or these By-laws, as such may be amended or restated from time
to time, the presence in person or by proxy of the holders of stock having a
majority of the votes which could be cast by the holders of all outstanding
stock entitled to vote at the meeting shall constitute a quorum at each meeting
of stockholders. In the absence of a quorum, the stockholders so present may, by
the affirmative vote of the holders of stock having a majority of the votes
which could be cast by all such holders, adjourn the meeting from time to time
in the manner provided in Section 1.4 of these By-laws until a quorum is
present. If a quorum is present when a meeting is convened, the subsequent
withdrawal of stockholders, even though less than a quorum remains, shall not
affect the ability of the remaining stockholders lawfully to transact business.
Section 1.6 Organization. Meetings of stockholders shall be presided over
by the Chairman of the Board, if any, or if there is none or in his or her
absence, by the President, or in his or her absence, by a chairman designated by
the Board of Directors, or in the absence of such designation by a chairman
chosen at the meeting. The Secretary shall act as secretary of the meeting, but
in his or her absence the chairman of the meeting may appoint any person to act
as secretary of the meeting.
Section 1.7 Voting.
(a) Except as otherwise provided by the Certificate of Incorporation, as
such may be amended or restated from time to time, each stockholder entitled to
vote at any meeting of stockholders shall be entitled to one vote for each share
of stock held by such stockholder which has voting power on the matter in
question.
(b) Voting at meetings of stockholders need not be by written ballot and
need not be conducted by inspectors of election unless so required by Section
1.9 of these By-laws or so determined by the holders of stock having a majority
of the votes which could be cast by the holders of all outstanding stock
entitled to vote which are present in person or by proxy at such meeting. Unless
otherwise provided in the Certificate of Incorporation, as such may be amended
or restated from time to time, directors shall be elected by a plurality of the
votes cast in the election of directors. Each other question shall, unless
otherwise provided by law, the Certificate of Incorporation or these By-laws, as
such may be amended or restated from time to time, be decided by the vote of the
holders of stock having a majority of the votes which could be cast by the
holders of all stock entitled to vote on such question which are present in
person or by proxy at the meeting.
(c) Stock of the Corporation standing in the name of another corporation
and entitled to vote may be voted by such officer, agent or proxy as the by-laws
or other internal
-2-
<PAGE>
regulations of such other corporation may prescribe or, in the absence of such
provision, as the board of directors or comparable body of such other
corporation may determine.
(d) Stock of the Corporation standing in the name of a deceased person, a
minor, an incompetent or a debtor in a case under Title 11, United States Code,
and entitled to vote may be voted by an administrator, executor, guardian,
conservator, debtor-in-possession or trustee, as the case may be, either in
person or by proxy, without transfer of such shares into the name of the
official or other person so voting.
(e) A stockholder whose voting stock of the Corporation is pledged shall
be entitled to vote such stock unless on the transfer records of the Corporation
the pledgor has expressly empowered the pledgee to vote such shares, in which
case only the pledgee, or such pledgee's proxy, may represent such shares and
vote thereon.
(f) If voting stock is held of record in the names of two or more persons,
whether fiduciaries, members of a partnership, joint tenants, tenants in common,
tenants by the entirety or otherwise, or if two or more persons have the same
fiduciary relationship respecting the same shares, unless the Secretary is given
written notice to the contrary and is furnished with a copy of the instrument or
order appointing them or creating the relationship wherein it is so provided,
their acts with respect to voting shall have the following effect: (i) if only
one votes, such act binds all; (ii) if more than one vote, the act of the
majority so voting binds all; and (iii) if more than one votes, but the vote is
evenly split on any particular matter each faction may vote such stock
proportionally, or any person voting the shares, or a beneficiary, if any, may
apply to the Court of Chancery of the State of Delaware or such other court as
may have jurisdiction to appoint an additional person to act with the persons so
voting the stock, which shall then be voted as determined by a majority of such
persons and the person appointed by the Court. If the instrument so filed shows
that any such tenancy is held in unequal interests, a majority or even split for
the purpose of this subsection shall be a majority or even split in interest.
(g) Stock of the Corporation belonging to the Corporation, or to another
corporation a majority of the shares entitled to vote in the election of
directors of which are held by the Corporation, shall not be voted at any
meeting of stockholders and shall not be counted in the total number of
outstanding shares for the purpose of determining whether a quorum is present.
Nothing in the Section 1.7 shall limit the right of the Corporation to vote
shares of stock of the Corporation held by it in a fiduciary capacity.
-3-
<PAGE>
Section 1.8 Proxies.
(a) Each stockholder entitled to vote at a meeting of stockholders may
authorize another person or persons to act for such stockholder by proxy filed
with the Secretary before or at the time of the meeting. No such proxy shall be
voted or acted upon after three years from its date, unless the proxy provides
for a longer period. A duly executed proxy shall be irrevocable if it states
that it is irrevocable and if, and only as long as, it is coupled with an
interest sufficient in law to support an irrevocable power. A stockholder may
revoke any proxy which is not irrevocable by attending the meeting and voting in
person or by filing with the Secretary an instrument in writing revoking the
proxy or another duly executed proxy bearing a later date.
(b) A stockholder may authorize another person or persons to act for such
stockholder as proxy (i) by executing a writing authorizing such person or
persons to act as such, which execution may be accomplished by such stockholder
or such stockholder's authorized officer, director, partner, employee or agent
(or, if the stock is held in a trust or estate, by a trustee, executor or
administrator thereof) signing such writing or causing his or her signature to
be affixed to such writing by any reasonable means, including, but not limited
to, facsimile signature, or (ii) by transmitting or authorizing the transmission
of a telegram, cablegram or other means of electronic transmission (a
"Transmission") to the person who will be the holder of the proxy or to a proxy
solicitation firm, proxy support service organization or like agent duly
authorized by the person who will be the holder of the proxy to receive such
Transmission; provided that any such Transmission must either set forth or be
submitted with information from which it can be determined that such
Transmission was authorized by such stockholder.
(c) Any inspector or inspectors appointed pursuant to Section 1.9 of these
By-Laws shall examine Transmissions to determine if they are valid. If no
inspector or inspectors are so appointed, the Secretary or such other person or
persons as shall be appointed from time to time by the Board of Directors shall
examine Transmissions to determine if they are valid. If it is determined a
Transmission is valid, the person or persons making that determination shall
specify the information upon which such person or persons relied. Any copy,
facsimile telecommunication or other reliable reproduction of such a writing or
Transmission may be substituted or used in lieu of the original writing or
Transmission for any and all purposes for which the original writing or
Transmission could be used; provided that such copy, facsimile telecommunication
or other reproduction shall be a complete reproduction of the entire original
writing or Transmission.
-4-
<PAGE>
Section 1.9 Voting Procedures and Inspectors of Elections.
(a) If the Corporation has a class of voting stock that is (i) listed on a
national securities exchange, (ii) authorized for quotation on an interdealer
quotation system of a registered national securities association or (iii) held
of record by more than 2,000 stockholders, the Board of Directors shall, in
advance of any meeting of stockholders, appoint one or more inspectors
(individually an "Inspector," and collectively the "Inspectors") to act at such
meeting and make a written report thereof. The Board of Directors may designate
one or more persons as alternate Inspectors to replace any Inspector who shall
fail to act. If no Inspector or alternate is able to act at such meeting, the
chairman of the meeting shall appoint one or more other persons to act as
Inspectors. Each Inspector, before entering upon the discharge of his or her
duties, shall take and sign an oath faithfully to execute the duties of
Inspector with strict impartiality and according to the best of his or her
ability.
(b) The Inspectors shall (i) ascertain the number of shares of stock of
the Corporation outstanding and the voting power of each, (ii) determine the
number of shares of stock of the Corporation present in person or by proxy at
such meeting and the validity of proxies and ballots, (iii) count all votes and
ballots, (iv) determine and retain for a reasonable period a record of the
disposition of any challenges made to any determination by the Inspectors and
(v) certify their determination of the number of such shares present in person
or by proxy at such meeting and their count of all votes and ballots. The
Inspectors may appoint or retain other persons or entities to assist them in the
performance of their duties.
(c) The date and time of the opening and the closing of the polls for each
matter upon which the stockholders will vote at a meeting shall be announced at
such meeting. No ballots, proxies or votes, nor any revocations thereof or
changes thereto, shall be accepted by the Inspectors after the closing of the
polls unless the Court of Chancery of the State of Delaware upon application by
any stockholder shall determine otherwise.
(d) In determining the validity and counting of proxies and ballots, the
Inspectors shall be limited to an examination of the proxies, any envelopes
submitted with such proxies, any information referred to in paragraphs (b) and
(c) of Section 1.8 of these By-laws, ballots and the regular books and records
of the Corporation, except that the Inspectors may consider other reliable
information for the limited purpose of reconciling proxies and ballots submitted
by or on behalf of banks, brokers, their nominees or similar persons which
represent more votes than the holder of a proxy is authorized by a stockholder
of record to cast or more votes than such stockholder holds of record. If the
Inspectors consider other reliable information for the limited purpose
-5-
<PAGE>
permitted herein, the Inspectors, at the time they make their certification
pursuant to paragraph (b) of this Section 1.9, shall specify the precise
information considered by them, including the person or persons from whom such
information was obtained, when and the means by which such information was
obtained and the basis for the Inspectors' belief that such information is
accurate and reliable.
Section 1.10 Fixing Date of Determination of Stockholders of Record.
(a) In order that the corporation may determine the stockholders entitled
(i) to notice of or to vote at any meeting of stockholders or any adjournment
thereof, (ii) to receive payment of any dividend or other distribution or
allotment of any rights, (iii) to exercise any rights in respect of any change,
conversion or exchange of stock or (iv) to take, receive or participate in any
other action, the Board of Directors may fix a record date, which shall not be
earlier than the date upon which the resolution fixing the record date is
adopted by the Board of Directors and which (1) in the case of a determination
of stockholders entitled to notice of or to vote at any meeting of stockholders
or adjournment thereof, shall, unless otherwise required by law, be not more
than 60 nor less than ten days before the date of such meeting; (2) in the case
of a determination of stockholders entitled to express consent to corporate
action in writing without a meeting, shall be not more than ten days after the
date upon which the resolution fixing the record date is adopted by the Board of
Directors; and (3) in the case of any other action, shall be not more than 60
days before such action.
(b) If no record date is fixed, (i) the record date for determining
stockholders entitled to notice of or to vote at a meeting of stockholders shall
be at the close of business on the day next preceding the day on which notice is
given, or, if notice is waived, at the close of business on the day next
preceding the day on which the meeting is held; and (ii) the record date for
determining stockholders for any other purpose shall be at the close of business
on the day on which the Board of Directors adopts the resolution relating
thereto.
(c) A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting,
but the Board of Directors may fix a new record date for the adjourned meeting.
Section 1.11 List of Stockholders Entitled to Vote. The Secretary shall
prepare, at least ten days before every meeting of stockholders, a complete list
of the stockholders entitled to vote at the meeting, arranged in alphabetical
order, and showing the address and the number of shares registered in the name
of each stockholder. Such list shall be open to the examination of any
stockholder, for any purpose germane to the meeting, during
-6-
<PAGE>
ordinary business hours, for a period of at least ten days prior to the meeting,
either at a place within the city where the meeting is to be held, which place
shall be specified in the notice of meeting, or, if not so specified, at the
place where the meeting is to be held. The list shall also be produced and kept
at the time and place of the meeting during the whole time thereof and may be
inspected by any stockholder who is present. The stock ledger shall be the only
evidence as to who are the stockholders entitled to examine the stock ledger,
the list of stockholders or the books of the corporation, or to vote in person
or by proxy at any meeting of stockholders.
Section 1.12 Stockholder Proposals and Board Nominations.
(a) At any annual meeting of the Corporation's stockholders, only such
business shall be conducted as shall have been properly brought before the
meeting. To be properly brought before an annual meeting, business must be (i)
specified in the notice of meeting (or any supplement thereto) given by or at
the direction of the Board of Directors, (ii) otherwise properly brought before
the meeting by or at the direction of the Board of Directors, or (iii) otherwise
properly brought before the meeting by a stockholder in accordance with these
By-laws. Business may be properly brought before an annual meeting by a
stockholder only if written notice of the stockholder's intent to propose such
business has been delivered, either by personal delivery, United States mail,
first class postage prepaid, or other similar means, to the Secretary of the
Corporation not later than 90 calendar days in advance of the anniversary date
of the release of the Corporation's proxy statement to stockholders in
connection with the preceding year's annual meeting of stockholders, except that
if no annual meeting was held in the previous year or the date of the annual
meeting has been changed by more than 30 calendar days from the anniversary of
the annual meeting date stated in the previous year's proxy statement, a
stockholder proposal shall be received by the Corporation a reasonable time
before the solicitation is made.
(b) Each notice of new business must set forth: (i) the name and address
of the stockholder who intends to raise the new business; (ii) the business
desired to be brought forth at the meeting and the reasons for conducting such
business at the meeting; (iii) a representation that the stockholder is a holder
of record of stock of the Corporation entitled to vote with respect to such
business and intends to appear in person or by proxy at the meeting to move the
consideration of such business; (iv) such stockholder's total beneficial
ownership of the Corporation's voting stock; and (v) such stockholder's interest
in such business. The chairman of the meeting may refuse to acknowledge a motion
to consider any business that he determines was not made in compliance with the
foregoing procedures.
-7-
<PAGE>
(c) An adjourned meeting, if notice of the adjourned meeting is not
required to be given to stockholders, shall be regarded as a continuation of the
original meeting, and any notice of new business must have met the foregoing
requirements as of the date of the original meeting. In the event of an
adjourned meeting where notice of the adjourned meeting is required to be given
to stockholders, any notice of new business made by a stockholder with respect
to the adjourned meeting must meet the foregoing requirements based upon the
date on which notice of the date of the adjourned meeting was given.
(d) Nominations for the election of directors may be made by the Board of
Directors or a committee appointed by the Board of Directors or by any
stockholder entitled to vote in the election of directors generally. However,
any stockholder entitled to vote in the election of directors may nominate one
or more persons for election as director(s) at a meeting only if written notice
of such stockholder's intent to make such nomination or nominations has been
delivered, either by personal delivery, United States mail, first class postage
prepaid, or other similar means, to the Secretary of the Corporation not later
than (i) with respect to an election to be held at an annual meeting of
stockholders, 90 calendar days in advance of the anniversary date of the release
of the Corporation's proxy statement to stockholders in connection with the
preceding year's annual meeting of stockholders, except that if no annual
meeting was held in the previous year or the date of the annual meeting has been
changed by more than 30 calendar days from the anniversary of the annual meeting
date stated in the previous year's proxy statement, a nominee proposal shall be
received by the Corporation a reasonable time before the solicitation is made,
and (ii) with respect to an election to be held at a special meeting of
stockholders for the election of directors, the close of business on the 10th
day following the date on which notice of such meeting is first given to
stockholders.
(e) Each such notice shall set forth: (i) the name and address of the
stockholder who intends to make the nomination and of the person or persons to
be nominated; (ii) a representation that the stockholder is a holder of record
of stock of the Corporation entitled to vote at such meeting and intends to
appear in person or by proxy at the meeting to nominate the person or persons
specified in the notice; (iii) a description of all arrangements or
understandings between the stockholder and each nominee and any other person or
persons (naming such person or persons) pursuant to which the nomination or
nominations are to be made by the stockholder; (iv) such other information
regarding each nominee proposed by such stockholder as would be required to be
included in a proxy statement filed pursuant to the proxy rules of the
Securities and Exchange Commission had the nominee been nominated, or intended
to be nominated, by the Board of Directors; and (v) the consent of each nominee
to serve as a director of the Corporation if so elected.
-8-
<PAGE>
ARTICLE II
BOARD OF DIRECTORS
------------------
Section 2.1 Number. The Board of Directors shall consist of such number
of directors as may be determined from time to time by resolution of the Board
of Directors.
Section 2.2 Election; Resignation; Vacancies.
(a) At each annual meeting at which the term of office of a class of
directors expires, the stockholders shall elect directors of such class each to
hold office until the annual meeting at which the terms of office of such class
of directors expire and the election and qualification of his or her successor,
or until his or her earlier death, resignation or removal.
(b) Any director may resign at any time by giving written notice to the
Chairman of the Board, if any, the President or the Secretary. Unless otherwise
stated in a notice of resignation, it shall take effect when received by the
officer to whom it is directed, without any need for its acceptance.
(c) Any newly created directorship or any vacancy occurring in the Board
of Directors for any reason may be filled by a majority of the remaining
directors, although less than a quorum, or by a plurality of the votes cast in
the election of directors at a meeting of stockholders. Each director elected to
replace a former director shall hold office until the expiration of the term of
office of the director whom he or she has replaced and the election and
qualification of his or her successor, or until his or her earlier death,
resignation or removal. A director elected to fill a newly created directorship
shall serve until the annual meeting at which the term of office of the class of
directors to which he or she is assigned expires, the election and qualification
of his or her successor, or until his or her earlier death, resignation or
removal.
Section 2.3 Regular Meetings. A regular annual meeting of the Board of
Directors shall be held, without call or notice, immediately after and at the
same place as the annual meeting of stockholders, for the purpose of organizing
the Board of Directors, electing officers and transacting any other business
that may properly come before such meeting. Additional regular meetings of the
Board of Directors may be held without call or notice at such times as shall be
fixed by resolution of the Board of Directors.
Section 2.4 Special Meetings. Special meetings of the Board of Directors
may be called by the Chairman of the Board, if any, the President, the
Secretary, or by a majority of the Board of Directors. Notice of a special
meeting of the Board of Directors shall be given by the person or persons
calling the meeting at
-9-
<PAGE>
least twenty-four hours before the special meeting. The purpose or purposes of a
special meeting need not be stated in the call or notice.
Section 2.5 Organization. Meetings of the Board of Directors shall be
presided over by the Chairman of the Board, if any, or if there is none or in
his or her absence, by the President, or in his or her absence by a chairman
chosen at the meeting. The Secretary shall act as secretary of the meeting, but
in his or her absence the chairman of the meeting may appoint any person to act
as secretary of the meeting. A majority of the directors present at a meeting,
whether or not they constitute a quorum, may adjourn such meeting to any other
date, time or place without notice other than announcement at the meeting.
Section 2.6 Quorum; Vote Required for Action. At all meetings of the
Board of Directors a majority of the whole Board of Directors shall constitute a
quorum for the transaction of business. Unless the Certificate of Incorporation
or these By-laws, as such may be amended or restated from time to time,
otherwise provide, the vote of a majority of the directors present at a meeting
at which a quorum is present shall be the act of the Board of Directors.
Section 2.7 Compensation Committee. Two or more directors of the
Corporation shall be appointed by the Board of Directors to act as a
Compensation Committee, each of whom shall be a director who is not an employee
of the Corporation or any subsidiary thereof. The Compensation Committee shall
have the power and authority to set the compensation of the officers and other
employees and agents of the Company and shall possess the power and authority to
act with respect to the compensation, option and other benefit plans of the
Corporation. The Compensation Committee shall also recommend fees to be paid to
members of the Board of Directors for services to the Corporation.
Section 2.8 Audit Committee. Two or more directors of the Corporation
shall be appointed by the Board of Directors to act as an Audit Committee, each
of whom shall be a director who is not an employee of the Corporation or any
subsidiary thereof. The Audit Committee shall have general oversight
responsibility with respect to the Corporation's financial reporting. In
performing its oversight responsibility, the Audit Committee shall make
recommendations to the Board of Directors as to the selection, retention, or
change in the independent accountants of the Corporation, review with the
independent accountants the scope of their examination and other matters
(relating to both audit and non-audit activities), and review generally the
internal auditing procedures of the Corporation. In undertaking the foregoing
responsibilities, the Audit Committee shall have unrestricted access, if
necessary, to the Corporation's personnel and documents and shall be provided
with the resources and assistance necessary to discharge its responsibilities,
including periodic reports from
-10-
<PAGE>
management assessing the impact of regulation, accounting, and reporting of
other significant matters that may affect the Corporation. The Audit Committee
shall review the financial reporting and adequacy of internal controls of the
Corporation, consult with the internal auditors and certified public
accountants, and from time to time, but not less than annually, report to the
Board of Directors.
Section 2.9 Other Committees. The Board of Directors may from time to time,
in its discretion, by resolution passed by a majority of the entire Board of
Directors, designate other committees of the Board of Directors consisting of
such number of directors as the Board of Directors shall determine, which shall
have and may exercise such lawfully delegable powers and duties of the Board of
Directors as shall be conferred or authorized by such resolution. The Board of
Directors shall have the power to change at any time the members of any such
committee, to fill vacancies and to dissolve any such committee.
Section 2.10 Alternates. The Board of Directors may from time to time
designate from among the directors alternates to serve on any committee of the
Board of Directors to replace any absent or disqualified member at any meeting
of such committee. Whenever a quorum cannot be secured for any meeting of any
committee from among the regular members thereof and designated alternates, the
member or members of such committee present at such meeting and not disqualified
from voting, whether or not constituting a quorum, may unanimously appoint
another director to act at such meeting in place of any absent or disqualified
member.
Section 2.11 Quorum and Manner of Acting-Committees. A majority of the
members of any committee of the Board of Directors shall constitute a quorum for
the transaction of business at any meeting of such committee, and the act of a
majority of the members present at any meeting at which a quorum is present
shall be the act of such committee.
Section 2.12 Committee Chairman, Books and Records, Etc. The chairman of
each committee of the Board of Directors shall be selected from among the
members of such committee by the Board of Directors.
Each committee shall keep a record of its acts and proceedings, and all
actions of each committee shall be reported to the Board of Directors when
required.
Each committee shall fix its own rules of procedure not inconsistent with
these By-laws or the resolution of the Board of Directors designating such
committee and shall meet at such times and places and upon such call or notice
as shall be provided by such rules.
-11-
<PAGE>
Section 2.13 Telephonic Meetings. Directors, or any committee of directors
designated by the Board of Directors, may participate in a meeting of the Board
of Directors or such committee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and participation in a meeting pursuant to this
Section 2.13 shall constitute presence in person at such meeting.
Section 2.14 Informal Action by Directors. Unless otherwise restricted by
the Certificate of Incorporation or these By-laws, as such may be amended or
restated from time to time, any action required or permitted to be taken at any
meeting of the Board of Directors, or of any committee thereof, may be taken
without a meeting if all members of the Board of Directors or such committee, as
the case may be, consent thereto in writing (which may be in counterparts), and
the written consent or consents are filed with the minutes of proceedings of the
Board of Directors or such committee.
Section 2.15 Reliance upon Records. Every director, and every member of any
committee of the Board of Directors, shall, in the performance of his or her
duties, be fully protected in relying in good faith upon the records of the
Corporation and upon such information, opinions, reports or statements presented
to the Corporation by any of its officers or employees, or committees of the
Board of Directors, or by any other person as to matters the director or member
reasonably believes are within such other person's professional or expert
competence and who has been selected with reasonable care by or on behalf of the
Corporation, including, but not limited to, such records, information, opinions,
reports or statements as to the value and amount of the assets, liabilities
and/or net profits of the Corporation, or any other facts pertinent to the
existence and amount of surplus or other funds from which dividends might
properly be declared and paid, or with which the Corporation's capital stock
might properly be purchased or redeemed.
Section 2.16 Interested Directors. A director who is directly or indirectly
a party to a contract or transaction with the Corporation, or is a director or
officer of or has a financial interest in any other corporation, partnership,
association or other organization which is a party to a contract or transaction
with the Corporation, may be counted in determining whether a quorum is present
at any meeting of the Board of Directors or a committee thereof at which such
contract or transaction is considered or authorized, and such director may
participate in such meeting and vote on such authorization to the extent
permitted by applicable law, including Section 144 of the General Corporation
Law of the State of Delaware.
Section 2.17 Compensation. Unless otherwise restricted by the Certificate
of Incorporation, as such may be amended or
-12-
<PAGE>
restated from time to time, the Board of Directors shall have the authority to
fix the compensation of directors. The directors shall be paid their reasonable
expenses, if any, of attendance at each meeting of the Board of Directors or a
committee thereof and may be paid a fixed sum for attendance at each such
meeting and an annual retainer or salary for services as a director or committee
member. No such payment shall preclude any director from serving the Corporation
in any other capacity and receiving compensation therefor.
Section 2.18 Presumption of Assent. Unless otherwise provided by the laws
of the State of Delaware, a director who is present at a meeting of the Board of
Directors or a committee thereof at which action is taken on any matter shall be
presumed to have assented to the action taken unless his or her dissent shall be
entered in the minutes of such meeting or unless he or she shall file his or her
written dissent to such action with the person acting as secretary of such
meeting before the adjournment thereof or shall forward such dissent by
registered mail to the Secretary immediately after the adjournment of such
meeting. Such right to dissent shall not apply to a director who voted in favor
of such action.
ARTICLE III
OFFICERS
--------
Section 3.1 Number and Designation. The officers of the Corporation shall
be a Chairman of the Board, a President, one or more Vice Presidents, a
Secretary and a Treasurer, and such Assistant Secretaries, Assistant Treasurers
or other officers or agents as may be elected or appointed by the Board of
Directors. Any two or more offices may be held by the same person unless the
Certificate of Incorporation or these By-laws, as such may be amended or
restated from time to time, provide otherwise.
Section 3.2 Election and Term of Office. The officers of the Corporation
shall be elected annually by the Board of Directors at the first meeting of the
Board of Directors held after the election of directors. If the election of
officers shall not be held at such meeting, such election shall be held as soon
thereafter as may be convenient. Vacancies may be filled or new offices created
and filled at any meeting of the Board of Directors. Each officer shall hold
office until his or her successor shall have been duly elected and shall have
qualified or until his or her earlier death, resignation or removal.
Section 3.3 Removal and Resignation. Any officer or agent elected or
appointed by the Board of Directors may be removed by the Board of Directors
whenever in its judgment the best interests of the Corporation would be served
thereby, but such
-13-
<PAGE>
removal shall be without prejudice to the contract rights, if any, of the person
so removed. Any officer or agent may resign at any time by giving written notice
to the Board of Directors, to the Chairman of the Board or to the Secretary. Any
such resignation shall take effect at the time of receipt of such notice or at
any later time specified therein; and, unless otherwise specified therein,
acceptance of such resignation shall not be necessary to make it effective.
Section 3.4 Vacancies. A vacancy in any office because of death,
resignation, removal, disqualification or otherwise may be filled by the Board
of Directors for the unexpired portion of the term.
Section 3.5 Chairman of the Board. The Chairman of the Board shall be the
chief executive officer of the Corporation and shall in general supervise and
control all of the business and affairs of the Corporation. The Chairman of the
Board may execute, alone or with the Secretary or any other officer of the
Corporation authorized by the Board of Directors, any deeds, mortgages, bonds,
contracts or other instruments which the Board of Directors or a committee
thereof has authorized to be executed, except in cases where the execution
thereof shall be expressly delegated by the Board of Directors or a committee
thereof or by these By-laws to some other officer or agent of the Corporation,
or shall be required by law to be otherwise executed, and in general he or she
shall perform all duties incident to the office of Chairman of the Board and
such other duties as from time to time may be prescribed by the Board of
Directors or a committee thereof. When present, he or she shall preside at all
meetings of the stockholders and of the Board of Directors.
Section 3.6 President. The President shall (if different from the Chairman
of the Board) be the chief operating officer of the Corporation, second only to
the Chairman of the Board. In the absence of the Chairman of the Board or in the
event of his or her inability to act as Chairman of the Board, the President
shall perform the duties of the Chairman of the Board and, when so acting, shall
have all the powers of, and be subject to all the restrictions placed upon the
Chairman of the Board. He or she may execute, alone or with the Secretary or any
other officer of the Corporation authorized by the Board of Directors, any
deeds, mortgages, bonds, contracts or other instruments which the Board of
Directors or a committee thereof has authorized to be executed, except in cases
where the execution thereof shall be expressly delegated by the Board of
Directors or a committee thereof or by these By-laws to some other officer or
agent of the Corporation, or shall be required by law to be otherwise executed,
and in general he or she shall perform all duties incident to the office of
President and such other duties as from time to time may be prescribed by the
Chairman of the Board, the Board of Directors or a committee thereof.
-14-
<PAGE>
Section 3.7 The Vice Presidents. In the absence of the President or in the
event of his or her inability to act, the Vice President (or in the event there
shall be more than one Vice President, the Vice Presidents in the order
determined by the Board of Directors or, if there shall have been no such
determination, then in the order of their election) shall perform the duties of
the President and, when so acting, shall have all the powers of and be subject
to all the restrictions upon the President. The Board of Directors may also
designate certain Vice Presidents as being in charge of designated divisions,
plants or functions of the Corporation's business and add appropriate
descriptions to their titles. In addition, any Vice President shall perform such
duties as from time to time may be assigned to him or her by the Chairman of the
Board, the President or the Board of Directors.
Section 3.8 The Secretary. The Secretary shall (a) keep the minutes of
proceedings of the stockholders, the Board of Directors and any committee of the
Board of Directors in one or more books provided for that purpose; (b) see that
all notices are duly given in accordance with the provisions of these By-laws or
as required by law; (c) be custodian of the corporate records and of the seal of
the Corporation; (d) affix the seal of the Corporation or a facsimile thereof,
or cause it to be affixed, and, when so affixed, attest the seal by his or her
signature, to all certificates for shares of capital stock of the Corporation
prior to the issue thereof and to all other documents the execution of which on
behalf of the Corporation under its seal is duly authorized by the Board of
Directors or otherwise in accordance with the provisions of these By-laws; (e)
keep a register of the post office address of each stockholder, director or
committee member, which shall be furnished to the Secretary by such stockholder,
director or member; (f) have general charge of the stock transfer books of the
Corporation; and (g) in general perform all duties incident to the office of
Secretary and such other duties as from time to time may be assigned to him or
her by the Chairman of the Board, the President or the Board of Directors.
Section 3.9 The Treasurer. The Treasurer shall have charge and custody of
and be responsible for all funds and securities of the Corporation, receive and
give receipts for moneys due and payable to the Corporation from any source
whatsoever, deposit all such moneys in the name of the Corporation in such
banks, trust companies or other depositories as shall be selected in accordance
with the provisions of Article IV of these By-laws, disburse the funds of the
Corporation as ordered by the Board of Directors or the Chairman of the Board or
as otherwise required in the conduct of the business of the Corporation and
render to the Chairman of the Board, President or the Board of Directors, upon
request, an accounting of all his or her transactions as Treasurer and a report
on the financial condition of the Corporation. The Treasurer shall in general
perform all the duties incident to the office of Treasurer and such other duties
as from time to time may
-15-
<PAGE>
be assigned to him or her by the Chairman of the Board, President or the Board
of Directors.
Section 3.10 Assistant Treasurers and Secretaries. In the absence of the
Secretary or the Treasurer, as the case may be, or in the event of his or her
inability to act, the Assistant Secretaries and the Assistant Treasurers,
respectively, in the order determined by the Board of Directors (or if there
shall have been no such determination, then in the order of their election),
shall perform the duties and exercise the powers of the Secretary or the
Treasurer, as the case may be. In addition, the Assistant Secretaries and the
Assistant Treasurers shall, in general, perform such duties as may be assigned
to them by the Chairman of the Board, the President, the Secretary, the
Treasurer or the Board of Directors.
Section 3.11 Salaries. The salaries of the officers and agents of the
Corporation shall be fixed from time to time by the Board of Directors or by
such officer as it shall designate for such purpose. No officer shall be
prevented from receiving such salary by reason of the fact that he or she is
also a director of the Corporation.
Section 3.12 Appointments. In addition to the elected officers described
above, the Chairman of the Board may from time to time designate persons to be
appointed Vice Presidents or bear such other title or titles as the Chairman of
the Board shall specify. The powers and duties of each such appointed person
shall be as prescribed by the Chairman of the Board from time to time. Such
appointed persons shall not be deemed elected or executive officers of the
Corporation. Each such appointed person shall serve until the successor thereof
is appointed or until the earlier resignation or removal of such appointed
person.
ARTICLE IV
STOCK CERTIFICATES AND TRANSFERS
--------------------------------
Section 4.1 Certificate. Every holder of stock shall be entitled to have a
certificate signed by or in the name of the Corporation by the Chairman of the
Board, if any, or the President or a Vice President, and by the Secretary or an
Assistant Secretary, of the Corporation, certifying the number of shares owned
by such stockholder in the Corporation. Any of or all the signatures on the
certificate may be facsimile. In case any officer, transfer agent, or registrar
who has signed or whose facsimile signature has been placed upon a certificate
shall have ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the Corporation with the same effect
as if such officer, transfer agent, or registrar continued to be such at the
date of issue.
-16-
<PAGE>
Section 4.2 Lost, Stolen or Destroyed Certificates; Issuance of New
Certificates. The Corporation may issue a new certificate for stock in the place
of any certificate theretofore issued by it, alleged to have been lost, stolen
or destroyed, and the Corporation may require the owner of the lost, stolen or
destroyed certificate, or such stockholder's legal representative, to give the
Corporation a bond sufficient to indemnify it against any claim that may be made
against it on account of the alleged loss, theft or destruction of any such
certificate or the issuance of such new certificate.
Section 4.3 Transfers of Stock. Upon surrender to the Corporation or the
transfer agent of the Corporation of a certificate for stock of the Corporation
duly endorsed or accompanied by proper evidence of succession, assignment or
authority to transfer or, if the relevant stock certificate is claimed to have
been lost, stolen or destroyed, upon compliance with the provisions of Section
4.2 of these By-laws, and upon payment of applicable taxes with respect to such
transfer, and in compliance with any restrictions on transfer applicable to such
stock certificate or the shares represented thereby of which the Corporation
shall have notice and subject to such rules and regulations as the Board of
Directors may from time to time deem advisable concerning the transfer and
registration of stock certificates, the Corporation shall issue a new
certificate or certificates for such stock to the person entitled thereto,
cancel the old certificate and record the transaction upon its books. Transfers
of stock shall be made only on the books of the Corporation by the registered
holder thereof or by such holder's attorney or successor duly authorized as
evidenced by documents filed with the Secretary or transfer agent of the
Corporation. Whenever any transfer of stock shall be made for collateral
security, and not absolutely, it shall be so expressed in the entry of transfer
if, when the certificate or certificates representing such stock are presented
to the Corporation for transfer, both the transferor and transferee request the
Corporation to do so.
Section 4.4 Stockholders of Record. The Corporation shall be entitled to
treat the holder of record of any stock of the Corporation as the holder thereof
and shall not be bound to recognize any equitable or other claim to or interest
in such stock on the part of any other person, whether or not it shall have
express or other notice thereof, except as otherwise required by the laws of the
State of Delaware.
ARTICLE V
NOTICES
-------
Section 5.1 Manner of Notice. Except as otherwise provided by law, the
Certificate of Incorporation or these By-laws,
-17-
<PAGE>
as such may be amended or restated from time to time, whenever notice is
required to be given to any stockholder, director or member of any committee of
the Board of Directors, such notice may be given by personal delivery or by
depositing it, in a sealed envelope, in the United States mails, first class,
postage prepaid, addressed, or by delivering it to a telegraph company, charges
prepaid, for transmission, or by transmitting it via telecopier, to such
stockholder, director or member, either at the address of such stockholder,
director or member as it appears on the records of the Corporation or, in the
case of such a director or member, at his or her business address; and such
notice shall be deemed to be given at the time when it is thus personally
delivered, deposited, delivered or transmitted, as the case may be. Such
requirement for notice shall also be deemed satisfied, except in the case of
stockholder meetings, if actual notice is received orally or by other writing by
the person entitled thereto as far in advance of the event with respect to which
notice is being given as the minimum notice period required by law or these By-
laws.
Section 5.2 Dispensation with Notice.
(a) Whenever notice is required to be given by law, the Certificate of
Incorporation or these By-laws, as such may be amended or restated from time to
time, to any stockholder to whom (i) notice of two consecutive annual meetings
of stockholders, and all notices of meetings of stockholders or of the taking of
action by stockholders by written consent without a meeting to such stockholder
during the period between such two consecutive annual meetings, or (ii) all, and
at least two, payments (if sent by first class mail) of dividends or interest on
securities of the Corporation during a 12-month period, have been mailed
addressed to such stockholder at the address of such stockholder as shown on the
records of the Corporation and have been returned undeliverable, the giving of
such notice to such stockholder shall not be required. Any action or meeting
which shall be taken or held without notice to such stockholder shall have the
same force and effect as if such notice had been duly given. If any such
stockholder shall deliver to the Corporation a written notice setting forth the
then current address of such stockholder, the requirement that notice be given
to such stockholder shall be reinstated.
(b) Whenever notice is required to be given by law, the Certificate of
Incorporation or these By-laws, as such may be amended or restated from time to
time, to any person with whom communication is unlawful, the giving of such
notice to such person shall not be required, and there shall be no duty to apply
to any governmental authority or agency for a license or permit to give such
notice to such person. Any action or meeting which shall be taken or held
without notice to any such person with whom communication is unlawful shall have
the same force and effect as if such notice had been duly given.
-18-
<PAGE>
Section 5.3 Waivers of Notice. Any written waiver of notice, signed by the
person entitled to notice, whether before or after the time stated therein,
shall be deemed equivalent to notice. Attendance of a person at a meeting shall
constitute a waiver of notice of such meeting, except when the person attends a
meeting for the express purpose of objecting, at the beginning of the meeting,
to the transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of any
regular special meeting of the stockholders, directors, or members of a
committee or directors need be specified in any written waiver of notice.
ARTICLE VI
INDEMNIFICATION
---------------
Section 6.1 Right to Indemnification.
(a) The Corporation shall indemnify and hold harmless, to the fullest
extent permitted by law as in effect on the date of adoption of these By-laws or
as they may thereafter be amended or restated from time to time, any person who
was or is made or is threatened to be made a party or is otherwise involved in
any action, suit or proceeding, whether civil, criminal, administrative or
investigative (including any action by or in the right of the Corporation) (a
"proceeding") by reason of the fact that he or she, or a person for whom he or
she is the legal representative, is or was a director, officer or employee of
the Corporation or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture or other enterprise, against any and all liability and loss (including
judgments, fines, penalties and amounts paid in settlement) suffered or incurred
and expenses reasonably incurred by such person (including attorneys' fees and
related expenses); provided that any standard of conduct applicable to whether a
director or officer may be indemnified shall be equally applicable to an
employee under this Article VI. The Corporation shall not be required to
indemnify a person in connection with a proceeding initiated by such person,
including a counterclaim or crossclaim, unless the proceeding was authorized by
the Board of Directors.
(b) For purposes of this Article VI: (i) any reference to "other
enterprise" shall include all plans, programs, policies, agreements, contracts
and payroll practices and related trusts for the benefit of or relating to
employees of the Corporation and its related entities ("employee benefit
plans"); (ii) any reference to "fines", "penalties", "liability" and "expenses"
shall include any excise taxes, penalties, claims, liabilities and reasonable
expenses (including reasonable legal fees and related expenses) assessed against
or incurred by a person with respect to any employee benefit plan; (iii) any
reference to "serving at the
-19-
<PAGE>
request of the Corporation" shall include any service as a director, officer,
employee or agent of the Corporation or trustee or administrator of any employee
benefit plan which imposes duties on, or involves services by, such director,
officer, employee or agent with respect to an employee benefit plan, its
participants, beneficiaries, fiduciaries, administrators and service providers;
(iv) any reference to serving at the request of the Corporation as a director,
officer, employee or agent of a partnership or trust shall include service as a
partner or trustee; and (v) a person who acted in good faith and in a manner he
or she reasonably believed to be in the interest of the participants and
beneficiaries of an employee benefit plan shall be deemed to have acted in a
manner "not opposed to the best interests of the Corporation" for purposes of
this Article VI.
Section 6.2 Prepayment of Expenses. The Corporation may pay or reimburse
the reasonable expenses incurred in defending any proceeding in advance of its
final disposition if the Corporation has received in advance an undertaking by
the person receiving such payment or reimbursement to repay all amounts advanced
if it should be ultimately determined that he or she is not entitled to be
indemnified under this Article VI or otherwise. The Corporation may require
security for any such undertaking.
Section 6.3 Claims. If a claim for indemnification or payment of expenses
under this Article VI is not paid in full within 30 days after a written claim
therefor has been received by the Corporation, the claimant may file suit to
recover the unpaid amount of such claim and, if successful in whole or in part,
shall be entitled to be paid the expense of prosecuting such claim. In any such
action the Corporation shall have the burden of proving that the claimant was
not entitled to the requested indemnification or payment of expenses under
applicable law.
Section 6.4 Insurance. The Corporation may purchase and maintain insurance
on its own behalf and on behalf of any person who is or was a director, officer
or employee of the Corporation or was serving at the request of the Corporation
as a director, officer or employee of another corporation, partnership, joint
venture, trust or other enterprise (including service with respect to any
employee benefit plan) against any liability asserted against him and incurred
by him in any such capacity, whether or not the Corporation would have the power
to indemnify such person against such liability under this Article VI.
Section 6.5 Non-Exclusivity of Rights. The rights conferred on any person
by this Article VI shall not be exclusive of any other rights which such person
may have or hereafter acquire under any statute, provision of the Certificate of
Incorporation or these By-laws, as such may be amended or restated from time to
time, agreement, vote of stockholders or disinterested directors or otherwise,
and shall continue as to a person who has ceased to be a director, officer or
employee and shall inure to the benefit of
-20-
<PAGE>
the heirs, executors, administrators and personal representatives of such a
person.
Section 6.6 Other Indemnification. The Corporation's obligation, if any, to
indemnify any person who was or is serving at its request as a director,
officer, employee, partner or agent of another corporation, partnership, joint
venture or other enterprise shall be reduced by any amount such person may
collect as indemnification from such other corporation, partnership, joint
venture or other enterprise.
Section 6.7 Amendment or Repeal. Any repeal or modification of the
foregoing provisions of this Article VI shall not adversely affect any right or
protection hereunder of any person in respect of any act or omission occurring
prior to the time of such repeal or modification.
Section 6.8 Merger or Consolidation. For purposes of this Article VI,
references to "the Corporation" shall include, in addition to the resulting
corporation, any constituent corporation (including any constituent of a
constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors, officers and employees, so that any person who is or was a director,
officer or employee of such a constituent corporation, or is or was serving at
the request of such a constituent corporation as a director, officer or employee
of another corporation, partnership, joint venture, trust or other enterprise
(including service with respect to any employee benefit plan), shall stand in
the same position under this Article VI with respect to the resulting or
surviving corporation as he would have with respect to such constituent
corporation if its separate existence had continued.
Section 6.9 Indemnification of Agents. The Corporation may, to the extent
authorized from time to time by the Board of Directors, grant rights to
indemnification and to the advancement of expenses to any agent of the
Corporation to the fullest extent of the provisions of this Article VI with
respect to the indemnification and advancement of expenses of directors,
officers and employees of the Corporation.
ARTICLE VII
GENERAL
-------
Section 7.1 Fiscal Year. The fiscal year of the Corporation shall be
determined by resolution of the Board of Directors. Absent such determination,
the fiscal year of the Corporation shall end on December 31 of each year.
-21-
<PAGE>
Section 7.2 Seal. The corporate seal shall have the name of the Corporation
inscribed thereon and shall be in such form as may be approved from time to time
by the Board of Directors.
Section 7.3 Form of Records. Any records maintained by the Corporation in
the regular course of its business, including its stock ledger, books of
account, and minute books, may be kept on, or be in the form of, punch cards,
magnetic tape, photographs, microphotographs, or any other information storage
device, provided that the records so kept can be converted into clearly legible
form within a reasonable time. The Corporation shall so convert any records so
kept upon the request of any person entitled to inspect the same.
Section 7.4 Amendment of By-Laws by the Board of Directors. These By-Laws
may be altered, amended or repealed, or new By-Laws may be adopted, by the
affirmative vote of a majority of the directors present at any regular or
special meeting of the Board of Directors at which a quorum is present.
Section 7.5 Amendment of the By-laws by the Stockholders. These By-laws may
be altered, amended or repealed, or new By-Laws may be adopted, by the
affirmative vote of the holders of seventy five percent (75%) of the shares of
the capital stock of the Corporation issued and outstanding and entitled to vote
at any regular meeting of the stockholders or at any special meeting of the
stockholders, provided notice of such alteration, amendment, repeal or adoption
of new By-laws shall have been stated in the notice of such meeting.
-22-
<PAGE>
BUILDING "C"
OLD ORCHARD PLAZA
OFFICE LEASE
BETWEEN
LONG DRIVE INVESTORS I, L.L.C.
LANDLORD
AND
PEAPOD, L.P.
TENANT
DATED _______________________, 1997
<PAGE>
TABLE OF CONTENTS
-----------------
<PAGE>
EXHIBIT A Premises
EXHIBIT B Base Rent
EXHIBIT C Letter of Credit
EXHIBIT D Amortization Schedule
RIDER ONE
WORK AGREEMENT
<PAGE>
OFFICE LEASE
------------
THIS LEASE made as of the _____ day of _______________, 1997, between Long
Drive Investors I, L.L.C., a Delaware limited liability company ("Landlord") and
Peapod, L.P., an Illinois limited partnership, whose address is 1033 University
Place, Evanston, Illinois ("Tenant").
WITNESSETH:
ARTICLE 1
PREMISES AND TERM
Landlord hereby leases to Tenant and Tenant hereby leases from Landlord
that certain premises consisting of 29,730 square feet ("Premises") described or
shown on Exhibit A attached hereto, in the building known as Building C
("Building") located at Old Orchard Plaza, 5401 Old Orchard Road, Skokie,
Illinois ("Property", as further described in Article 25), subject to the
provisions herein contained. The term ("Term") of this Lease shall commence on
(i) June 15, 1997 for the portion of the Premises consisting of the second floor
and the data center on the third floor, and (ii) July 1, 1997 for the remainder
of the Premises (except that each of the foregoing dates shall be extended by
one day for each day that Landlord is delayed beyond April 18, 1997 in obtaining
all necessary permits required to begin construction of the Work to be performed
pursuant to the Work Agreement attached hereto) (each of the foregoing dates
relative to space (i) and space (ii) above, respectively, being referred to
hereinafter as the "Commencement Date" for such space), and end December 31,
2004 ("Expiration Date"), unless sooner terminated as provided herein. The
Commencement Date shall be subject to further adjustment as provided in Article
4. Landlord and Tenant agree that for purposes of this Lease the rentable area
of the Premises is 29,730 square feet, the rentable area of the Building is
49,550 square feet and the rentable area of the Property is 280,120 square feet.
ARTICLE 2
BASE RENT
Tenant shall pay Landlord Base Rent as set forth in Exhibit B attached
hereto, in monthly installments, in advance on or before the first day of each
calendar month during the Term. If the Term commences on a day other than the
first day of a calendar month, or ends on a day other than the last day of a
calendar month, then the Base Rent for such month shall be prorated on the basis
of 1/30th of the monthly Base Rent for each day of such month.
Notwithstanding the foregoing to the contrary, Tenant shall be entitled to
an abatement of the Base Rent for the portion of the Premises which comprises
floors 3 and 4 consisting of
1
<PAGE>
approximately 19,820 square feet from the Commencement Date until March 31, 1998
("Abatement Period"). The Abatement Period shall be extended one (1) additional
day for each day the Commencement Date is delayed.
ARTICLE 3
ADDITIONAL RENT
(A) TAXES. Tenant shall pay Landlord an amount equal to Tenant's Prorata
Share of Taxes in the manner described below. The terms "Taxes" and "Tenant's
Prorata Share" shall have the meanings specified therefor in Article 25.
(B) OPERATING EXPENSES. Tenant shall pay Landlord an amount equal to
Tenant's Prorata Share of Operating Expenses in the manner described below. The
terms "Operating Expenses" and "Tenant's Prorata Share" shall have the meanings
specified therefor in Article 25.
(C) MANNER OF PAYMENT. Taxes and Operating Expenses shall be paid in the
following manner:
(i) Landlord may reasonably estimate in advance the amounts Tenant
shall owe for Taxes and Operating Expenses for any full or
partial calendar year of the Term. In such event, Tenant shall
pay such estimated amounts, on a monthly basis, on or before
the first day of each calendar month, together with Tenant's
payment of Base Rent. Such estimate may be reasonably adjusted
from time to time by Landlord.
(ii) Within 120 days after the end of each calendar year, or as soon
thereafter as practicable, Landlord shall provide a statement
(the "Statement") to Tenant showing: (a) the amount of actual
Taxes and Operating Expenses for such calendar year, with a
listing of amounts for major categories of Operating Expenses,
(b) any amount paid by Tenant towards Taxes and Operating
Expenses during such calendar year on an estimated basis, and
(c) any revised estimate of Tenant's obligations for Taxes and
Operating Expenses for the current calendar year.
(iii) If the Statement shows that Tenant's estimated payments were
less than Tenant's actual obligations for Taxes and Operating
Expenses for such year, Tenant shall pay the difference. If the
Statement shows an increase in Tenant's estimated payments for
the current calendar year, Tenant shall pay the difference
between the new and former estimates, for the period of January
1 of the current calendar year through the month in which the
2
<PAGE>
Statement is sent. Tenant shall make such payments within
thirty (30) days after Tenant's receipt of the Statement.
(iv) If the Statement shows that Tenant's estimated payments
exceeded Tenant's actual obligations for Taxes and Operating
Expenses, Tenant shall receive a credit for the difference
against payments of Rent next due. If the Term shall have
expired and no further Rent shall be due, Tenant shall receive
a refund of such difference, within thirty (30) days after
Landlord sends the Statement.
(v) So long as Tenant's obligations hereunder are not materially
adversely affected thereby, Landlord reserves the right to
reasonably change, from time to time, the manner or timing of
the foregoing payments. In lieu of providing one Statement
covering Taxes and Operating Expenses, Landlord may provide
separate statements, at the same or different times. No delay
by Landlord in providing the Statement (or separate statements)
shall be deemed a default by Landlord or a waiver of Landlord's
right to require payment of Tenant's obligations for actual or
estimated Taxes or Operating Expenses.
(D) PRORATION. If the Term commences other than on January 1, or ends
other than on December 31, Tenant's obligations to pay estimated and actual
amounts towards Taxes and Operating Expenses for such first or final calendar
years shall be prorated to reflect the portion of such years included in the
Term. Such proration shall be made by multiplying the total estimated or actual
(as the case may be) Taxes and Operating Expenses, for such calendar years by a
fraction, the numerator of which shall be the number of days of the Term during
such calendar year, and the denominator of which shall be 365.
(E) LANDLORD'S RECORDS. Landlord shall maintain records respecting Taxes
and Operating Expenses and determine the same in accordance with sound
accounting and management practices, consistently applied. Although this Lease
contemplates the computation of Taxes and Operating Expenses on a cash basis,
Landlord shall make reasonable and appropriate accrual adjustments to ensure
that each calendar year includes substantially the same recurring items.
Landlord reserves the right to change to a full accrual system of accounting so
long as the same is consistently applied and Tenant's obligations are not
materially adversely affected. Tenant or its representative shall have the
right to examine such records upon reasonable prior notice specifying such
records Tenant desires to examine, during normal business hours at the place or
places where such records are normally kept by sending such notice no later than
ninety (90) days following the furnishing of the Statement. Tenant may take
exception to matters included in Taxes or Operating Expenses, or Landlord's
computation of Tenant's Prorata Share of either, by sending notice specifying
such exception and the reasons therefor to Landlord no later than sixty (60)
days after Landlord makes such records available for examination. Such
Statement shall be considered
3
<PAGE>
final, except as to matters to which exception is taken after examination of
Landlord's records in the foregoing manner and within the foregoing times.
Tenant acknowledges that Landlord's ability to budget and incur expenses depends
on the finality of such Statement, and accordingly agrees that time is of the
essence of this Paragraph. If Tenant takes exception to any matter contained in
the Statement as provided herein, Landlord shall refer the matter to an
independent Big Six accounting firm not then used by Landlord and approved by
Tenant, whose certification as to the proper amount shall be final and
conclusive as between Landlord and Tenant. Tenant shall promptly pay the cost of
such certification unless such certification determines that Tenant was
overbilled by more than 2%. Pending resolution of any such exceptions in the
foregoing manner, Tenant shall continue paying Tenant's Prorata Share of Taxes
and Operating Expenses in the amounts determined by Landlord, subject to
adjustment after any such exceptions are so resolved.
(F) RENT AND OTHER CHARGES. Base Rent, Taxes, Operating Expenses and any
other amounts which Tenant is or becomes obligated to pay Landlord under this
Lease or other agreement entered into in connection herewith, are sometimes
herein referred to collectively as "Rent," and all remedies applicable to the
non-payment of Rent shall be applicable thereto. Rent shall be paid at any
office maintained by Landlord or its agent at the Property, or at such other
place as Landlord may designate.
ARTICLE 4
COMMENCEMENT OF TERM
The Commencement Date set forth in Article 1 shall be delayed and Rent
shall be abated to the extent that Landlord fails: (i) to substantially
complete the improvements to the Premises required to be performed by Landlord
under the attached Work Agreement, or (ii) to deliver possession of the Premises
for any other reason, except to the extent that Tenant, its contractors, agents
or employees or Tenant Delays (as defined in the Work Agreement) in any way
contribute to either such failures. If Landlord so fails for a sixty (60) day
initial grace period, or such additional time as may be necessary due to fire or
other casualty, strikes, lock outs or other labor troubles, shortages of
equipment or materials, governmental requirements, power shortages or outages,
acts or omissions of Tenant or other Persons, or other causes beyond Landlord's
reasonable control, which shall, in no event, extend such initial grace period
beyond a maximum of one hundred twenty (120) days of delay in the aggregate,
Tenant shall have the right to terminate this Lease by at least thirty (30)
days' written notice to Landlord any time thereafter provided, however, that if
Landlord substantially completes the improvements and delivers the Premises to
Tenant within said notice period, Tenant's termination of the Lease shall be
null and void and of no force or effect. Any such delay in the Commencement
Date shall not subject Landlord to liability for loss or damage resulting
therefrom, and Tenant's sole recourse with respect thereto shall be the
abatement of Rent and right to terminate this Lease described above. Upon any
such termination, Landlord and Tenant shall be entirely relieved of their
obligations hereunder, and any Security Deposit and Rent payments shall be
returned to Tenant. If the
4
<PAGE>
Commencement Date is delayed, the Expiration Date shall not be similarly
extended, unless Landlord and Tenant mutually agree in writing. During any
period that Tenant shall be permitted to enter the Premises prior to the
Commencement Date other than to occupy the same (e.g., to perform alterations or
improvements), Tenant shall comply with all terms and provisions of this Lease,
except those provisions requiring the payment of Rent. Tenant shall be permitted
to enter the portions of the Premises consisting of the second floor and the
data center on the third floor upon substantial completion of same and Tenant
shall comply with all the terms and provisions of this Lease regarding such
occupancy except that Rent shall be prorated based on the number of rentable
square feet occupied by Tenant. If Tenant shall be permitted to enter other
portions of the Premises prior to the Commencement Date for the purpose of
occupying same, Tenant shall comply with all the terms and provisions of this
Lease regarding such occupancy of such other portions except that Rent shall be
likewise prorated based on the number of rentable square feet occupied by
Tenant.
ARTICLE 5
CONDITION OF PREMISES
Except as expressly provided in the attached Work Agreement, Tenant has
inspected the Premises, Property, Systems and Equipment (as defined in Article
25), or has had an opportunity to do so, and agrees to accept the same "as is"
without any agreements, representations, understandings or obligations on the
part of Landlord to perform any alterations, repairs or improvements.
ARTICLE 6
USE AND RULES
Tenant shall use the Premises for general office purposes, including a call
center and data center and no other purpose whatsoever, in compliance with all
applicable Laws, and without disturbing or interfering with any other tenant or
occupant of the Property. Tenant shall not use the Premises in any manner so as
to cause a cancellation of Landlord's insurance policies, or an increase in the
premiums thereunder. Tenant shall comply with all rules set forth in Rider One
attached hereto (the "Rules"). Landlord shall have the right to reasonably
amend such Rules and supplement the same with other reasonable Rules (not
expressly inconsistent with this Lease) relating to the Property, or the
promotion of safety, care, cleanliness or good order therein, and all such
amendments or new Rules shall be binding upon Tenant after five (5) days notice
thereof to Tenant. All Rules shall be applied on a non-discriminatory basis,
but nothing herein shall be construed to give Tenant or any other Person (as
defined in Article 25) any claim, demand or cause of action against Landlord
arising out of the violation of such Rules by any other tenant, occupant, or
visitor of the Property, or out of the enforcement or waiver of the Rules by
Landlord in any particular instance.
5
<PAGE>
ARTICLE 7
SERVICES AND UTILITIES
Landlord shall provide the following services and utilities (the cost of
which shall be included in Operating Expenses unless otherwise stated herein or
in any separate rider hereto):
(A) Heat, ventilation and air-conditioning ("HVAC") to provide a
temperature required, in Landlord's reasonable opinion and in accordance with
applicable Law, for occupancy of the Premises under normal business operations,
from 8:00 a.m. until 6:00 p.m. Monday through Friday and from 8:00 to 1:00 on
Saturdays except on Holidays (as defined in Article 25). Provided that Landlord
executes the Work substantially in accordance with the current Plans referenced
in the attached Work Agreement and provides maintenance in accordance with the
provisions of this Lease, Landlord shall not be responsible for inadequate HVAC
service (i) in the portion of the Premises other than the data center to the
extent that Tenant exceeds the heat load factors which Tenant's architect
furnished to Landlord (i.e., occupancy by no more than 96 persons per floor with
equipment and lighting not exceeding one desk top computer per person, standard
lighting and other low voltage, low current incidental equipment) and, (ii) in
the data center, regardless of Tenant's use thereof. Tenant shall be
responsible for providing and paying all costs associated with any additional
HVAC capacity or service Tenant deems necessary or desirable.
(B) Water for drinking, lavatory and toilet purposes at those points of
supply provided for nonexclusive general use of other tenants at the Property.
(C) Customary office cleaning and trash removal service Monday through
Friday or Sunday through Thursday in and about the Premises.
(D) Operatorless passenger elevator service in common with Landlord and
other tenants and their contractors, agents and visitors.
(E) Parking in common with other tenants of the Property on a first come,
first served basis in accordance with applicable Laws. By the first anniversary
of the Commencement Date and for the remainder of the Term Landlord will
maintain for Tenant's benefit a parking ratio at the Property of four (4)
parking spaces per each 1,000 square feet of occupied space at the Property.
Notwithstanding anything to the contrary contained in this Lease, the
Premises shall be separately metered and Tenant shall make arrangements to
directly purchase and pay for all electricity consumed in the Premises (other
than that consumed by HVAC equipment during regular Building hours, the cost of
which shall be included in Operating Expenses under Article 25) from the local
utility or municipality serving the Building during the Term, as the same may
6
<PAGE>
be extended. Tenant's use of electrical service shall not exceed the safe and
lawful capacity of the Building's existing electrical circuits as may be
modified per the Plans referenced in the attached Work Agreement. In the event
that Tenant requires HVAC service outside of the normal Building hours set forth
in Article 7(A) above, Landlord shall seek to provide same, provided that
Landlord shall receive Tenant's request within a reasonable period prior to the
time such extra HVAC service is needed. Landlord may comply with written or oral
requests by any officer or employee of Tenant, unless Tenant shall notify
Landlord of, or Landlord shall request, the names of authorized individuals (up
to 3 for each floor on which the Premises are located) and procedures for
written requests. Tenant shall pay the costs, for such extra HVAC service as
Landlord shall from time to time reasonably determine, which shall include any
indirect costs of Landlord in furnishing same such as, but not limited to,
amortization of equipment costs and chemical usage. All charges for extra HVAC
service shall be due at the same time as the installment of Base Rent with which
the same are billed, or if billed separately, shall be due within thirty (30)
days after such billing.
In the event that Tenant requires supplementary HVAC service during regular
Building hours, Landlord may install and operate meters or any other reasonable
system for monitoring or estimating any services or utilities used by Tenant in
excess of those required to be provided by Landlord under this Article
(including a system for Landlord's engineer to reasonably estimate any such
excess usage). If such system indicates such excess services or utilities,
Tenant shall pay Landlord's reasonable charges for installing and operating such
system and any supplementary HVAC or other systems or equipment (or adjustments
or modifications to the existing Systems and Equipment), and Landlord's
reasonable charges for such amount of excess services or utilities used by
Tenant.
Landlord does not warrant that any services or utilities will be free from
shortages, failures, variations, or interruptions caused by repairs,
maintenance, replacements, improvements, alterations, changes of service,
strikes, lockouts, labor controversies, accidents, inability to obtain services,
fuel, steam, water or supplies, governmental requirements or requests, or other
causes beyond Landlord's reasonable control. None of the same shall be deemed
an eviction or disturbance of Tenant's use and possession of the Premises or any
part thereof, or render Landlord liable to Tenant for abatement of Rent, except
as expressly provided below, or relieve Tenant from performance of Tenant's
obligations under this Lease. Landlord in no event shall be liable for damages
by reason of loss of profits, business interruption or other consequential
damages.
Notwithstanding anything to the contrary in this Article 7, if: (a) any
services or utilities are interrupted or discontinued as a result of Landlord's
negligence, and Tenant is unable to and does not use, the Premises as a result
of such interruption or discontinuance, and (b) Tenant shall have given written
notice respecting such interruption or discontinuance to Landlord, and Landlord
shall have failed to cure such interruption or discontinuance within five (5)
consecutive days after receiving such notice, or such additional time as may be
required due to acts of god, force majeure, casualty damage, strikes, shortages
of labor or materials, or other causes beyond
7
<PAGE>
Landlord's reasonable control, Rent hereunder shall thereafter be abated until
such time as such services or utilities are restored or Tenant begins using the
Premises again, whichever shall first occur. In the event of (a) and (b) above,
and in the event such interruption or discontinuance has not been cured within
one hundred eighty (180) consecutive days after Landlord receives notice or such
additional time as may be required by causes beyond Landlord's reasonable
control, Tenant may terminate this Lease by sending Landlord at least sixty (60)
days (but not more than 120 days) advance notice. For purposes of this Article
7, an interruption or discontinuance of a service or utility shall be deemed to
be cured if the restoration of such service or utility is effective for an
aggregate period or periods of time which exceed, in the aggregate, the
period(s) of interruption or discontinuance. Such termination right shall not be
available to Tenant if Landlord corrects the interruption or discontinuance
within sixty (60) days after Tenant's notice or provides Tenant new premises
reasonably comparable to the Premises and access thereto within sixty (60) days
after Tenant's notice. Such abatement of Rent and termination right shall be
Tenant's sole recourse in the event of a discontinuance or interruption of
services or utilities required to be provided by Landlord hereunder.
Notwithstanding any of the foregoing to the contrary, in the event of an
interruption or discontinuance of services or utilities which is the result of
casualty damage, the provisions of Article 10 shall govern and control.
ARTICLE 8
ALTERATIONS AND LIENS
Except for purely "cosmetic" changes not visible from outside the Premises
(e.g., paint, wallpaper and carpeting) and certain communication and computer
cabling modifications as further described in Article 29 below, Tenant shall
make no additions, changes, alterations or improvements (the "Work") to the
Premises or the Systems and Equipment (as defined in Article 25) pertaining to
the Premises without the prior written consent of Landlord. Landlord may impose
reasonable requirements as a condition of such consent including without
limitation the submission of plans and specifications for Landlord's prior
written approval, obtaining necessary permits, posting bonds, obtaining
insurance, prior approval of contractors, subcontractors and suppliers, prior
receipt of copies of all contracts and subcontracts, contractor and
subcontractor lien waivers, affidavits listing all contractors, subcontractors
and suppliers, use of union labor (if Landlord uses union labor), affidavits
from engineers acceptable to Landlord stating that the Work will not adversely
affect the Systems and Equipment or the structure of the Property, and
requirements as to the manner and times in which such Work shall be done. All
Work shall be performed in a good and workmanlike manner and all materials used
shall be of a quality comparable to or better than those in the Premises and
Property and shall be in accordance with plans and specifications approved by
Landlord, and Landlord may require that all such Work be performed under
Landlord's supervision. Except in those instances in which purely cosmetic
changes are involved, Tenant shall pay Landlord a reasonable fee (not to exceed
5% of the cost of the Work plus reimbursement of Landlord's out of pocket costs
to cover Landlord's overhead in reviewing Tenant's plans and specifications and
performing any supervision of the Work. If
8
<PAGE>
Landlord consents or supervises, the same shall not be deemed a warranty as to
the adequacy of the design, workmanship or quality of materials, and Landlord
hereby expressly disclaims any responsibility or liability for the same.
Landlord shall under no circumstances have any obligation to repair, maintain or
replace any portion of the Work.
Tenant shall keep the Property and Premises free from any mechanic's,
materialman's or similar liens or other such encumbrances in connection with any
Work on or respecting the Premises not performed by or at the request of
Landlord, and shall indemnify and hold Landlord harmless from and against any
claims, liabilities, judgments, or costs (including attorneys' fees) arising out
of the same or in connection therewith. Tenant shall give Landlord notice at
least twenty (20) days prior to the commencement of any Work on the Premises (or
such additional time as may be necessary under applicable Laws), to afford
Landlord the opportunity of posting and recording appropriate notices of non-
responsibility. Tenant shall remove any such lien or encumbrance by bond or
otherwise within thirty (30) days after written notice by Landlord, and if
Tenant shall fail to do so, Landlord may pay the amount necessary to remove such
lien or encumbrance, without being responsible for investigating the validity
thereof. The amount so paid shall be deemed additional Rent under this Lease
payable upon demand, without limitation as to other remedies available to
Landlord under this Lease. Nothing contained in this Lease shall authorize
Tenant to do any act which shall subject Landlord's title to the Property or
Premises to any liens or encumbrances whether claimed by operation of law or
express or implied contract. Any claim to a lien or encumbrance upon the
Property or Premises arising in connection with any Work on or respecting the
Premises not performed by or at the request of Landlord shall be null and void,
or at Landlord's option shall attach only against Tenant's interest in the
Premises and shall in all respects be subordinate to Landlord's title to the
Property and Premises.
ARTICLE 9
REPAIRS
Except for customary cleaning and trash removal provided by Landlord under
Article 7, and damage covered under Article 10, Tenant shall keep the Premises
in good and sanitary condition, working order and repair (including without
limitation, carpet, wall-covering, doors, plumbing and other fixtures,
equipment, alterations and improvements whether installed by Landlord or
Tenant). In the event that any repairs, maintenance or replacements are
required, Tenant shall promptly arrange for the same either through Landlord for
such reasonable charges as Landlord may from time to time establish, or such
contractors as Landlord generally uses at the Property or such other contractors
as Landlord shall first approve in writing, and in a first class, workmanlike
manner approved by Landlord in advance in writing. If Tenant does not promptly
make such arrangements, Landlord may, but need not, make such repairs,
maintenance and replacements, and the costs paid or incurred by Landlord
therefor shall be reimbursed by Tenant promptly after request by Landlord.
Tenant shall indemnify Landlord and pay for any repairs, maintenance and
replacements to areas of the Property outside the Premises, caused, in whole or
9
<PAGE>
in part, as a result of moving any furniture, fixtures, or other property to or
from the Premises, or by Tenant or its employees, agents, contractors, or
visitors (notwithstanding anything to the contrary contained in this Lease).
Except as provided in the preceding sentence, or for damage covered under
Article 10, Landlord shall keep the common areas of the Property in good and
sanitary condition, working order and repair (the cost of which shall be
included in Operating Expenses, as described in Article 25, except as limited
therein).
ARTICLE 10
CASUALTY DAMAGE
If the Premises or any common areas of the Property providing access
thereto or any parking areas necessary for Landlord to comply with Landlord's
parking obligations pursuant to Article 7(E) shall be damaged by fire or other
casualty, Landlord shall use available insurance proceeds to restore the same.
Such restoration shall be to substantially the condition prior to the casualty,
except for modifications required by zoning and building codes and other Laws or
by any Holder (as defined in Article 25), any other modifications to the common
areas deemed desirable by Landlord (provided access to the Premises is not
materially impaired), and except that Landlord shall not be required to repair
or replace any of Tenant's furniture, furnishings, fixtures or equipment, or any
alterations or improvements in excess of any work performed or paid for by
Landlord under any separate agreement signed by the parties in connection
herewith. Landlord shall not be liable for any inconvenience or annoyance to
Tenant or its visitors, or injury to Tenant's business resulting in any way from
such damage or the repair thereof. However, Landlord shall allow Tenant a
proportionate abatement of Rent during the time and to the extent the Premises
are unfit for occupancy for the purposes permitted under this Lease and not
occupied by Tenant as a result thereof (unless Tenant or its employees or agents
caused the damage). Notwithstanding the foregoing to the contrary, Landlord may
elect to terminate this Lease by notifying Tenant in writing of such termination
within sixty (60) days after the date of damage (such termination notice to
include a termination date providing at least ninety (90) days for Tenant to
vacate the Premises), if the Property shall be materially damaged by Tenant or
its employees or agents, or if the Property shall be damaged by fire or other
casualty or cause such that: (a) repairs to the Premises and access thereto
cannot reasonably be completed within 120 days after the casualty without the
payment of overtime or other premiums, (b) more than 25% of the Premises is
affected by the damage, and fewer than 24 months remain in the Term, or any
material damage occurs to the Premises during the last 12 months of the Term,
(c) any Holder (as defined in Article 25) shall require that the insurance
proceeds or any portion thereof be used to retire the Mortgage debt (or shall
terminate the ground lease, as the case may be), or the damage is not
10
<PAGE>
covered by Landlord's insurance policies required to be maintained hereunder, or
(d) the cost of the repairs, alterations, restoration or improvement work would
exceed 25% of the replacement value of the Building, or the nature of such work
would make termination of this Lease necessary. Tenant agrees that Landlord's
obligation to restore, and the abatement of Rent and termination right provided
below, shall be Tenant's sole recourse in the event of such damage, and waives
any other rights Tenant may have under any applicable law to terminate the Lease
by reason of damage to the Premises or Property. Tenant acknowledges that this
Article represents the entire agreement between the parties respecting damage to
the Premises or Property.
Notwithstanding anything to the contrary contained in this Article 10,
Tenant may terminate this Lease if Tenant is unable to use all or a substantial
portion of the Premises (or more than 20% of the parking required to be provided
pursuant to Article 7(E) is unusable) as a result of fire or other casualty not
caused by Tenant or its employees or agents, and (a) Landlord fails to commence
restoration work to the Premises and access thereto and/or, if applicable, the
parking areas within sixty (60) days after the damage occurs, or (b) Landlord
fails to substantially complete such work within 180 days after commencing the
same (or if the Premises contains more than 30,000 rentable square feet, then an
additional 30 days for each additional 5,000 rentable square feet), or such
additional time as may be necessary due to strikes, lock-outs or other labor
troubles, shortages of equipment or materials, governmental requirements, power
shortages or outages or other causes beyond Landlord's reasonable control, which
time period shall in no event exceed, in the aggregate, more than two hundred
seventy (270) days or (c) such work is reasonably estimated (which estimate
Landlord shall provide within 60 days following the casualty), to take more than
180 days to substantially complete after being commenced (or if the Premises
contains more than 30,000 rentable square feet, then an additional 30 days for
each additional 5,000 rentable square feet), or (d) more than 25% of the
Premises is affected by the damage, and fewer than 24 months remain in the Term.
In order to exercise any of the foregoing termination rights, Tenant must send
Landlord at least sixty (60) days (but not more than 120 days) advance notice
specifying the basis for termination, and such notice must be given no later
than thirty (30) days following the occurrence of the condition serving as the
basis for the termination right invoked by Tenant. Such termination rights shall
not be available to Tenant if: (i) Landlord substantially completes the repairs
to the Premises and/or, if applicable, the parking areas and access thereto
within sixty (60) days after Tenant's notice, or (ii) Landlord provides Tenant
with new premises reasonably comparable to the Premises (and/or, if applicable,
substitute parking located on or near (and accessible from) the Property) and
access thereto within sixty (60) days after Tenant's notice. Notwithstanding
anything to the contrary contained herein, if Tenant, or its officers,
employees, contractors, invitees or agents delay Landlord in performing the
repairs, Landlord shall have additional time to complete the work equal to such
delay and Tenant shall pay Landlord all Rent for the period of such delay.
ARTICLE 11
INSURANCE, SUBROGATION, AND WAIVER OF CLAIMS
11
<PAGE>
Tenant shall maintain during the Term comprehensive (or commercial) general
liability insurance, with limits of not less than $2,000,000 combined single
limit for personal injury, bodily injury or death, or property damage or
destruction (including loss of use thereof) for any one occurrence. Tenant shall
also maintain during the Term worker compensation insurance as required by
statute, and primary, noncontributory, "all-risk" property damage insurance
covering Tenant's personal property, business records, fixtures and equipment,
for damage or other loss caused by fire or other casualty or cause including,
but not limited to, vandalism and malicious mischief, theft, water damage of any
type, including sprinkler leakage, bursting or stoppage of pipes, explosion,
business interruption, and other insurable risks in amounts not less than the
full insurable replacement value of such property and full insurable value of
such other interests of Tenant (subject to reasonable deductible amounts).
Landlord shall, as part of Operating Expenses, maintain during the Term
comprehensive (or commercial) general liability insurance, with limits of not
less than $2,000,000 combined single limit for personal injury, bodily injury or
death, or property damage or destruction (including loss of use thereof) for any
one occurrence. Landlord shall also, as part of Operating Expenses, maintain
during the Term worker compensation insurance as required by statute, and
primary, non-contributory, extended coverage or "all-risk" property damage
insurance, in an amount equal to at least ninety percent (90%) of the full
insurable replacement value of the Property (exclusive of the costs of
excavation, foundations and footings, and such risks required to be covered by
Tenant's insurance, and subject to reasonable deductible amounts), or such other
amount necessary to prevent Landlord from being a co-insured, and such other
coverage as Landlord shall deem appropriate or that may be required by any
Holder (as defined in Article 25).
Tenant shall provide Landlord with certificates evidencing such coverage
(and, with respect to liability coverage, showing Landlord and such other
parties that Landlord shall designate as additional insureds) prior to the
Commencement Date, which shall state that such insurance coverage may not be
changed or canceled without at least twenty (20) days prior written notice to
Landlord, and shall provide renewal certificates to Landlord at least twenty
(20) days prior to expiration of such policies. Landlord may periodically, but
not more often than every five years, require that Tenant reasonably increase
the aforementioned coverage. Except as provided to the contrary herein, any
insurance carried by Landlord or Tenant shall be for the sole benefit of the
party carrying such insurance. Any insurance policies hereunder may be "blanket
policies." All insurance required hereunder shall be provided by responsible
insurers and Tenant's insurer shall be reasonably acceptable to Landlord. By
this Article, Landlord and Tenant intend that their respective property loss
risks shall be borne by responsible insurance carriers to the extent above
provided, and Landlord and Tenant hereby agree to look solely to, and seek
recovery only from, their respective insurance carriers in the event of a
property loss to the extent that such coverage is agreed to be provided
hereunder. The parties each hereby waive all rights and claims against such
other for such losses, and waive all rights of subrogation of their respective
insurers, provided such waiver of subrogation shall not affect the right of the
insured to recover thereunder. The parties agree that their respective insurance
policies are now, or shall be, endorsed such that
12
<PAGE>
said waiver of subrogation shall not affect the right of the insured to recover
thereunder, so long as no material additional premium is charged therefor.
ARTICLE 12
CONDEMNATION
If the whole or any material part of the Premises or Property shall be
taken by power of eminent domain or condemned by any competent authority for any
public or quasi-public use or purpose, or if any adjacent property or street
shall be so taken or condemned, or reconfigured or vacated by such authority in
such manner as to require the use, reconstruction or remodeling of any part of
the Premises or Property, or if Landlord shall grant a deed or other instrument
in lieu of such taking by eminent domain or condemnation, Landlord shall have
the option to terminate this Lease upon ninety (90) days notice, provided such
notice is given no later than 180 days after the date of such taking,
condemnation, reconfiguration, vacation, deed or other instrument. Tenant shall
have reciprocal termination rights if the whole or any material part of the
Premises is permanently taken, or if access to the Premises is permanently
materially impaired, or if more than 20% of the parking required to be provided
pursuant to Article 7(E) is taken and Landlord does not replace such parking in
some fashion within 180 days, or such additional time as may be necessary due to
strikes, lock-outs or other labor troubles, shortages of equipment or materials,
governmental requirements, power shortages or outages or other causes beyond
Landlord's reasonable control, which time period shall in no event exceed, in
the aggregate, more than two hundred seventy (270) days. Landlord shall be
entitled to receive the entire award or payment in connection therewith, except
that Tenant shall have the right to file any separate claim available to Tenant
for any taking of Tenant's personal property and fixtures belonging to Tenant
and removable by Tenant upon expiration of the Term, and for moving expenses (so
long as such claim does not diminish the award available to Landlord [on account
of Landlord's fee interest subject to Tenant's leasehold interest] or any
Holder, and such claim is payable separately to Tenant). All Rent shall be
apportioned as of the date of such termination, or the date of such taking,
whichever shall first occur. If any part of the Premises shall be taken, and
this Lease shall not be so terminated, the Rent shall be proportionately abated.
ARTICLE 13
RETURN OF POSSESSION
At the expiration or earlier termination of this Lease or Tenant's right of
possession, Tenant shall surrender possession of the Premises in the condition
required under Article 9, ordinary wear and tear excepted, and shall surrender
all keys, any key cards, and any parking stickers or cards, to Landlord, and
advise Landlord as to the combination of any locks or vaults then remaining in
the Premises, and shall remove all trade fixtures and personal property. All
improvements, fixtures and other items in or upon the Premises (except trade
fixtures and personal
13
<PAGE>
property belonging to Tenant), whether installed by Tenant or Landlord, shall be
Landlord's property and shall remain upon the Premises, all without
compensation, allowance or credit to Tenant. However, if prior to such
termination or within ten (10) days thereafter Landlord so directs by notice,
Tenant shall promptly remove such of the foregoing items as are designated in
such notice and restore the Premises to the condition prior to the installation
of such items; provided, Landlord shall not require removal of customary office
improvements installed pursuant to any separate agreement signed by both parties
in connection with entering this Lease (except as expressly provided to the
contrary therein), or installed by Tenant with Landlord's written approval
(except as expressly required by Landlord in connection with granting such
approval). If Tenant shall fail to perform any repairs or restoration, or fail
to remove any items from the Premises required hereunder, Landlord may do so,
and Tenant shall pay Landlord the cost thereof upon demand. All property removed
from the Premises by Landlord pursuant to any provisions of this Lease or any
Law may be handled or stored by Landlord at Tenant's expense, and Landlord shall
in no event be responsible for the value, preservation or safekeeping thereof.
All property not removed from the Premises or retaken from storage by Tenant
within thirty (30) days after expiration or earlier termination of this Lease or
Tenant's right to possession, shall at Landlord's option be conclusively deemed
to have been conveyed by Tenant to Landlord as if by bill of sale without
payment by Landlord. Unless prohibited by applicable Law, Landlord shall have a
lien against such property for the costs incurred in removing and storing the
same.
ARTICLE 14
HOLDING OVER
Unless Landlord expressly agrees otherwise in writing, Tenant shall pay
Landlord 150% of the amount of Rent then applicable (which shall increase to
200% of the amount then applicable beginning with the second month of such
holdover) (or the highest amount permitted by Law, whichever shall be less)
prorated on per diem basis for each day Tenant shall retain possession of the
Premises or any part thereof after expiration or earlier termination of this
Lease, together with all damages sustained by Landlord on account thereof. The
foregoing provisions shall not serve as permission for Tenant to hold-over, nor
serve to extend the Term (although Tenant shall remain bound to comply with all
provisions of this Lease until Tenant vacates the Premises, and shall be subject
to the provisions of Article 13). Notwithstanding the foregoing to the contrary,
at any time before or after expiration or earlier termination of the Lease,
Landlord may serve notice advising Tenant of the amount of Rent and other terms
required, should Tenant desire to enter a month-to-month tenancy (and if Tenant
shall hold over more than one full calendar month after such notice, Tenant
shall thereafter be deemed a month-to-month tenant, on the terms and provisions
of this Lease then in effect, as modified by Landlord's notice, and except that
Tenant shall not be entitled to any renewal or expansion rights contained in
this Lease or any amendments hereto).
ARTICLE 15
14
<PAGE>
NO WAIVER
No provision of this Lease will be deemed waived by either party unless
expressly waived in writing signed by the waiving party. No waiver shall be
implied by delay or any other act or omission of either party. No waiver by
either party of any provision of this Lease shall be deemed a waiver of such
provision with respect to any subsequent matter relating to such provision, and
Landlord's consent or approval respecting any action by Tenant shall not
constitute a waiver of the requirement for obtaining Landlord's consent or
approval respecting any subsequent action. Acceptance of Rent by Landlord shall
not constitute a waiver of any breach by Tenant of any term or provision of this
Lease. No acceptance of a lesser amount than the Rent herein stipulated shall be
deemed a waiver of Landlord's right to receive the full amount due, nor shall
any endorsement or statement on any check or payment or any letter accompanying
such check or payment be deemed an accord and satisfaction, and Landlord may
accept such check or payment without prejudice to Landlord's right to recover
the full amount due. The acceptance of Rent or of the performance of any other
term or provision from any Person other than Tenant, including any Transferee,
shall not constitute a waiver of Landlord's right to approve any Transfer.
ARTICLE 16
ATTORNEYS' FEES AND JURY TRIAL
In the event of any litigation between the parties, the prevailing party
shall be entitled to obtain, as part of the judgment, all reasonable attorneys'
fees, costs and expenses incurred in connection with such litigation, except as
may be limited by applicable Law. In the interest of obtaining a speedier and
less costly hearing of any dispute, the parties hereby each irrevocably waive
the right to trial by jury.
ARTICLE 17
PERSONAL PROPERTY TAXES, RENT TAXES AND OTHER TAXES
Tenant shall pay prior to delinquency all taxes, charges or other
governmental impositions assessed against or levied upon Tenant's fixtures,
furnishings, equipment and personal property located in the Premises, and any
Work to the Premises under Article 8. Whenever possible, Tenant shall cause all
such items to be assessed and billed separately from the property of Landlord.
In the event any such items shall be assessed and billed with the property of
Landlord, Tenant shall pay Landlord its share of such taxes, charges or other
governmental impositions within thirty (30) days after Landlord delivers a
statement and a copy of the assessment or other documentation, showing the
amount of such impositions applicable to Tenant's property. Tenant shall pay any
rent tax or sales tax, service tax, transfer tax or value added tax, or any
other applicable tax on the Rent or services herein or otherwise respecting this
Lease.
15
<PAGE>
ARTICLE 18
REASONABLE APPROVALS
Whenever Landlord's approval or consent is expressly required under this
Lease (including Article 21) or any other agreement between the parties,
Landlord shall not unreasonably withhold or delay such approval or consent
(reasonableness shall be a condition to Landlord's enforcement of such consent
or approval requirement, and not a covenant), except for matters affecting the
structure, safety or security of the Property, or the appearance of the Property
from any common or public areas.
ARTICLE 19
SUBORDINATION, ATTORNMENT AND MORTGAGEE PROTECTION
This Lease is subject and subordinate to all Mortgages (as defined in
Article 25) now or hereafter placed upon the Property, and all other
encumbrances and matters of public record applicable to the Property. If any
foreclosure proceedings are initiated by any Holder or a deed in lieu is granted
(or if any ground lease is terminated), Tenant agrees, upon written request of
any such Holder or any purchaser at foreclosure sale, to attorn and pay Rent to
such party and to execute and deliver any instruments necessary or appropriate
to evidence or effectuate such attornment (provided such Holder or purchaser
shall agree to accept this Lease and not disturb Tenant's occupancy, so long as
Tenant does not default and fail to cure within the time permitted hereunder).
However, in the event of attornment, no Holder shall be: (i) liable for any act
or omission of Landlord, or subject to any offsets or defenses which Tenant
might have against Landlord (prior to such Holder becoming Landlord under such
attornment), (ii) liable for any security deposit or bound by any prepaid Rent
not actually received by such Holder, or (iii) bound by any future modification
of this Lease not consented to by such Holder. Any Holder (as defined in Article
25) may elect to make this Lease prior to the lien of its Mortgage, by written
notice to Tenant, and if the Holder of any prior Mortgage shall require, this
Lease shall be prior to any subordinate Mortgage. Tenant agrees to give any
Holder by certified mail, return receipt requested, a copy of any notice of
default served by Tenant upon Landlord, provided that prior to such notice
Tenant has been notified in writing (by way of service on Tenant of a copy of an
assignment of leases, or otherwise) of the address of such Holder. Tenant
further agrees that if Landlord shall have failed to cure such default within
the times permitted Landlord for cure under this Lease, any such Holder whose
address has been provided to Tenant shall have an additional period of thirty
(30) days in which to cure (or such additional time as may be required due to
causes beyond such Holder's control, including time to obtain possession of the
Property by power of sale or judicial action). Tenant shall execute such
documentation as Landlord may reasonably request from time to time, in order to
confirm the matters set forth in this Article in recordable form.
16
<PAGE>
ARTICLE 20
ESTOPPEL CERTIFICATE
Tenant shall from time to time, within twenty (20) days after written
request from Landlord, execute, acknowledge and deliver a statement (i)
certifying that this Lease is unmodified and in full force and effect or, if
modified, stating the nature of such modification and certifying that this Lease
as so modified, is in full force and effect (or if this Lease is claimed not to
be in force and effect, specifying the ground therefor) and any dates to which
the Rent has been paid in advance, and the amount of any Security Deposit, (ii)
acknowledging that there are not, to Tenant's knowledge, any uncured defaults on
the part of Landlord hereunder, or specifying such defaults if any are claimed,
and (iii) certifying such other matters as Landlord may reasonably request, or
as may be requested by Landlord's current or prospective Holders, insurance
carriers, auditors, and prospective purchasers. Any such statement may be relied
upon by any such parties. If Tenant shall fail to execute and return such
statement within the time required herein, Tenant shall be deemed to have agreed
with the matters set forth therein.
ARTICLE 21
ASSIGNMENT AND SUBLETTING
(A) TRANSFERS. Tenant shall not, without the prior written consent of
Landlord, which consent shall not be unreasonably withheld, as further described
below: (i) assign, mortgage, pledge, hypothecate, encumber, or permit any lien
to attach to, or otherwise transfer, this Lease or any interest hereunder, by
operation of law or otherwise, (ii) sublet the Premises or any part thereof, or
(iii) permit the use of the Premises by any Persons (as defined in Article 25)
other than Tenant and its employees (all of the foregoing are hereinafter
sometimes referred to collectively as "Transfers" and any Person to whom any
Transfer is made or sought to be made is hereinafter sometimes referred to as a
"Transferee"). If Tenant shall desire Landlord's consent to any Transfer, Tenant
shall notify Landlord in writing, which notice shall include: (a) the proposed
effective date (which shall not be less than 30 nor more than 180 days after
Tenant's notice), (b) the portion of the Premises to be Transferred (herein
called the "Subject Space"), (c) the terms of the proposed Transfer and the
consideration therefor, the name and address of the proposed Transferee, and a
copy of all documentation pertaining to the proposed Transfer, and (d) current
financial statements of the proposed Transfer certified by an officer, partner
or owner thereof, and any other information to enable Landlord to determine the
financial responsibility, character, and reputation of the proposed Transferee,
nature of such Transferee's business and proposed use of the Subject Space, and
such other information as Landlord may reasonable require. Any Transfer made
without complying with this Article shall, at Landlord's option, be null, void
and of no
17
<PAGE>
effect, or shall constitute a Default under this Lease. Whether or not Landlord
shall grant consent, Tenant shall pay any reasonable legal fees incurred by
Landlord, within thirty (30) days after written request by Landlord.
(B) APPROVAL. Landlord will not unreasonably withhold its consent (as
provided in Article 18) to any proposed Transfer of the Subject Space to the
Transferee on the terms specified in Tenant's notice. The parties hereby agree
that it shall be reasonable under this Lease and under any applicable Law for
Landlord to withhold consent to any proposed Transfer where one or more of the
following applies (without limitation as to other reasonable grounds for
withholding consent): (i) the Transferee is of a character or reputation or
engaged in a business which is not consistent with the quality of the Property,
(ii) the Transferee intends to use the Subject Space for purposes which are not
permitted under this Lease, (iii) the Subject Space is not regular in shape with
appropriate means of ingress and egress suitable for normal renting purposes,
(iv) the Transferee is either a government (or agency or instrumentality
thereof) or an occupant of the Property, (v) the proposed Transferee does not
have a reasonable financial condition in relation to the obligations to be
assumed in connection with the Transfer, or (vi) Tenant has committed and failed
to cure a Default at the time Tenant requests consent to the proposed Transfer.
(C) TRANSFER PREMIUM. If Landlord consents to a Transfer, and as a
condition thereto which the parties hereby agree is reasonable, Tenant shall pay
Landlord fifty percent (50%) of any Transfer Premium derived by Tenant from such
Transfer. "Transfer Premium" shall mean all rent, additional rent or other
consideration paid by such Transferee in excess of the Rent payable by Tenant
under this Lease (on a monthly basis during the Term ,and on a per rentable
square foot basis, if less than all of the Premises is transferred), after
deducting the reasonable expenses incurred by Tenant for any changes,
alterations and improvements to the Premises, any other economic concessions or
services provided to the Transferee, and any customary brokerage commissions
paid in connection with the Transfer. If part of the consideration for such
Transfer shall be payable other than in cash, Landlord's share of such non-cash
consideration shall be in such form as is reasonably satisfactory to Landlord.
The percentage of the Transfer Premium due Landlord hereunder shall be paid
within ten (10) days after Tenant receives any Transfer Premium from the
Transferee.
(D) RECAPTURE. Notwithstanding anything to the contrary contained in this
Article, Landlord shall have the option, by giving written notice to Tenant
within thirty (30) days after receipt of Tenant's notice of any proposed
Transfer, to recapture the subject Space. Such recapture notice shall cancel and
terminate this Lease with respect to the Subject Space as of the date stated in
Tenant's notice as the effective date of the proposed Transfer (or at Landlord's
option, shall cause the Transfer to be made to Landlord or its agent, in which
case the parties shall execute the Transfer documentation promptly thereafter).
If this Lease shall be cancelled with respect to less than the entire Premises,
the Rent reserved herein shall be prorated on the basis of the number of
rentable square feet retained by Tenant in proportion to the number of rentable
square feet contained in the Premises, this Lease as so amended shall continue
thereafter in full
18
<PAGE>
force and effect, and upon request of either party, the parties shall execute
written confirmation of the same.
(E) TERMS OF CONSENT. If Landlord consents to a Transfer: (a) the terms
and conditions of this Lease, including among other things, Tenant's liability
for the Subject Space, shall in no way be deemed to have been waived or
modified, (b) such consent shall not be deemed consent to any further Transfer
by either Tenant or a Transferee, (c) no Transferee shall succeed to any rights
provided in this Lease or any amendment hereto to extend the Term of this Lease,
expand the Premises, or lease additional space, any such rights being deemed
personal to Tenant, (d) Tenant shall deliver to Landlord promptly after
execution, an original executed copy of all documentation pertaining to the
Transfer in form reasonably acceptable to Landlord, and (e) Tenant shall furnish
upon Landlord's request a complete statement, certified by an independent
certified public accountant, or Tenant's chief financial officer, setting forth
in detail the computation of any Transfer Premium Tenant has derived and shall
derive from such Transfer. Landlord or its authorized representatives shall have
the right at all reasonable times to audit the books, records and papers of
Tenant relating to any Transfer, and shall have the right to make copies
thereof. If the Transfer Premium respecting any Transfer shall be found
understated, Tenant shall within thirty (30) days after demand pay the
deficiency, and if understated by more than 2%, Tenant shall pay Landlord's
costs of such audit. Any sublease hereunder shall be subordinate and subject to
the provisions of this Lease, and if this Lease shall be terminated during the
term of any sublease, Landlord shall have the right to: (i) treat such sublease
as canceled and repossess the Subject Space by any lawful means, or (ii) require
that such subtenant attorn to and recognize Landlord as its landlord under any
such sublease. If Tenant shall Default and fail to cure within the time
permitted for cure under Article 23(A), Landlord is hereby irrevocably
authorized, as Tenant's agent and attorney-in-fact, to direct any Transferee to
make all payments under or in connection with the Transfer directly to Landlord
(which Landlord shall apply towards Tenant's obligations under this Lease) until
such Default is cured.
(F) CERTAIN TRANSFERS. For purposes of this Lease, the term "Transfer"
shall also include (a) if Tenant is a partnership, the withdrawal or change,
voluntary, involuntary or by operation of law, of a majority of the partners, or
a transfer of a majority of partnership interests, within a twelve month period,
or the dissolution of the partnership, and (b) if Tenant is a closely held
corporation (i.e., whose stock is not publicly held and not traded through an
exchange or over the counter), the dissolution, merger, consolidation or other
reorganization of Tenant, or within a twelve month period: (i) the sale or other
transfer of more than an aggregate of 50% of the voting shares of Tenant (other
than to immediate family members by reason of gift or death) or (ii) the sale,
mortgage, hypothecation or pledge of more than an aggregate of 50% of Tenant's
net assets, except where such transfer, sale, mortgage or pledge is made for a
separate legitimate business purpose and not to avoid the restrictions set forth
in this Article 21.
(G) AFFILIATES. Notwithstanding anything to the contrary contained in this
Article 21, Tenant may permit the Premises to be used by, or may sublease the
Premises or assign this Lease
19
<PAGE>
to any party (an "Affiliate") which directly or indirectly: (i) wholly owns or
controls Tenant, (ii) is wholly owned or controlled by Tenant, (iii) is under
common ownership or control with Tenant, or (iv) into which Tenant or any of the
foregoing parties is merged, consolidated or reorganized, or to which all or
substantially all of Tenant's assets or any such other party's assets are sold;
without Landlord's consent, provided: (a) Landlord shall receive a copy of the
executed transfer document promptly after execution, (b) Tenant shall remain
liable under this Lease (provided that Tenant remains in existence) and (c) the
Transferee shall expressly assume Tenant's obligations under this Lease.
(H) PREAPPROVED OCCUPANTS. Tenant shall be permitted to provide up to 3000
square feet of space, in the aggregate, to Tenant's consultants, vendors, joint
venturers, directors, advisors or other parties who have a direct relation to
Tenant's business and whose character, reputation, business and use are
consistent with the quality of the Property, without the same being deemed a
Transfer hereunder or being subject to the provisions of this Article 21,
provided, however, that (i) Tenant shall provide Landlord with a list of any
parties occupying the Premises pursuant to this subparagraph (H) including the
amount of space leased within ten (10) days of Landlord's written request for
same, and (ii) if Landlord reasonably determines that any party in the Premises
pursuant to this subparagraph (H) does not have a character, reputation,
business and use consistent with the quality of the Property, such party shall
vacate the Premises within fifteen (15) days of Landlord's written notice to
Tenant requiring same.
ARTICLE 22
RIGHTS RESERVED BY LANDLORD
Except to the extent expressly limited herein, Landlord reserves full
rights to control the Property (which rights may be exercised without subjecting
Landlord to claims for constructive eviction, abatement of Rent, damages or
other claims of any kind), including more particularly, but without limitation,
the following rights:
(A) To change the name or street address of the Property; install and
maintain signs on the exterior and interior of the Property; retain at all
times, and use in appropriate instances, keys to all doors within and into the
Premises; grant to any Person the right to conduct any business or render any
service at the Property, whether or not it is the same or similar to the use
permitted Tenant by this Lease; and have access for Landlord and other tenants
of the Property to any mail chutes located on the Premises according to the
rules of the United States Postal Service.
(B) To enter the Premises at reasonable hours for reasonable purposes,
including inspection and supplying cleaning service or other services to be
provided Tenant hereunder, to show the Premises to current and prospective
mortgage lenders, ground lessors, insurers, and
20
<PAGE>
prospective purchasers, tenants and brokers, at reasonable hours, and if Tenant
shall abandon the Premises at any time, or shall vacate the same during the last
3 months of the Term, to decorate, remodel, repair, or alter the Premises.
(C) To limit or prevent access to the Property, shut down elevator
service, activate elevator emergency controls, or otherwise take such action or
preventative measures deemed necessary by Landlord for the safety of tenants or
other occupants of the Property or the protection of the Property and other
property located thereon or therein, in case of fire, invasion, insurrection,
riot, civil disorder, public excitement or other dangerous condition, or threat
thereof.
(D) To decorate and to make alterations, additions and improvements,
structural or otherwise, in or to the Property or any part thereof, and any
adjacent building, structure, parking facility, land, street or alley (including
without limitation changes and reductions in corridors, lobbies, parking
facilities and other public areas and the installation of kiosks, planters,
sculptures, displays, escalators, mezzanines, and other structures, facilities,
amenities and features therein, and changes for the purpose of connection with
or entrance into or use of the Property in conjunction with any adjoining or
adjacent building or buildings, now existing or hereafter constructed). In
connection with such matters, or with any other repairs, maintenance,
improvements, or alterations, in or about the Property, Landlord may erect
scaffolding and other structures reasonably required, and during such operations
may enter upon the Premises and take into and upon or through the Premises, all
materials required to make such repairs, maintenance, alterations or
improvements, and may close public entry ways, other public areas, restrooms,
stairways or corridors.
In connection with entering the Premises to exercise any of the foregoing
rights, Landlord shall: (a) provide reasonable advance written notice (except in
emergencies, or for routine cleaning or other routine matters) to Tenant's
contact person as designated by Tenant in writing from time to time (Tenant's
contact person shall initially be Mr. Daniel Rabinowitz), and (b) take
reasonable steps to minimize any interference with Tenant's business.
ARTICLE 23
Landlord's Remedies
(A) Default. The occurrence of any one or more of the following events
shall constitute a "Default" by Tenant, which if not cured within any applicable
time permitted for cure below, shall give rise to Landlord's remedies set forth
in Paragraph (B), below: (i) failure by Tenant to make when due any payment of
Rent, unless such failure is cured within ten (10) days after notice; (ii)
failure by Tenant to observe or perform any of the terms or conditions of this
Lease to be observed or performed by Tenant other than the payment of Rent, or
as provided below, unless such failure is cured within thirty (30) days after
notice, or such shorter period expressly provided elsewhere in this Lease
(provided, if the nature of Tenant's failure is such that more time is
<PAGE>
reasonably required in order to cure, Tenant shall not be in Default if Tenant
commences to cure within such period and thereafter reasonably seeks to cure
such failure to completion); (iii) failure by Tenant to comply with the Rules,
unless such failure is cured within five (5) days after notice (provided, if the
nature of Tenant's failure is such that more time is reasonably required in
order to cure, Tenant shall not be in Default if Tenant commences to cure within
period and thereafter reasonably seeks to cure such failure to completion); (iv)
vacation of all or a substantial portion of the Premises for more than thirty
(30) consecutive days, or the failure to take possession of the Premises within
sixty (60) days after the Commencement Date; (v) (a) making by Tenant or any
guarantor of this Lease ("Guarantor") of any general assignment for the benefit
of creditors, (b) filing by or against Tenant or any Guarantor of a petition to
have Tenant or such Guarantor adjudged a bankrupt or a petition for
reorganization or arrangement under any Law relating to bankruptcy (unless, in
the case of a petition filed against Tenant or such Guarantor, the same is
dismissed within sixty (60) days, (c) appointment of a trustee or receiver to
take possession of substantially all of Tenant's assets located on the Premises
or of Tenant's interest in this Lease, where possession is not restored to
Tenant within thirty (30) days, (d) attachment, execution or other judicial
seizure of substantially all of Tenant's assets located on the Premises or of
Tenant's interest in this Lease, (e) Tenant's or any Guarantor's convening of a
meeting of its creditors or any class thereof for the purpose of effecting a
moratorium upon or composition of its debts, or (f) Tenant's or any Guarantor's
insolvency or admission of an inability to pay its debts as they mature; (vi)
any material misrepresentation herein, or material misrepresentation or omission
in any financial statements or other materials provided by Tenant or any
Guarantor in connection with negotiating or entering this Lease or in connection
with any Transfer under Article 21; (vii) cancellation of any guaranty of this
Lease by any Guarantor; (viii) failure by Tenant to cure within any applicable
times permitted thereunder any default under any other lease for space at the
Property or any other buildings owned or managed by Landlord or its affiliates,
now or hereafter entered by Tenant (and any Default hereunder not cured within
the times permitted for cure herein shall, at Landlord's election, constitute a
default under any such other lease or leases). Failure by Tenant to comply with
the same term or condition of this Lease on three occasions during any twelve
month period shall cause any failure to comply with such term or condition
during the succeeding twelve month period, at Landlord's option, to constitute
an incurable Default, if Landlord has given Tenant notice of each such failure
within ten (10) days after each such failure occurs. The notice and cure periods
provided herein are in lieu of, and not in addition to, any notice and cure
periods provided by Law.
(B) REMEDIES. If a Default occurs and is not cured within any applicable
time permitted under Paragraph (A), Landlord shall have the rights and remedies
hereinafter set forth, which shall be distinct, separate and cumulative with and
in addition to any other right or remedy allowed under any Law or, other
provisions of this Lease:
(i) Landlord may terminate this Lease, repossess the Premises by
detainer suit, summary proceedings or other lawful means, and
recover as damages a sum of money equal to: (a) any unpaid Rent
as of the termination date including
22
<PAGE>
interest at the Default Rate (as defined in Article 25), (b)
any unpaid Rent which would have accrued after the termination
date through the time of award including interest at the
Default Rate, less such loss of Rent that Tenant proves could
have been reasonably avoided, (c) any unpaid Rent which would
have accrued after the time of award during the balance of the
Term, less such loss of Rent that Tenant proves could be
reasonably avoided, and (d) any other amounts necessary to
compensate Landlord for all damages proximately caused by
Tenant's failure to perform its obligations under this Lease,
including without limitation all Costs of Reletting (as defined
in Paragraph F). For purposes of computing the amount of Rent
herein that would have accrued after the time of award,
Tenant's Prorata Share of Taxes and Operating Expenses shall be
projected, based upon the average rate of increase, if any, in
such items from the Commencement Date through the time of
award.
(ii) If applicable Law permits, Landlord may terminate Tenant's
right of possession and repossess the Premises by detainer
suit, summary proceedings or other lawful means, without
terminating this Lease (and if such Law permits, and Landlord
shall not have expressly terminated the Lease in writing, any
termination shall be deemed a termination of Tenant's right of
possession only). In such event, Landlord may recover: (a) any
unpaid Rent as of the date possession is terminated, including
interest at the Default Rate, (b) any unpaid Rent which accrues
during the Term from the date possession is terminated through
the time of award (or which may have accrued from the time of
any earlier award obtained by Landlord through the time of
award), including interest at the Default Rate, less any Net
Re-Letting Proceeds (as defined in Paragraph F) received by
Landlord during such period, and less such loss of Rent that
Tenant proves could have been reasonably avoided, and (c) any
other amounts necessary to compensate Landlord for all damages
proximately caused by Tenant's failure to perform its
obligations under this Lease, including without limitation, all
Costs of Reletting (as defined in Paragraph F). Landlord may
bring suits for such amounts or portions thereof, at any time
or times as the same accrue or after the same have accrued, and
no suit or recovery of any portion due hereunder shall be
deemed a waiver of Landlord's right to collect all amounts to
which Landlord is entitled hereunder, nor shall the same serve
as any defense to any subsequent suit brought for any amount
not theretofore reduced to judgment.
(C) Mitigation of Damages. If Landlord terminates this Lease or Tenant's
right to possession, Landlord shall use reasonable efforts to mitigate
Landlord's damages, and Tenant shall be entitled to submit proof of such failure
to mitigate as a defense to Landlord's claims hereunder,
23
<PAGE>
if mitigation of damages by Landlord is required by applicable Law. If Landlord
has not terminated this Lease or Tenant's right to possession, Landlord shall
have no obligation to mitigate (except as may be required by applicable Law),
and may permit the Premises to remain vacant or abandoned; in such case, Tenant
may seek to mitigate damages by attempting to sublease the Premises or assign
this Lease (subject to Article 21).
(D) Specific Performance, Collection of Rent and Acceleration. Landlord
shall at all times have the rights and remedies (which shall be cumulative with
each other and cumulative and in addition to those rights and remedies available
under Paragraph (B), above or any Law or other provision of this Lease), without
prior demand or notice except as required by applicable Law: (i) to seek any
declaratory, injunctive or other equitable relief, and specifically enforce this
Lease, or restrain or enjoin a violation or breach of any provision hereof, and
(ii) to sue for and collect any unpaid Rent which has accrued. Notwithstanding
anything to the contrary contained in this Lease, to the extent not expressly
prohibited by applicable Law, in the event of any Default by Tenant not cured
within any applicable time for cure hereunder, Landlord may terminate this Lease
or Tenant's right to possession and accelerate and declare that all Rent
reserved for the remainder of the Term shall be immediately due and payable (in
which event, Tenant's Pro rata Share of Taxes and Operating Expenses for the
remainder of the Term shall be projected based upon the average rate of
increase, if any, in such items from the Commencement Date through the date of
such declaration); provided, Landlord shall, after receiving payment of the same
from Tenant, be obligated to turn over to Tenant any actual Net Re-Letting
Proceeds thereafter received during the remainder of the Term, up to the amount
so received from Tenant pursuant to this provision.
(E) Late Charges and Interest. Tenant shall pay, as additional Rent, a
service charge of Two Hundred Dollars ($200.00) for bookkeeping and
administrative expenses, the second and each subsequent time in any twelve (12)
month period that Rent is not received within five (5) days after its due date.
In addition, any Rent paid more than five (5) days after due shall accrue
interest from the due date at the Default Rate (as defined in Article 25), until
payment is received by Landlord. Such service charge and interest payments shall
not be deemed consent by Landlord to late payments, nor a waiver of Landlord's
right to insist upon timely payments at any time, nor a waiver of any remedies
to which Landlord is entitled as a result of the late payment of Rent.
(F) Certain Definitions. "Net Re-Letting Proceeds" shall mean the total
amount of rent and other consideration paid by any Replacement Tenants, less all
Costs of Re-Letting, during a given period of time. "Costs of Re-Letting" shall
include without limitation, all reasonable costs and expenses incurred by
Landlord for any repairs, maintenance, changes, alterations and improvements to
the Premises, brokerage commissions, advertising costs, attorneys' fees, any
customary free rent periods or credits, tenant improvement allowances, take-over
lease obligations and other customary, necessary or appropriate economic
incentives required to enter leases with Replacement Tenants, and costs of
collecting rent from Replacement Tenants. "Replacement
24
<PAGE>
Tenants" shall mean any Persons (as defined in Article 25) to whom Landlord
relets the Premises or any portion thereof pursuant to this Article.
(G) OTHER MATTERS. No re-entry or repossession, repairs, changes,
alterations and additions, reletting, acceptance of keys from Tenant, or any
other action or omission by Landlord shall be construed as an election by
Landlord to terminate this Lease or Tenant's right to possession, or accept a
surrender of the Premises, nor shall the same operate to release the Tenant in
whole or in part from any of Tenant's obligations hereunder, unless express
written notice of such intention is sent by Landlord or its agent to Tenant. To
the fullest extent permitted by Law, all rent and other consideration paid by
any Replacement Tenants shall be applied: first, to the Costs of Re-Letting,
second, to the payment of any Rent theretofore accrued, and the residue, if any,
shall be held by Landlord and applied to the payment of other obligations of
Tenant to Landlord as the same become due (with any remaining residue to be
retained by Landlord). Rent shall be paid without any prior demand or notice
therefor (except as expressly provided herein) and without any deduction, set-
off or counterclaim, or relief from any valuation or appraisement laws.
Landlord may apply payments received from Tenant to any obligations of Tenant
then accrued, without regard to such obligations as may be designated by Tenant.
Landlord shall be under no obligation to observe or perform any provision of
this Lease on its part to be observed or performed which accrues after the date
of any Default by Tenant hereunder not cured within the times permitted
hereunder. The times set forth herein for the curing of Defaults by Tenant are
of the essence of this Lease. Tenant hereby irrevocably waives any right
otherwise available under any Law to redeem or reinstate this Lease.
ARTICLE 24
Landlord's Right to Cure
If Landlord shall fail to perform any term or provision under this Lease
required to be performed by Landlord, Landlord shall not be deemed to be in
default hereunder nor subject to any claims for damages of any kind, unless such
failure shall have continued for a period of thirty (30) days after written
notice thereof by Tenant; provided, if the nature of Landlord's failure is such
that more than thirty (30) days are reasonably required in order to cure,
Landlord shall not be in default if Landlord commences to cure such failure
within such thirty (30) day period, and thereafter reasonably seeks to cure such
failure to completion. The aforementioned periods of time permitted for Landlord
to cure shall be extended for any period of time during which Landlord is
delayed in, or prevented from, curing due to fire or other casualty, strikes,
lock-outs or other labor troubles, shortages of equipment or materials,
governmental requirements, power shortages or outages, acts or omissions by
Tenant or other Persons, and other causes beyond Landlord's reasonable control.
If Landlord shall fail to cure within the times permitted for cure herein,
Landlord shall be subject to such remedies as may be available to Tenant
(subject to the other provisions of this Lease); provided, in recognition that
Landlord must receive timely payments of
25
<PAGE>
Rent and operate the Property, Tenant shall have no right of self-help to
perform repairs or any other obligation of Landlord, and shall have no right to
withhold, set-off, or abate Rent.
ARTICLE 25
Captions, Definitions and Severability
The captions of the Articles and Paragraphs of this Lease are for
convenience of reference only and shall not be considered or referred to in
resolving questions of interpretation. If any term or provision of this Lease
shall be found invalid, void, illegal, or unenforceable with respect to any
particular Person by a court of competent jurisdiction, it shall not affect,
impair or invalidate any other terms or provisions hereof, or its enforceability
with respect to any other Person, the parties hereto agreeing that they would
have entered into the remaining portion of this Lease notwithstanding the
omission of the portion or portions adjudged invalid, void, illegal, or
unenforceable with respect to such Person.
(A) "Building" shall mean the structure identified in Article I of this
Lease.
(B) "Default Rate" shall mean the prime rate (as quoted by the First
National Bank of Chicago, or if same is no longer in existence, then the prime
rate as quoted in the Wall Street Journal) plus five percent (5%) per annum, or
the highest rate permitted by applicable Law, whichever shall be less.
(C) "Holder" shall mean the holder of any Mortgage at the time in
question, and where such Mortgage is a ground lease, such term shall refer to
the ground lessor.
(D) "Holidays" shall mean all federally observed holidays, including New
Year's Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day,
Christmas Day, and to the extent of utilities or services provided by union
members engaged at the Property, such other holidays observed by such unions.
(E) "Landlord" and "Tenant" shall be applicable to one or more Persons as
the case may be, and the singular shall include the plural, and the neuter shall
include the masculine and feminine; and if there be more than one, the
obligations thereof shall be joint and several. For purposes any provisions
indemnifying or limiting the liability of Landlord, the term "Landlord" shall
include Landlord's present and future partners, beneficiaries, trustees,
officers, directors, employees, shareholders, principals, agents, affiliates,
successors and assigns.
(F) "Law" shall mean all federal, state, county and local governmental and
municipal laws, statutes, ordinances, rules, regulations, codes, decrees, orders
and other such requirements, applicable equitable remedies and decisions by
courts in cases where such decisions are considered
26
<PAGE>
binding precedents in the state in which the Property is located, and decisions
of federal courts applying the Laws of such State.
(G) "Mortgage" shall mean all mortgages, deeds of trust, ground leases and
other such encumbrances now or hereafter placed upon the Property or Building,
or any part thereof, and all renewals, modifications, consolidations,
replacements or extensions thereof, and all indebtedness now or hereafter
secured thereby and all interest thereon.
(H) "Operating Expenses" shall mean all expenses, costs and amounts (other
than Taxes) of every kind and nature which Landlord shall pay during any
calendar year any portion of which occurs during the Term, because of or in
connection with the ownership, management, repair, maintenance, restoration and
operation of the Property, including without limitation, any amounts paid for:
(a) utilities for the Property, including but not limited to electricity, power,
gas, steam, oil or other fuel, water, sewer, lighting, heating, air conditioning
and ventilating, (b) permits, licenses and certificates necessary to operate,
manage and lease the Property, (c) insurance applicable to the Property, not
limited to the amount of coverage Landlord is required to provide under this
Lease, (d) supplies, tools, equipment and materials used in the operation,
repair and maintenance of the Property, (e) accounting, legal, inspection,
consulting, concierge and other services, (f) any equipment rental (or
installment equipment purchase or equipment financing agreements), or management
agreements (including the cost of any management fee actually paid thereunder
and the fair rental value of any office space provided thereunder, up to
customary and reasonable amounts), (g) wages, salaries and other compensation
and benefits (including out-of-pocket costs for off-site parking privileges, if
necessary) for all persons engaged in the operation, maintenance or security of
the Property, and employer's Social Security taxes, unemployment taxes or
insurance, and any other taxes which may be levied on such wages, salaries,
compensation and benefits, (h) payments under any easement, operating agreement,
declaration, restrictive covenant, or instrument pertaining to the sharing of
costs in any planned development, and (i) operation, repair, and maintenance of
all Systems and Equipment and components thereof (including replacement of
components), janitorial service, alarm and security service, window cleaning,
trash removal, elevator maintenance, cleaning of walks, parking facilities and
building walls, removal of ice and snow, replacement of wall and floor
coverings, ceiling tiles and fixtures in lobbies, corridors, restrooms and other
common or public areas or facilities, maintenance and replacement of shrubs,
trees, grass, sod and other landscaped items, irrigation systems, drainage
facilities, fences, curbs, and walkways, re-paving and re-striping parking
facilities, and roof repairs. If the Property is not at least 95% occupied
during all or a portion of any calendar year, Landlord may, in accordance with
sound accounting and management practices, determine the amount of variable
Operating Expenses (i.e., those items which vary according to occupancy levels)
that would have been paid had the Property been 95% occupied, and the amount so
determined shall be deemed to have been the amount of variable Operating
Expenses for such year. Notwithstanding the foregoing, Operating Expenses shall
not, however, include:
27
<PAGE>
(i) depreciation of the Property or any equipment except as
permitted in (ii) below, interest and amortization on
Mortgages, and other debt costs or ground lease payments, if
any; legal fees in connection with leasing, tenant disputes or
enforcement of leases; real estate brokers' leasing
commissions; improvements or alterations to tenant spaces; the
cost of providing any service directly to and paid directly by,
any tenant; any costs expressly excluded from Operating
Expenses elsewhere in this Lease; costs of any items to the
extent Landlord receives reimbursement from insurance proceeds
or from a third party (such proceeds to be deducted from
Operating Expenses in the year in which received);
(ii) capital expenditures, except those: (a) made primarily to
reduce Operating Expenses, or to comply with any Laws or other
governmental requirements, or (b) for replacements (as opposed
to additions or new improvements) of non-structural items
located in the common areas of the Property required to keep
such areas in good condition; provided, all such permitted
capital expenditures (together with reasonable financing
charges) shall be amortized for purposes of this Lease over the
shorter of: (i) their useful lives, (ii) the period during
which the reasonably estimated savings in Operating Expenses
equals the expenditures, or (iii) three (3) years; and
(iii) salaries of executive personnel to the extent not directly
involved in management and operation of the Property.
(I) "Person" shall mean an individual, trust, partnership, joint venture,
association, corporation, and any other entity.
(J) "Property" shall mean the Building, and any common or public areas or
facilities, easements, corridors, lobbies, sidewalks, loading areas, driveways,
landscaped areas, skywalks, parking garages and lots, and any and all other
structures or facilities operated or maintained in connection with or for the
benefit of the Building, and all parcels or tracts of land on which all or any
portion of the Building or any of the other foregoing items are located, and any
fixtures, machinery, equipment, apparatus, Systems and Equipment, furniture and
other personal property located thereon or therein and used in connection
therewith, whether title is held by Landlord or its affiliates. Because the
Building is part of a complex, development or group of buildings or structures
collectively owned or managed by Landlord or its affiliates or collectively
managed by Landlord's managing agent, the Property shall, at Landlord's option
also be deemed to include such other of those buildings or structures as
Landlord shall from time to time designate, and shall initially include such
buildings and structures (and related facilities and parcels on which the same
are located) as Landlord shall have incorporated by reference to the total
square footage of the Property in Article 1. Possession of areas necessary for
utilities, services, safety and operation of the Property, including the Systems
and Equipment (as defined in Article 25), fire stairways,
28
<PAGE>
perimeter walls, space between the finished ceiling of the Premises and the slab
of the floor or roof of the Property thereabove, and the use thereof together
with the right to install, maintain, operate, repair and replace the Systems and
Equipment, including any of the same in, through, under or above the Premises in
locations that will not materially interfere with Tenant's use of the Premises,
are hereby excepted and reserved by Landlord, and not demised to Tenant.
(K) "Rent" shall have the meaning specified therefor in Article 3(F).
(L) "Systems and Equipment" shall mean any plant, machinery, transformers,
duct work, cable, wires, and other equipment, facilities, and systems designed
to supply heat, ventilation, air conditioning and humidity or any other services
or utilities, or comprising or serving as any component or portion of the
electrical, gas, steam, plumbing, sprinkler, communications, alarm, security, or
fire/life/safety systems or equipment, or any other mechanical, electrical,
electronic, computer or other systems or equipment for the Property.
(M) "Taxes" shall mean all federal, state, county, or local governmental or
municipal taxes, fees, charges or other impositions of every kind and nature,
whether general, special, ordinary or extraordinary (including without
limitation, real estate taxes, general and special assessments, transit taxes,
water and sewer rents, taxes based upon the receipt of rent including gross
receipts or sales taxes applicable to the receipt of rent or service or value
added taxes (unless required to be paid by Tenant under Article 17), personal
property taxes imposed upon the fixtures, machinery, equipment, apparatus,
Systems and Equipment, appurtenances, furniture and other personal property used
in connection with the Property which Landlord shall pay during any calendar
year, any portion of which occurs during the Term (without regard to any
different fiscal year used by such government or municipal authority) because of
or in connection with the ownership, leasing and operation of the Property.
Notwithstanding the foregoing, there shall be excluded from Taxes all excess
profits taxes, franchise taxes, gift taxes, capital stock taxes, inheritance and
succession taxes, estate taxes, federal and state income taxes, and other taxes
to the extent applicable to Landlord's general or net income (as opposed to
rents, receipts or income attributable to operations at the Property). If the
method of taxation of real estate prevailing at the time of execution hereof
shall be, or has been altered, so as to cause the whole or any part of the taxes
now, hereafter or heretofore levied, assessed or imposed on real estate to be
levied, assessed or imposed on Landlord, wholly or partially, as a capital levy
or otherwise, or on or measured by the rents received therefrom, then such new
or altered taxes attributable to the Property shall be included within the term
"Taxes," except that the same shall not include any enhancement of said tax
attributable to other income of Landlord. Any expenses incurred by Landlord in
attempting to protest, reduce or minimize Taxes shall be included in Taxes in
the calendar year such expenses are paid. Tax refunds shall be deducted from
Taxes in the year they are received by Landlord, but if such refund shall relate
to taxes paid in a prior year of the Term, and the Lease shall have expired,
Landlord shall mail Tenant's Prorata Share of such net refund (after deducting
expenses and attorneys' fees), up to the amount Tenant paid towards Taxes during
such year, to Tenant's last known address. If Taxes for any period during the
Term or any extension thereof, shall be
29
<PAGE>
increased after payment thereof by Landlord, for any reason including without
limitation error or reassessment by applicable governmental or municipal
authorities, Tenant shall pay Landlord upon demand Tenant's Prorata Share of
such increased Taxes. Tenant shall pay increased Taxes whether Taxes are
increased as a result of increases in the assessment or valuation of the
Property (whether based on a sale, change in ownership or refinancing of the
Property or otherwise), increases in the tax rates, reduction or elimination of
any rollbacks or other deductions available under current law, scheduled
reductions of any tax abatement, as a result of the elimination, invalidity or
withdrawal of any tax abatement, or for any other cause whatsoever.
Notwithstanding the foregoing, if any Taxes shall be paid based on assessments
or bills by a governmental or municipal authority using a fiscal year other than
a calendar year, Landlord may elect to average the assessments or bills for the
subject calendar year, based on the number of months of such calendar year
included in each such assessment or bill.
(N) "Tenant's Prorata Share" of Taxes and Operating Expenses shall be the
rentable area of the Premises divided by the rentable area of the Property (or,
at Landlord's option, the rentable area of the Building, for those components of
Taxes and Operating Expenses that primarily benefit the Building) on the last
day of the calendar year for which Taxes or Operating Expenses are being
determined, excluding any parking facilities. Tenant acknowledges that the
"rentable area of the Premises" and the "rentable area of the Property" under
this Lease includes the usable area, without deduction for columns or
projections, multiplied by a load or conversion factor, to reflect a share of
certain areas, which may include lobbies, corridors, mechanical, utility,
janitorial, boiler and service rooms and closets, restrooms, and other public,
common and service areas. Except to the extent Landlord elects to the contrary
as provided herein, the "rentable area of the Property" shall include all
rentable area of all space leased or available for lease at the Property, which
Landlord may reasonably re-determine from time to time, to reflect re-
configurations, additions or modifications to the Property. If the Property or
any development of which it is a part, shall contain non-office uses, Landlord
shall have the right to determine in accordance with sound accounting and
management principles and in a manner fair and equitable to tenants of the
Property including Tenant, Tenant's Prorata Share of Taxes and Operating
Expenses for only the office portion, in which event, Tenant's Prorata Share
shall be based on the ratio of the rentable area of the Premises to the rentable
area of such office portion. Similarly, if the Property shall contain tenants
who do not participate in all or certain categories of Taxes or Operating
Expenses on a prorata basis, Landlord may exclude, in accordance with sound
accounting and management principles and in a manner fair and equitable to
tenants of the Property including Tenant, the amount of Taxes or Operating
Expenses, or such categories of the same, as the case may be, attributable to
such tenants, and exclude the rentable area of their premises, in computing
Tenant's Prorata Share. Because the Property is part of a complex, development
or group of buildings or structures collectively owned or managed by Landlord or
its affiliates or collectively managed by Landlord's managing agent, Landlord
may allocate Taxes and Operating Expenses within such complex, development or
group, and between such buildings and structures and the parcels on which they
are located, in accordance with sound accounting and management principles. In
the alternative, Landlord shall have the right to determine, in
30
<PAGE>
accordance with sound accounting and management principles and in a manner fair
and equitable to tenants of the Property including Tenant, Tenant's Prorata
Share of Taxes and Operating Expenses based upon the totals of each of the same
for a group of such buildings and structures, the land constituting parcels on
which the same are located, and all related facilities, including common areas
and easements, corridors, lobbies, sidewalks, elevators, loading areas, parking
facilities and driveways and other appurtenances and public areas, in which
event Tenant's Prorata Share shall be based on the ratio of the rentable area of
the Premises to the rentable area of the group of such buildings. In the event
that Tenant leases additional space during any calendar year, Tenant's Prorata
Share shall be correspondingly adjusted and the charge to Tenant for Taxes and
Operating Expenses shall be prorated to take into account the different amounts
of space leased by Tenant for each period during the year.
ARTICLE 26
CONVEYANCE BY LANDLORD AND LIABILITY
In case Landlord or any successor owner of the Property or the Building
shall convey or otherwise dispose of any portion thereof in which the Premises
are located, to another Person (and nothing herein shall be construed to
restrict or prevent such conveyance or disposition), such other Person shall
thereupon be and become landlord hereunder and shall be deemed to have fully
assumed and be liable for all obligations of this Lease to be performed by
Landlord which first arise after the date of conveyance, including the return of
any Security Deposit, and Tenant shall attorn to such other Person, and Landlord
or such successor owner shall, from and after the date of conveyance, be free of
all liabilities and obligations hereunder not then incurred. The liability of
Landlord to Tenant for any default by Landlord under this Lease or arising in
connection herewith or with Landlord's operation, management, leasing, repair,
renovation, alteration, or any other matter relating to the Property or the
Premises, shall be limited to the interest of Landlord in the Property (and the
rental proceeds thereof). Tenant agrees to look solely to Landlord's interest in
the Property (and the rental proceeds thereof) for the recovery of any judgment
against Landlord, and Landlord shall not be personally liable for any such
judgment or deficiency after execution thereon. The limitations of liability
contained in this Article shall apply equally and inure to the benefit of
Landlord's present and future partners, beneficiaries, officers, directors,
trustees, shareholders, agents and employees, and their respective partners,
heirs, successors and assigns. Under no circumstances shall any present or
future general or limited partner of Landlord (if Landlord is a partnership), or
trustee or beneficiary (if Landlord or any partner of Landlord is a trust) have
any liability for the performance of Landlord's obligations under this Lease.
Notwithstanding the foregoing to the contrary, Landlord shall have personal
liability for insured claims, beyond Landlord's interest in the Property (and
rental proceeds thereof), to the extent of Landlord's liability insurance
coverage available for such claims.
ARTICLE 27
31
<PAGE>
INDEMNIFICATION
Except to the extent arising from the intentional or grossly negligent acts
of Landlord or Landlord's agents or employees, Tenant shall defend, indemnify
and hold harmless Landlord from and against any and all claims, demands,
liabilities, damages, judgments, orders, decrees, actions, proceedings, fines,
penalties, costs and expenses, including without limitation, court costs and
attorneys' fees arising from or relating to any loss of life, damage or injury
to person, property or business occurring in or from the Premises, or caused by
or in connection with any violation of this Lease or use of the Premises or
Property by, or any other act or omission of, Tenant, any other occupant of the
Premises, or any of their respective agents, employees, contractors or guests.
Without limiting the generality of the foregoing, Tenant specifically
acknowledges that the indemnity undertaking herein shall apply to claims in
connection with or arising out of any "Work" as described in Article 8, the
installation, maintenance, use or removal of any "Lines" located in or serving
the Premises as described in Article 29, and the transportation, use, storage,
maintenance, generation, manufacturing, handling, disposal, release or discharge
of any "Hazardous Material" as described in Article 30 (whether or not any of
such matters shall have been theretofore approved by Landlord), except to the
extent that any of the same arises from the intentional or grossly negligent
acts of Landlord or Landlord's agents or employees.
ARTICLE 28
SAFETY AND SECURITY DEVICES, SERVICES AND PROGRAMS
The parties acknowledge that safety and security devices, services and
programs provided by Landlord, if any, while intended to deter crime and ensure
safety, may not in given instances prevent theft or other criminal acts, or
ensure safety of persons or property. The risk that any safety or security
device, service or program may not be effective, or may malfunction, or be
circumvented by a criminal, is assumed by Tenant with respect to Tenant's
property and interests, and Tenant shall obtain insurance coverage to the extent
Tenant desires protection against such criminal acts and other losses, as
further described in Article 11. Tenant agrees to cooperate in any reasonable
safety or security program developed by Landlord or required by Law.
ARTICLE 29
COMMUNICATIONS AND COMPUTER LINES
Tenant may install, maintain, replace, remove or use any communications or
computer wires, cables and related devices (collectively the "Lines") at the
Property in or serving the Premises, provided: (a) Tenant shall obtain
Landlord's prior written consent, use an experienced and qualified contractor
approved in writing by Landlord, and comply with all of the other provisions of
Article 8, (b) any such installation, maintenance, replacement, removal or use
shall comply with all Laws applicable thereto and good work practices, and shall
not interfere with the
32
<PAGE>
use of any then existing Lines at the Property, (c) an acceptable number of
spare Lines and space for additional Lines shall be maintained for existing and
future occupants of the Property, as determined in Landlord's reasonable
opinion, (d) if Tenant at any time uses any equipment that may create an
electromagnetic field exceeding the normal insulation ratings of ordinary
twisted pair riser cable or cause radiation higher than normal background
radiation, the Lines therefor (including riser cables) shall be appropriately
insulated to prevent such excessive electromagnetic fields or radiation, (e) as
a condition to permitting the installation of new Lines, Landlord may require
that Tenant remove existing Lines located in or serving the Premises, (f)
Tenant's rights shall be subject to the rights of any regulated telephone
company, and (g) Tenant shall pay all costs in connection therewith. Landlord
reserves the right to require that Tenant remove any Lines located in or serving
the Premises which are installed in violation of these provisions, or which are
at any time in violation of any Laws or represent a dangerous or potentially
dangerous condition (whether such Lines were installed by Tenant or any other
party), within three (3) days after written notice. Notwithstanding any of the
foregoing to the contrary, Tenant may install, maintain, replace, remove or use
any Lines within and solely serving Tenant's Premises where same shall not
impact Landlord's or other tenant's use of the Lines at the Property in any way
(including, without limitation, utilization of more than a fair allocation by
Tenant of the Building and Property's riser capacity) without Landlord's prior
consent, provided Tenant shall notify Landlord of any such work in writing
within thirty (30) days of such work (or on some other periodic basis chosen by
Landlord and requested of Tenant in writing).
Landlord may (but shall not have the obligation to): (i) install new Lines
at the Property (ii) create additional space for Lines at the Property, and
(iii) reasonably direct, monitor and/or supervise the installation, maintenance,
replacement and removal of, the allocation and periodic re-allocation of
available space (if any) for, and the allocation of excess capacity (if any) on,
any Lines now or hereafter installed at the Property by Landlord, Tenant or any
other party (but Landlord shall have no right to monitor or control the
information transmitted through such Lines). Such rights shall not be in
limitation of other rights that may be available to Landlord by Law or
otherwise. If Landlord exercises any such rights, Landlord may charge Tenant for
the costs attributable to Tenant, or may include those costs and all other costs
in Operating Expenses under Article 25 (including without limitation, costs for
acquiring and installing Lines and risers to accommodate new Lines and spare
Lines, any associated computerized system and software for maintaining records
of Line connections, and the fees of any consulting engineers and other
experts); provided, any capital expenditures included in Operating Expenses
hereunder shall be amortized (together with reasonable finance charges) over the
period of time prescribed by Article 25.
Notwithstanding anything to the contrary contained in Article 13, Landlord
reserves the right to require that Tenant remove any or all Lines installed by
or for Tenant within or serving the Premises upon termination of this Lease,
provided Landlord notifies Tenant prior to or within thirty (30) days following
such termination. Any Lines not required to be removed pursuant to this Article
shall, at Landlord's option, become the property of Landlord (without payment by
33
<PAGE>
Landlord). If Tenant fails to remove such Lines as required by Landlord, or
violates any other provision of this Article, Landlord may, after twenty (20)
days written notice to Tenant, remove such Lines or remedy such other violation,
at Tenant's expense (without limiting Landlord's other remedies available under
this Lease or applicable Law). Tenant shall not, without the prior written
consent of Landlord in each instance, grant to any third party a security
interest or lien in or on the Lines, and any such security interest or lien
granted without Landlord's written consent shall be null and void. Except to the
extent arising from the intentional or negligent acts of Landlord or Landlord's
agents or employees, Landlord shall have no liability for damages arising from,
and Landlord does not warrant that the Tenant's use of any Lines will be free
from the following (collectively called "Line Problems"): (x) any eavesdropping
or wire-tapping by unauthorized parties, (y) any failure of any Lines to satisfy
Tenant's requirements, or (z) any shortages, failures, variations,
interruptions, disconnections, loss or damage caused by the installation,
maintenance, replacement, use or removal of Lines by or for other tenants or
occupants at the Property, by any failure of the environmental conditions or the
power supply for the Property to conform to any requirements for the Lines or
any associated equipment, or any other problems associated with any Lines by any
other cause. Under no circumstances shall any Line Problems be deemed an actual
or constructive eviction of Tenant, render Landlord liable to Tenant for
abatement of Rent, or relieve Tenant from performance of Tenant's obligations
under this Lease. Landlord in no event shall be liable for damages by reason of
loss of profits, business interruption or other consequential damage arising
from any Line Problems.
ARTICLE 30
HAZARDOUS MATERIALS
Tenant shall not transport, use, store, maintain, generate, manufacture,
handle, dispose, release or discharge any "Hazardous Material" (as defined
below) upon or about the Property, nor permit Tenant's employees, agents,
contractors, and other occupants of the Premises to engage in such activities
upon or about the Property. However, the foregoing provisions shall not prohibit
the transportation to and from, and use, storage, maintenance and handling
within, the Premises of substances customarily used in offices (or such other
business or activity expressly permitted to be undertaken in the Premises under
Article 6), provided: (a) such substances shall be used and maintained only in
such quantities as are reasonably necessary for such permitted use of the
Premises, strictly in accordance with applicable Law and the manufacturers'
instructions therefor, (b) such substances shall not be disposed of, released or
discharged on the Property, and shall be transported to and from the Premises in
compliance with all applicable Laws, and as Landlord shall reasonably require,
(c) if any applicable Law or Landlord's trash removal contractor requires that
any such substances be disposed of separately from ordinary trash, Tenant shall
make arrangements at Tenant's expense for such disposal directly with a
qualified and licensed disposal company at a lawful disposal site (subject to
scheduling and approval by Landlord), and shall ensure that disposal occurs
frequently enough to prevent unnecessary storage of such substances
34
<PAGE>
in the Premises, and (d) any remaining such substances shall be completely,
properly and lawfully removed from the Property upon expiration or earlier
termination of this Lease.
Tenant shall promptly notify Landlord of: (i) any enforcement, cleanup or
other regulatory action taken or threatened by any governmental or regulatory
authority with respect to the presence of any Hazardous Material on the Premises
or the migration thereof from or to other property, (ii) any demands or claims
made or threatened by any party against Tenant or the Premises relating to any
loss or injury resulting from any Hazardous Material, (iii) any release,
discharge or nonroutine, improper or unlawful disposal or transportation of any
Hazardous Material on or from the Premises, and (iv) any matters where Tenant is
required by Law to give a notice to any governmental or regulatory authority
respecting any Hazardous Materials on the Premises. Landlord shall have the
right (but not the obligation) to join and participate, as a party, in any legal
proceedings or actions affecting the Premises initiated in connection with any
environmental, health or safety Law. At such times as Landlord may reasonably
request, Tenant shall provide Landlord with a written list identifying any
Hazardous Material then used, stored, or maintained upon the Premises, the use
and approximate quantity of each such material, a copy of any material safety
data sheet ("MSDS") issued by the manufacturer therefor, written information
concerning the removal, transportation and disposal of the same, and such other
information as Landlord may reasonably require or as may be required by Law.
The term "Hazardous Material" for purposes hereof shall mean any chemical,
substance, material or waste or component thereof which is now or hereafter
listed, defined or regulated as a hazardous or toxic chemical, substance,
material or waste or component thereof by any federal, state or local governing
or regulatory body having jurisdiction, or which would trigger any employee or
community "right-to-know" requirements adopted by any such body, or for which
any such body has adopted any requirements for the preparation or distribution
of an MSDS.
If any Hazardous Material is released, discharged or disposed of by Tenant
or any other occupant of the Premises, or their employees, agents or
contractors, on or about the Property in violation of the foregoing provisions,
Tenant shall immediately, properly and in compliance with applicable Laws clean
up and remove the Hazardous Material from the Property and any other affected
property and clean or replace any affected personal property (whether or not
owned by Landlord), at Tenant's expense. Such clean up and removal work shall
be subject to Landlord's prior written approval (except in emergencies), and
shall include, without limitation, any testing, investigation, and the
preparation and implementation of any remedial action plan required by any
governmental body having jurisdiction or reasonably required by Landlord. If
Tenant shall fail to comply with the provisions of this Article within five (5)
days after written notice by Landlord, or such shorter time as may be required
by Law or in order to minimize any hazard to Persons or property, Landlord may
(but shall not be obligated to) arrange for such compliance directly or as
Tenant's agent through contractors or other parties selected by Landlord, at
Tenant's expense (without limiting Landlord's other remedies under this Lease or
applicable Law). If any Hazardous Material is released, discharged or disposed
of on or about the Property and such release, discharge or disposal is not
caused by Tenant or other occupants of the Premises, or their
35
<PAGE>
employees, agents or contractors, such release, discharge or disposal shall be
deemed casualty damage under Article 10 to the extent that the Premises or
common areas serving the Premises are affected thereby; in such case, Landlord
and Tenant shall have the obligations and rights respecting such casualty damage
provided under Article 10.
ARTICLE 31
MISCELLANEOUS
(A) Each of the terms and provisions of this Lease shall be binding upon
and inure to the benefit of the parties hereto, their respective heirs,
executors, administrators, guardians, custodians, successors and assigns,
subject to the provisions of Article 21 respecting Transfers.
(B) Neither this Lease nor any memorandum of lease or short form lease
shall be recorded by Tenant.
(C) This Lease shall be construed in accordance with the Laws of the state
in which the Property is located.
(D) All obligations or rights of either party arising during or
attributable to the period ending upon expiration or earlier termination of this
Lease shall survive such expiration or earlier termination.
(E) Landlord agrees that, if Tenant timely pays the Rent and performs the
terms and provisions hereunder, and subject to all other terms and provisions of
this Lease, Tenant shall hold and enjoy the Premises during the Term, free of
lawful claims by any Person acting by or through Landlord.
(F) This Lease does not grant any legal rights to "light and air" outside
the Premises nor any particular view or cityscape visible from the Premises.
(G) If the Commencement Date is delayed in accordance with Article 4 for
more than one year, Landlord may declare this Lease null and void, and if the
Commencement Date is so delayed for more than seven years, this Lease shall
thereupon become null and void without further action by either party.
ARTICLE 32
OFFER
The submission and negotiation of this Lease shall not be deemed an offer
to enter the same by Landlord, but the solicitation of such an offer by Tenant.
36
<PAGE>
ARTICLE 33
NOTICES
Except as expressly provided to the contrary in this Lease, every notice or
other communication to be given by either party to the other with respect hereto
or to the Premises or Property, shall be in writing and shall not be effective
for any purpose unless the same shall be served personally or by national air
courier service, or United States certified mail, return receipt requested,
postage prepaid, addressed, if to Tenant, at the address first set forth in the
Lease, until the Commencement Date, and thereafter to the Tenant at the
Premises, with a copy to Cowen, Crowley, Nord & Staub, P.C., 55 West Monroe
Street, Suite 500, Chicago, Illinois 60603, Attention: Donald C. Nord and
Wilbert F. Crowley, and if to Landlord, at the address at which the last payment
of Rent was required to be made, with copies to Walton Street Capital, L.L.C.,
900 North Michigan Avenue, Suite 1900, Chicago, Illinois 60611, Attention: Mr.
Howard Brody and to Development Resources, Inc., 439 North Wells Street,
Chicago, Illinois 60610, Attention: Mr. James De Rose, or such other address or
addresses as Tenant or Landlord may from time to time designate by notice given
as above provided. Every notice or other communication hereunder shall be
deemed to have been given as of the third business day following the date of
such mailing (or as of any earlier date evidenced by a receipt from such
national air courier service or the United States Postal Service) or immediately
if personally delivered. Notices not sent in accordance with the foregoing
shall be of no force or effect until received by the foregoing parties at such
addresses required herein.
ARTICLE 34
REAL ESTATE BROKERS
Tenant represents that Tenant has dealt only with Frain Camins &
Swarthchild (whose commission, if any, shall be paid by Landlord pursuant to
separate agreement) as broker, agent or finder in connection with this Lease and
agrees to indemnify and hold Landlord harmless from all damages, judgments,
liabilities and expenses (including reasonable attorneys' fees) arising from any
claims or demands of any other broker, agent or finder with whom Tenant has
dealt for any commission or fee alleged to be due in connection with its
participation in the procurement of Tenant or the negotiation with Tenant of
this Lease.
ARTICLE 35
SECURITY DEPOSIT
37
<PAGE>
Tenant shall deposit with Landlord a letter of credit (as described below)
in the initial amount of $840,000 as a security deposit ("Security Deposit"),
upon Tenant's execution and submission of this Lease. The letter of credit
shall be a clean, unconditional, stand-by, irrevocable letter of credit in the
initial amount of $840,000 (which shall be subject to periodic reductions
described below) substantially in the form attached hereto as Exhibit C, issued
by a federally insured national banking association located in Chicago
reasonably acceptable to Landlord. Tenant shall maintain the letter of credit
through December 31, 2004 ("LOC Expiration Date"), but may initially obtain a
letter of credit for a shorter term so long as it is renewed or replaced
periodically by submitting to Landlord original amendments extending the
expiration date (or replacement letters of credit with extended expiration
dates), on a periodic basis no later than the date that is 30 days prior to the
expiration date of the letter of credit then in effect. Failure to so extend the
expiration date of the letter of credit through said LOC Expiration Date in the
foregoing manner shall constitute a default under this Lease, entitling
Landlord, in addition to all other remedies, to draw down the letter of credit
without notice to Tenant and to hold or apply the proceeds thereof as a Security
Deposit. Beginning on the anniversary date ("Anniversary Date") of the date
Tenant first pays Rent on the entire Premises, and provided Tenant is not then
in default of the Lease beyond any applicable cure periods, the amount of the
letter of credit may be reduced by Tenant to $750,000.00. Thereafter, provided
that Tenant is not in default beyond any applicable cure periods, Tenant may
reduce the amount of the letter of credit as follows:
<TABLE>
<CAPTION>
Anniversary Date Required Amount
---------------- ---------------
<S> <C>
3rd $562,500
4th $375,000
5th $187,500
</TABLE>
The Security Deposit shall serve as security for the prompt, full and
faithful performance by Tenant of the terms and provisions of this Lease. In
the event that Tenant is in Default hereunder and fails to cure within any
applicable time permitted under this Lease, or in the event that Tenant owes any
amounts to Landlord upon the expiration of this Lease, Landlord may use or apply
the whole or any part of the Security Deposit for the payment of Tenant's
obligations hereunder. The use or application of the Security Deposit or any
portion thereof shall not prevent Landlord from exercising any other right or
remedy provided hereunder or under any Law and shall not be construed as
liquidated damage. In the event the Security Deposit is reduced by such use or
application, Tenant shall deposit with Landlord within ten (10) days after
written notice, an amount sufficient to restore the full amount of the Security
Deposit. Landlord shall not be required to keep the Security Deposit separate
from Landlord's general funds or pay interest on the Security Deposit. Any
remaining portion of the Security Deposit shall be returned to Tenant within
sixty (60) days after Tenant has vacated the Premises in accordance with Article
13. If the Premises shall be expanded at any time, or if the Term shall be
extended at an increased rate of Rent, the Security Deposit shall thereupon be
proportionately increased. Tenant shall have the right, upon thirty (30) days'
notice to Landlord to replace the letter of credit with an equivalent
38
<PAGE>
amount of cash to be held per the terms of this Article 35 by Landlord, or in an
escrow arrangement with a title company or a bank (any costs of which
arrangement Tenant shall pay), the terms of which escrow shall be substantially
similar to the letter of credit (including, without limitation, Landlord's
ability to draw down on such Security Deposit unilaterally, unconditionally and
without the need for advance notice), and otherwise acceptable to Landlord.
Notwithstanding any of the foregoing, to the extent that a mutually agreeable
escrow arrangement is utilized, Tenant shall have the right to have the Security
Deposit invested for Tenant's benefit in U.S Treasury obligations or other
interest-bearing investments acceptable to Landlord.
ARTICLE 36
OPTION TO EXTEND
Tenant is hereby granted an option to extend the Term for a single
additional period of five (5) consecutive Lease Years ("Extension Period"), on
the same terms and conditions in effect under the Lease immediately prior to the
Extension Period, except that Tenant shall have no further right to extend, and
monthly Base Rent shall be the then Prevailing Rental Rate. The option to
extend may be exercised only by giving Landlord irrevocable and unconditional
written notice thereof no earlier than twenty four (24) months and no later than
twelve (12) months prior to the commencement of the Extension Period. Said
exercise shall, at Landlord's election, be null and void if Tenant is in Default
under the Lease beyond any applicable cure period at the date of said notice or
at any time thereafter and prior to commencement of the Extension Period. The
term "Lease Year" herein means each twelve month annual period, commencing with
the first day of the Extension Period, without regard to calendar years.
"Prevailing Rental Rate" means the average per square foot rental rate per
year for all renewal leases for renewal periods approximately as long as the
Extension Period, executed by tenants for similar uses and lengths of time for
multi-story buildings in the Property during the six (6) months immediately
prior to the date upon which such Prevailing Rental Rate is to become effective,
where such renewal rates were not set by the terms of such leases. In all
cases, such rates shall take into consideration the location, quality and age of
the building, floor level, extent of leasehold improvements (existing or to be
provided), rental abatements, lease takeovers/assumptions, parking charges,
moving expenses and other concessions for the benefit of Tenant, term of lease,
extent of services to be provided, distinction between "gross" and "net" lease,
base year or amount allowed by Landlord for payment of building operating
expenses (expense stop), and the time the particular rental rate under
consideration became or is to become effective, or any other relevant term or
condition.
If the parties are unable to agree on the Prevailing Rental Rate within
thirty (30) days after the commencement of the Extension Period, either party
may request that the Prevailing Rental Rate be determined by arbitration, under
the Commercial Arbitration Rules of the American Arbitration Association then in
effect. Such determination shall be final and binding upon the
39
<PAGE>
parties. In recognition that the Prevailing Rental Rate may not be determined
until after the commencement of the Extension Period, Tenant shall pay, during
the Extension Period until the Prevailing Rental Rate is determined, 100% of the
amount of Rent then in effect (including Base Rent, and all other charges).
Under no circumstances shall the Rent during the Extension Period ever be less
than 100% of such amount of Rent then in effect, regardless of the Prevailing
Rental Rate, as determined in accordance with the foregoing provisions. If the
Prevailing Rental Rate is determined to be greater than such amount, Tenant
shall pay Landlord, within thirty (30) days after written request therefor, the
difference between the amount required by such determination of the Prevailing
Rental Rate, and the amount of Rent therefore paid by Tenant during the
Extension Period.
If Tenant shall fail to exercise the option herein provided, said option
shall terminate, and shall be null and void and of no further force and effect.
Tenant's exercise of said option shall not operate to cure any default by Tenant
of any of the terms or provisions in the Lease, nor to extinguish or impair any
rights or remedies of Landlord arising by virtue of such default. If the Lease
or Tenant's right to possession of the Premises shall terminate in any manner
whatsoever before Tenant shall exercise the option herein provided, then
immediately upon such termination, the option herein granted to extend the Term,
shall simultaneously terminate and become null and void. Such option is
personal to Tenant. Under no circumstances shall the assignee under a complete
or partial assignment of the Lease (except for an Affiliate which is assigned
the entire interest in the Lease), or a subtenant under a sublease of the
Premises, have any right to exercise the option to extend granted herein. Time
is of the essence of this provision.
ARTICLE 37
Expansion Space
During the period commencing on the Commencement Date and continuing until
December 31, 1997 ("ROFR Period"), Tenant shall have a right of first refusal
("ROFR") to lease the remainder of the Building ("Expansion Space"). Landlord
shall present any lease for the Expansion Space (or a portion of Expansion
Space) which has been signed by a third party and Landlord is otherwise prepared
to sign ("ROFR Lease") during the ROFR Period to Tenant and Tenant shall have a
period of five (5) days to irrevocably exercise in writing its right to lease
that portion of the Expansion Space which is the subject of the ROFR Lease on
the terms contained in the ROFR Lease. Failure of Tenant to timely exercise
Tenant's ROFR shall be deemed an election by Tenant not to exercise Tenant's
ROFR. Notwithstanding the foregoing, Landlord shall use reasonable efforts to
give Tenant prior notice in the event Landlord is engaged in negotiations which
likely will result in Tenant's ROFR being exercisable.
For the remainder of the initial Term of the Lease following the ROFR
Period, Tenant shall have a right of first opportunity to lease any remaining
portion of the Expansion Space prior to the Expansion Space being offered to a
third party, in an "as is" condition, when the same
40
<PAGE>
becomes legally available to lease, on the same terms and provisions then in
effect under the Lease, except that (i) monthly Base Rent for the Expansion
Space shall be adjusted to reflect the Prevailing Rental Rate, and (ii) if the
commencement date for the leasing of the Expansion Space does not occur during
the first thirty (30) months of the initial Term (a commencement date for the
Expansion Space during the first thirty (30) months of the initial Term shall
result in the lease for the Expansion Space being coterminous with the initial
Term of the Lease), then Tenant shall be required to lease the Expansion Space
for the term otherwise contemplated by Landlord and the Lease Term shall be
correspondingly extended at the Prevailing Rental Rate so as to be coterminous
with the Expansion Space lease. "Prevailing Rental Rate" means the average per
square foot rental rate per month for all leases for comparable space and
approximately the same number of months, executed by tenants in multi-story
buildings in the Property for office space expansions during the six (6) months
immediately prior to the date upon which such Prevailing Rental Rate is to
become effective and payable under the terms of this Lease, where the rates for
such expansions were not set in such leases, subject to reasonable adjustments
for comparable space on more desirable, or less desirable floors or areas of the
Property. If no such comparable space has been leased during such six (6) month
period, the rental rates used for purposes of this provision shall be adjusted
to the amounts Landlord would have used had leases for such comparable space
been entered. In calculating the Prevailing Rental Rate, Landlord shall take
into account the existence in comparable leases of base years, stop levels or
other provisions respecting taxes or operating expenses and any other economic
provisions, such as but not limited to consumer price index provisions, utility
reimbursements or fixed rent increases, any free rent periods, and improvement
allowances. To the extent that any of the foregoing provisions or concessions
are generally provided by Landlord in comparable expansion leases at the time
the prevailing Rental Rate is being determined, Landlord shall provide the same
to Tenant.
Landlord shall notify Tenant in writing within thirty (30) days after the
Expansion Space becomes legally available to lease, or at Landlord's option,
such earlier time as Landlord shall be in a position to project when the
Expansion Space will be legally available to lease, advising Tenant of such
projected date. Tenant shall then have ten (10) business days in which to
notify Landlord in writing exercising Tenant's right to lease the Expansion
Space on the terms described above. If Tenant exercises the right to lease the
Expansion Space, said lease shall commence the later of thirty (30) days after
Tenant's notice exercising the right, or the date the Expansion Space is
available for occupancy, and shall continue for the duration of the Term of the
Lease. After Tenant validly exercises the expansion right provided herein, the
parties shall execute an amendment to the Lease, adding the Expansion Space, or
a new lease for the Expansion Space, or such other documentation as Landlord
shall require, promptly after Landlord shall prepare the same, in order to
confirm the leasing of such Expansion Space to Tenant, but an otherwise valid
exercise of the expansion rights contained herein shall be fully effective,
whether or not such confirmatory documentation is executed.
If the parties are unable to agree on the Prevailing Rental Rate within
sixty (60) days after the commencement of the lease for the Expansion Space,
either party may request that the
41
<PAGE>
Prevailing Rental Rate be determined by arbitration, under the Commercial
Arbitration Rules of the American Arbitration Association then in effect. In
recognition that the Prevailing Rental Rate may not be determined until after
the commencement of the lease for the Expansion Space, Tenant shall pay, as Rent
for the Expansion Space, until the Prevailing Rental Rate is determined, the
amount of Rent then in effect under the Lease on a per rentable square foot
basis (including Base Rent, and all other charges). Under no circumstances shall
the Rent under the Lease ever be less than such amount of Rent then in effect
under the Lease on a per rentable square foot basis, regardless of the
Prevailing Rental Rate, as determined in accordance with the foregoing
provisions. If the Prevailing Rental Rate is determined to be greater than such
amount, Tenant shall pay Landlord, within thirty (30) days after written request
therefor, the difference between the amount required by such determination of
the Prevailing Rental Rate, and the amount theretofore paid by Tenant for the
Expansion Space.
The foregoing expansion right shall apply only with respect to the entire
Expansion Space, and may not be exercised with respect to only a portion
thereof, unless only a portion shall first become available (in which case, the
foregoing expansion right shall apply to such portions, as the same become
available). If Tenant shall fail to exercise such expansion right, after notice
by Landlord of the availability of the Expansion Space, as provided herein, such
right shall be deemed to have lapsed and expired, and shall be of no further
force or effect. Landlord may thereafter freely lease all or a portion of the
Expansion Space to any other party, at any time, on any terms, in Landlord's
sole discretion (except that prior to entering into a lease for the Expansion
Space with a third party within ninety (90) days of Tenant's waiving its right
to the Expansion Space, which lease's economic terms in the aggregate are at
least 25% more favorable than the terms offered to Tenant, Landlord shall again
offer the Expansion Space to Tenant subject to the terms set forth herein). The
foregoing expansion right shall be subject to the existing tenants or occupants
of the Expansion Space renewing their existing leases whether pursuant to
options to extend previously granted or otherwise, and in all events is subject
and subordinate to any existing rights of any other parties to lease the
Expansion Space, if such existing rights have already been granted prior to the
date of this Lease.
If Tenant shall exercise the expansion right granted herein, Landlord does
not guarantee that the Expansion Space will be available on the commencement
date for the lease thereof, if the then existing occupants of the Expansion
Space shall hold-over, or for any other reason beyond Landlord's reasonable
control. In such event, rent with respect to the Expansion Space shall be
abated until Landlord legally delivers the same to Tenant, as Tenant's sole
recourse. Tenant's exercise of such expansion right shall not operate to cure
any default by Tenant of any of the terms and provisions in the Lease, nor to
extinguish or impair any rights or remedies of Landlord arising by virtue of
such default. The expansion right herein shall, at Landlord's election, be null
and void, if Tenant is in default under the Lease on the date Tenant exercises
its rights hereunder or at any time thereafter and prior to commencement of the
Lease for the Expansion Space. If the Lease or Tenant's right to possession of
the Premises shall terminate in any manner whatsoever before Tenant shall
exercise the right herein provided, or if Tenant shall have subleased or
42
<PAGE>
assigned more than 25% of the Premises, then immediately upon such termination,
sublease or assignment, the right to lease the Expansion Space herein granted
shall simultaneously terminate and become null and void. Such right is personal
to Tenant. Under no circumstances shall the assignee under a complete or partial
assignment of the Lease (except for an Affiliate which is assigned the entire
interest in the Lease), or a subtenant under a sublease of the Premises, have
any right to exercise the expansion right granted herein. Tenant agrees that
time is of the essence of this provision.
Landlord agrees that it shall use reasonable efforts (without being
required to make any economic concessions) to negotiate relocation clauses in
future leases in the Building which are for less than 9,911 square feet. Not
more than twice a year, Tenant shall be entitled to make a written request to
Landlord for a list of the space available to lease in Old Orchard Plaza and the
space in the Building which is subject to a lease containing a relocation clause
and Landlord will provide such a list within twenty (20) days of receipt of such
request.
Subject to the terms of this Article 37, Tenant may also give written
notice to Landlord of Tenant's desire to lease all or a portion of the Expansion
Space which is then legally available to lease, regardless of whether or not
Landlord has a third party interested in the Expansion Space and Landlord shall
lease the same to Tenant on the terms contained in this Article 37 (except that
Landlord shall have the right to reasonably modify terms of the expansion lease
such as the dimensions or the amount of space leased [if less than the entire
Expansion Space is leased] to take into account factors such as the
marketability of the remaining space and its compliance with applicable laws
concerning occupancy).
ARTICLE 38
Americans with Disabilities Act
The parties acknowledge that Title III of the Americans With Disabilities
Act of 1990 (42 U.S.C. (S)12101 et seq.) and regulations and guidelines
promulgated thereunder, as all of the same may be amended and supplemented from
time to time (collectively referred to herein as the "ADA") established
requirements for accessibility and barrier removal, and that such requirements
may or may not apply to the Premises and Property depending on, among other
things: (1) whether Tenant's business is deemed a "public accommodation" or
"commercial facility", (2) whether such requirements are "readily achievable",
and (3) whether a given alteration affects a "primary function area" or triggers
"path of travel" requirements. The parties hereby agree that: (a) Landlord
shall be responsible for ADA Title III compliance in the common areas, except as
provided below, (b) Tenant shall be responsible for ADA Title III compliance in
the Premises, and (c) Landlord may perform, or require that Tenant perform, and
Tenant shall be responsible for the cost of, ADA Title III "path of travel"
requirements triggered by alterations in the Premises. Tenant shall be solely
responsible for requirements under Title I of the ADA relating to Tenant's
employees.
43
<PAGE>
ARTICLE 39
Lease Termination
In the event that Tenant desires at least 10,000 square feet of additional
space, Tenant shall provide Landlord with written notice of the amount of
additional space Tenant requires (which notice shall be binding on Tenant for
purposes of this Article 39 both as to the amount of space required by Tenant
and as to Tenant's leasing of such space, if available) not later than December
31, 2002 (and no earlier than November 1, 2002) and Landlord shall respond to
Tenant in writing within one hundred twenty (120) days of such notice indicating
whether or not Landlord can satisfy Tenant's space requirements set forth in
such notice in a location or locations somewhere in the Property by December 31,
2003. Such space, if available, shall be leased by Tenant in "as is" condition
at the Prevailing Rental Rate (as defined in Article 38, and subject to the
arbitration provisions contained therein) commencing on the earlier of January
1, 2004 or the earlier availability of the space. In the event Landlord is
unable to accommodate Tenant with the amount of additional space set forth in
Tenant's notice, Tenant shall have a one-time right to terminate this Lease
effective as of December 31, 2003 ("Termination Date") provided that Tenant
meets all of the following additional requirements:
(i) Tenant has not exercised Tenant's Option to Extend pursuant to
Article 37 or otherwise; and
(ii) Tenant provides Landlord with irrevocable written notice of
Tenant's intention to terminate this Lease within sixty (60) days
of Landlord's notice to Tenant concerning Landlord's inability to
provide the expansion space specified in Tenant's original notice
to Landlord ("Termination Notice"); and
(iii) Tenant is not in default at the time Tenant gives Landlord the
Termination Notice or at any time thereafter; and
(iv) Tenant actually enters into a lease with a third party landlord
for premises (which lease may consist of more than one non-
contiguous location provided that the smallest location may not
be smaller than (a) the number of aggregate square feet of space
Landlord has available for lease on December 31, 2003 or (b) the
existing Premises, whichever is greater) at least 95% as large as
the space which would have comprised the Premises plus the
additional space requested of Landlord, and provides Landlord
with proof of same; and
(v) Tenant submits to Landlord with the Termination Notice a
certified or cashier's check for one half the total termination
payment ("Termination Payment") equal to the sum of the costs
incurred by Landlord for the construction of Tenant's initial
improvements per the Work Agreement attached to the Lease, such
amount being
44
<PAGE>
currently estimated to be approximately $891,900.00 (and which
actual amount shall be confirmed in writing within 90 days after
the Commencement Date) plus $199,785.00 payable to broker by
Landlord in connection with the Lease, plus all of Landlord's
out-of-pocket costs in connection with any future amendments of
this Lease, all including interest at the rate of ten percent
(10%) per annum, amortized as shown on Exhibit D attached hereto
(prior to submitting the Termination Notice, Tenant shall submit
a written request to Landlord for Landlord to calculate the
amount of the Termination Payment and Landlord shall provide such
amount within thirty (30) days of Tenant's written request for
same); and
(vi) Tenant submits to Landlord prior to the Termination Date a
certified or cashier's check for the remaining half of the
Termination Payment.
Tenant shall continue to comply with all the terms and provisions of this Lease
and shall remain liable for all of Tenant's obligations which accrue hereunder
up to and including the Termination Date. This termination right is personal to
Tenant. Under no circumstance shall the assignee under a complete or partial
assignment of the Lease (except for an Affiliate which is assigned Tenant's
entire interest in the Lease), or a subtenant under a sublease of the Premises,
have any right to exercise the termination right granted herein. Tenant agrees
that time is of the essence of this provision.
ARTICLE 40
SIGNAGE
Tenant shall have the following signage rights: (i) monument signage which
fronts on Old Orchard Road and the entry road to the Property, (ii) monument
signage on the entry road adjacent to the Building, (iii) a listing in the
directory in the Building, and (iv) if Tenant occupies at least four (4) full
floors in the Building, Tenant shall have the right to install a sign on the
Building. Landlord shall install, at Landlord's cost, the signage set forth in
(i) and (iii) above and shall maintain same, the cost of such maintenance to be
included in Operating Expenses. Tenant shall install, at Tenant's cost, the
signage set forth in (ii) and (iv) above and shall maintain same at Tenant's
expense which maintenance obligation shall be subject to all the provisions of
this Lease, including, without limitation, Article 9. All aspects of the size,
design, materials, exact location, etc. of all such signage shall be subject to
Landlord's approval (which approval Landlord may withhold in Landlord's sole
discretion) and shall comply with all applicable Laws, codes and ordinances.
ARTICLE 41
USE OF ROOF
45
<PAGE>
Tenant shall have the right, at Tenant's cost, to place a satellite dish
not exceeding 48" in diameter on the roof of the Building, without paying
additional monthly Rent. All aspects of such installation (including, without
limitation, the location of the dish, type and color of the dish and any
required concealment) shall be subject to Landlord's prior written approval
(which approval Landlord may withhold in Landlord's sole discretion) and shall
comply with all applicable Laws, codes and ordinances.
ARTICLE 42
CERTIFICATE OF GOOD STANDING
Tenant shall furnish to Landlord within twenty one (21) days of the date
hereof, a certificate of good standing for Peapod, Inc., a Delaware corporation.
Failure by Tenant to timely furnish same shall be an event of default hereunder
entitling Landlord, in addition to the other remedies provided hereunder, to
stop the Work pursuant to the attached Work Agreement and to draw down on the
letter of credit Security Deposit and use the proceeds of same to cover the
costs of any Work previously executed.
ARTICLE 43
ENTIRE AGREEMENT
This Lease, together with Rider One, Exhibits A through D and the document
captioned Work Agreement (WHICH COLLECTIVELY ARE HEREBY INCORPORATED WHERE
REFERRED TO HEREIN AND MADE A PART HEREOF AS THOUGH FULLY SET FORTH), contains
all the terms and provisions between Landlord and Tenant relating to the matters
set forth herein and no prior or contemporaneous agreement or understanding
pertaining to the same shall be of any force or effect, except any such
contemporaneous agreement specifically referring to and modifying this Lease,
signed by both parties. Without limitation as to the generality of the
foregoing, Tenant hereby acknowledges and agrees that Landlord's leasing agents
and field personnel are only authorized to show the Premises and negotiate terms
and conditions for leases subject to Landlord's final approval, and are not
authorized to make any agreements, representations, understandings or
obligations, binding upon Landlord, respecting the condition of the Premises or
Property, suitability of the same for Tenant's business, or any other matter,
and no such agreements, representations, understandings or obligations not
expressly contained herein or in such contemporaneous agreement shall be of any
force or effect. Neither this Lease, nor any Riders or Exhibits referred to
above may be modified, except in writing signed by both parties.
LANDLORD:
LONG DRIVE INVESTORS I, L.L.C.,
46
<PAGE>
a Delaware limited liability company
By: Walton Street Real Estate Fund I, L.L.C.,
a Delaware limited liability company,
Managing Member
By: Walton Street Managers I, L.P.,
a Delaware limited partnership,
Managing Member
By: WSC Managers I, Inc.,
a Delaware corporation,
General Partner
By: ___________________________
Name: _________________________
Title: ______________________
TENANT:
Peapod, L.P.,
an Illinois limited partnership
By: ___________________________________________
Name Typed: ___________________________________
Title: _____________________________________
47
<PAGE>
EXHIBIT A
---------
PREMISES
[Gene Ventura to submit.]
<PAGE>
EXHIBIT B
---------
BASE RENT
<TABLE>
<CAPTION>
Annual Per
Rentable Square
Foot Base Annual Monthly
Period Rental Rate Base Rent Base Rent
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
June 15, 1997 through $12.00 $356,760.00 $29,730.00 *
June 30, 1998
July 1, 1998 through $12.50 $371,625.00 $30,968.75
June 30, 1999
July 1, 1999 through $13.00 $386,490.00 $32,207.50
June 30, 2000
July 1, 2000 through $13.50 $401,355.00 $33,446.25
June 30, 2001
July 1, 2001 through $14.00 $416,220.00 $34,685.00
June 30, 2002
July 1, 2002 through $14.50 $431,085.00 $35,923.75
June 30, 2003
July 1, 2003 through $15.00 $445,950.00 $37,162.50
June 30, 2004
July 1, 2004 through $15.50 $460,815.00 $38,401.25
December 31, 2004
</TABLE>
* Subject to the Base Rent abatement provision contained in Article 2 of the
Lease and a proportionate adjustment to reflect the fact that Tenant is only
scheduled to occupy the second floor and the data center on the third floor
during the period from June 15, 1997 through June 30, 1997.
<PAGE>
EXHIBIT C
---------
LETTER OF CREDIT
<PAGE>
EXHIBIT D
---------
AMORTIZATION SCHEDULE
<PAGE>
RIDER ONE
---------
RULES
(1) On Saturdays, Sundays and Holidays, and on other days between the
hours of 6:00 P.M. and 8:00 A.M. the following day, or such other hours as
Landlord shall determine from time to time, access to the Property and/or to the
passageways, entrances, exits, shipping areas, halls, corridors, elevators or
stairways and other areas in the Property may be restricted and access gained by
use of a key to the outside doors of the Property, or pursuant to such security
procedures Landlord may from time to time impose. All such areas, and all roofs,
are not for use of the general public and Landlord shall in all cases retain the
right to control and prevent access thereto by all persons whose presence in the
judgment of Landlord shall be prejudicial to the safety, character, reputation
and interests of the Property and its tenants provided, however, that nothing
herein contained shall be construed to prevent such access to persons with whom
Tenant deals in the normal course of Tenant's business unless such persons are
engaged in activities which are illegal or violate these Rules. No Tenant and no
employee or invitee of Tenant shall enter into areas reserved for the exclusive
use of Landlord, its employees or invitees. Tenant shall keep doors to corridors
and lobbies closed except when persons are entering or leaving.
(2) Tenant shall not paint, display, inscribe, maintain or affix any sign,
placard, picture, advertisement, name, notice, lettering or direction on any
part of the outside or inside of the Property, or on any part of the inside of
the Premises which can be seen from the outside of the Premises, without the
prior consent of Landlord, and then only such name or names or matter and in
such color, size, style, character and material as may be first approved by
Landlord in writing. Landlord reserves the right to remove at Tenant's expense
all matter not so installed or approved without notice to Tenant.
(3) Tenant shall not in any manner use the name of the Property for any
purpose other than that of the business address of the Tenant, or use any
picture or likeness of the Property, in any letterheads, envelopes, circulars,
notices, advertisements, containers or wrapping material without Landlord's
express consent in writing.
(4) Tenant shall not place anything or allow anything to be placed in the
Premises near the glass of any door, partition, wall or window which may be
unsightly from outside the Premises, and Tenant shall not place or permit to be
placed any article of any kind on any window ledge or on the exterior walls.
Blinds, shades, awnings or other forms of inside or outside window ventilators
or similar devices, shall not be placed in or about the outside windows in the
Premises except to the extent, if any, that the character, shape, color,
material and make thereof is first approved by the Landlord.
(5) Furniture, freight and other large or heavy articles, and all other
deliveries may be brought into the Property only at times and in the manner
designated by Landlord, in compliance
R1-1
<PAGE>
with all Laws, and always at the Tenant's sole responsibility and risk. All
damage done to the Property by moving or maintaining such furniture, freight or
articles shall be repaired by Landlord at Tenant's expense. Landlord may inspect
items brought into the Property or Premises with respect to weight or dangerous
nature. Landlord may require that all furniture, equipment, cartons and similar
articles removed from the Premises or the Property be listed and a removal
permit therefor first be obtained from Landlord. Tenant shall not take or permit
to be taken in or out of other entrances of the Property, any item normally
taken, or which Landlord otherwise reasonably requires to be taken, in or out
through service doors. Tenant shall not allow anything (including without
limitation, portable carts, signs, placards, and billboards) to remain in or
obstruct in any way, any lobby, plaza, corridor, sidewalk, passageway, entrance,
exit, hall, elevator, escalator, stairway, shipping area, or other area. Tenant
shall move all supplies, furniture and equipment as soon as received directly to
the Premises, and shall move all such items and waste that are at any time being
taken from the Premises directly to the areas designated for disposal. Tenant
shall cause trash and rubbish to be deposited only in receptacles approved or
designated by Landlord. Any hand-carts used at the Property shall have rubber
wheels and side guards and no other material handling equipment may be brought
upon the Property except as Landlord shall approve in writing in advance.
Nothing contained in this paragraph shall be deemed to prevent Tenant from
taking routine delivery of items during normal business hours which do not tie
up the elevators or otherwise inconvenience other tenants in the Building.
(6) Tenant shall not overload any floor or part thereof in the Premises,
or Property, including any public corridors or elevators therein bringing in or
removing any large or heavy articles, and Landlord may direct and control the
location of safes and all other heavy articles and require supplementary
supports at Tenant's expense of such material and dimensions as Landlord may
deem necessary to properly distribute the weight.
(7) Tenant shall not attach or permit to be attached additional locks or
similar devices to any door or window, change existing locks or the mechanism
thereof, or make or permit to be made any keys for any door other than those
provided by Landlord. If more than two keys for one lock are desired, Landlord
will provide them upon payment therefor by Tenant. Tenant, upon termination of
its tenancy, shall deliver to the Landlord all keys of offices, rooms and toilet
rooms which have been furnished Tenant or which the Tenant shall have had made,
and in the event of loss of any keys so furnished shall pay Landlord therefor.
(8) If Tenant desires signal, communication, alarm or other utility or
similar service connections installed or changed, Tenant shall not install or
change the same without the prior approval of Landlord, and then only under
Landlord's direction at Tenant's expense. Tenant shall not install in the
Premises any equipment which requires more electric current than Landlord is
required to provide under this Lease, without Landlord's prior approval, and
Tenant shall ascertain from Landlord the maximum amount of load or demand for or
use of electrical current which can safely be permitted in the Premises, taking
into account the capacity of electric wiring
R1-2
<PAGE>
in the Property and the Premises and the needs of tenants of the Property, and
shall not in any event connect a greater load than such safe capacity.
(9) Tenant shall not obtain for use upon the Premises ice, drinking water,
towel, janitor and other similar services, except from Persons approved by the
Landlord. Any Person engaged by Tenant to provide janitor or other services
shall be subject to direction by the manager or security personnel of the
Property.
(10) The toilet rooms, urinals, wash bowls and other such apparatus shall
not be used for any purpose other than that for which they were constructed and
no foreign substance of any kind whatsoever shall be thrown therein and the
expense of any breakage, stoppage or damage resulting from the violation of this
Rule shall be borne by the Tenant who, or whose employees or invitees shall have
caused it.
(11) The janitorial closets, utility closets, telephone closets, broom
closets, electrical closets, storage closets, and other such closets, rooms and
areas shall be used only for the purposes and in the manner designated by
Landlord, and may not be used by tenants, or their contractors, agents,
employees, or other parties without Landlord's prior written consent.
(12) Landlord reserves the right to exclude or expel from the Property any
person who, in the judgment of Landlord, is intoxicated or under the influence
of liquor or drugs, or who shall in any manner do any act in violation of any of
these Rules. Tenant shall not at any time manufacture, sell, use or give away,
any spirituous, fermented, intoxicating or alcoholic liquors on the Premises,
nor permit any of the same to occur (except in connection with occasional social
or business events conducted in the Premises which do not violate any Laws nor
bother or annoy any other tenants). Tenant shall not at any time sell, purchase
or give away, food in any form by or to any of Tenant's agents or employees or
any other parties on the Premises, nor permit any of the same to occur (other
than in lunch rooms or kitchens for employees as may be permitted or installed
by Landlord, which does not violate any Laws or bother or annoy any other
tenant), nor permit any video, electronic or pinball machines on the Premises.
If any food or beverages shall be permitted to be sold or consumed on the
Premises, Landlord may require that Tenant engage a responsible pest and rodent
control service approved by Landlord on such regular basis as Landlord
reasonably requires.
(13) Tenant shall not make any room-to-room canvass to solicit business or
information or to distribute any article or material to or from other tenants or
occupants of the Property and shall not exhibit, sell or offer to sell, use,
rent or exchange any products or services in or from the Premises unless
ordinarily embraced within the Tenant's use of the Premises specified in the
Lease. No leaflets or other materials may be distributed or placed on vehicles
in any parking area or facility.
R1-3
<PAGE>
(14) Tenant shall not waste electricity, water, heat or air conditioning or
other utilities or services, and agrees to cooperate fully with Landlord to
assure the most effective and energy efficient operation of the Property and
shall not allow the adjustment (except by Landlord's authorized Property
personnel) of any controls. Tenant shall keep corridor doors closed and shall
not open any windows, except that if the air circulation shall not be in
operation, windows which are openable may be opened with Landlord's consent. As
a condition to claiming any deficiency in the air-conditioning or ventilation
services provided by Landlord, Tenant shall close any blinds or drapes in the
Premises to prevent or minimize direct sunlight.
(15) Tenant shall conduct no auction, fire or "going out of business sale"
or bankruptcy sale in or from the Premises, and such prohibition shall apply to
Tenant's creditors.
(16) Tenant shall cooperate and comply with any reasonable safety or
security programs, including fire drills and air raid drills, and the
appointment of "fire wardens" developed by Landlord for the Property, or
required by Law. Before leaving the Premises unattended, Tenant shall close and
securely lock all doors or other means of entry to the Premises and shut off all
lights and water faucets in the Premises (except heat to the extent necessary to
prevent the freezing or bursting of pipes).
(17) Tenant will comply with all municipal, county, state, federal or other
government laws, statutes, codes, regulations and other requirements, including
without limitation, environmental, health, safety and police requirements and
regulations respecting the Premises, now or hereinafter in force, at its sole
cost, and will not use the Premises for any immoral purposes.
(18) Tenant shall not (i) carry on any business, activity or service except
those ordinarily embraced within the permitted use of the Premises specified in
the Lease and more particularly, but without limiting the generality of the
foregoing, shall not (ii) install or operate any internal combustion engine,
boiler, machinery, refrigerating, heating or air conditioning equipment in or
about the Premises, unless previously approved by Landlord in writing, such
consent not to be unreasonably withheld, (iii) use the Premises for housing,
lodging or sleeping purposes or for the washing of clothes, (iv) place any radio
or television antennae other than inside of the Premises, (v) operate or permit
to be operated any musical or sound producing instrument or device which may be
heard outside the Premises, (vi) use any source of power other than electricity,
(vii) operate any electrical or other device from which may emanate electrical
or other waves which may interfere with or impair radio, television, microwave,
or other broadcasting or reception from or in the Property or elsewhere, (viii)
bring or permit any bicycle or other vehicle, or dog (except in the company of a
blind person or except where specifically permitted) or other animal or bird in
the Property, (ix) make or permit objectionable noise or odor to emanate from
the Premises, (x) do anything in or about the Premises tending to create or
maintain a nuisance or do any act tending to injure the reputation of the
Property, (xi) throw or permit to be thrown or dropped any article from any
window or other opening in the Property, (xii) use or permit upon the Premises
R1-4
<PAGE>
anything that will invalidate or increase the rate of insurance on any policies
of insurance now or hereafter carried on the Property or violate the
certificates of occupancy issued for the premises or the Property, (xiii) use
the Premises for any purpose, or permit upon the Premises anything, that may be
dangerous to persons or property (including but not limited to flammable oils,
fluids, paints, chemicals, firearms or any explosive articles or materials) nor
(xiv) do or permit anything to be done upon the Premises in any way tending to
disturb any other tenant at the Property or the occupants of neighboring
property.
(19) The following Rules shall apply to the parking areas:
(i) In all cases, parking for Tenant and its employees and visitors
shall be on a "first come, first served," unassigned basis, with
Landlord and other tenants at the Property, and their employees
and visitors, and other Persons (as defined in Article 25 of the
Lease) to whom Landlord shall grant the right or who shall
otherwise have the right to use the same, all subject to these
Rules, as the same may be amended or supplemented, and applied
on a non-discriminatory basis, all as further described in
Article 6 of the Lease. Notwithstanding the foregoing to the
contrary, Landlord reserves the right to assign specific spaces,
and to reserve spaces for visitors, small cars, handicapped
individuals, and other tenants, visitors of tenants or other
Persons, and Tenant and its employees and visitors shall not
park in any such assigned or reserved spaces.
(ii) In case of any violation of these provisions, Landlord may
refuse to permit the violator to park, and may remove the
vehicle owned or driven by the violator from the Property
without liability whatsoever, at such violator's risk and
expense. Landlord reserves the right to close all or a portion
of the parking areas in order to make repairs or perform
maintenance services, or to alter, modify, re-stripe or renovate
the same, or if required by casualty, strike, condemnation, act
of God, Law or governmental requirement, or any other reason
beyond Landlord's reasonable control.
(iii) Cars must be parked entirely within the stall lines, and only
small cars may be parked in areas reserved for small cars; all
directional signs and arrows must be observed; the speed limit
shall be 5 miles per hour; spaces reserved for handicapped
parking must be used only by vehicles properly designated; every
parker is required to park and lock his own car; washing,
waxing, cleaning or servicing of any vehicle is prohibited;
parking spaces may be used only for parking automobiles; parking
is prohibited in areas: (a) not striped or designated for
parking, (b) aisles, (c) where "no parking" signs are posted,
(d) on ramps, and (e) loading areas and other specially
R1-5
<PAGE>
designated areas. Delivery trucks and vehicles shall use only
those areas designated therefor.
R1-6
<PAGE>
WORK AGREEMENT
--------------
TURN-KEY DEAL
THIS AGREEMENT made as of the day of _________, 1997, between Long Drive
Investors I, L.L.C., a Delaware limited liability company ("Landlord") and
Peapod, L.P., an Illinois limited partnership ("Tenant").
Reference is made to the lease agreement dated ___________________________,
1997 (the "Lease") for premises consisting of 29,730 square feet in Building C
(the "Premises"), located in the property known as Old Orchard Plaza (the
"Property").
I. THE WORK. The "Work" herein shall consist of the improvements shown
on the plans ("Plans") referenced as follows, and any demolition or preparation
work required in connection therewith:
Name of Architect or Space Planner: Techno Architects/Interior
Designers
Address of Architect or Space Planner: 1147 West Ohio Street
Chicago, Illinois 60622
<TABLE>
<CAPTION>
<S> <C> <C>
Dates of Plans and Revisions: Issued for Review 3/6/97
Issued for Bid/Engineering 3/10/97
Issued for Permit 3/27/97
Addendum 1 3/13/97
Addendum 2 3/18/97
Addendum 3 3/27/97
</TABLE>
II. BASIC AGREEMENT. Subject to the provisions contained in Article 1 and
Article 4 of the Lease and Section III below, Landlord shall substantially
complete the Work described above, on or before the Commencement Date under the
Lease.
Landlord shall bear the cost of the Work (including the cost of building
permits and sales tax) except for the Architects and/or Space Planner's fees and
except as otherwise expressly provided to the contrary herein.
III. TENANT DELAYS. Delays in substantially completing the Work and
delivering the Premises that occur as a result of one or more of the following
(collectively called "Tenant
WA-1
<PAGE>
Delays") shall not delay the Commencement Date or postpone the commencement of
Rent under the Lease:
(a) Tenant's requests for changes to the Work or Change Orders under
Section V, or otherwise,
(b) Tenant's failure to furnish an amount equal to Landlord's
reasonable estimate of Tenant's Cost (if any) within 10 days, as
described in Section XI (which shall give Landlord the absolute right
to postpone the Work until such amount is furnished to Landlord),
(c) any upgrades, special work or other non-building standard items,
or items not customarily provided by Landlord to office tenants, to
the extent that the same involve longer lead times, installation
times, delays or difficulties in obtaining building permits,
requirements for any governmental approval, permit or action beyond
the issuance of normal building permits (as described in Section IV),
or other delays not typically encountered in connection with
Landlord's standard office improvements,
(d) the performance by Tenant or Tenant's contractors, agents or
employees of any work at or about the Premises or Property, or
(e) any act or omission of Tenant or Tenant's contractors, agents or
employees, or any breach by the Tenant of any provisions contained in
this Agreement or in the Lease, or any failure of Tenant to cooperate
with Landlord or otherwise act in good faith in order to cause the
Work to be designed and performed in a timely manner.
IV. GOVERNMENTAL APPROVAL OF PLANS. Landlord shall apply for any normal
building permits required for the Work. If the Plans must be revised in order
to obtain such building permits, Landlord shall promptly notify Tenant. In such
case, Tenant shall promptly arrange for the Plans to be revised to satisfy the
building permit requirements and shall submit the revised Plans to Landlord for
approval as a Change Order under Section V. Landlord shall have no obligation
to apply for any zoning, parking or sign code amendments, approvals, permits or
variances, or any other governmental approval, permit or action (except normal
building permits as described above). If any such other matters are required,
Tenant shall promptly seek to satisfy such requirements or revise the Plans to
eliminate such requirements. Delays in substantially completing the Work by the
Commencement Date as a result of requirements for building permits or other
governmental approvals, permits or actions shall affect the Commencement Date
and commencement of Rent to the extent provided in Section III.
WA-2
<PAGE>
V. CHANGES TO PLANS. If Tenant shall desire any changes, alterations, or
additions to the Plans referenced above, Tenant shall submit a detailed written
request or revised Plans (the "Change Order") to Landlord for approval. If
reasonable and practicable and generally consistent with the Plans theretofor
approved, Landlord shall not unreasonably withhold approval, but all costs in
connection therewith, including without limitation construction costs, permit
fees, and any additional plans, drawings and engineering reports or opinions or
other studies or tests, or revisions of such existing items, shall be paid for
by Tenant as a Tenant's Cost under Section XI, or as Landlord shall otherwise
reasonably require.
VI. COMPLETION.
A. Landlord shall be deemed to have "substantially completed" the
Work for purposes hereof if Landlord has caused all of the Work to be completed
substantially except for so-called "punchlist items," e.g. minor details of
construction or decoration or mechanical adjustments which do not substantially
interfere with Tenant's occupancy of the Premises, or Tenant's ability to
complete any improvements to the Premises to be made by Tenant. If there is any
dispute as to whether Landlord has substantially completed the Work, the good
faith decision of Landlord's space planner shall be final and binding on the
parties.
B. If Landlord notifies Tenant in writing that the Work is
substantially completed, and Tenant fails to object thereto in writing within
seven (7) days thereafter specifying in reasonable detail the items of work
needed to be performed in order for substantial completion, Tenant shall be
deemed conclusively to have agreed that the Work is substantially completed, for
purposes of commencing the Commencement Date and Rent under the Lease.
C. Substantial completion shall not prejudice Tenant's rights to
require full completion of any remaining items of Work. However, if Landlord
notifies Tenant in writing that the Work is fully completed, and Tenant fails to
object thereto in writing within fifteen (15) days thereafter specifying in
reasonable detail the items of work needed to be completed and the nature of
work needed to complete said items, Tenant shall be deemed conclusively to have
accepted the Work as fully completed (or such portions thereof as to which
Tenant has not so objected).
D. Landlord reserves the right to substitute comparable or better
materials and items for those shown in the Plans, so long as they do not
materially and adversely affect the appearance of the Premises.
VII. WORK PERFORMED BY TENANT. Landlord, at Landlord's discretion, may
permit Tenant and Tenant's agents and contractors to enter the Premises prior to
completion of the Work in order to make the Premises ready for Tenant's use and
occupancy. If Landlord permits such entry prior to completion of the Work, then
such permission is conditioned upon Tenant and Tenant's agents, contractors,
workmen, mechanics, suppliers and invitees working in harmony and interfering
with Landlord and Landlord's contractors in doing the Work or with other tenants
WA-3
<PAGE>
and occupants of the Building. If at any time such entry shall cause or threaten
to cause such disharmony or interference, Landlord shall have the right to
withdraw such permission upon twenty-four (24) hours oral or written notice to
Tenant. Tenant agrees that any such entry into the Premises shall be deemed to
be under all of the terms, covenants, conditions and provisions of the Lease
(including, without limitation, all insurance requirements), except as to the
covenant to pay Rent thereunder, and further agrees that Landlord shall not be
liable in any way for any injury, loss or damage which may occur to any items of
work constructed by Tenant or to other property of Tenant that may be placed in
the Premises prior to completion of the Work, the same being at Tenant's sole
risk.
VIII. LIABILITY. The parties acknowledge that Landlord is not an
architect or engineer, and that the Work will be designed and performed by
independent architects, engineers and contractors. Accordingly, Landlord does
not guarantee or warrant that the Plans will be free from errors or omissions,
nor that the Work will be free from defects, and Landlord shall have no
liability therefor, provided that such architects, engineers and contractors are
licensed and reputable. In the event of such errors, omissions, or defects,
Landlord shall cooperate in any action Tenant desires to bring against such
parties.
IX. TAXES. Tenant shall pay prior to delinquency all taxes, charges or
other governmental impositions (including without limitation, any real estate
taxes or assessments, sales tax or value added tax) assessed against or levied
upon Tenant's fixtures, furnishings, equipment and personal property located in
the Premises and the Work to the Premises under this Agreement. Whenever
possible, Tenant shall cause all such items to be assessed and billed separately
from the property of Landlord. In the event any such items shall be assessed
and billed with the property of Landlord, Tenant shall pay its share of such
taxes, charges or other governmental impositions to Landlord within thirty (30)
days after Landlord delivers a statement and a copy of the assessment or other
documentation showing the amount of such impositions applicable to Tenant.
X. INCORPORATION INTO LEASE; DEFAULT. THE PARTIES AGREE THAT THE
PROVISIONS OF THIS WORK AGREEMENT ARE HEREBY INCORPORATED BY THIS REFERENCE INTO
THE LEASE FULLY AS THOUGH SET FORTH THEREIN. In the event of any express
inconsistencies between the Lease and this Work Agreement, the latter shall
govern and control. Any default by a party hereunder shall constitute a default
by that party under the Lease and said party shall be subject to the remedies
and other provisions applicable thereto under the Lease.
XI. TENANT'S COST.
Any amounts that Tenant is required to pay under this Agreement pursuant to
Section V or otherwise shall be referred to as "Tenant's Cost" herein. Tenant's
Cost shall be deemed additional "Rent" under the Lease. Landlord may at any
time reasonably estimate Tenant's Cost in advance, in which case, Tenant shall
deposit such estimated amount with Landlord within 10
WA-4
<PAGE>
days after requested by Landlord. If such estimated amount exceeds the actual
amount of Tenant's Cost, Tenant shall receive a refund of the difference, and if
the actual amount shall exceed the estimated amount, Tenant shall pay the
difference to Landlord within 10 days after requested by Landlord.
LANDLORD:
LONG DRIVE INVESTORS I, L.L.C.,
a Delaware limited liability company
By: Walton Street Real Estate Fund I, L.L.C.,
a Delaware limited liability company,
Managing Member
By: Walton Street Managers I, L.P.,
a Delaware limited partnership,
Managing Member
By: WSC Managers I, Inc.,
a Delaware corporation,
General Partner
By: ___________________________
Name: ____________________
Title: ____________________
TENANT:
Peapod, L.P.,
an Illinois limited partnership
By: _____________________________________________
Name Typed: ______________________________________
Title: ______________________________________
WA-5
<PAGE>
CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE
406 PROMULGATED UNDER THE SECURITIES AND EXCHANGE ACT OF 1934, AS AMENDED, AND
RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH
ASTERISKS.
FULL SERVICE AGREEMENT
This Agreement is made as of September 1, 1995, among Jewel Food Stores,
Inc. ("Jewel"), and Peapod LP ("Peapod"), an Illinois limited partnership and
successor in interest to Peapod, Inc.
WHEREAS, Jewel and Peapod, Inc. entered into an agreement dated February
19, 1992 ("Original Agreement") whereby Jewel agreed to act as the exclusive
grocery and drug retail source for Peapod's shopping and delivery service; and
WHEREAS, the Original Agreement was amended by a letter agreement between
Jewel and Peapod, Inc. dated as of October 5, 1993 and a Memorandum of Agreement
between Jewel and Peapod, Inc. dated as of December 7, 1993; and
WHEREAS, the parties now wish to enter into a new agreement that will
supersede the Original Agreement as amended.
NOW, THEREFORE, in consideration of the mutual covenants set forth herein,
Jewel and Peapod agree as follows:
1. Grocery Shopping, Delivery and Customer Information Service: Peapod will
provide its on-line grocery information, shopping and delivery service
("Full Service Program") furnishing its customers with selected grocery
information ("Shoppers Helper") and fulfilling grocery orders placed
through Peapod's system by shopping and delivery or customer pickup
("Fulfillment Service"). In addition, Peapod will provide at its offices,
customer service personnel to handle customer inquiries and requests.
Employees of Peapod will maintain professional standards at all times.
Jewel will instruct store personnel to assist Peapod's staff to ensure the
timely and orderly shopping and temporary storage for delivery of grocery
orders. Jewel personnel will not provide shopping service assistance. The
Full Service Program does not include the shopping and delivery or customer
pickup of alcoholic beverages, which shall be governed by separate
agreement.
2. Exclusive Rights to Full Service Program: Subject to the terms and
conditions of this Agreement, Jewel will be the sole and exclusive grocery
and drug retailer for Peapod's Full Service Program in the Chicago
metropolitan area (delineated in Appendix I to this Agreement) for a five
year period from September 1, 1995 to August 31, 2000.
3. Order Fee: Jewel agrees to pay Peapod **** percent (****%) of sales from
each Fulfillment Service order. This fee will be billed on a bi-monthly
basis and payments shall be due within 10 days of receipt.
4. Exclusive Rights Fees:
(a) Fulfillment Service: Jewel agrees to pay Peapod $**** on or about
September 1, 1996 and an additional $**** on or about September 1 of
each of the three years
<PAGE>
CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE
406 PROMULGATED UNDER THE SECURITIES AND EXCHANGE ACT OF 1934, AS AMENDED, AND
RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH
ASTERISKS.
thereafter (for a total of $****) for the exclusive right to the
Fulfillment Service granted in paragraph 2; provided, that payments
due subsequent to termination by either party pursuant to this
Agreement shall not be required.
(b) Shoppers Helper: Subject to adjustment as provided in this paragraph 4
(b), Jewel agrees to pay Peapod $**** per month for each validated
Shoppers Helper subscriber not using the Fulfillment Service during a
given month. Jewel will pay such fee monthly as part of the
reconciliation with Peapod for payment of customers' orders. The
parties agree to use reasonable commercial efforts to develop a method
to validate participation in Shoppers Helper and to identify changes
in buying behavior as a result of such participation.
(c) Shoppers Helper Fee Adjustment: If Jewel in its discretion determines
that the fee structure for Shoppers Helper is too high relative to the
benefit to Jewel, Jewel shall give Peapod notice of its desire to
renegotiate the fee. If the parties do not agree on an adjusted fee
within thirty days after such notice, Jewel may elect to pay a lower
fee or to cease paying the Shoppers Helper fee by notice to Peapod
anytime after September 11, 1996. In the event such fee is adjusted
without mutual agreement to less than $**** per month per subscriber,
Peapod shall have the right to cancel Jewel's exclusive right to the
Shoppers Helper program at any time upon thirty days notice to Jewel
without affecting the other rights and obligations of the parties
under this Agreement. As long as Jewel's exclusive right to the
Shoppers Helper program has not been terminated, both parties agree to
support the program operationally and with marketing support as
contemplated by this Agreement.
5. Zones and Expansion: Jewel and Peapod agree that the Peapod Full Service
Program will be extended to the geographic areas currently served as set
forth on page 2 of Appendix I and such additional geographic areas as shall
be mutually agreed upon by the parties. Such geographic areas shall
hereinafter be referred to as "Zones". Each Zone shall be mutually defined
and indicated by zip code (See Appendix I) and shall consist of
approximately 90,000 potential households. Jewel reserves the right to
substitute one base store for another within a given Zone, but agrees to
provide Peapod at least 30 days written notice. Jewel reserves the right to
cease using Peapod's operation in one or more Zones, but continue
operations in the remaining Zones.
6. New Zone Fee: Jewel agrees to pay Peapod a fee of $**** for each additional
Zone agreed to by Jewel opened by the parties, payable $**** within ten
days after agreement to open such Zone and $**** within ten days after
Peapod begins operations in such Zone. Jewel shall not be required to pay a
monthly or annual Zone fee for current or future Zones.
7. Payment to Jewel, Coupons and Refunds: The following procedures will be
used to facilitate the purchase and subsequent payment of all grocery
orders:
-2-
<PAGE>
CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE
406 PROMULGATED UNDER THE SECURITIES AND EXCHANGE ACT OF 1934, AS AMENDED, AND
RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH
ASTERISKS.
(a) Peapod will issue to Jewel on a daily basis, and Jewel will accept for
payment, a voucher for each individual order. Original vouchers and
reports shall be submitted, and all vouchers will be due and payable
to Jewel, on the fifteenth and thirtieth of each month. Peapod
acknowledges and agrees that it will have no security interest, nor
will it grant a security interest to any other party, in funds owed to
Jewel. Peapod will cooperate with Jewel to clarify accounting terms
and procedures.
(b) Peapod will accept checks or credit cards from its customers for
grocery purchases (plus shopping fees) or debit the amount of the
purchase from the customer' s checking account via Electronic Fund
Transfer (EFT). Peapod also accepts the total credit risk on each
payment as it has the right and ability to terminate a membership
immediately should a customer default on a payment. Jewel will pay
Peapod's credit card costs on the customer's actual purchase amount,
and Peapod will pay credit card costs on fees and other amounts
charged to the customer by Peapod.
(c) Peapod will accept coupons from its customers upon delivery of
groceries. The value of these coupons will be deducted from each
customer's subsequent order so that Peapod can clear the coupons
accurately at its central office. Peapod will be responsible for
clearing coupons according to Jewel's predescribed procedure,
verifying that the coupons relate to items actually purchased and that
all coupons are within the limits of the expiration date. Peapod will
submit the coupons to Jewel monthly and deduct the cumulative amount
from the total dollar amount owed to Jewel. Peapod will be responsible
for totaling the coupons and submitting an orderly report for Jewel's
verification once a month.
(d) Peapod will accept product returns from its customers and will return
these products to Jewel for credit. Product returned to Jewel will be
credited as a deduction from the total dollar amount owed Jewel at the
time of the monthly billing. Peapod will provide any documentation of
returns reasonably requested by Jewel. Peapod will accept
responsibility for any product which is returned by a customer due to
damage or spoilage during delivery.
(e) From time-to-time Jewel offers customers special promotional
considerations such as trading stamps. Such considerations are issued
at the point of purchase based upon total purchases made. Peapod
agrees to deliver all such promotional offers along with the grocery
deliveries. Jewel agrees to accept such considerations as payment
where appropriate.
8. Store Site Needs: Jewel agrees to provide Peapod with the following at each
base store that it enters:
(a) sufficient space (minimum 600 sq. ft.) to stage orders which are
waiting to be delivered to customers or picked up by customers (in
order to avoid disruption to
-3-
<PAGE>
CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE
406 PROMULGATED UNDER THE SECURITIES AND EXCHANGE ACT OF 1934, AS AMENDED, AND
RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH
ASTERISKS.
Jewel's in-store operations, this space will ideally be located
outside of the retail selling area of the store with close proximity
and access to outside door);
(b) access to electric power to run a small freezer in order to keep
frozen items frozen until they are ready for delivery and to run
Peapod's computer and related electrical equipment;
(c) a secure office space (preferably 10 ft. by 12 ft.) for Peapod
employees which will allow Peapod to securely store its computer and
shopping equipment;
(d) where pickup service is involved, access to a door adjacent to the
pickup parking area; Peapod and Jewel agree to develop reasonable
joint security procedures with regard to use of such door.
9. Product Pricing: Jewel has complete discretion to establish and change its
prices under the current pricing system. After September 1, 1996, Jewel has
the right to institute zone pricing to Peapod. Each party will assume those
costs necessary to enable that party to modify its systems to implement
such zone pricing. After September 1, 1996, Jewel has the right to
institute Peapod-wide pricing if the necessary technology is available. The
parties agree to use commercially reasonable efforts to develop the
necessary technology to establish Peapod-wide pricing. Nothing in this
Agreement shall prohibit Jewel or Peapod from informing customers that the
Peapod price is different from in-store prices.
10. Pricing and Technical Requirements: In order to offer their members up-to-
date pricing and sale item information, Peapod will publish on their
network a list of Jewel items and the corresponding price, while noting any
sale prices. In order to accomplish this, the following procedures have
been established:
(a) Peapod will maintain a data base of items based on its ability to add
as many items as possible with priority given to items requested by
its members.
(b) Peapod will provide the technical expertise to download pricing from
Jewel's computer to Peapod's computer via a modem. All item and price
file maintenance will be downloaded up to five times weekly.
(c) Peapod will provide the computer equipment necessary and a dedicated
telephone line at each base store it enters to allow Peapod employees
to receive orders. Peapod will maintain and service the equipment it
provides. Peapod will be responsible for all repairs or replacement of
the equipment due to malfunction or damage of any kind.
(d) Jewel will provide a technical manager to work directly with Peapod's
technical manager on any improvements which need to be made to
Peapod's system at Jewel's end.
-4-
<PAGE>
CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE
406 PROMULGATED UNDER THE SECURITIES AND EXCHANGE ACT OF 1934, AS AMENDED, AND
RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH
ASTERISKS.
(e) Jewel will periodically provide to Peapod a master load file in order
to update the item file or fix inaccuracies.
11. Advertising and Marketing: The parties will cooperate in a joint
advertising and marketing effort as described in Appendix II to this
Agreement. Jewel agrees to absorb the cost of development, production,
stock and distribution of all advertising efforts described in Appendix II.
Jewel does not agree to absorb the costs of advertising and marketing
efforts in excess of those described in Appendix II.
For purposes of promoting the Full Service Program in each Zone, Jewel
shall allow Peapod to use the Jewel name and logo. In return Peapod agrees
that Jewel has the sole right to review and approve all marketing materials
which promote the Full Service Program in conjunction with the Jewel name.
Nothing contained in this Agreement, or any of the covenants and provisions
hereof, shall constitute an assignment of any Jewel or affiliate trademark,
trade name, name or logo, it being expressly understood and agreed that the
use of the Jewel name or logo or any of the trademarks or trade names shall
only be for the purpose of promoting the Full Service Program or any part
thereof. Nothing contained herein shall give Peapod any right, title or
interest in the Jewel name, logo, trademark or trade name; Peapod agrees
that these are the sole property of Jewel Food Stores, Inc. and that any
and all uses by Peapod during the term of this Agreement shall enure to the
benefit of Jewel Food Stores, Inc.
It is also understood that Peapod continues to own all rights, title and
interest to the Peapod name, logo, trademarks or trade name and all the
rights to all of its grocery screens and software, and may sell advertising
within such grocery screens.
12. Confidentiality: Neither party to this Agreement shall publicly disclose
the terms of this Agreement without prior written consent of the other
party. Peapod agrees not to use confidential information or pricing
information, nor to disclose any such information to any third party except
as may be necessary for Peapod to perform its obligations pursuant to this
Agreement and except as may be agreed upon by the parties. If Peapod should
disclose confidential information to a third party pursuant to this
Agreement, Peapod shall cause the third party to agree to the
confidentiality provisions set forth in this Agreement. Peapod further
agrees that it will only view or down load pricing information from Jewel's
computer as contemplated by this Agreement and that all information
retrieved will be used solely for the purposes contemplated by this
Agreement.
Confidential information includes, but is not limited to: Jewel's
philosophy and objectives, competitive advantages and disadvantages,
customer information of any nature, employment information, technological
development, Jewel financial information or other information of Jewel or
Jewel's parent company, its affiliated and subsidiary companies, or the
affairs of the same, which Jewel reasonably considers confidential.
Confidential information does not
-5-
<PAGE>
CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE
406 PROMULGATED UNDER THE SECURITIES AND EXCHANGE ACT OF 1934, AS AMENDED, AND
RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH
ASTERISKS.
include information known to Peapod prior to the date of the Original
Agreement, that is in the public domain or was attained lawfully from a
third party by Peapod.
Each party shall protect the confidentiality of all information of a
confidential or proprietary nature disclosed to it by the other party, and
each party shall use such information only as contemplated by this
Agreement. Each party will restrict disclosure of such confidential or
proprietary information including, but not limited to, that which pertains
to advance information on Jewel pricing and item sales, solely to those of
its employees and agents with a need to know such information.
All provisions in paragraph 12 shall survive the expiration or termination
of this Agreement for any reason.
13. Indemnity: Peapod warrants that the Peapod grocery delivery system and
corresponding software do not infringe upon or violate any patent,
copyright, trade secret, or any other proprietary right of any third party;
and agrees to indemnify and hold Jewel harmless along with Jewel's
subsidiaries and affiliates who are utilizing the grocery delivery system,
and each company's respective officers, directors and employees for all
costs, damages, claims or causes of action arising from such claim, whether
or not such claim is successful including expenses and reasonable
attorney's fees. Jewel shall promptly notify Peapod and Peapod shall defend
any such claim in Jewel's name, but at Peapod's expense, in the event of
any claim.
Peapod agrees to indemnify and hold Jewel harmless from all losses, claims,
damages, expenses and liabilities (including reasonable attorney's fees),
which may be incurred by Jewel as the result of the acts or omissions of
Peapod, its servants or agents while engaged in the services contemplated
under this Agreement, other than those amounts paid in settlement of any
claim or litigation effected without the consent or approval of Peapod or
its representatives. Such indemnification shall encompass claims for
personal injury and property damage and bodily injury resulting from but
not limited to automobile accidents and property and personal injury claims
which may be brought by servants or agents of either party hereto or any
third party.
Peapod shall indemnify and hold harmless Jewel for any and all claims,
losses, actions, demands or damages arising, out of its negligence or
willful or wanton actions of for failure to act pursuant to the terms of
this Agreement. Nothing herein shall relieve Peapod of its liability for
breach of its obligations under this Agreement or for loss or damage caused
by the negligence or purposeful conduct of Peapod, its employees or agents.
Peapod shall be responsible for the satisfaction of all claims made against
Jewel, its parent or affiliated companies by Peapod's employees or agents
relating to any injuries suffered while on Jewel premises or while engaging
in any activity contemplated under the terms of this Agreement.
Jewel agrees to indemnify and hold Peapod harmless from all losses, claims,
damages, expenses and liabilities (including reasonable attorney's fees),
which may be incurred by
-6-
<PAGE>
CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE
406 PROMULGATED UNDER THE SECURITIES AND EXCHANGE ACT OF 1934, AS AMENDED, AND
RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH
ASTERISKS.
Peapod as the direct result of the negligent acts or omissions of Jewel
while engaged in the services contemplated under this Agreement, other than
those amounts paid in settlement of any claim or litigation effected
without the consent or approval of Jewel or its representatives.
14. Insurance: Prior to the first date listed above, Peapod shall provide to
Jewel proof of general liability insurance and automobile liability
coverage in a sum of no less than 5 Million Dollars coverage per incident.
Such insurance must remain in force for the entire length of this Agreement
and name Jewel as an additional insured. Said insurance shall include
bodily injury and property damage, including products, completed operations
and advertising liability and contractual liability covering Peapod's
liabilities under this Agreement. Peapod shall carry worker's compensation
and employer's liability as required by the laws of the State of Illinois
covering all persons employed by Peapod in the performance of the work
herein.
15. Peapod Exclusivity: Jewel agrees that Peapod will be the sole consumer
computer service which Jewel will utilize for the shopping of Jewel
products during the term of this Agreement.
16. Subscription Lists: Peapod will supply Jewel at the end of each calendar
quarter with the following information regarding each Peapod grocery
service subscriber ("Subscriber Lists") to the extent permitted by
applicable law and Peapod's contract with subscribers: the name, address,
telephone number, date the individual became a subscriber, types of
services used, frequency of use, amount of the three most recent purchases
through Peapod, and date of most recent use of Peapod services. The
Subscriber Lists shall be kept confidential by Jewel and shall not be used
by Jewel or disclosed by Jewel to third parties except as follows:
(a) Jewel may mail advertising and promotion materials to subscribers
regarding Jewel Stores products available for purchase in Jewel Stores
and product recalls;
(b) After this Agreement expires or is terminated by either party, Jewel
may use the Subscriber Lists to solicit persons identified by
Subscriber Lists to purchase products from Jewel stores through
another shopping and/or delivery service, including Jewel's own
shopping and delivery service; and
(c) After this Agreement expires or is terminated by either party,
Subscriber Lists will be used only by Jewel, affiliated companies or
companies with which Jewel has a contractual relationship in
connection with Jewel's business, including another home shopping
service, and Jewel will not otherwise disclose Subscriber Lists to
third parties.
Peapod covenants, while this Agreement remains in effect and for three
years thereafter, it will not sell, lease, or otherwise transfer its
Subscriber Lists that existed during the term of this Agreement to any
company that competes with Jewel. Peapod will have the right to use its
Subscriber Lists in any way not prohibited, including soliciting persons to
use the Peapod service after the contract is terminated or has expired.
-7-
<PAGE>
CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE
406 PROMULGATED UNDER THE SECURITIES AND EXCHANGE ACT OF 1934, AS AMENDED, AND
RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH
ASTERISKS.
17. Term: This Agreement shall remain in force until August 31, 2000.
18. Termination: Jewel may terminate this Agreement at any time upon one
hundred twenty days notice to Peapod. Peapod may terminate this Agreement
if Chicago metropolitan area sales are less than $**** in 1996 or less than
$**** plus 10% compounded annually for any year thereafter. Either party
may terminate this Agreement upon thirty days prior written notice if the
other party fails to comply with any material provision of this Agreement
or if a bankruptcy, insolvency, receivership, liquidation, dissolution or
similar proceeding ("Insolvency Proceeding") is instituted by or against
the other party and is not discharged within thirty days of its occurrence.
If Peapod terminates because annual sales are less than the mutually agreed
minimum, or if Jewel terminates due to breach of this Agreement or
institution of an Insolvency Proceeding by or against Peapod as stated
above, Peapod must refund to Jewel a pro rata portion of the exclusive
rights fees paid by Jewel for the contract year (September 1 -August 31) in
which termination occurred pursuant to paragraph 4(a) based on the number
of days remaining in the contract year as of the date of termination.
19. Right of First Refusal: Any time during the fifth year of this Agreement,
Jewel shall have an exclusive right to negotiate continuation of the Peapod
service in the Chicago metropolitan area. Either party may provide written
notice to the other party of its desire to negotiate continuation of the
Peapod service. If Jewel and Peapod have not entered into a written
agreement to continue the Peapod service within thirty days of such notice
or one hundred eighty days prior to the end of the term of this Agreement,
whichever is earlier, Peapod may negotiate with other supermarket or
combination store retailers to provide the Peapod service in the Chicago
metropolitan area; provided, however, that Jewel shall have a right of
first refusal to accept the terms that Peapod has definitively negotiated
(based on a fully executed letter of intent expressing economic terms) with
such other supermarket or combination store retailer, with such reasonable
adjustments as are necessitated solely by differences between Jewel's
operation and such other retailer's operation ("Adjustments"). Peapod shall
give Jewel written notice of the terms contained in such letter of intent,
including any proposed Adjustments. The parties shall have thirty days
after Peapod's notice to resolve any differences in Adjustments. Jewel
shall have sixty days after Peapod's notice (the "Offering Period") to
accept such terms, including any mutually agreed Adjustments, by written
notice to Peapod. If Jewel does not accept such terms by notice within the
Offering Period, Peapod shall be free to enter into an agreement with any
third party within ninety days after the expiration of the Offering Period
to provide the Peapod service in the Chicago metropolitan area on
substantially the same economic terms as those presented to Jewel. In such
event, this Agreement shall terminate on the earlier of one hundred twenty
days from the expiration of the Offering Period or the date of termination
otherwise provided in this Agreement.
20. Relationship of Parties: The relationship of Peapod and Jewel under this
Agreement is that of independent contractors, and nothing contained in this
Agreement shall create, constitute or be construed so as to create or
constitute an agency relationship, joint venture, partnership, franchise or
any other type of relationship other than two independent parties
contracting for
-8-
<PAGE>
CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE
406 PROMULGATED UNDER THE SECURITIES AND EXCHANGE ACT OF 1934, AS AMENDED, AND
RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH
ASTERISKS.
services. Neither Jewel nor Peapod will make any representation or hold
itself out to any third party to the contrary. Peapod's agents or employees
shall not be considered employees of Jewel nor shall Jewel employees be
considered employees of Peapod. Peapod will make all decisions concerning
hiring, termination, and terms of employment with respect to its employees
and agents. Peapod shall be responsible in all respects for the employment,
control and conduct of any and all persons hired or employed by it. Peapod
shall pay all unemployment insurance and similar taxes and unemployment
related expenses related to such employees. Peapod shall be solely
responsible for all withholding from its employees and shall properly pay
over to the appropriate authorities all income taxes withheld.
21. Significant Changes in Technology: In the event of a significant change in
the technology applicable to home shopping that has a material effect on
the cost to either Peapod or Jewel to provide the home shopping service,
the parties agree to renegotiate the terms of the Agreement affected by the
technology change.
22. General:
(a) All notices, requests, demands and other communications under this
Agreement shall be in writing and shall be deemed to have been duly
given if delivered personally or after the fifth day having been sent
certified or registered mail, postage prepaid, to a party at its
address set forth above in this Agreement or at any such other address
a party shall designate in writing.
(b) This Agreement shall inure to the benefit of and be binding upon the
parties hereto and their respective successors, heirs and permitted
assigns. This Agreement is not assignable by Peapod without the prior
written consent of Jewel, and any attempt to assign any of the rights,
duties or obligations without such consent is void, except if such
assignment is to a successor of substantially all rights and
liabilities of the Company and does not involve a change of
controlling interest; should such a permitted assignment occur, Peapod
shall provide Jewel 30 days prior written notice of the assignment.
Nothing in this Agreement, express or implied, shall confer on any
person other than the parties hereto or their respective successors,
heirs or permitted assigns, any rights, remedies, obligations, or
liabilities under or by reason of this Agreement.
(c) If any provision of this Agreement shall be determined by a court of
competent jurisdiction to be invalid or unenforceable, such
determination shall not affect the remaining provisions of this
Agreement, all of which shall remain in full force and effect.
(d) This Agreement shall be governed and construed by the laws of the
State of Illinois.
(e) This Agreement may not be modified in any manner, including prior or
current course
-9-
<PAGE>
CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE
406 PROMULGATED UNDER THE SECURITIES AND EXCHANGE ACT OF 1934, AS AMENDED, AND
RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH
ASTERISKS.
of dealing or usage of trade, except by written instruments signed by
duly authorized representatives of Peapod and Jewel.
(f) The section headings of this Agreement are inserted in this Agreement
for convenience only and are not intended to effect the meaning or
interpretation hereof.
(g) The waiver by either party of a breach of any provision of this
Agreement shall not operate nor be construed as a waiver of any other
or a subsequent breach of the same or a different kind.
(h) Neither party is responsible for failure to fulfill its obligations
under this Agreement due to causes in whole or in part, beyond its
control.
(i) This constitutes the entire Agreement between Jewel and Peapod and
supersedes any prior written or oral agreements with respect to the
same subject matter.
(j) Jewel waives all rights relating to the refund of $300,000, or any
part thereof, paid to Peapod pursuant to the letter agreement between
Jewel and Peapod, Inc. dated as of October 5, 1993.
IN WITNESS WHEREOF, the parties hereto have caused their respective corporate
name to be here unto subscribed by their duly authorized representatives.
JEWEL FOOD STORES, INC. PEAPOD LP
By: Peapod, Inc.
Its General Partner
By: /s/ Edward J. McManus By: /s/ Andrew B. Parkinson
----------------------------- --------------------------
Name: Edward J. McManus Name: Andrew B. Parkinson
Title: Senior VP and General Manager Title: President
-10-
<PAGE>
CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE
406 PROMULGATED UNDER THE SECURITIES AND EXCHANGE ACT OF 1934, AS AMENDED, AND
RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH
ASTERISKS.
APPENDIX I
Page 1 of 2
Chicago Metropolitan Area
[Insert Map here.]
-11-
<PAGE>
CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE
406 PROMULGATED UNDER THE SECURITIES AND EXCHANGE ACT OF 1934, AS AMENDED, AND
RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH
ASTERISKS.
<TABLE>
<CAPTION>
APPENDIX I
Page 2 of 2
Zone List
(Current Zones as of
September 1, 1995)
Zone A (2485) Zone D (3000) Zone G (2317)
2485 Howard Ave. 3000 Kirchoff Rd. 2317 75th Street
Evanston, IL 60201 Rolling Meadows, IL 60008 Woodridge, IL 60517
(708) 328-9791 (708) 398-2060 (708) 985-9380
- -------------- -------------- --------------
<S> <C> <C> <C> <C>
60043 Kenilworth A 60004 Arlington Heights D 60440 Bolingbrook
60076 Skokie A 60005 Arlington Heights D 60504 Aurora
60077 Lincolnwood A 60007 Elk Grove Village D 60514 Clarendon Hills
60077 Skokie A 60008 Rolling Meadows D 60515 Downers Grove
60091 Wilmette A 60010 Barrington D 60516 Downers Grove
60201 Evanston A 60047 Lake Zurich D 60517 Woodridge
60202 Evanston A 60067 Palatine D 60521 Oak Brook/
60203 Evanston A 60074 Palatine D Hinsdale/
60208 Evanston, N.U. A 60173 Schaumburg D Willowbrook
60209 Evanston, N.U. A 60193 Schaumburg D 60532 Lisle
60626 Rogers Park A 60194 Schaumburg D 60540 Naperville
60645 Lincolnwood A 60195 Hoffman Estates D 60559 Westmont
60645 Rogers Park A 60561 Darian
60563 Naperville
60564 Naperville
60565 Naperville
Zone B (2775) Zone E (7342) Zone H (2128)
2775 Pfingsten Road 7342 West Foster 2128 S. Mannheim
Glenview, IL 60025 Chicago, IL 60656 Westchester, IL 60154
(708) 564-8550 (312) 775-6866 (708) 531-9560
- -------------- -------------- --------------
60016 Des Plaines B 60018 Des Plaines E 60104 Bellwood
60022 Glencoe B 60068 Park Ridge E 60106 Bensenville
60025 Glenview B 60176 Schiller Park E 60126 Elmhurst
60026 Glenview B 60630 Jefferson E 60130 Forest Park
60029 Golf B 60631 Norwood Park E 60131 Franklin Park
60053 Morton Grove B 60634 Dunning E 60141 Hines
60056 Mt. Prospect B 60635 Elmwood Park E 60153 Maywood
60062 Northbrook B 60641 Irving Park E 60154 Westchester
60070 Prospect 60646 Edgebrook E 60160 Melrose Park
Heights B 60648 Niles E 60162 Hillside
60090 Wheeling B 60656 Harwood 60163 Berkeley
60093 Northfield B Heights E 60164 Northlake
60093 Winnetka B 60714 Niles E 60165 Stone Park
60171 River Grove
60181 Villa Park
60301 Oak Park
60302 Oak Park
60304 Oak Park
60305 River Forest
60402 Berwyn
60501 Summit
60513 Brookfield
60525 LaGrange/
Countryside
60534 Lyons
60546 Riverside
60558 Western Springs
60650 Cicero
</TABLE>
-12-
<PAGE>
CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE
406 PROMULGATED UNDER THE SECURITIES AND EXCHANGE ACT OF 1934, AS AMENDED, AND
RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH
ASTERISKS.
<TABLE>
<CAPTION>
Zone C (5343) Zone F (890)
5343 N. Broadway 890 Western
Chicago, IL 60640 Lake Forest, IL 60045
(312) 784-1922 (708) 735-8018
- -------------- --------------
<S> <C> <C> <C>
60610 Fort Dearborn C 60015 Deerfield F
60611 Fort Dearborn C 60035 Highland Park F
60613 Lakeview C 60037 Highland Park F
60614 Lincoln Park C 60040 Highwood F
60618 Kedzie Grace C 60044 Lake Bluff F
60625 Ravenswood C 60045 Lake Forest F
60640 Uptown C 60048 Libertyville F
60647 Logan Square C 60061 Vernon Hills F
60654 Fort Dearborn C 60069 Lincolnshire F
60657 Graceland C 60089 Buffalo Grove F
60659 Northtown C
60660 Rogers Park C
60601 North Loop C
60602 Dwntwn/Loop C
60603 Main Loop C
60604 South Loop C
60605 South Dwntwn. C
60606 West Dwntwn. C
60607 S.W. Dwntwn. C
60622 Wicker Park C
60661 River North C
</TABLE>
-13-
<PAGE>
CONFIDENTIAL MATERIAL APPEARING IN THIS DOCUMENT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE
406 PROMULGATED UNDER THE SECURITIES AND EXCHANGE ACT OF 1934, AS AMENDED, AND
RULE 24B-2 PROMULGATED THEREUNDER. OMITTED INFORMATION HAS BEEN REPLACED WITH
ASTERISKS.
Appendix II
Jewel/Peapod
Annual Marketing Support
Chicago
****
-14-
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use of our report dated May 9, 1997, relating to the
balance sheet of New Peapod, Inc. as of December 31, 1996, and the related
statement of operations for the period from December 5, 1996 (inception)
through December 31, 1996, included herein and to the use of our report dated
February 7, 1997, relating to the balance sheets of Peapod LP as of December
31, 1995 and 1996, and the related statements of operations, partners'
capital, and cash flows for each of the years in the three-year period ended
December 31, 1996, included herein and to the reference to our firm under the
headings "Selected Financial and Operating Data" and "Experts" in the
Prospectus.
Chicago, Illinois KPMG Peat Marwick LLP
May 9, 1997
