SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-22557
PEAPOD, INC.
(Exact name of Registrant as specified in its charter)
Delaware 36-4118175
- ----------------------------------- ------------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of Incorporation or Organization)
9933 Woods Drive, Skokie, Illinois 60077
(Address of principal executive offices) (ZIP Code)
(847) 583-9400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
The number of shares outstanding of the registrant's common stock,
$0.01 par value ("Common Stock") as of April 22, 1998 was 16,884,620.
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. Financial Statements.
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<CAPTION>
PEAPOD, INC.
BALANCE SHEETS
(in thousands, except for share data)
(unaudited)
December 31, March 31,
1997 1998
---------------- --------------
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents.......................................... $54,079 $10,061
Marketable securities.............................................. 8,798 43,016
Receivables, net of bad debt allowance of $352 and $295 as
of December 31, 1997 and March 31, 1998, respectively............ 1,195 1,476
Prepaid expenses................................................... 444 153
Other current assets............................................... 228 571
---------------- --------------
Total current assets.......................................... 64,744 55,277
Property and equipment:
Computer equipment and software.................................... 4,499 4,770
Service equipment and other........................................ 1,053 1,285
---------------- --------------
Property and equipment, at cost......................................... 5,552 6,055
Accumulated depreciation........................................... (2,301) (2,722)
---------------- --------------
Net property and equipment.............................................. 3,251 3,333
Capitalized software development costs.................................. 998 1,273
Goodwill, net of accumulated amortization of $174 and $184
as of December 31, 1997 and March 31, 1998, respectively............. 117 107
---------------- --------------
Total assets.................................................. $69,110 $59,990
================ ==============
Liabilities and Stockholders' Equity Current liabilities:
Accounts payable................................................... $ 7,514 $ 3,614
Accrued compensation............................................... 1,258 902
Other accrued liabilities.......................................... 926 754
Current deferred service fees...................................... 1,969 1,606
Current obligations under capital lease............................ 727 670
---------------- --------------
Total current liabilities..................................... 12,394 7,546
Deferred service fees................................................... 1,212 1,021
Obligations under capital lease, less current obligations............... 701 561
---------------- --------------
Total liabilities............................................. 14,308 9,128
Stockholders' equity:
Preferred stock, $.01 par value, authorized 5,000,000
shares, none issued and outstanding............................. -- --
Common stock, $.01 par value, 50,000,000 shares authorized,
16,852,557 and 16,881,629 shares issued and outstanding at
December 31, 1997 and March 31, 1998, respectively............ 169 169
Additional paid-in capital......................................... 63,148 63,260
Unrealized gain (loss) on available for sale securities............ -- (71)
Accumulated deficit................................................ (8,495) (12,477)
Treasury stock, 2,000 shares at cost.......................... (19) (19)
---------------- --------------
Total stockholders' equity.................................... 54,802 50,862
================ ==============
Total liabilities and stockholders' equity.................... $69,110 $59,990
================ ==============
See accompanying notes to financial statements.
</TABLE>
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<TABLE>
<CAPTION>
PEAPOD, INC.
STATEMENTS OF OPERATIONS
(in thousands, except for share and per share data)
(unaudited)
-------------------------------------------
Three months ended March 31,
-------------------------------------------
----------------- ------------------
1997 1998
----------------- ------------------
Revenues:
<S> <C> <C>
Net product sales......................................... $ 9,216 $ 15,495
Member and retailer services.............................. 2,470 2,793
Interactive marketing services............................ 425 526
Licensing services........................................ -- 50
----------------- ------------------
Total revenues....................................... 12,111 18,864
Costs and expenses:
Cost of goods sold........................................ 8,623 14,573
Fulfillment operations.................................... 3,870 5,178
General and administrative................................ 739 1,365
Marketing and selling..................................... 1,358 1,384
System development and maintenance........................ 376 610
Depreciation and amortization............................. 212 463
----------------- ------------------
Total costs and expenses............................. 15,178 23,573
----------------- ------------------
Operating loss................................................. (3,067) (4,709)
Other income (expense):
Interest expense.......................................... (15) (56)
Interest income........................................... 135 783
================= ==================
Net income (loss).............................................. $ (2,947) $ (3,982)
================= ==================
Earning per share:
Basic..................................................... $ (0.23) $ (0.24)
Diluted................................................... $ (0.23) $ (0.24)
Shares used to compute net loss per share:
Basic..................................................... 12,599,133 16,859,437
Diluted................................................... 12,599,133 16,859,437
See accompanying notes to financial statements.
</TABLE>
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<TABLE>
<CAPTION>
PEAPOD, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended March 31,
--------------------------------------
1997 1998
---------------- ----------------
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Cash flows from operating activities:
Net loss....................................................... $ (2,947) $ (3,982)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization.............................. 212 463
Stock and options issued for services rendered............. 428 45
Changes in operating assets and liabilities:
(Increase) decrease in receivables, net................ (648) (281)
(Increase) decrease in prepaid expenses................ (136) 292
(Increase) decrease in other current assets............ 11 (343)
Increase (decrease) in accounts payable................ (402) (3,900)
Increase (decrease) in accrued compensation............ (191) (356)
Increase (decrease) in other accrued liabilities....... 422 (172)
Increase (decrease) in deferred service fees........... (108) (553)
---------------- ----------------
Net cash used in operating activities.............. (3,359) (8,787)
Cash flows from investing activities:
Property and equipment purchased............................... (254) (462)
Capitalized software development costs......................... (151) (308)
Net purchase of marketable securities......................... -- (34,291)
---------------- ----------------
Net cash used in investing activities.............. (405) (35,061)
Cash flows from financing activities:
Proceeds from issuance of stock, net of offering costs......... 150 --
Proceeds from issuance of stock upon exercise of options....... -- 67
Payments on capital lease obligations.......................... (82) (237)
---------------- ----------------
Net cash provided by financing activities.......... 68 (170)
---------------- ----------------
Net increase in cash............................................... (3,696) (44,018)
Cash and cash equivalents at beginning of period................... 13,039 54,079
================ ================
Cash and cash equivalents at end of period......................... $ 9,343 $10,061
================ ================
$ 9 $ 65
Supplemental disclosure of cash flows information--interest paid
Supplemental disclosures of noncash investing and
financing activity - equipment on capital leases............... 120 40
================ ================
See accompanying notes to financial statements.
</TABLE>
<PAGE>
PEAPOD, INC.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation. The unaudited interim financial statements included
herein have been prepared by the Company, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain notes and
other information normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted from the interim financial statements presented in
this quarterly report on Form 10-Q in accordance with such rules and
regulations. In the opinion of the Company's management, the accompanying
financial statements include all adjustments, consisting only of normal
recurring adjustments, necessary to state fairly the financial position of
the Company as of March 31, 1998, and the results of its operations and
cash flows for the periods indicated. The results of operations for the
three months ended March 31, 1998 are not necessarily indicative of the
results to be expected for the full year.
These financial statements should be read in conjunction with the audited
financial statements and notes thereto of the Company for the year ended
December 31, 1997, which are included in the Company's Annual Report on
Form 10-K filed with the Securities and Exchange Commission.
2. Conversion. Peapod, Inc. ("Company") is the successor to a business
originally founded in 1989 as a Delaware corporation and operated since
1992 through an Illinois limited partnership ("Peapod LP"). In December
1996, the Company was incorporated in Delaware. In a conversion (the
"Conversion") that was effected on May 31, 1997 (i) all of the equity
interests in Peapod LP were transferred to the Company in exchange for
12,656,417 shares of Common Stock, (ii) Peapod LP was dissolved, (iii) all
of the assets and liabilities of Peapod LP were transferred to the Company
and (iv) outstanding options and warrants for equity interests in Peapod LP
were converted into options and warrants for shares of Common Stock. The
transfer of the assets and liabilities of Peapod LP to the Company have
been recorded by the Company at the historical carrying values of Peapod
LP. On June 16, 1997 ("Offering Date"), the Company closed an initial
public offering of 4,000,000 shares of Common Stock at $16.00 per share
generating net proceeds of approximately $58.1 million.
3. Earnings Per Share. The Company applies SFAS No. 128, Earnings Per Share,
and Securities and Exchange Commission Staff Accounting Bulletin No. 98
("SAB 98") in computing earnings per share. Basic net loss per share is
computed using the weighted average number of common shares outstanding.
Diluted net loss per share is computed using the weighted average number of
common shares outstanding and equivalent shares based on the assumed
exercise of stock options and warrants (using the treasury stock method).
Prior periods' net loss per share has been restated to conform to the
requirements of SFAS No. 128 and SAB 98.
4. Reclassifications. Certain prior year balances have been reclassified to
conform with the current year presentation (i.e., in the first quarter
ended March 31, 1998 and March 31, 1997, grocery discounts of $922,000 and
$593,000, respectively have been reclassified from Member and retailer
services to a reduction in Cost of goods sold).
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
RESULTS OF OPERATIONS
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<CAPTION>
The following table sets forth certain unaudited financial information
from the Statements of Operations as a percentage of total revenues:
---------------- ---------------------
1997 1998
---------------- ---------------------
<S> <C> <C>
Revenues:
Net product sales......................................... 76 % 82 %
Member and retailer services.............................. 20 15
Interactive marketing services............................ 4 3
Licensing services........................................ -- 0
---------------- ------------------
Total revenues....................................... 100 100
Costs and expenses:
Cost of goods sold........................................ 71 77
Fulfillment operations.................................... 32 28
General and administrative................................ 6 7
Marketing and selling..................................... 11 7
System development and maintenance........................ 3 3
Depreciation and amortization............................. 2 3
---------------- ------------------
Total costs and expenses............................. 125 125
---------------- ------------------
Operating loss................................................. (25) (25)
Other income (expense):
Interest expense.......................................... 0 0
Interest income........................................... 1 4
================ ==================
Net loss....................................................... (24)% (21)%
================ ==================
</TABLE>
Comparison of Three Months Ended March 31, 1998 and March 31, 1997
Net product sales. Net product sales, which is revenue form the sale of
groceries and other products to members, increased by 68% from $9,216,000 in the
quarter ended March 31, 1997 to $15,495,000 in the quarter ended March 31, 1998.
This increase was principally due to a 61% increase in the number of orders,
from 84,800 in the quarter ended March 31, 1997 to 136,600 in the quarter ended
March 31, 1998. Membership, measured as customers transacting within the last 12
months, increased 89% from 54,800 members at March 31, 1997 to 103,800 at March
31, 1998. The Company has historically used a more narrow definition of
membership including only those customers transacting within a particular month.
Under the historical definition, membership increased 76% from 43,200 at March
31, 1997 to 76,000 at March 31, 1998. The Company's new membership definition is
designed to accommodate alternative consumer offerings and to be more consistent
with other Internet-based companies. Increases in the Company's membership base
and orders resulted largely from increased penetration in exiting markets (i.e.,
Boston, Chicago, Columbus and San Francisco) and the development of the Peapod
service in new markets since March 31, 1997 (i.e., Houston, Dallas, and Austin).
Member and retailer services. Revenues from 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 13% from $2,470,000 in the quarter ended March 31, 1997
to $2,793,000 in the quarter ended March 31, 1998. This increase is primarily
attributable to (i) higher grocery volumes and order quantities and (ii) the
increasing size of the Company's membership base. Discounts on groceries
received from retailers have been reclassified as a reduction in Cost of
groceries sold.
Interactive marketing services. Revenues from interactive marketing
services include fees from consumer goods companies for interactive advertising,
promotion and research services. Fees from such services increased by 24% from
$425,000 in the quarter ended March 31, 1997 to $526,000 in the quarter ended
March 31, 1998. The increase is primarily due to growth in interactive
sponsorship revenue during the period.
Cost of goods sold. Cost of goods sold includes groceries and other
products purchased on behalf of its members, net of returns and discounts. Cost
of groceries sold increased from $8,623,000 in the quarter ended March 31, 1997
to $14,573,000 in the quarter ended March 31, 1998, commensurate with the growth
in Grocery sales.
Fulfillment operations. Fulfillment 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 field support functions such as recruiting,
training, database merchandising and customer support. Grocery operations
expenses increased 34% from $3,870,000 in the quarter ended March 31, 1997 to
$5,178,000 in the quarter ended March 31, 1998. The increase is primarily
attributable to (i) the direct costs of shopping, packing and delivering the
increased volume of member orders; (ii) salaries and overhead expenses for
customer support functions to support increases in the Company's membership
base; and (iii) salaries and overhead expenses for additional fulfillment
centers.
At March 31, 1998, Peapod fulfilled member orders from 40 fulfillment
centers across seven metropolitan markets serving 6,105,000 households compared
to 41 fulfillment centers across six metropolitan markets at March 31, 1997
serving 5,057,000 households. The evolution of the Company's fulfillment model
has resulted in economies of scale as fulfillment centers have been consolidated
into more centralized and dedicated facilities. In addition, the Atlanta market
ceased operations in the quarter ended March 31, 1998.
General and administrative. General and administrative expenses, which
include corporate staff, accounting, finance, human resources, and business
development departments increased 85% from $739,000 in the quarter ended March
31, 1997 to $1,365,000 in the quarter ended March 31, 1998. The increase is
primarily attributable to compensation-related expenses to support the Company's
growth in these corporate staff functions.
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 public relations and
interactive marketing services. The Company expenses all such costs as incurred.
Marketing and selling expenses increased by 2% from $1,358,000 in the quarter
ended March 31, 1997 to $1,384,000 in the quarter ended March 31, 1998.
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 62% from $376,000 in the quarter
ended March 31, 1997 to $610,000 in the quarter ended March 31, 1998. The
increase is primarily attributable to increased compensation expenses to support
the Company's growth and its software licensing initiative. In addition,
$308,000 of development costs were capitalized in the first quarter of 1998
related to the hand-held scanner picking system and the next version of the
Company's consumer software compared to $151,000 of such costs in the first
quarter of 1997.
Depreciation and amortization. Depreciation and amortization increased
118% from $212,000 in the quarter ended March 31, 1997 to $463,000 in the
quarter ended March 31, 1998. This increase is the result of equipment added to
support new members, fulfillment centers and new employees and changes in the
depreciable lives of certain capital assets already in service.
Other income (expense). Other income (expense) includes interest paid
on capital leases and interest earned on cash balances. Interest expense
increased from $15,000 in the quarter ended March 31, 1997 to $56,000 in the
quarter ended March 31, 1998. Interest income increased from $135,000 in the
quarter ended March 31, 1997 to $783,000 in the quarter ended March 31, 1998,
resulting from the investment of proceeds from the issuance of equity in both
1996 and 1997.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities increased from $3,359,000 in the
first three months of 1997 to $8,787,000 in the first three months of 1998. The
$5,428,000 increase in cash used in operating activities was primarily
attributable to a $3,900,000 decrease in accounts payable and a $1,035,000
increase in net losses. As of March 31, 1998, the Company had $10,061,000 in
cash and cash equivalents, and $43,016,000 in marketable securities. In 1997,
the Company sold equity which generated aggregate net proceeds of $58,846,000,
including $58,120,000 net proceeds from the Company's initial public offering of
Common Stock in June 1997 (the "IPO"). The Company uses its working capital to
fund ongoing operations, marketing programs and geographic expansion and to
further develop its products and services.
The Company anticipates that existing cash and marketable securities
will be sufficient to fund the Company's operations and capital requirements for
the foreseeable future. However, no assurance can be given that changing
business circumstances will not require additional capital for reasons that are
not currently anticipated or that the necessary capital will then be available
to the Company on favorable terms, or at all.
The Company believes that inflation has not had a material effect on
its operations.
The Company has evaluated the impact of the Year 2000 issue on its
business and does not expect to incur significant costs associated with Year
2000 compliance or that Year 2000 issues will have a material impact on the
Company's business, results of operations or financial condition. The Company's
software systems and applications are currently Year 2000 compliant. Certain
operating systems of third party vendors on which certain Company software
resides are net yet Year 2000 compliant. However, these vendors have indicated
to the Company that Year 2000 compliant upgrades are available and the Company
intends to install these upgrades by the end of 1998. With respect to its
grocery retail partners, to the extent that any of the Company's retail
partners' computer systems are not Year 2000 compliant, the Company has
established alternative procedures for obtaining relevant retailer information
at a minimal cost to the Company.
RECENTLY ISSUED ACCOUNTING STANDARDS
On October 27, 1997 the American Institute of Certified Public
Accountants issued Statement of Position ("SOP") No. 97-2, Software Revenue
Recognition. This SOP provides guidance on applying generally accepted
accounting principles in recognizing revenue on software transactions. This SOP
supersedes SOP 91-1, Software Revenue Recognition. This SOP is effective for
transactions entered into in fiscal years beginning after December 15, 1997. SOP
No. 97-2 is not anticipated to have a material impact on the Company's financial
statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income." The Company is required to adopt SFAS No.
130 for periods beginning after December 15, 1997. This statement establishes
standards for reporting comprehensive income and its components in a full set of
general purpose financial statements. The standard requires all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed in
equal prominence with the other financial statements. The standard is not
expected to have a material impact on the Company's current presentation of
income.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information." The
Company is required to adopt the disclosures of SFAS No. 131 beginning with its
December 31, 1998 annual financial statements. This statement establishes
standards for the way companies are to report information about operating
segments. It also establishes standards for related disclosures about products
and services, geographic areas and major customers.
The Company is currently evaluating the impact of this standard on its financial
statements.
<PAGE>
PART II
OTHER INFORMATION
Item 5. Other Information
Safe Harbor Statement under the Private Securities Litigation
Reform Act of 1995.
Certain statements in this report 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,"
"intend" or other similar expression, constitute
"forward-looking statements" under The Private Securities
Litigation Reform Act of 1995. Such forward-looking statements
are contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and in other
portions of this report. Such forward-looking statements are
subject to known and unknown risks, uncertainties and other
factors which may cause actual results to be materially
different from those contemplated by the forward-looking
statements. Such factors include, among other things: (1) the
developing nature of the markets for the Company's services
and the rapid technological change relating thereto; (2) the
Company's relationship with its retail partners and its
interactive marketing services and research customers; (3) the
Company's ability to execute its growth strategies; (4) the
extent to which the Company is able to attract and retain key
personnel; (5) competition; (6) general economic conditions;
(7) regulations; and (8) the risk factors or uncertainties
listed from time to time in the Company's filings with the
Securities and Exchange Commission.
Item 6. Exhibits and Reports on form 8-K.
(a) Exhibits - The following exhibits are filed herewith or
are incorporated herein:
Exhibit
No. Description
27 -- Financial Data Schedule
(b)Reports on Form 8-K - The Registrant filed no Current
Reports on Form 8-K during the quarter ended March 31,
1998.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Peapod, Inc.
--------------
(Registrant)
April 29, 1997 /s/ John P. Miller_____________
John P. Miller
Chief Financial and
Administrative Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> MAR-31-1998
<CASH> 10,061
<SECURITIES> 43,016
<RECEIVABLES> 1,771
<ALLOWANCES> 295
<INVENTORY> 0
<CURRENT-ASSETS> 55,277
<PP&E> 6,055
<DEPRECIATION> 2,722
<TOTAL-ASSETS> 59,990
<CURRENT-LIABILITIES> 7,546
<BONDS> 0
0
0
<COMMON> 169
<OTHER-SE> 50,693
<TOTAL-LIABILITY-AND-EQUITY> 59,990
<SALES> 15,495
<TOTAL-REVENUES> 18,864
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 23,573
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 56
<INCOME-PRETAX> (3,982)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,982)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,982)
<EPS-PRIMARY> (0.24)
<EPS-DILUTED> (0.24)
</TABLE>
