SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1997 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)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common
Stock, par value $0.01 per share, including associated Preferred Stock Purchase
Rights
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the registrant's Common Stock held by
non-affiliates as of March 5, 1998: $63,332,109 based on a closing price of
$4.50 of the registrant's Common Stock on the Nasdaq National Market. This
calculation does not reflect a determination that persons are affiliates for any
other purpose.
The number of shares outstanding of the registrant's common stock,
$0.01 par value ("Common Stock") as of March 5, 1998 was 16,857,393.
Documents Incorporated by Reference
Portions of the Registrant's Proxy Statement for the 1998 Annual
Meeting of Stockholders (to be filed on or before April 30, 1998) are
incorporated by reference into Part III, as indicated herein.
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PEAPOD, INC.
Form 10-K Annual Report -- 1997
Table of Contents
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PART I
Item 1. Business...............................................................................3
Item 2. Properties............................................................................11
Item 3. Legal Proceedings.....................................................................12
Item 4. Submission of Matters to a Vote of Security Holders...................................12
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.............13
Item 6. Selected Financial Data...............................................................14
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................................16
Item 8. Financial Statements and Supplementary Data...........................................20
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure............................................................................37
PART III
Item 10. Directors and Executive Officers of the Registrant....................................38
Item 11. Executive Compensation................................................................39
Item 12. Security Ownership of Certain Beneficial Owners and Management........................39
Item 13. Certain Relationships and Related Transactions........................................39
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................40
Signatures..............................................................................................45
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All statements, trend analysis and other information 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," in other portions of this report and in the Company 1998 annual
report to shareholders. 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.
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PART I
Item 1. Business
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 provides 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(R)" 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' purchase
intentions, 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.
Peapod's success to date is built upon the high-quality and personalized
service of its "Smart Shopping for Busy People" solution. As of December 31,
1997, Peapod had 71,500 members and offered its online grocery service in eight
metropolitan markets: Chicago, IL; San Francisco/San Jose, CA; Columbus, OH;
Boston, MA; Atlanta, GA; and Houston, Dallas and Austin, TX.
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. Market researcher
Yankee Group Inc. estimates that the number of U.S. households dialing into the
Web will grow from over 20 million in 1997 to an expected 26 million by the end
of 1998. Forrester Research estimates that the total value of goods purchased
over the Web will grow from $2.4 billion in 1997 to as much as $12.1 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.
Grocery Retailing. The U.S. retail supermarket business represented
approximately $323.2 billion in revenues in 1996, according to Progressive
Grocer's 1998 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 1997 study
conducted by the Food Marketing Institute suggested that approximately
two-thirds of households' primary grocery shoppers would prefer to be doing
something other than in-store grocery shopping.
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 1997 study conducted by Andersen Consulting on
behalf of the Consumer Direct Cooperative estimated that this emerging channel
could result in revenue of $60 to $85 billion by the year 2007, translating into
an 8 to 12 percent share for the channel of all dollars spent on groceries and
related products and services. 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 national advertising
expenditures by consumer packaged goods companies in 1996 were approximately $15
billion. Jupiter Communications estimates that interactive advertising spending
will grow from $301 million in 1996 to $5.0 billion by the year 2000 as Internet
usage grows worldwide. 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.
The total market for information and research regarding consumer goods was
estimated to generate approximately $4.8 billion in revenues in 1996, 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.
Growth Strategies
Peapod's objective is to substantially expand its online grocery shopping
channel in the United States and become the preferred venue for 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 name brand
recognition. The Internet will be an increasingly important marketing medium for
building brand awareness and attracting new members.
Provide Superior Service Quality. The Company is committed to providing its
members with superior experiences in all aspects of its services. The Company's
"Smart Shopping for Busy People" solutions include user-friendly,
highly-functional and cost-effective shopping tools as well as a variety of
convenient delivery and customer support services. "The Peapod Promise" of
superior service and customer support designed to ensure member satisfaction.
The Company will continue to pursue improvements in its service quality that can
be sustained as membership and orders grow aggressively.
Optimize the Model for Fulfillment Services. The Company is evolving its
product distribution and order fulfillment model in order to reduce costs,
improve quality and enhance volume scalability. The Company is working with its
retail partners and other industry experts to develop specialized distribution
centers. Such centers have the potential to lower distribution channel costs for
both retail partners and Peapod. The Company is also developing warehousing and
routing technologies designed to increase the efficiency of Peapod's order
fulfillment. Ultimately, the Company believes that lower costs can support a
lower consumer price and, in turn, greater membership and order volumes.
Grow Membership and Order Volume. Peapod plans to continue to increase
revenues and realize economies of scale by growing its membership base and order
volumes. The Company will pursue this growth by expanding into new metropolitan
markets and increasing its 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 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 service
as a powerful advertising venue as well as a valuable research tool.
Work with Retail Partners to Grow Online Shopping Channel. Peapod has
developed a range of technical, management and fulfillment services which can be
adapted to meet a retail partner's needs. Additionally, through the Split Pea
Software(TM) division, Peapod is licensing its grocery shopping system and
providing software support services to retailers on an international basis. The
Company has also initiated efforts to license this technology to retailers in
U.S. markets. Peapod believes that its systems, including the shopping
application, remote development framework and database engines, are among the
most advanced systems available for high-volume, internet shopping transactions.
Peapod also believes that its extensive experience as the pioneer of online
grocery shopping and delivery services will continue to be of value to retail
partners.
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
member services. With Peapod, members are able to recapture a portion of the
time typically associated with traditional 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. Peapod makes available, at the member's fingertips, up-to-date
product information, including product availability, pricing and promotions, and
keeps a running online tally of the member's bill. 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.
Peapod is accessible through a proprietary dial-up network or Peapod's
Internet web site (www.peapod.com). 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 cart. 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.
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.
As of December 31, 1997, Peapod offered its online grocery service in eight
metropolitan markets, and conducted delivery operations from 52 fulfillment
centers covering 6,488,000 households, or approximately 6% of U.S. households.
Peapod's service areas encompassed approximately 1,732,000 households in
Chicago, 851,000 households in San Francisco/San Jose, 396,000 households in
Columbus, 1,269,000 households in Boston, 938,000 households in Houston, 748,000
households in Dallas, 254,000 households in Austin and 300,000 households in
Atlanta. In early 1998 the Company's retail partner in Atlanta sold its Atlanta
operations and consequently Peapod is not currently offering its service in
Atlanta. See "--Grocery Retailer Alliances."
Grocery Retailer Alliances
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. Peapod believes that its members 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 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.
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 database of over 50,000 products, including product
descriptions and detailed nutritional information, incorporates the retailers'
branded or regional products. Retailers also benefit from Peapod's marketing
expertise in acquiring online grocery shopping members, and from the extensive
services that Peapod provides members such as fulfillment, transaction
processing and customer support. 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'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 three 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;
and in Houston, Dallas and Austin, Randalls Food & Drug Inc. The Company entered
the Atlanta market in 1997 through a relationship with Bruno's, Inc. In early
1998, Bruno's sold its Atlanta stores, ceased operations in Atlanta and filed
for protection under federal bankruptcy laws. As a result the Company is not
offering its services in the Atlanta market.
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. 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 slightly less
than one-half of its revenues in 1997.
Peapod has initiated efforts to license its online shopping systems to
international and domestic retailers. For example, in late 1997 the Company
signed a five-year agreement with Coles Myer Ltd., a leading Australian
retailer, to license to Coles Myer its online grocery shopping, fulfillment and
customer support systems, and to provide certain software and business support
services. Peapod expects to receive fixed license fees, annual software
maintenance fees, and variable license fees based on Coles Myer's order volume.
Interactive Marketing Services
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. 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.
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
research services. The Company 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 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 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.
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.
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. 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, which is being released in early
1998, is based on Microsoft's ActiveX technology and is designed to offer an
even greater level of integration with the Internet. 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 television-based browsers or inexpensive
Internet appliances, Peapod can quickly adapt its consumer software to support
those platforms.
Access. The "thin client" portion of 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
"--Peapod Services; 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 member 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. Peapod has promotional plans focused on radio and
newspaper advertising, direct mailings of starter kit diskettes and a variety of
other programs. 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.
The Company's marketing objectives include, in addition to member
acquisition, increases in member usage, grocery order size and member retention.
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. The Company, from time-to-time enters into relationships
with advertising agencies and other third parties to sell certain media and
promotional products on Peapod's behalf. 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
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 warehouse-based delivery services have recently emerged. In competing
against such services Peapod emphasizes its user-friendly and functional online
shopping system 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 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 free-standing inserts ("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 "--Peapod Services;
Interactive Marketing Services."
Employees
As of December 31, 1997, the Company had approximately 285 full-time and
1,135 part-time employees. Substantially all of the part-time employees serve in
grocery picking, packing, delivery and member support positions. Of the
Company's full-time employees, approximately 160 are in field operations or
member support functions, 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.
Intellectual Property and Other Proprietary Rights
The Company believes that its success and ability to compete is somewhat
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 certain
of its proprietary software, its Web site 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. 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.
Item 2. Properties
The following are the principal properties of the Company:
Location Function Owned/Leased Usable Space
- ------------------- ------------------ ------------- ------------
Skokie, IL Corporate Office Leased 37,974
Boston, MA Regional Office Leased 1,461
San Francisco, CA Regional Office Leased 2,553
Columbus, OH Regional Office Leased 878
Solana Beach, CA Technology Center Leased 1,000
<PAGE>
Item 3. 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.
Item 4. Submission of Matters to a Vote of Security Holders
None.
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The principal market for Peapod's common stock is The Nasdaq National
Market ("NASDAQ"). On March 5, 1998, there were approximately 166 holders of
record of Peapod common stock. High and low sales prices of Peapod's common
stock as reported by NASDAQ for each quarter of 1997 follows:
Price
------------------------------
High Low
------------- ------------
Calendar Quarter Ended:
June 30 *............................. $ 18.500 $ 11.250
September 30.......................... 13.750 7.875
December 31........................... 14.000 5.000
The Company has not declared any dividends in 1997. 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.
*The Company conducted an initial public offering on June 10, 1997 at
$16.00 per share.
<PAGE>
Item 6. Selected Financial Data
The selected statement of operations and balance sheet data set forth below
have been derived from the historical financial statements of the Company. The
historical financial statements as of December 31, 1996 and 1997 and for the
years ended December 31, 1995, 1996 and 1997 have been audited by KPMG Peat
Marwick LLP, independent certified public accountants, whose report thereon
appears elsewhere in this document. The statement of operations and balance
sheet data set forth below as of December 31, 1993 and 1994, as well as the
balance sheet data as of December 31, 1995, have been derived from the Company'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 document.
<TABLE>
<CAPTION>
Years Ended December 31,
1993 1994 1995 1996 1997
(dollars in thousands, except share and per share data)
Statement of Operations Data:(1)
<S> <C> <C> <C> <C> <C>
Revenues:(2)
Grocery sales, net of returns.... $ 2,893 $ 6,745 $ 12,731 $ 22,015 $ 43,487
Interactive marketing services... -- -- 163 1,069 2,222
Member and retailer services..... 812 1,601 3,049 6,088 13,898
Total revenues................... 3,705 8,346 15,943 29,172 59,607
Groceries sold, net of returns........ (2,893) (6,745) (12,731) (22,015) (43,487)
Other costs and expenses.............. (2,463) (5,918) (9,796) (17,187) (31,069)
Operating loss........................ (1,651) (4,317) (6,584) (10,030) (14,949)
Net loss.............................. (1,676) (4,347) (6,592) (9,566) (12,979)
Basic and diluted net loss per share(3) $ (0.38) $ (0.75) $ (0.79) $ (0.82) $ (0.87)
Shares used to compute basic and
diluted net loss per share(3)...... 4,399,342 5,804,055 8,357,585 11,664,956 14,915,734
- -----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C>
Operating Data:(1)
Markets(4)....................... 2 2 2 4 8
Members(5)....................... 3,000 7,900 12,500 33,300 71,500
Orders (for the year ended)...... 28,600 70,300 124,100 201,100 396,600
Households in service area(6).... 1,083,400 1,917,000 2,204,200 3,581,000 6,488,000
Balance Sheet Data:(1)
Cash and cash equivalents........ $ 644 $ 2,254 $ 2,466 $ 13,039 $ 54,079
Working capital.................. 175 902 438 7,356 52,350
Total assets..................... 1,556 3,465 4,531 16,528 69,110
Long-term obligations............ 205 47 374 340 701
Total stockholders' equity....... 559 1,435 1,413 8,403 54,802
</TABLE>
(1) Prior to May 31, 1997, represents the financial and operating information of
Peapod LP, the predecessor entity to the Company, and the Company.
(2) Grocery sales, 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.
(3) Basic and diluted net loss per share and the shares used in computing basic
and diluted net loss per share have been restated to conform with Statement
of Financial Accounting Standards No. 128, Earnings Per Share, and
Securities and Exchange Commission Staff Accounting Bulletin No. 98, as
discussed in Note 2 of the Notes to Financial Statements.
(4) Represents the number of metropolitan markets served.
(5) Represents the number of households and businesses subscribing to the Peapod
services.
(6) 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).
<PAGE>
Item 7. 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.
RESULTS OF OPERATIONS
1997 Compared to 1996
Grocery sales, net of returns. Grocery sales, net of returns, which are
the actual costs of groceries purchased by members, increased by 98% from
$22,015,000 in 1996 to $43,487,000 in 1997, principally due to an increase in
the number of orders. The total number of orders increased from 201,100 in 1996
to 396,600 in 1997. Total membership at December 31, 1996 and 1997 was 33,300
and 71,500, respectively, reflecting an increase of 115%. Increases in the
Company's membership base resulted largely from the introduction of the Peapod
service in four new markets in 1997: Houston, Atlanta, Dallas and Austin, as
well as increased penetration in the Chicago, San Francisco/San Jose, Columbus
and Boston markets.
Interactive marketing services. Revenues from interactive marketing
include fees from consumer goods companies for interactive advertising,
promotion and research services. Fees from such services increased by 108% from
$1,069,000 in 1996 to $2,222,000 in 1997. The increase is primarily due to an
increasing number of interactive marketing services clients during the year.
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 128% from $6,088,000 in 1996 to $13,898,000 in 1997. This increase is
primarily attributable to (i) additional fees paid by new and existing
retailers, (ii) higher grocery volumes and order quantities, (iii) the
increasing size of the Company's membership base, and (iv) the addition of new
markets during the year.
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 members. Groceries sold, net of returns increased from $22,015,000 in
1996 to $43,487,000 in 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 field support functions such as recruiting, training,
database merchandising and member support. Grocery operations expenses increased
115% from $8,141,000 in 1996 to $17,496,000 in 1997. The increase is primarily
attributable to (i) salaries and overhead expenses of new fulfillment centers,
(ii) the direct costs of shopping, packing and delivering member orders relating
to the increased volume of orders, (iii) salaries and overhead expenses for
member support, (iv) salaries and overhead expenses for four new markets opened
in 1997, and (v) new training and recruiting functions created to assist in the
rapid opening and support of new markets and new fulfillment centers.
At December 31, 1997, Peapod fulfilled member orders from 52
fulfillment centers across eight metropolitan markets, compared to 27
fulfillment centers across four metropolitan markets at December 31, 1996. Four
new metropolitan markets and 25 fulfillment centers were added during 1997
compared to two new metropolitan markets and 14 fulfillment centers added during
1996. In January 1998, the Company's retailer partner in Atlanta ceased
operations and consequently Peapod is not offering its service in Atlanta. See
"Business, Peapod Services, Grocery Retailer Alliances."
General and administrative. General and administrative expenses, which
include corporate staff, accounting and human resource functions, increased 41%
from $2,920,000 in 1996 to $4,129,000 in 1997. The increase resulted primarily
from occupancy expenses related to the centralization of field support
functions, the relocation of the Company's headquarters, and an increase in
staffing levels to support the Company's growth.
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. Marketing and selling expenses increased by 64% from $3,984,000 in
1996 to $6,514,000 in 1997. The increase is principally due to additional
marketing staff to support the growth in interactive marketing services and
other marketing initiatives, along with more aggressive member acquisition
programs during the year.
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 14% from $1,492,000 in 1996 to
$1,696,000 in 1997. In 1996, Peapod began work on Version 5.0 of its end-user
software, which it expects to release in early 1998. During 1997, the Company
capitalized $849,000 of these development costs while $148,000 of these
development costs were capitalized during 1996.
Depreciation and amortization. Depreciation and amortization increased
90% from $651,000 in 1996 to $1,234,000 in 1997. This increase is the result of
equipment added to support new members, new 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 subordinated debentures and capital leases and interest earned on cash
balances. Interest expense increased from $72,000 in 1996 to $83,000 in 1997.
Interest income increased from $537,000 in 1996 to $2,053,000 in 1997, resulting
from the investment of proceeds from the Company's initial public offering in
June 1997.
1996 Compared to 1995
Grocery sales, net of returns. Grocery sales, net of returns increased
73% from $12,731,000 in 1995 to $22,015,000 in 1996. This increase was
principally due to a 62% increase in the number of orders and a 7% 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 100% 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 58% from
$5,168,000 in 1995 to $8,141,000 in 1996, largely from the increase in the
number of orders and the increased number of fulfillment centers.
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 66% from $1,762,000 in 1995 to $2,920,000 in 1996. This increase
reflected (i) the hiring of additional administrative personnel to support
member, fulfillment center and market growth, (ii) the hiring of personnel in
the fourth quarter of 1996 to oversee product introductions, and (iii) a
one-time severance charge of $400,000 in the third quarter of 1996.
Marketing and selling. Marketing and selling expenses increased by 160%
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 in the third and fourth quarters to support two new market
openings 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 55% 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. 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.
Depreciation and amortization. Depreciation and amortization increased
76% 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 the investment of proceeds from the issuance
of equity in 1996. Interest income increased from $61,000 in 1995 to $537,000 in
1996.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities increased from $4,503,000 in 1996 to
$6,277,000 in 1997. The increase in cash used in operating activities was
primarily attributable to increased net losses and increases in receivables,
partially offset by increases in accounts payable. As of December 31, 1997, the
Company had $54,079,000 in cash and cash equivalents, and $8,798,000 in
short-term investments. In 1997, the Company sold equity which generated
aggregate net proceeds of $58,846,000, including $58,120,000 of net proceeds
from the Company's initial public offering of Common Stock in June 1997 (the
"IPO"). The Company intends to use the net proceeds from the IPO primarily for
expansion into new geographic markets and further penetration in existing
markets. 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 short-term investments
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.
YEAR 2000 DISCLOSURE
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 not 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 will
establish 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 No. 91-1, Software Revenue Recognition. This SOP is effective for
transactions entered into in fiscal years beginning after December 15, 1997. The
Company is currently evaluating the effect of this SOP on its fiscal 1998
financial statements.
<PAGE>
Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report............................................ 21
Balance Sheets as of December 31, 1996 and 1997......................... 22
Statements of Operations for the years ended December 31, 1995, 1996
and 1997.................. 23
Statements of Stockholders' Equity for the years ended December 31, 1995,
1996 and 1997........ 24
Statements of Cash Flows for the years ended December 31, 1995,
1996 and 1997.................. 25
Notes to Financial Statements........................................... 26
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of
Peapod, Inc.:
We have audited the accompanying balance sheets of Peapod, Inc. as of
December 31, 1996 and 1997, and the related statements of operations,
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1997. 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 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, Inc. as of December
31, 1996 and 1997, and the results of its operations and its cash flows for each
of the years in the three-year period ended December 31, 1997, in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
Chicago, Illinois
February 4, 1998
<PAGE>
<TABLE>
<CAPTION>
PEAPOD, INC.
BALANCE SHEETS
December 31, 1996 and 1997
December 31,
----------------------------------
1996 1997
---------------- -----------------
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents.......................................... $13,038,680 $54,079,002
Marketable securities.............................................. -- 8,797,507
Receivables, net of bad debt allowance of $41,608 and $351,647 as
of December 31, 1996 and 1997, respectively...................... 535,091 1,194,830
Prepaid expenses................................................... 449,267 444,333
Other current assets............................................... 189,402 228,482
---------------- -----------------
Total current assets.......................................... 14,212,440 64,744,154
Property and equipment:
Computer equipment and software.................................... 2,492,507 4,498,975
Service equipment and other........................................ 764,418 1,053,333
---------------- -----------------
Property and equipment, at cost......................................... 3,256,925 5,552,308
Accumulated depreciation........................................... (1,247,238) (2,301,133)
---------------- -----------------
Net property and equipment.............................................. 2,009,687 3,251,175
Capitalized software development costs.................................. 148,454 997,547
Goodwill, net of accumulated amortization of $134,864 and $173,821
as of December 31, 1996 and 1997, respectively....................... 155,830 116,873
Other assets ........................................................... 1,947 --
---------------- -----------------
Total assets.................................................. $16,528,358 $69,109,749
================ =================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable................................................... $ 3,370,423 $ 7,514,561
Accrued compensation............................................... 1,078,705 1,257,998
Other accrued liabilities.......................................... 875,396 925,961
Current deferred service fees...................................... 1,199,827 1,968,742
Current obligations under capital lease............................ 332,490 726,939
---------------- -----------------
Total current liabilities..................................... 6,856,841 12,394,201
Deferred service fees................................................... 929,445 1,212,467
Obligations under capital lease, less current obligations............... 339,529 700,990
---------------- -----------------
Total liabilities............................................. 8,125,815 14,307,658
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,
12,526,812 and 16,852,557 shares issued and outstanding at
December 31, 1996 and 1997, respectively...................... 125,268 168,526
Additional paid-in capital......................................... 8,278,275 63,148,021
Accumulated deficit................................................ (1,000) (8,495,456)
Treasury stock, 2,000 shares at December 31, 1997.................. -- (19,000)
---------------- -----------------
Total stockholders' equity.................................... 8,402,543 54,802,091
================ =================
Total liabilities and stockholders' equity.................... $16,528,358 $69,109,749
================ =================
</TABLE>
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
PEAPOD, INC.
STATEMENTS OF OPERATIONS
Years ended December 31, 1995, 1996 and 1997
Years ended December 31,
---------------------------------------------------------------
--------------- ---------------- ----------------
1995 1996 1997
--------------- ---------------- ----------------
<S> <C> <C> <C>
Revenues:
Grocery sales, net of returns........ $12,730,673 $22,015,468 $ 43,487,348
Interactive marketing services....... 162,699 1,069,335 2,221,829
Member and retailer services......... 3,049,279 6,087,742 13,897,557
--------------- ---------------- ----------------
Total revenues.................. 15,942,651 29,172,545 59,606,734
Costs and expenses:
Groceries sold, net of returns....... 12,730,673 22,015,468 43,487,348
Grocery operations................... 5,167,847 8,141,184 17,496,047
General and administrative........... 1,761,590 2,919,876 4,128,529
Marketing and selling................ 1,532,983 3,984,166 6,513,703
System development and
maintenance....................... 964,496 1,492,126 1,696,287
Depreciation and amortization........ 369,527 650,954 1,233,768
--------------- ---------------- ----------------
Total costs and expenses........ 22,527,116 39,203,774 74,555,682
--------------- ---------------- ----------------
Operating loss............................. (6,584,465) (10,031,229) (14,948,948)
Other income (expense):
Interest expense..................... (68,472) (72,388) (83,255)
Interest income...................... 61,016 537,110 2,052,578
=============== ================ ================
Net loss.................................. $(6,591,921) $(9,566,507) $(12,979,625)
=============== ================ ================
Net loss per share:
Basic................................ $ (0.79) $ (0.82) $ (0.87)
Diluted.............................. $ (0.79) $ (0.82) $ (0.87)
Shares used to compute net loss per share:
Basic................................ 8,357,585 11,664,956 14,915,734
Diluted.............................. 8,357,585 11,664,956 14,915,734
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
PEAPOD, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1995, 1996 and 1997
Common Stock Treasury Stock
---------------------- -----------------
Additional Accumulated
Shares Amount Shares Amount Paid-in Deficit Total
Capital
------------ -------- ------- -------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995........................ 7,548,302 $ 75,483 -- $ -- $ 1,359,766 $ -- $ 1,435,249
Issuance of stock, net of offering costs.......... 2,007,722 20,077 -- -- 6,433,964 -- 6,454,041
Repurchase and cancellation of stock.............. (13,453) (134) -- -- (43,588) -- (43,722)
Issuance of stock upon exercise of warrants....... 1,250 12 -- -- 2,776 -- 2,788
Issuance of options for services rendered......... -- -- -- -- 99,658 -- 99,658
Issuance of stock for services rendered........... 20,550 206 -- -- 56,261 -- 56,467
Net loss.......................................... -- -- -- -- (6,591,921) -- (6,591,921)
------------ -------- ------- -------- ----------- ------------ ------------
Balance at December 31, 1995...................... 9,564,371 95,644 -- -- 1,316,916 -- 1,412,560
Issuance of stock, net of offering costs.......... 2,876,000 28,760 -- -- 16,202,988 -- 16,231,748
Issuance of stock for services rendered........... 100 1 -- -- 999 -- 1,000
Issuance of stock for services rendered and at a 86,341 863 -- -- 322,879 -- 323,742
discount.......................................
Net loss.......................................... -- -- -- -- (9,565,507) (1,000) (9,566,507)
------------ -------- ------- -------- ----------- ------------ ------------
Balance at December 31, 1996...................... 12,526,812 125,268 -- -- 8,278,275 (1,000) 8,402,543
Issuance of stock prior to May 31, 1997 for
services rendered at a discount................ 89,080 891 -- -- 577,377 -- 578,268
Issuance of stock for services rendered........... 15,000 150 -- -- 104,850 -- 105,000
Issuance of stock upon exercise of warrants...... 8,125 81 -- -- 18,038 -- 18,119
Issuance of stock upon exercise of options....... 213,540 2,136 -- -- 574,610 -- 576,746
Treasury stock.................................... -- -- (2,000) (19,000) -- -- (19,000)
Initial public offering of stock, net of offering 4,000,000 40,000 -- -- 58,080,040 -- 58,120,040
costs............................................
Net loss - from January 1, 1997 through May 31, 1997 -- -- -- -- (4,485,169) -- (4,485,169)
Net loss - subsequent to May 31, 1997............... -- -- -- -- -- (8,494,456) (8,494,456)
========== ======== ======= ======== =========== ============ ============
Balance at December 31, 1997 ....................... 16,852,557 $168,526 (2,000) $(19,000) $63,148,021 $(8,495,456) $54,802,091
========== ======== ======= ======== =========== ============ ============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
PEAPOD, INC.
STATEMENTS OF CASH FLOWS
Years ended December 31, 1995, 1996 and 1997
Years ended December 31,
------------------------------------------------
1995 1996 1997
-------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss......................................... $(6,591,921) $(9,566,507) $(12,979,625)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization................ 369,527 650,954 1,233,768
Stock and options issued for services rendered 156,125 147,151 533,295
Write-off of patent application costs........ 18,653 -- --
Loss on disposition of fixed assets.......... 3,084 2,359 204,007
Changes in operating assets and liabilities:
(Increase) decrease in receivables, net.. (76,444) (349,014) (659,739)
(Increase) decrease in prepaid expenses.. (78,045) (309,546) 4,934
(Increase) decrease in other current assets (147,316) 54,754 (39,080)
Increase (decrease) in accounts payable.. 494,055 1,709,880 4,144,138
Increase (decrease) in accrued compensation 184,526 731,556 179,293
Increase (decrease) in other accrued 172,059 483,053 50,565
liabilities
Increase (decrease) in deferred service fees 24,168 1,942,604 1,051,937
----------- ------------- -----------
Net cash used in operating activities (5,471,529) (4,502,756) (6,276,507)
Cash flows from investing activities:
Property and equipment purchased................. (629,833) (823,662) (1,515,340)
Capitalized software development costs........... -- (148,454) (849,093)
Net purchase of short-term investments.......... -- -- (8,797,507)
Proceeds from sale of property and equipment..... 700 -- 21,178
----------- ------------- -------------
Net cash used in investing activities (629,133) (972,116) (11,140,762)
Cash flows from financing activities:
Proceeds from issuance of stock, net of offering 6,454,041 16,409,339 58,270,013
costs
Proceeds from issuance of stock upon exercise of 2,788 -- 18,119
warrants
Proceeds from issuance of stock upon exercise of -- -- 557,746
options
Repurchase of and cancellation of stock.......... (43,722) -- --
Repayment of subordinated debentures............. -- (125,000) --
Proceeds from issuance of notes payable.......... 1,025,000 -- --
Payments on notes payable........................ (1,025,000) -- --
Payments on capital lease obligations............ (100,255) (236,978) (388,287)
----------- ------------- -------------
Net cash provided by financing activities 6,312,852 16,047,361 58,457,591
----------- ------------- -------------
Net increase in cash................................. 212,190 10,572,489 41,040,322
Cash and cash equivalents at beginning of period..... 2,254,001 2,466,191 13,038,680
=========== ============= =============
Cash and cash equivalents at end of period........... $ 2,466,191 $ 13,038,680 $54,079,002
=========== ============= =============
Supplemental disclosure of cash flows
information--interest paid $ 67,506 $ 71,571 $ 67,054
Supplemental disclosures of noncash investing and
financing activity:...............................
Equipment on capital leases..................... 314,655 502,172 1,144,197
Options exercised by sale of stock to the Company -- -- 19,000
=========== ============= ============
See accompanying notes to financial statements.
</TABLE>
<PAGE>
PEAPOD, INC.
NOTES TO FINANCIAL STATEMENTS
(1) Description of the Company and Basis of Presentation
Peapod, Inc. ("the Company") is a Delaware corporation and was incorporated
on December 5, 1996, and 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 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 exchanged for warrants and options 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. The
financial statements are presented as if the Company were in existence
throughout all periods. Net losses incurred by Peapod LP through May 31, 1997
have been reflected in additional paid-in capital since such losses were
allocated to the partners of Peapod LP (and do not represent a component of the
Company's accumulated deficit).
On June 10, 1997, the Company completed its initial public offering and
issued 4,000,000 shares of common stock, resulting in net proceeds (after
deducting offering costs) of $58,120,040.
The Company is an interactive online grocery shopping and delivery service,
which as of December 31, 1997 operated in the Chicago, Illinois; San
Francisco/San Jose, California; Columbus, Ohio; Boston, Massachusetts; Atlanta,
Georgia; and Dallas, Houston and Austin, Texas 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.
<PAGE>
PEAPOD, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 three 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 Company 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
Company capitalized $148,454 and $849,093 in development costs in 1996 and 1997,
respectively. There was no amortization in 1995, 1996 and 1997.
Goodwill
Goodwill is being amortized on a straight-line basis over its estimated
useful life of eight years.
Income Taxes
Effective with the Conversion, the Company accounts for income taxes in
accordance with SFAS No. 109, Accounting for Income Taxes. Under the asset and
liability method of SFAS No. 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to the differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under SFAS No.
109, the effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date.
Prior to the Conversion, Peapod LP operated in the form of a partnership
and was not subject to taxation directly as its net losses were allocated to and
included in the income tax returns of its partners.
Stock Option Plans
Prior to January 1, 1996, the Company accounted for its 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 stock exceeded the exercise price. On
January 1, 1996, the Company 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 stock
option grants made in 1995 and future years as if the fair-value based method
defined in SFAS No. 123 had been applied. The Company has elected to continue to
apply the provisions of APB Opinion No. 25 and apply the pro forma disclosure
provisions of SFAS No. 123.
<PAGE>
PEAPOD, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Financial Instruments
The fair values of the Company'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 net future cash flows expected to result from the use of the assets
and their eventual disposition. The Company has determined that as of December
31, 1997, there has been no impairment in the carrying values of long-lived
assets.
Use of Estimates
Management of the Company 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.
Quarterly Results
The accompanying unaudited quarterly results (see Note 12) 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.
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.
(3) Reliance on Certain Relationships
The business of the Company is dependent upon contracts with a grocery
retailer in each metropolitan market where the Company 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 Company's operations. A number of
these agreements are terminable prior to expiration by either party with short
notice.
<PAGE>
PEAPOD, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Company's Chicago market, serviced through an agreement with
Jewel/Osco, accounted for approximately 66%, 67%, and 44% of the Company's
revenues for the years ended 1995, 1996 and 1997, respectively.
The Company entered the Atlanta market in fiscal year 1997 through a
relationship with Bruno's, Inc. In early 1998, Bruno's Atlanta stores were sold
and certain operations ceased. As a result, the Company ceased offering its
services in the Atlanta market and is currently evaluating other opportunities
with respect to that market.
(4) Marketable Securities
During 1997, the Company began investing in securities with an initial
maturity of greater than three months. At December 31, 1997, the Company's
marketable securities, at cost, consisted of:
Securities held to maturity:
Commercial paper................................ $ 7,604,135
Securities available for sale:
Commercial paper................................ 786,950
Corporate debt securities....................... 406,422
==================
Total marketable securities.......................... $ 8,797,507
==================
All securities mature during 1998. No unrealized holding gain or loss has
been recorded as of December 31, 1997 as the difference between the cost and
fair value of the securities is immaterial.
The fair value of marketable securities is based on the quoted market price
of each individual security on December 31, 1997.
(5) Commitments and Contingencies
Capital Leases
Peapod, Inc. has capitalized certain computer equipment and furniture
acquired through capital leases. The future minimum lease payments as of
December 31, 1997 are as follows:
1998 ...................................... $ 851,433
1999....................................... 541,316
2000....................................... 198,346
2001....................................... 20,946
---------------
1,612,041
Less amount representing interest.......... 184,112
---------------
1,427,929
Less current obligations................... 726,939
===============
$ 700,990
===============
<PAGE>
PEAPOD, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Costs and related accumulated amortization for equipment under capital
leases totaled $999,065 and $298,424, respectively, as of December 31, 1996; and
$2,143,262 and $839,935, respectively, as of December 31, 1997. Amortization
expense totaled $94,217, $184,490 and $541,511 for the years ended December 31,
1995, 1996 and 1997, respectively.
Operating Leases
The Company leases its office facilities under non-cancelable operating
leases. Rent expense on operating leases totaled $155,730, $237,797 and $461,799
for the years ended December 31, 1995, 1996 and 1997, respectively. Total future
minimum lease payments under operating leases as of December 31, 1997 are as
follows:
1998............................ $ 703,073
1999............................ 751,111
2000............................ 706,339
2001............................ 691,632
2002 and beyond................. 2,182,862
====================
$ 5,035,017
====================
The Company maintains an unsecured letter of credit in support of the
minimum future lease payments under a lease for office space amounting to
$1,350,000 as of December 31, 1997, declining annually during the lease term.
The letter of credit expires on November 21, 1998; however, it is expected to be
renewed annually over the life of the lease.
Contingencies
The Company is involved in lawsuits and claims which arise in the ordinary
course of business. There are no such matters pending that the Company believes
to be material in relation to its business, financial condition, or results of
operations.
(6) Partnership Agreement
Peapod LP, in accordance with the partnership agreement, was required to
pay a management fee to the general partner. For the years ended December 31,
1995, 1996 and 1997, the amount charged to general and administrative expenses
totaled $150,000, $175,000 and $72,917 respectively. The partnership agreement
was terminated upon the Conversion.
(7) Peapod LP Equity Programs
The Company had a program where certain executives and advisors were able
to receive stock in lieu of compensation. The program allowed these executives
and advisors to receive stock at 85% of the estimated fair market value. Expense
was recognized based on the estimated fair market value of the stock at the date
of issuance. This program was terminated in 1997 prior to the Conversion.
<PAGE>
PEAPOD, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Company also had a director purchase plan whereby each director of the
Company was eligible to purchase stock 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 stock at the date of issuance. This program
was terminated in 1997 prior to the Conversion.
During the year ended December 31, 1995, 20,550 shares were issued and
$38,538 of expense was reflected in the financial statements. In addition,
70,656 shares 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.
During the year ended December 31, 1996, 86,341 shares were issued and
$44,115 of expense was reflected in the financial statements. In addition,
45,292 shares 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.
During the first quarter of 1997, and prior to the Conversion, 89,080
shares were issued and $428,295 of expense was reflected in the financial
statements.
(8) Options for Stock
Peapod, Inc. has an option plan providing for the issuance of options to
eligible employees, directors, advisors and consultants. This plan permits the
Company to issue options on terms that the Company determines appropriate,
subject to a maximum term of 10 years. Such terms include exercise price, number
of shares, vesting dates and other terms. Peapod LP had two option plans which
were terminated upon the Conversion. All outstanding options issued by Peapod LP
were exchanged for options for stock of the Company on terms substantially the
same as in the original option grants.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its plans. Had compensation cost for the Company's option plans
been determined consistent with SFAS No. 123, the net loss would have been
increased to the pro forma amounts indicated below:
1995 1996 1997
Net loss
As reported............... $(6,591,921) $(9,566,507) $(12,979,625)
Pro forma................. (6,750,362) (9,828,192) $(15,836,804)
Net loss per share
As reported--basic and diluted. $ (0.79) $ (0.82) $ (0.87)
Pro forma--basic and diluted... (0.81) (0.84) (1.06)
Under the option plans, the exercise price of each option equals the
estimated fair market value of the stock 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, 1996 and 1997, respectively: no expected dividend yield;
expected volatility of 20, 20 and 50 percent; risk free interest rates of 6.4%,
6.5% and 6.5%, and expected lives of seven years.
PEAPOD, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Another 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 year ended December 31, 1995, expense
was recorded of $99,658.
Additional information on stock options is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
-------------------- -------------------- --------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
price Options price Options price
Options
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year...... 861,849 $ 1.63 1,448,446 $ 2.20 1,630,946 $ 2.77
Granted............................... 590,097 3.03 285,000 6.00 1,179,200 13.70
Forfeited............................. (3,500) 2.36 (102,500) 3.78 (46,650) 12.65
Exercised............................. -- -- (213,540) 2.70
Outstanding at end of year............ 1,448,446 $ 2.20 1,630,946 $ 2.77 2,549,956 $ 7.65
Options exercisable at year end....... 858,336 $ 1.79 1,116,172 $ 2.11 1,126,138 $ 2.45
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
Weighted
average Weighted Weighted
remaining average average
Range of Options contractual exercise Options exercise
exercise outstanding life price exercisable price
prices
- -------------- ----------- ------------ ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
$ 1.33-- 2.00 762,344 5.20 years $ 1.61 751,677 $ 1.60
2.23-- 3.25 390,662 6.43 2.87 228,538 2.77
6.00-- 9.50 552,000 7.02 6.85 145,923 6.35
11.38--17.60 844,950 7.12 15.82 -- --
----------- -----------
2,549,956 6.42 years $ 7.65 1,126,138 $ 2.45
=========== ============= ========== ============ ===========
</TABLE>
(9) Warrants
Contractually, all warrants issued by Peapod LP were converted into
warrants for shares of the Company on a one for one basis. Company stock warrant
activity for the years ended December 31, 1995, 1996 and 1997 is summarized
below:
<PAGE>
PEAPOD, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Weighted
average
exercise Exercise
Warrants price price
------------ --------- -------------
<S> <C> <C> <C>
Outstanding on January 1, 1995........... 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
Exercised................................ (8,125) 2.23 2.23
============
Outstanding and exercisable on
December 31, 1997....................... 59,716 $ 2.40 $1.33--7.00
============ =========
</TABLE>
(10) Income Taxes
No provision for income taxes was recorded prior to the Conversion, as such
liability was the responsibility of the partners of Peapod LP, rather than of
the Company. Upon the Conversion of Peapod LP into Peapod, Inc., the Company
recorded an initial net deferred tax asset of $838,898 which was offset in its
entirety by a valuation allowance. The remaining change in deferred income taxes
for the year ended December 31, 1997 relates to the period subsequent to the
Conversion.
There is no provision for income taxes for the year ended December 31, 1997
due to the Company's loss before income taxes.
Deferred tax assets:
Bad debts................................ $ 140,659
Compensation accruals.................... 229,021
Deferred revenues........................ 786,541
Other accrued liabilities................ 134,837
Net operating loss....................... 3,397,526
---------------
Gross deferred tax assets........... 4,688,584
Less valuation allowance............ (4,211,531)
---------------
Net deferred tax assets....... 477,053
---------------
Deferred tax liabilities:
Fixed assets............................. (78,034)
Capitalized software..................... (399,019)
---------------
Gross deferred tax liabilities (477,053)
===============
Deferred income taxes......................... $ --
===============
The provision for income taxes for the year ended December 31, 1997 is
based on the loss before income taxes for the period subsequent to the
Conversion of $8,494,456. The effective tax rate on this loss differs from the
U.S. statutory rate. The following table reconciles the provision for income
taxes using the U.S. statutory rate with the provision at the effective rate:
<PAGE>
PEAPOD, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Tax benefit at U.S. Federal income tax rate of 34%... $ (2,888,115)
Increase (reduction) in taxes resulting from:
State income tax benefit, net of Federal effect. (505,895)
Tax effect of non-deductible expenses........... 21,377
Increase in valuation allowance................. 3,372,633
----------------
================
Income tax provision................................. $ --
================
(11) Employee Benefit Plans
Effective September 1, 1995, the Company implemented a 401(k) savings plan
("Savings Plan"). Qualified employees may participate in the Savings Plan by
contributing up to 15% of their gross wages. The Company may elect to make
matching contributions at the discretion of the Board of Directors of the
Company. The Company has made no contributions through December 31, 1997.
In 1997, the Company implemented an employee stock purchase plan ("Purchase
Plan"). The Company's Purchase Plan provides that eligible employees may
contribute up to $6,250 of their base earnings per quarter towards the quarterly
purchase of the Company's Common Stock. The employee's purchase price is 85% of
the lesser of the fair market value of the stock on the first business day or
the last business day of the quarterly offering period. During 1997, no
compensation expense was recorded in connection with the Purchase Plan. The
total number of shares issuable under the Purchase Plan is 150,000. In January
1998, 4,246 shares were issued related to 1997 purchases at a price per share to
the employee of $5.525.
<PAGE>
PEAPOD, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(12) Quarterly Results (Unaudited)
<TABLE>
<CAPTION>
1997
(in thousands, except share and per share data)
----------------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues:
Grocery sales, net of returns......... $ 9,216 $ 10,177 $ 10,208 $ 13,886
Interactive marketing services........ 425 565 614 618
Member and retailer services.......... 3,063 3,909 3,393 3,533
-------------- -------------- -------------- --------------
Total revenues................... 12,704 14,651 14,215 18,037
Costs and expenses:
Groceries sold, net of returns........ 9,216 10,177 10,208 13,886
Grocery operations.................... 3,903 4,324 4,105 5,164
General and administrative............ 827 1,663 1,154 485
Marketing and selling................. 1,237 1,008 1,679 2,590
System development and maintenance.... 376 303 378 639
Depreciation and amortization......... 212 378 366 278
-------------- -------------- -------------- --------------
Total costs and expenses......... 15,771 17,853 17,890 23,042
-------------- -------------- -------------- --------------
Operating loss............................. (3,067) (3,202) (3,675) (5,005)
Other income (expense):
Interest expense...................... (15) (30) (13) (25)
Interest income....................... 135 201 874 842
-------------- -------------- -------------- --------------
Net loss................................... $ (2,947) $ (3,031) $ (2,814) $ (4,188)
-------------- -------------- -------------- --------------
Basic and diluted net loss per share....... $ (0.23) $ (0.22) $ (0.17) $ (0.25)
============== ============== ============== ==============
Shares used to compute basic and diluted
net loss per share......................... 12,599,133 13,522,753 16,672,852 16,802,695
============== ============== ============== ==============
</TABLE>
<PAGE>
PEAPOD, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
1996
(in thousands, except share and per share data)
----------------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues:
Grocery sales, net of returns......... $ 4,984 $ 5,025 $ 4,818 $ 7,188
Interactive marketing services........ 194 207 284 384
Member and retailer services.......... 1,156 1,190 1,803 1,939
-------------- -------------- -------------- --------------
Total revenues................... 6,334 6,422 6,905 9,511
Costs and expenses:
Groceries sold, net of returns........ 4,984 5,025 4,818 7,188
Grocery operations.................... 1,554 1,660 2,038 2,889
General and administrative............ 488 574 1,071 787
Marketing and selling................. 611 923 809 1,641
System development and
maintenance........................ 355 334 455 348
Depreciation and amortization......... 118 150 174 209
-------------- -------------- -------------- --------------
Total costs and expenses......... 8,110 8,666 9,365 13,062
-------------- -------------- -------------- --------------
Operating loss............................. (1,776) (2,244) (2,460) (3,551)
Other income (expense):
Interest expense...................... (19) (16) (19) (18)
Interest income....................... 18 149 195 175
============== ============== =============----==============
Net loss................................... $ (1,777) $ (2,111) $ (2,284) $ (3,394)
============== ============== ============== ==============
Basic and diluted net loss per share....... $ (0.18) $ (0.18) $ (0.18) $ (0.27)
============== ============== ============== ==============
Shares used to compute basic and diluted
net loss per share......................... 9,645,170 11,952,148 12,520,830 12,522,841
============== ============== ============== ==============
</TABLE>
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
This information contained under the headings "Election of Directors"
and "Executive Officers" in the Proxy Statement (which Proxy Statement will be
filed with the Securities and Exchange Commission on or before April 30, 1998)
is incorporated herein by reference.
(a) Information about directors and nominees required by this item is
incorporated by reference to the information under the caption "Election of
Directors" in the Registrant's definitive proxy statement to be filed on or
before April 30, 1998 in connection with its 1998 Annual Meeting of
Stockholders.
(b) Information regarding compliance with Section 16(a) reporting requirements,
to the extent required to be disclosed, is incorporated by reference to the
information under the caption "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Registrant's definitive proxy statement to be filed on
or before April 30, 1998 in connection with its 1998 Annual Meeting of
Stockholders.
(c) The following table sets forth certain information concerning each of the
Company's executive officers.
Mr. Andrew B. Parkinson has been the Company's 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. John C. Walden has served as the Company's Chief Operating Officer
since 1997. He is responsible for the general development and execution of the
Company's operating strategies and plans. He joined the Company in 1996 as
Executive Vice President-Finance and Business Development. 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.
Mr. Thomas L. Parkinson has been the Company's 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. Timothy M. Dorgan joined the Company 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 P. Miller joined the Company in 1997 in his current role. As
Senior Vice President-Chief Financial and Administrative Officer, Mr. Miller is
responsible for the Company's accounting, finance and human resource functions.
Prior to joining Peapod, from 1993 to 1997 he served as Controller for The
Interlake Corporation and from 1989 to 1993 he served as Vice President-Finance
of the Material Handling Division of the Interlake Corporation. Mr. Miller holds
an MBA from the University of Michigan, a BA in Economics from DePauw
University, and is a Certified Public Accountant.
Mr. John A. Furton 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
customer support. 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. Carl E. Alguire currently serves as Senior Vice President-Fulfillment
Operations. He joined the Company in 1994 as Regional Vice President and served
in that capacity until 1997. Prior to joining Peapod, Mr. Alguire was Vice
President of Expressline/Quicksilver, Inc. where he was responsible for all
daily operations of Cleveland's largest rush delivery company. He also founded
and ran a $3.5 million general and grocery delivery business, and held the
position of grocery store manager for Fisher Foods, Inc. He holds an AS from
Ohio State University.
Item 11. Executive Compensation
Except for information referred to in Item 402(a)(8) of Regulation S-K, the
information contained under the headings "Election of Directors" and "Executive
Compensation and Other Information" in the Proxy Statement (which Proxy
Statement will be filed with the Securities and Exchange Commission on or before
April 30, 1998) is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information contained under the heading "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement (which Proxy Statement
will be filed with the Securities and Exchange Commission on or before April 30,
1998) is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information contained under the heading "Certain Relationships and
Related Transactions" in the Proxy Statement (which Proxy Statement will be
filed with the Securities and Exchange Commission on or before April 30, 1998)
is incorporated herein by reference.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) Financial Statements
The following financial statements are filed as part of this report:
Report of Independent Public Accountants.
Balance Sheets of the Company as of December 31, 1996 and 1997.
Statements of Operations of the Company for the years ended December
31, 1995, 1996 and 1997.
Statements of Stockholders' Equity of the Company for the years ended
December 31, 1995, 1996 and 1997.
Statements of Cash Flows of the Company for the years ended December
31, 1995, 1996 and 1997.
Notes to Financial Statements.
(a)(2) Financial Statement Schedule
Report of Independent Public Accountants on Financial Statement
Schedule. Page 43
Schedule II -- Valuation and Qualifying Accounts. Page 44
All other schedules are omitted because of the absence of conditions
under which they would have been required or because the required
information is disclosed in the financial statements or notes thereto.
(a)(3) Exhibits
The following exhibits are filed herewith or are incorporated herein:
Exhibit
No. Description
2-- Conversion Agreement and Plan of
Reorganization (incorporated by reference to
Exhibit 10.1 to the Registrant's Registration
Statement on Form S-1, as amended (Registration
No. 333-24341) (the "Registration Statement"))
3.1-- Restated Certificate of Incorporation of the
Company (incorporated by reference to Exhibit 3.1
of the Registration Statement)
3.2-- Restated By-Laws of the Company (incorporated by
reference to Exhibit 3.2 of the Registration
Statement)
4.1-- Stockholders Rights Plan (incorporated by
reference to Exhibit 4.1 of the Registration
Statement)
4.2-- Certificate of Designation of Series A Junior
Participating Preferred Stock (incorporated by
reference to Exhibit 4.2 of the
Registration Statement)
10.1-- Lease of the Company's principal offices located
in Skokie, Illinois (incorporated by reference
to Exhibit 10.1 of the Registration Statement)
*10.2-- Employment Agreement between the Company and
Andrew B. Parkinson, dated June 9, 1997
(incorporated by reference to Exhibit
10.4 of the Registration Statement)
*10.3-- Employment Agreement between the Company and
Thomas L. Parkinson, dated June 9, 1997
(incorporated by reference to Exhibit
10.5 of the Registration Statement)
*10.4-- Employment Agreement between the Company and
John C. Walden, dated June 9, 1997 (incorporated
by reference to Exhibit 10.6 of
the Registration Statement)
*10.5-- Employment Agreement between the Company and
Timothy M. Dorgan, dated June 9, 1997
(incorporated by reference to Exhibit 10.7
of the Registration Statement)
*10.6-- Employment Agreement between the Company and
John A. Furton, dated June 9, 1997 (incorporated
by reference to Exhibit 10.8 of
the Registration Statement)
*^10.7-- Employment Agreement between the Company and
John P. Miller
*10.8-- Form of Severance Agreement between the Company
and each of Andrew B. Parkinson, Thomas L.
Parkinson, John C. Walden, Timothy M. Dorgan
and John A. Furton, dated June 9, 1997
(incorporated by reference to Exhibit 10.9 of the
Registration Statement)
10.9-- Amended and Restated Investors Agreement, dated
April 1, 1997, among the Company and certain
investors (incorporated by reference to Exhibit
10.10 of the Registration Statement)
10.10-- Unitholders Agreement among Peapod LP, the
General Partners and certain investors, as
amended (incorporated by reference to Exhibit
10.11 of the Registration Statement)
10.11-- Parkinson Registration Rights Agreement among
the Company, Andrew B. Parkinson and Thomas L.
Parkinson, dated May 30, 1997 (incorporated by
reference to Exhibit 10.12 of the Registration
Statement)
10.12-- Tasso H. Coin Registration Rights Agreement
between the Company and Tasso H. Coin, dated May
31, 1997 (incorporated by reference to Exhibit
10.13 of the Registration Statement)
*10.13-- 1997 Long-Term Incentive Plan (incorporated by
reference to Exhibit 10 of the Registration
Statement on Form S-8 dated September 11, 1997)
*10.14-- Employee Stock Purchase Plan (incorporated by
reference to Exhibit 10 of the Registration
Statement on Form S-8 dated September 11, 1997)
*10.15-- Form of Indemnification Agreement between the
Company and each of its directors and executive
officers, dated June 9, 1997 (incorporated by
reference to Exhibit 10.16 of the Registration
Statement)
^23-- Independent Auditors' Consent
^24-- Powers of Attorney (included on signature page)
^27-- Financial Data Schedule
^ Filed herewith
* Represents management contract or compensatory plan
(b) Reports on Form 8-K
The Registrant did not file any Current Reports on Form 8-K during the
year ended December 31, 1997.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of
Peapod, Inc.:
We have audited the accompanying balance sheets of Peapod, Inc. as of
December 31, 1996 and 1997, and the related statements of operations,
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1997. In connection with our audits of the
aforementioned financial statements, we have also audited the related financial
statement schedule. This financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion on the
financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects, the information set forth therein.
KPMG Peat Marwick LLP
Chicago, Illinois
February 4, 1998
<PAGE>
<TABLE>
<CAPTION>
PEAPOD, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
Represents bad debt allowance and the related bad debt expense.
Column A Column B Column C Column D Column E
------------------------------------- -------------- --------------- -------------- ---------------
Balance at Charged to
beginning of costs and Balance at
Description Year expenses Deductions end of year
------------------------------------- -------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Year ended December 31, 1995 $ 35,200 $ 28,088 $ (36,023) $ 27,265
Year ended December 31, 1996 27,265 23,626 (9,283) 41,608
Year ended December 31, 1997 41,608 481,342 (171,303) 351,647
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
March 10, 1998
Andrew B. Parkinson
Chairman, President and Chief
Executive Officer
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 amendments to this Annual Report on Form 10-K, 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 1934, as amended,
and all requirements of the Securities and Exchange Commission. 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.
Signature Title
- ---------------------------------- ----------------------------
|
Chairman, President, Chief |
/s/ Andrew B. Parkinson Executive Officer and |
- ---------------------------------- Director |
Andrew B. Parkinson |
|
|
Executive Vice President -- |
/s/ Thomas L. Parkinson Chief Technology Officer, |
- ---------------------------------- and Director |
Thomas L. Parkinson |
|
|
Senior Vice President, Chief |
/s/ John P. Miller Financial and Administrative |
- ---------------------------------- Officer |
John P. Miller |} March 10, 1998
|
|
/s/ Earl W. Rachowicz Vice President and Controller|
- ---------------------------------(principal accounting officer)|
Earl W. Rachowicz |
|
|
/s/ Tasso H. Coin |
- ---------------------------------- Director |
Tasso H. Coin |
|
|
/s/ Trygve E. Myhren |
- ---------------------------------- Director |
Trygve E. Myhren |
|
/s/ Seth L. Pierrepont |
- ---------------------------------- Director |
Seth L. Pierrepont |
THIS EMPLOYMENT AGREEMENT ("Agreement"), is entered into and
effective as of November 1, 1997, by and between Peapod, Inc., a Delaware
corporation (the "Company"), and John P. Miller ("Employee").
WHEREAS, effective as of the date hereof, the Company wishes
to employ Employee and Employee wishes to accept employment with the Company.
NOW, THEREFORE, for and in consideration of the promises and
the mutual covenants and agreements herein contained, the Company and the
Employee hereby agree as follows:
1. Employment-At-Will Employee and the Company acknowledge and
agree that Employee is an "employee-at-will" and that Employee and the Company
each shall have the right to terminate Employee's employment with the Company at
any time and for any reason, subject to Section 3 herein.
2. Confidentiality, Nonsolicitation and Noncompete Agreement.
As a condition to Employee's employment by the Company, Employee agrees to enter
into, effective as of the effective date of this Agreement, an "Employee
Nonsolicitation and Noncompete Agreement" (hereinafter "Employee Confidentiality
Agreement") in substantially the form attached hereto as Exhibit A, as it may be
modified from time to time, and Employee agrees to comply fully with all of the
terms and provisions of such Employee Confidentiality Agreement as if such terms
and provisions were fully set forth in this Agreement. The covenants contained
in the Employee Confidentiality Agreement and its subsequent modifications shall
survive the expiration of this Agreement and the termination of Employee's
employment with the Company, regardless of when or the reason for such
termination, as set forth therein.
3. Severance Benefits. (a) If Employee is terminated by the Company for "Cause"
(as hereinafter defined), Employee shall receive Employee's then current annual
base salary through the date of termination (subject to any applicable payroll
or other taxes required to be withheld). Employee shall not be eligible to
receive any additional benefits or payments, pro rata or otherwise, under any
other Company compensation plans, including bonus, commission, or stock
compensation. "Cause" as used herein shall mean: if, in the Company's reasonable
determination: Employee "grossly neglects" (as hereinafter defined) his or her
duties; Employee engages in "misconduct" (as hereinafter defined); or Employee
refuses to sign or violates any confidentiality, non-competition,
non-solicitation, or intellectual property agreement. "Gross neglect" means the
failure in any material respect to perform the essential functions of Employee's
job or the failure to carry out the Company's reasonable directions with respect
to material duties. "Misconduct" means: embezzlement or misappropriation of
corporate or other funds, theft from any grocer or other supplier or vendor of
the Company, or other acts of fraud, dishonesty, theft, or self-dealing, whether
directed at the Company or otherwise; willful refusal to perform assigned
duties; material violation of significant Company policy(ies) or practice(s);
significant violation of any statutory, regulatory, or common law duty of
loyalty to the Company; drug usage (not administered under and in accordance
with medical supervision) or habitual intoxication; or indictment for a felony.
(b) If Employee terminates Employee's employment with the
Company for any reason, Employee shall provide the Company with 2 weeks (14
calendar days) written notice thereof ("Notice Period"). Upon receipt of such
written notice, the Company may accelerate the date of Employee's termination.
In the event that the Company accelerates Employee's date of termination,
Employee shall receive his or her then current annual base salary payments for
the balance of the two-week Notice Period (subject to any applicable payroll or
other taxes required to be withheld). Employee shall not be eligible to receive
any additional payments or benefits, pro rata or otherwise, under any other
Company compensation plans, including bonus, commission, or stock compensation.
(c) If Employee is terminated by the Company for any reason
other than for "Cause" (as defined above), Employee shall be entitled to (i)
payments equivalent to 12 months of his or her then current annual base salary
(subject to any applicable payroll or other taxes required to be withheld) and
(ii) pro rata participation (as defined below) in the Company's bonus
compensation plans for which Employee was eligible immediately prior to such
termination. Such amount(s) shall be paid at such interval(s) as they would
otherwise be paid. Any requirement of the Company that the Employee be based
anywhere other than Evanston, Illinois, Skokie, Illinois, or outside a 30-mile
radius of such locations, without "Cause" existing at such time, shall be deemed
a termination of Employee other than for "Cause."
(d) Employee's employment shall terminate automatically upon
Employee's death. Employee or his or her estate shall receive Employee's then
current base salary payments through the date of termination and pro rata
participation in the Company's bonus compensation plans for which Employee was
eligible immediately prior to such termination. Such amount(s) shall be paid at
such interval(s) as they would otherwise be paid.
(e) Upon Employee's Incapacity (as defined herein), the
Company may terminate Employee's employment with thirty days notice. Incapacity
shall mean such physical or mental condition, or combination of conditions, of
the Employee which exists for at least 26 weeks, either continuously or over a
52-week period and which, in the reasonable opinion of the Company, renders
Employee incapable of performing the essential functions of his or her position
with or without reasonable accommodation. Employee agrees to submit to any
reasonable medical examination(s) as may be directed by the Company for the
purpose of determining the existence of the Incapacity. During the 26 weeks and
through the date of termination, Employee shall receive (i) base salary payments
reduced by amounts Employee receives pursuant to any Company plan or policy
because of the physical or mental condition, or combination of conditions,
underlying the Incapacity and (ii) pro rata participation in the Company's
compensation plans, including bonus, commission, or stock compensation for which
Employee was eligible immediately prior to such termination. Such amount(s)
shall be paid at such interval(s) as they would otherwise be paid. The Company
also reserves the right to terminate Employee's employment under other
provisions of this Section 3 as may be applicable during the period of
Incapacity, except that the Incapacity shall not be the basis of a termination
for gross neglect under Section 3(a).
(f) As used in this Agreement, "pro rata participation" in any
Company compensation plan shall mean the percentage share derived by dividing
Employee's duration of employment within the compensation period, as determined
by the particular compensation plan, in which Employee's employment terminates
by that total compensation period.
(g) The severance benefits provided hereunder shall be the
total severance benefits to which Employee is entitled and shall be in lieu of,
and not in addition to, any other severance plan, policy, or arrangement of the
Company or previously agreed to by Employee and the Company.
4. Notices. Any notice or request required or permitted to be
given hereunder must be, and shall be sufficient if, in writing and delivered
personally or if sent by registered or certified mail, return receipt requested,
as follows: if to the Employee, to the address of Employee as set forth in the
records of the Company, and if to the Company, to 9933 Woods Drive, Skokie,
Illinois 60077, Attention: President, or to any other address designated by
either party by notice similarly given. Such notice shall be deemed to have been
given upon the personal delivery or such mailing thereof, as the case may be.
5. Authority; No Conflict. Employee expressly represents and
warrants to the Company that Employee has full and sole right and authority to
execute and deliver this Agreement and to comply with the terms and provisions
hereof and that the execution and delivery of this Agreement and compliance with
the terms and provisions hereof by Employee will not conflict with or result in
a breach of the terms, conditions, or provisions of any other agreement,
restriction, or obligation by which the Employee is bound or will become bound.
6. Assignment and Succession. This Agreement shall be binding
upon and shall operate for the benefit of the parties hereto and their
respective legal representatives, legatees, distributees, heirs, and successors
and assigns. Employee acknowledges that the services Employee renders pursuant
to this Agreement are unique and personal. Accordingly, Employee may not assign
any of Employee's rights contained in this Agreement or delegate any of
Employee's job duties or any duties under this Agreement. The Company may assign
its rights, duties, or obligations under this Agreement to a purchaser or
transferee of all, or substantially all, of the Company's assets.
7. Applicable Law. This Agreement, and any claim or
controversy arising out of or relating to this Agreement, shall at all times be
construed, interpreted, and enforced in accordance with, and be governed by, the
internal laws (as opposed to conflict of laws provisions) of the State of
Illinois.
8. Severability. Whenever possible, each provision of this
Agreement will be construed and interpreted in such manner as to be effective
and valid under applicable law. In the event that any provision or any part of a
provision of this Agreement shall be held to be void or unenforceable, the
remaining provisions of this Agreement shall continue in full force and effect.
9. Waiver, Etc. The waiver of a breach of any provision of
this Agreement shall not operate or be construed to be a waiver of any other or
a subsequent breach. No delay or omission in the exercise of any power, remedy,
or right herein provided or otherwise available to any party, shall impair or
affect the right of such party thereafter to exercise the same. Any extension of
time or other indulgence granted to a party hereunder or to any other person
shall not otherwise alter or affect any power, remedy, or right of any other
party, or obligations of the party to whom such extension or indulgence is
granted except as specifically waived.
10. Dispute Resolution. Any controversy or claim arising out
of or relating to this Agreement, or the breach thereof, shall be settled by
arbitration administered by the American Arbitration Association ("AAA") in
accordance with its National Rules for the Resolution of Employment Disputes, to
the extent not inconsistent with this provision or the provision designating the
internal laws of Illinois as the law governing any controversies, claims, or
breaches of this Agreement. Judgment upon the award rendered by the arbitrator
may be entered in any court having jurisdiction thereof. Such arbitration shall
be conducted in Chicago, Illinois before a single arbitrator. The parties shall
select an arbitrator by mutual agreement from a panel of arbitrators experienced
in arbitrating employment disputes proposed by AAA. If the parties are unable to
agree on an arbitrator, AAA shall select an arbitrator in accordance with its
procedures. Nothing herein shall preclude the Company from seeking and/or
obtaining injunctive relief from a court of competent jurisdiction and/or in
arbitration pursuant to the Employee Confidentiality Agreement required
hereunder to be executed by the Employee.
11. Entire Agreement. This Agreement, together with the
Employee Confidentiality Agreement and its later modifications, contain the
entire agreement of the parties relating to the subject matter hereof including,
but not limited to, any previous written agreements concerning Employee's
employment with the Company. This agreement may not be modified or discharged
orally, but only by an agreement in writing signed by the party against whom
enforcement of any change, modification, waiver, extension, or discharge is
sought.
12. Termination. This Agreement shall terminate on the third
anniversary of its effective date ("Agreement Termination Date") and shall
thereafter be of no further force or effect; provided, however, that if upon the
Agreement Termination Date, the Company does not have a severance pay policy in
effect under which Employee would be eligible to receive severance benefits in
the event of Employee's termination without cause, then Employee shall be
entitled to receive severance benefits consistent with paragraph 3(c) of this
Agreement if terminated without cause.
THE PARTIES HERETO AGREE TO THE TERMS HEREOF AND AGREE TO BE BOUND BY THEM AND
TO ADHERE TO THEM IN GOOD FAITH.
EMPLOYEE NEW PEAPOD, INC.
/s/ John P. Miller By: /s/ John C. Walden
Name: John P. Miller Name: John C. Walden
Title: Chief Operating Officer
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
The Board of Directors and Stockholders of
Peapod, Inc.:
We consent to incorporation by reference in the registration statements
(No. 333-35405 and No. 333-35445) on Forms S-8 of Peapod, Inc. of our reports
dated February 4, 1998, related to the balance sheets of Peapod, Inc. as of
December 31, 1996 and 1997, and the related statements of operations,
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1997, and related financial statement schedule, which
reports appear in the December 31, 1997 annual report on Form 10-K of Peapod,
Inc.
KPMG Peat Marwick LLP
Chicago, Illinois
March 5, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> DEC-31-1997
<CASH> 54,079
<SECURITIES> 8,797
<RECEIVABLES> 1,547
<ALLOWANCES> 352
<INVENTORY> 0
<CURRENT-ASSETS> 64,744
<PP&E> 5,552
<DEPRECIATION> 2,301
<TOTAL-ASSETS> 69,110
<CURRENT-LIABILITIES> 12,394
<BONDS> 0
0
0
<COMMON> 168
<OTHER-SE> 54,634
<TOTAL-LIABILITY-AND-EQUITY> 69,110
<SALES> 43,487
<TOTAL-REVENUES> 59,607
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 74,556
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (83)
<INCOME-PRETAX> (12,979)
<INCOME-TAX> 0
<INCOME-CONTINUING> (12,979)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,979)
<EPS-PRIMARY> (0.87)
<EPS-DILUTED> (0.87)
</TABLE>
