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, 1998 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 26, 1999: $140,695,898 based on a closing price of
$10.94 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 26, 1999 was 17,416,464.
Documents Incorporated by Reference
Portions of the Registrant's Proxy Statement for the 1999 Annual
Meeting of Stockholders (to be filed on or before April 6, 1999) are
incorporated by reference into Part III, as indicated herein.
<PAGE>
PEAPOD, INC.
Form 10-K Annual Report -- 1998
Table of Contents
Forward Looking Statements ..................................................3
PART I
Item 1. Business.............................................................3
Item 2. Properties...........................................................9
Item 3. Legal Proceedings....................................................9
Item 4. Submission of Matters to a Vote of Security Holders..................9
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters..............9
Item 6. Selected Financial Data.............................................10
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............11
Item 7a. Quantitative and Qualitative Disclosure about Market Risk..........15
Item 8. Financial Statements and Supplementary Data.........................16
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.............33
PART III
Item 10. Directors and Executive Officers of the Registrant.................33
Item 11. Executive Compensation.............................................34
Item 12. Security Ownership of Certain Beneficial Owners and Management.....35
Item 13. Certain Relationships and Related Transactions.....................35
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...35
Signatures..................................................................40
<PAGE>
Forward Looking Statements
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
"Business", "Management's Discussion and Analysis of Financial Condition and
Results of Operations," in other portions of this report and in the Company's
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 including effectively
implementing a centralized fulfillment distribution model; (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.
PART I
Item 1. Business
The Company
Peapod(R) is America's leading Internet grocer and a provider of targeted
media and research services. Peapod's "Smart Shopping for Busy People(R)"
solution provides consumers with time savings and convenience through a
user-friendly, highly functional virtual supermarket, personalized shopping and
delivery services, and responsive telephonic and email support. 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.
From its founding in 1989 until 1998, the Company serviced consumers
exclusively in partnership with traditional grocery retailers. The Company
partnered with a retailer in each market, and fulfilled customer orders through
a network of existing retail stores. In 1997, the Company determined that, in
order to satisfy increasing consumer demand, ensure high quality service and
reduce its cost structure, it would shift its fulfillment to a centralized,
dedicated distribution model. The Company has opened new distribution centers in
two markets and has a third center currently under construction. It intends to
centralize all operations over time, and will enter new markets only with
centralized, dedicated distribution.
Peapod's technology is central to its business model, and integrates
proprietary and commercial systems in a manner specifically tailored to the
consumer direct business. Peapod's sophisticated Website 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 its product database and
merchandising systems, providing dynamic pricing and promotional information to
its members. Peapod has designed its fulfillment management and transportation
applications, for both in-store and warehouse-based fulfillment, 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.
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 merchandising
and fulfillment of high-volume, multi-temperature, custom-picked orders. The
Company's technology and operating processes for shopping, packing and
delivering products, as well as its customer support capabilities, have been
refined over its years of experience to be efficient and ensure high levels of
customer service. The Company's Website and merchandise offerings reflect
extensive and continuous learning regarding the preferences, habits and
decision-making processes of online grocery consumers.
Peapod also provides consumer goods companies with a forum for targeted
interactive advertising, high-impact electronic couponing and cost-effective
product research by linking together members from multiple markets into a
national online network. 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.
This business offers attractive profit margins relative to the core grocery
business, and is expected to become meaningful once Peapod's membership base
begins to scale.
As of December 31, 1998, Peapod had 95,000 members and offered its Internet
grocery service in eight metropolitan markets: Chicago, IL; San Francisco/San
Jose, CA; Columbus, OH; Boston, MA; Houston, Dallas and Austin, TX, and Long
Island, NY.
Peapod was incorporated in December 1996 in the state of Delaware and is a
successor to a business originally founded in 1989. The Company's principal
corporate offices are located in Skokie, Illinois, a suburb of Chicago. Peapod
completed its initial public offering in June 1997 and its common stock is
listed on the Nasdaq National Market under the symbol "PPOD".
Growth Strategies
Peapod's objective is to substantially expand the Internet grocery shopping
channel in the United States, retain its dominant share of the channel, and
become the preferred venue for online marketing programs and research for
consumers goods companies. The Company's growth strategies include the
following:
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" solution includes user-friendly,
highly-functional and cost-effective shopping tools as well as a variety of
convenient delivery services. "The Peapod Promise" of superior service is
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 has re-engineered
its product distribution and order fulfillment model in order to reduce costs,
improve quality and enhance volume scalability. The Company has developed
warehousing and routing technologies, and associated operating processes,
designed to increase the efficiency of Peapod's order fulfillment. Peapod will
continue to pursue enhancements to its model that will reduce fulfillment costs
while preserving service quality as its order volume increases.
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 increasing its penetration in
existing markets, with particular focus on the markets in which it operates its
new centralized model, and by expanding into new metropolitan markets over time.
The Company believes that it can achieve competitive advantages in its various
markets as the first one to build a substantial Internet membership base and
achieve operating scale.
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.
Build Leadership in Interactive Marketing Services. 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 Internet
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.
Leverage Local Fulfillment Infrastructure. Peapod has the opportunity to
leverage its local fulfillment capabilities, including its facilities, efficient
picking systems and home delivery, to provide additional products and services
to its membership base. For instance, Peapod plans to introduce a national
Internet service that will offer consumers thousands of dry grocery and
household items, available for shipment directly from Peapod's various
distribution centers. Further, Peapod may broaden the products available for
purchase to include other home replenishment items, specialty food categories
and non-food products.
Peapod Services
Consumer Services. Peapod's "Smart Shopping for Busy People" solution provides
consumers with time savings and convenience through its user-friendly, highly
functional and information-rich virtual supermarket and personalized shopping,
delivery and customer support 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 at a convenient time. Peapod makes available, at the member's
fingertips, up-to-date product information, including 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 its Internet Website www.peapod.com. The site
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 product searches
based on brand or category names (which is particularly helpful for coupon
redemption or purchasing recipe ingredients). Members can also 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). Through the use of these tools, members can quickly identify desirable
products and place them into their "virtual" shopping cart. The Company believes
that its Website provides one of the most functional Internet shopping services
currently available.
Peapod's typical members are females between the ages of 30 and 54,
households with children and dual income households. 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 $115, which the Company believes
is five times the in-store average.
As of December 31, 1998, Peapod offered its Internet grocery service in
eight metropolitan markets, and conducted delivery operations from 36
fulfillment centers covering 6,628,500 households, or approximately 7% of U.S.
households. Peapod's service areas encompassed approximately 1,732,000
households in Chicago, 840,000 households in San Francisco/San Jose, 398,000
households in Columbus, 1,242,000 households in Boston, 939,000 households in
Houston, 995,000 households in Dallas, 257,000 households in Austin and 226,000
households in Long Island.
Product Supply Relationships. From its founding in 1989 until 1998, the
Company serviced consumers exclusively in partnership with traditional grocery
retailers. The Company partnered with a retailer in each market, and fulfilled
customer orders through a network of existing retail stores ("Partnership
Model"). In 1997, the Company determined that, in order to satisfy increasing
consumer demand, ensure high quality service and reduce its cost structure, it
would shift its fulfillment to a centralized, dedicated distribution model
("Centralized Model"). In the Centralized Model, the Company constructs a
distribution center for its own exclusive use in storing, picking, packing and
delivering Internet grocery orders. The Company purchases products on a
wholesale basis for the distribution center from a variety of suppliers,
including in some cases traditional retailers.
The Company continues to operate the Partnership Model under existing
contracts with the following retailers: in Columbus, Ohio, The Kroger Company;
in Boston, Massachusetts, The Stop & Shop Supermarket Company; and in Houston,
Dallas and Austin, Texas, Randalls Food & Drug Inc. The Company has implemented
its Centralized Model with new distribution centers in Long Island, New York,
and Chicago, Illinois, and is completing construction of a new center in San
Francisco, California. It intends to employ the Centralized Model in all
operations over time, including in all new markets.
Interactive Marketing. Peapod provides a forum for consumer package goods
companies to conduct targeted interactive advertising, electronic couponing and
extensive product research. Peapod links together members from multiple markets
into a national online network, and collects substantial data regarding members'
attitudes, purchasing behavior and demographics. In addition, Peapod's growing
membership base has an attractive demographic profile that 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 Website 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.
Peapod's database and membership profile 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.
Peapod's systems provide accountability for every marketing event executed on
the Peapod system so that exposures, click-throughs, 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's extensive member data profiles also allow it to provide
consumer goods companies with improved research and data products, at a lower
cost than traditional research services. For example, the Company recently
announced Consumer DirectionsTM, a new research cooperative designed to provide
consumer package goods companies with information about behavior in the Internet
distribution channel. 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.
Technology
The Website. The www.peapod.com Website provides the Company with a
distributed, scalable, and secure online grocery retailing capability that is
accessible and easy to use for consumers. The highly specialized software has
been designed around industry standard architectures and provides 24-hour/7-day
per week availability for online shopping.
Applications. The Company employs a number of technologies that enable
efficient system operations and a responsive consumer experience. All Website
business logic is encapsulated in a set of reusable business objects that
provide software developers a layer of abstraction between the page layout and
the underlying data elements and database calls. This abstraction reduces the
effort associated with online feature and content development along with the
management required to maintain large numbers of products and their frequent
pricing and availability changes. The Company's Lexicon system distributes and
manages frequently-accessed content and data in order to assure customers a
responsive and personalized online shopping session.
A 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 customers based on a range of
defined criteria. The Company 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 the Company to offer sophisticated advertising and market
research services to its consumer packaged goods clients.
Transaction Systems. The Company has deployed several enterprise
transaction systems that manage the Peapod service operations and integrate with
the online retailing application. The fulfillment management systems, using a
combination of commercially-available and internally-developed applications,
reside largely in the Company's fulfillment centers and provide logistics
support for order picking and vehicle routing. Centralized customer support
systems manage call center operations, customer billing and electronic payment
processing, and provide for ongoing service policy management and customer
communication.
Location. The Company's primary data center is housed in its corporate
headquarters where systems operations personnel administer the online shopping
application, network services and transaction processing systems. The Company
uses the services of several outside firms to provide connectivity to the
Internet and its own fulfillment centers, security, network and systems
monitoring, data backup and redundant power generation.
Marketing and Promotion
Consumer Marketing. The Company's marketing objectives include increasing
member acquisition, retention, usage, and grocery order size, along with Peapod
brand awareness. Peapod executes an integrated, multi-media promotional plan
that includes radio and newspaper advertising, direct mail, mass transit,
Internet advertising and local branding on employee uniforms and delivery
trucks. In addition, 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.
Interactive Marketing. Peapod's interactive marketing 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. Peapod also advertises its interactive
marketing 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 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 companies 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 Chicago and
Boston where several warehouse-based delivery services have recently emerged.
The Company believes that many large grocery retailers may initiate
Internet shopping and delivery programs over time due to the large potential
size of this 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. Because of the large capital investments required to develop
Internet grocery shopping and delivery systems and to operate the service, the
Company believes that well-capitalized companies, or start-up companies with
access to significant capital, 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 insert ("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
Internet. 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 Internet
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."
Employees
As of December 31, 1998, the Company had approximately 240 full-time and
1,125 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 systems and technology. The Company relies on a combination
of copyright, trademark and trade secret laws as well as confidentiality
agreements and other measures to establish and protect its proprietary rights.
The Company does not have any patents. The Company has U.S. registrations for
the "Peapod" service mark and associated logos and for Peapod's "Smart Shopping
for Busy People" slogan. The Company has registered copyrights, or has applied
for copyright registration, with respect to its Website 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 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 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 49,068
Niles, IL Warehouse Leased 35,479 *
Boston, MA Regional Office Leased 1,461
San Francisco, CA Regional Office Leased 2,553
Union City, CA Warehouse Leased 46,104
Columbus, OH Regional Office Leased 878
* The usable space in this warehouse will increase to 70,958 in March 1999.
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.
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 26, 1999, there were approximately 269 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 and 1998 follows:
1997 1998
--------------------------- -----------------------------
High Low High Low
------------ ----------- ------------ ------------
Calendar Quarter Ended:
March 31 ....... $ 8.750 $ 4.500
June 30 *.......$18.500 $11.250 10.030 4.063
September 30.... 13.750 7.875 8.688 4.688
December 31..... 14.000 5.000 13.500 2.750
* The Company conducted an initial public offering on June 10, 1997 at
$16.00 per share.
The Company has not declared any dividends since its initial public
offering. The Company does not anticipate paying cash dividends on its Common
Stock in the foreseeable future. Any payment of cash dividends in the future
will depend upon the financial condition, capital requirements and earnings of
the Company, limitations on dividend payments pursuant to the terms of debt
agreements and such other factors as the Board of Directors may deem relevant.
Item 6. Selected Financial Data
The selected statement of operations and balance sheet data set forth below
have been derived from the historical financial statements of the Company. The
historical financial statements as of December 31, 1997 and 1998 and for the
years ended December 31, 1996, 1997 and 1998 have been audited by KPMG LLP,
independent certified public accountants, whose report thereon appears elsewhere
in this document. The statement of operations and balance sheet data set forth
below as of, and for the years ended, December 31, 1994 and 1995, as well as the
balance sheet data as of December 31, 1996, have been derived from the Company's
unaudited internal financial statements and reflect all adjustments which
management considers necessary for a fair and consistent presentation of the
results of operations for those periods. The selected financial and operating
data should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements and
related notes thereto appearing elsewhere in this document.
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------------
1994 1995 1996 1997 1998
(dollars in thousands, except share and per share data)
Statement of Operations Data:(1)
<S> <C> <C> <C> <C> <C>
Revenues:(2)
Net product sales...$ 6,745 $ 12,731 $ 22,015 $ 43,487 $ 57,305
Member and retailer.... 1,260 2,315 4,558 11,234 9,650
Interactive marketing . -- 163 1,069 2,222 1,460
Licensing.............. -- -- -- -- 850
Total revenues........ 8,005 15,209 27,642 56,943 69,265
Cost of goods sold......(6,404) (11,997) (20,485) (40,823) (53,903)
Other costs and expenses(5,918) (9,796) (17,188) (31,060) (39,420)
Operating loss..........(4,317) (6,584) (10,031) (14,940) (24,058)
Net loss.......... (4,347) (6,592) (9,566) (12,979) (21,565)
Basic and diluted net
loss per share......$ (0.75) $ (0.79) $ (0.82) $ (0.87) $ (1.27)
Shares used to compute basic and diluted net
loss per share..... 5,804,055 8,357,585 11,664,956 14,915,734 16,964,439
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
----------------------------------------------------------------------
1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C>
Operating Data:(1)
Markets(3)...... 2 2 4 8 8
Members(4)...... 8,400 13,300 35,400 100,400 95,000
Orders (for the year ended)... 70,300 124,100 201,100 396,600 494,700
Households in service area(5). 1,917,000 2,204,200 3,581,000 6,488,000 6,628,500
Balance Sheet Data:(1)
Cash and cash equivalents .....$ 2,254 $ 2,466 $ 13,039 $ 54,079 $ 4,341
Marketable securities............ -- -- -- 8,798 31,049
Total assets..................... 3,465 4,531 16,528 69,110 42,971
Long-term obligations............ 47 374 340 701 395
Total stockholders' equity....... 1,435 1,413 8,403 54,803 33,606
</TABLE>
(1) Prior to May 31, 1997, represents the financial and operating information
of Peapod LP, the predecessor entity to the Company.
(2) Net product sales represent groceries sold to members. Member and retailer
revenues include fees from members and retail partners related to the
Company's online services and grocery and delivery operations. Interactive
marketing revenues include fees from advertising, promotions and research.
(3) Represents the number of metropolitan markets served.
(4) Represents the number of households and businesses subscribing to the
Peapod services.
(5) 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).
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. Certain prior year
balances have been reclassified to conform with the current year presentation
(i.e., some fulfillment operations expenses that were administrative functions
have been moved to general and administrative and others which were advertising
related were moved to marketing and selling expenses).
RESULTS OF OPERATIONS
1998 Compared to 1997
Net product sales. Net product sales, which are the sales of groceries
to members, increased 32% from $43,487,000 in 1997 to $57,305,000 in 1998. This
increase was principally due to a 25% increase in the number of orders and a 6%
increase in the size of the average grocery order. The total number of orders
increased from 396,600 in 1997 to 494,700 in 1998. Total membership at December
31, 1997 and 1998 was 100,400 and 95,000, respectively. Decreases in the
Company's membership base resulted largely from closing the Atlanta market in
January 1998 and from deliberate postponement of acquisition marketing programs
in 1998 to focus resources on centralizing the distribution fulfillment model.
Member and retailer revenue. Member and retailer revenue includes
subscription, service and other fees paid by members and retail partners related
to Peapod's online shopping and delivery operations. Revenues from such services
decreased 14% from $11,234,000 in 1997 to $9,650,000 in 1998. The decrease was
primarily attributable to an absence of market opening and related fees in 1998
compared to the openings of four new markets in 1997. New lower membership
pricing plans implemented during 1998 also contributed to the decrease.
Interactive marketing revenue. Revenues from interactive marketing
include fees from consumer goods companies for interactive advertising,
promotion and research services. Revenues from interactive marketing decreased
34% from $2,222,000 in 1997 to $1,460,000 in 1998. The decrease is due to the
Company's decision to limit member acquisition spending and geographic growth
during 1998.
Licensing revenue. During 1998, $850,000 of maintenance and licensing
fees were recognized relating to the licensing of the Company's software to
Coles Myer Ltd. No such fees were recognized in 1997. On December 31, 1998, the
Company concluded a restructuring transaction that established its licensing
business into a newly-formed company called Split Pea Software, Inc ("Split
Pea"). The Company owns a minority interest of 40% of the voting common stock of
Split Pea. All future licensing services will be provided by Split Pea which
will collect all future licensing revenue.
Cost of goods sold. Cost of goods sold, which are the cost of groceries
sold to members, increased 32% from $40,823,000 in 1997 to $53,903,000 in 1998,
commensurate with the increase in net product sales.
Fulfillment operations. Fulfillment operations expenses include (i) the
direct costs relating to the shopping, packing and delivery of member orders,
(ii) salaries and overhead expenses of each fulfillment center, (iii) salaries
and overhead expenses for each metropolitan market and (iv) salaries and
overhead expenses for certain field support functions such as recruiting,
training, database merchandising and member support. Fulfillment operations
expenses increased 19% from $14,469,000 in 1997 to $17,196,000 in 1998. This
increase is primarily attributable to the direct costs of shopping, packing and
delivering the increased volume of orders
At December 31, 1998, Peapod fulfilled member orders from 36
fulfillment centers compared to 52 such centers at the end of 1997. In 1998, 15
fulfillment centers were consolidated into existing ones and 1 in Atlanta was
closed when the market closed in early 1998. One fulfillment center was added
with the opening of the New York market.
General and administrative. General and administrative expenses, which
include corporate staff, accounting and human resource functions, increased 35%
from $5,935,000 in 1997 to $8,029,000 in 1998. This increase resulted primarily
from expenses related to being a public company such as investor relations fees,
franchise taxes, permits and licenses, legal and accounting expenses. With the
growth and relocation of the Company's headquarters, occupancy expense also
increased.
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 decreased by 2% from $7,726,000 in 1997
to $7,545,000 in 1998. The decrease in marketing and selling expenses was
attributable to savings for compensation related expenses and a delay in
marketing programs offset by a fourth quarter 1998 write-off of prepaid
marketing costs. During 1998, the Company focused resources on transitioning its
fulfillment operations to a centralized distribution model. During that period
the Company reduced certain member acquisition marketing expenditures.
System development and maintenance. System development and maintenance
expenses, which include new product development as well as the maintenance and
enhancement of existing systems, doubled from $1,696,000 in 1997 to $3,386,000
in 1998. This increase resulted primarily from (i) higher staffing and
associated expenses required to support the Company's growth, (ii) evolution to
a new centralized fulfillment and Internet model, and (iii) a reduced amount of
software development costs capitalized in 1998.
Depreciation and amortization. Depreciation and amortization increased
165% from $1,234,000 in 1997 to $3,264,000 in 1998. This increase resulted
largely from the fourth quarter 1998 write-off of capitalized software costs for
previous versions of the Company's software and due to a change in depreciable
lives of various fixed assets.
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 $83,000 in 1997 to $190,000 in 1998
related to additional capital leases. Interest income increased from $2,044,000
in 1997 to $2,683,000 in 1998, resulting from the investment of proceeds from
the Company's initial public offering in June 1997.
1997 Compared to 1996
Net product sales. Net product sales, 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 35,400 and 100,400,
respectively, reflecting an increase of 184%. 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.
Member and retailer revenue. Revenue from members and retailers
increased 146% from $4,558,000 in 1996 to $11,234,000 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.
Interactive marketing revenue. Revenue from interactive marketing
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.
Cost of goods sold. Cost of goods sold increased from $20,485,000 in
1996 to $40,823,000 in 1997, commensurate with the increase in net product
sales.
Fulfillment operations. Fulfillment operations expenses increased 110%
from $6,889,000 in 1996 to $14,469,000 in 1997. The increase was 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.
General and administrative. General and administrative expenses
increased 57% from $3,785,000 in 1996 to $5,935,000 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 increased by 63%
from $4,739,000 in 1996 to $7,726,000 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 increased 51% from $1,124,000 in 1996 to $1,696,000 in 1997. In 1996,
Peapod began work on Version 5.0 of its end-user software. 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 was 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). Interest expense increased from $72,000 in 1996
to $83,000 in 1997. Interest income increased from $537,000 in 1996 to
$2,044,000 in 1997 resulting from the investment of proceeds from the Company's
initial public offering in June 1997.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities increased from $6,277,000 in 1997 to
$24,294,000 in 1998. The increase in cash used in operating activities was
primarily attributable to increased net losses, a decrease in accounts payable
and an increase in receivables. As of December 31, 1998, the Company had
$4,341,000 in cash and cash equivalents and $31,049,000 in marketable
securities. 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 continue using the net proceeds from the IPO primarily for
expansion into new geographic markets, further penetration in existing markets
and funding the transition to a centralized distribution model. The Company uses
its working capital to fund ongoing operations, marketing programs and
geographic expansion and to further develop its products and services.
As of December 31, 1998, the Company's principal sources of liquidity
consisted of $35,390,000 of cash and marketable securities. The Company
anticipates that the existing cash and marketable securities will be sufficient
to fund the Company's operations and capital requirements for the foreseeable
future. However, no assurance can be given that changing business circumstances
will not require additional capital for reasons that are not currently
anticipated or that the necessary capital will then be available to the Company
on favorable terms, or at all.
The Company believes that inflation has not had a material effect on
its operations.
YEAR 2000 DISCLOSURE
The "Year 2000" problem concerns the inability of information systems
to properly recognize and process date-sensitive information beyond December 31,
1999. The Company has evaluated the impact of the Year 2000 issue on its
business and does not expect to incur significant costs associated with its own
Year 2000 compliance or that internal 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. In addition, with respect to the Company's ability to obtain product
information, 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. The Company has not incurred to date, and does not expect to incur,
material costs with respect to its initiatives mentioned above.
Nonetheless, failure of certain third party systems could have a
material adverse impact on the Company. Because of the range of possible issues
and the large number of variables involved, it is impossible to quantify the
potential cost of problems should remediation efforts of third parties with whom
the Company does business not be successful. For example, the Company relies on
its retail partners and on other third party vendors for inventory that the
Company sells. The Company is addressing whether these third parties in its
supply chain are adequately addressing their Year 2000 compliance issues. The
Company has initiated communications with its significant suppliers and other
vendors to determine and monitor the Year 2000 issue and to evaluate the impact
on the Company. Failure by such parties to timely address the Year 2000 issue
could impact the Company's ability to obtain inventory, among other things,
which could have a material adverse impact on the Company's business, financial
condition or results of operations.
Furthermore, the Company utilizes third party equipment, software and
content, including non-information technology systems (such as building
equipment and security systems) that may not be Year 2000 compliant. The Company
is in the process of assessing whether critical third-party systems and
equipment and critical non-information technology systems and equipment are
adequately addressing the Year 2000 issue. For example, certain operating
systems of third party vendors on which certain Company software resides are not
yet Year 2000 compliant. Several of these vendors have indicated to the Company
that Year 2000 compliant upgrades are available and the Company intends to
install these upgrades in the first half of 1999. Failure of third-party
equipment, software or content to operate properly with regard to the Year 2000
issue could require the Company to incur unanticipated expense to remedy
problems, which could have a material adverse effect of the Company's business,
results of operation and financial condition.
RECENTLY ISSUED ACCOUNTING STANDARDS
There are no recently issued accounting standards that will have a
material impact on the Company's financial statements.
Item 7a. Quantitative and Qualitative Disclosure about Market Risk
The Company does not have any derivative financial instruments as of
December 31, 1998. However, the Company is exposed to interest rate risk. The
Company has established policies and procedures to manage the exposure to
changes in the market risk of its marketable securities, of which $15,836,000
are current and $15,213,000 are non-current, none of which are considered
trading securities. The Company believes that the market risk arising from its
marketable securities holdings is not material.
The table below provides information about the Company's marketable securities,
including principal cash flows for 1999 through 2001, and the related weighted
average interest rates.
Principal amounts by expected maturity (in thousands):
1999 2000 2001
Corporate debt securities:
Principal............................. $11,768 $ 7,685 $ 1,850
Weighted average interest rate........ 6.00% 6.20% 5.53%
Government obligations:
Principal............................. $ 3,950 $ 5,550 $ --
Weighted average interest rate........ 5.18% 5.23% --
Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
- -------------------------------------------------------------
Independent Auditors' Report................................................ 17
Balance Sheets as of December 31, 1998 and 1997............................. 18
Statements of Operations for the years ended December 31, 1998, 1997 and 1996.19
Statements of Comprehensive Income for the years ended December 31, 1998, 1997
and 1996........ 20
Statements of Stockholders' Equity for the years ended December 31, 1998, 1997
and 1996........ 21
Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996.22
Notes to Financial Statements................................................ 23
<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, 1998 and 1997, and the related statements of operations,
comprehensive income, stockholders' equity and cash flows for each of the years
in the three-year period ended December 31, 1998. 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, 1998 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, 1998, in conformity
with generally accepted accounting principles.
/s/KPMG LLP
Chicago, Illinois
February 5, 1999
<PAGE>
<TABLE>
<CAPTION>
PEAPOD, INC.
BALANCE SHEETS
December 31, 1998 and 1997
(in thousands, except share data)
1998 1997
---------------- ---------------
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents.......................................... $ 4,341 $54,079
Marketable securities.............................................. 15,836 8,798
Receivables, net of allowance for doubtful accounts of $287 and
$352 in 1998 and 1997........................................... 2,516 1,195
Prepaid expenses................................................... 186 444
Other current assets............................................... 974 228
---------------- ---------------
Total current assets.......................................... 23,853 64,744
Property and equipment:
Computer equipment and software.................................... 4,010 4,499
Service equipment and other........................................ 2,147 1,053
---------------- ---------------
Property and equipment, at cost......................................... 6,157 5,552
Accumulated depreciation........................................... (2,252) (2,301)
---------------- ---------------
Net property and equipment.............................................. 3,905 3,251
Non-current marketable securities....................................... 15,213 --
Capitalized software development costs.................................. -- 998
Goodwill, net of accumulated amortization of $174 in 1997............... -- 117
---------------- ---------------
Total assets.................................................. $42,971 $69,110
================ ===============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable................................................... $ 3,442 $ 7,514
Accrued compensation............................................... 802 1,258
Other accrued liabilities.......................................... 2,688 926
Deferred revenue................................................... 1,000 1,969
Current obligations under capital lease............................ 590 727
---------------- ---------------
Total current liabilities..................................... 8,522 12,394
Deferred revenue........................................................ 448 1,212
Obligations under capital lease, less current portion................... 395 701
---------------- ---------------
Total liabilities............................................. 9,365 14,307
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;
17,245,828 and 16,852,557 shares issued in 1998 and 1997.... 172 169
Additional paid-in capital......................................... 64,319 63,148
Accumulated other comprehensive income -
Unrealized gain on available-for-sale securities 83 --
Accumulated deficit................................................ (30,060) (8,495)
Treasury stock, at cost, 117,476 and 2,000 shares in 1998 and 1997. (908) (19)
---------------- ---------------
Total stockholders' equity.................................... 33,606 54,803
================ ===============
Total liabilities and stockholders' equity.................... $42,971 $69,110
================ ===============
</TABLE>
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
PEAPOD, INC.
STATEMENTS OF OPERATIONS
Years ended December 31, 1998, 1997 and 1996
(in thousands, except per share data)
1998 1997 1996
--------------- ---------------- ----------------
<S> <C> <C> <C>
Revenues:
Net product sales.................... $ 57,305 $ 43,487 $ 22,015
Member and retailer.................. 9,650 11,234 4,558
Interactive marketing................ 1,460 2,222 1,069
Licensing............................ 850 -- --
--------------- ---------------- ----------------
Total revenues.................. 69,265 56,943 27,642
Costs and expenses:
Cost of goods sold................... 53,903 40,823 20,485
Fulfillment operations............... 17,196 14,469 6,889
General and administrative........... 8,029 5,935 3,785
Marketing and selling................ 7,545 7,726 4,739
System development and
maintenance....................... 3,386 1,696 1,124
Depreciation and amortization........ 3,264 1,234 651
--------------- ---------------- ----------------
Total costs and expenses........ 93,323 71,883 37,673
--------------- ---------------- ----------------
Operating loss............................. (24,058) (14,940) (10,031)
Other income (expense):
Interest income...................... 2,683 2,044 537
Interest expense..................... (190) (83) (72)
=============== ================ ================
Net loss.................................. $ (21,565) $ (12,979) $ (9,566)
=============== ================ ================
Net loss per share:
Basic................................ $ (1.27) $ (0.87) $ (0.82)
Diluted.............................. $ (1.27) $ (0.87) $ (0.82)
Shares used to compute net loss per share:
Basic................................ 16,964,439 14,915,734 11,664,956
Diluted.............................. 16,964,439 14,915,734 11,664,956
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
PEAPOD, INC.
STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 1998, 1997 and 1996
(in thousands)
----------------- ---------------- -------------
1998 1997 1996
----------------- ---------------- -------------
<S> <C> <C> <C>
Net loss $ (21,565) $ (12,979) $ (9,566)
Other comprehensive income:
Unrealized gain on available-for-sale securities 83 -- --
----------------- ---------------- ------------
Comprehensive income (loss) $ (21,482) $ (12,979) $ (9,566)
================= ================ ============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
PEAPOD, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1998, 1997 and 1996
(in thousands, except share data)
Accumulated
Other
Common Stock Treasury Stock Additional Comprehensive Accumulated
Shares Amount Shares Amount Paid-in Capital Income Deficit Total
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996......................9,564,371 $ 95 -- $ -- $ 1,317 $-- $ -- $ 1,412
Issuance of stock, net of offering costs........2,876,000 29 -- -- 16,203 -- -- 16,232
Issuance of stock for services rendered......... 100 -- -- -- 1 -- -- 1
Issuance of stock for services rendered and at a
discount.................................... 86,341 1 -- -- 323 -- -- 324
Net loss....................................... -- -- -- -- (9,565) -- (1) (9,566)
-------------------------------------------------------------------------------------
Balance at December 31, 1996...................12,526,812 125 -- -- 8,279 -- (1) 8,403
Issuance of stock prior to May 31, 1997 for
services rendered at a discount............. 89,080 1 -- -- 577 -- -- 578
Issuance of stock for services rendered........ 15,000 -- -- -- 105 -- -- 105
Issuance of stock upon exercise of warrants... 8,125 1 -- -- 17 -- -- 18
Issuance of stock upon exercise of options.... 213,540 2 -- -- 575 -- -- 577
Treasury stock................................. -- -- (2,000) (19) -- -- -- (19)
Initial public offering of stock, net of
offering costs.............................. 4,000,000 40 -- -- 58,080 -- -- 58,120
Net loss - from January 1, 1997 through May 31,
1997........................................ -- -- -- -- (4,485) -- -- (4,485)
Net loss - subsequent to May 31, 1997.......... -- -- -- -- -- -- (8,494) (8,494)
-------------------------------------------------------------------------------------
Balance at December 31, 1997...................16,852,557 169 (2,000) (19) 63,148 -- (8,495) 54,803
Issuance of stock for services rendered........ 6,143 -- -- -- 45 -- -- 45
Issuance of stock upon exercise of warrants... 28,793 -- -- -- 64 -- -- 64
Issuance of stock upon exercise of options and
for employee stock purchase plan.............. 358,335 3 -- -- 1,062 -- -- 1,065
Treasury stock................................... -- -- (115,476) (889) -- -- -- (889)
Unrealized gain on available-for-sale securities. -- -- -- -- -- 83 -- 83
Net los........................................ -- -- -- -- -- -- (21,565) (21,565)
------------------------------------------------------------------------------------
Balance at December 31, 1998 ...................17,245,828 $172 (117,476) $(908) $64,319 $83 $(30,060) $33,606
====================================================================================
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
PEAPOD, INC.
STATEMENTS OF CASH FLOWS
Years ended December 31, 1998, 1997 and 1996
(in thousands)
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss......................................... $ (21,565) $ (12,979) $ (9,566)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization................ 3,264 1,234 651
Stock and options issued for services rendered 45 533 147
Loss on disposition of fixed assets.......... 270 204 2
Changes in operating assets and liabilities:
(Increase) decrease in receivables, net.. (1,321) (660) (349)
(Increase) decrease in prepaid expenses.. 258 5 (310)
(Increase) decrease in other current assets (746) (39) 55
Increase (decrease) in accounts payable.. (4,072) 4,144 1,710
Increase (decrease) in accrued compensation (456) 179 732
Increase (decrease) in other accrued liabilities 1,762 50 483
Increase (decrease) in deferred revenue.. (1,733) 1,052 1,943
------------- ------------- -------------
Net cash used in operating activities (24,294) (6,277) (4,502)
Cash flows from investing activities:
Property and equipment purchased................. (2,346) (1,515) (824)
Capitalized software development costs........... (513) (849) (148)
Purchases of marketable securities............... (53,352) (8,798) --
Sales of marketable securities................... 31,184 -- --
Proceeds from sale of property and equipment..... 117 21 --
------------- ------------- -------------
Net cash used in investing activities (24,910) (11,141) (972)
Cash flows from financing activities:
Proceeds from issuance of stock, net of offering costs -- 58,270 16,409
Proceeds from issuance of stock upon exercise of warrants 64 18 --
Proceeds from issuance of stock upon exercise of --
options and employee stock purchase plan ....... 1,065 558 --
Stock purchased for treasury..................... (889) -- --
Repayment of subordinated debentures............. (125)
Payments on capital lease obligations............ (774) (388) (237)
------------- ------------- -------------
Net cash provided by (used in)financing activities (534) 58,458 16,047
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents. (49,738) 41,040 10,573
Cash and cash equivalents at beginning of year....... 54,079 13,039 2,466
============= ============= =============
Cash and cash equivalents at end of year............. $ 4,341 $ 54,079 $ 13,039
============= ============= =============
Supplemental disclosure of cash flows
information--interest paid......................... $ 159 $ 67 $ 72
Supplemental disclosures of noncash investing and
financing activity:
Equipment on capital leases.................. 331 1,144 502
Options exercised by sale of stock to the Company 889 19 --
============= ============= =============
</TABLE>
See accompanying notes to financial statements.
<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 the Company's
Common Stock. The transfer of the assets and liabilities of Peapod LP to the
Company has 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 $58.1 million.
The Company is an interactive online grocery shopping and delivery service,
which as of December 31, 1998 operated in the Chicago, Illinois; San
Francisco/San Jose, California; Columbus, Ohio; Boston, Massachusetts; Long
Island, New York; and Dallas, Houston and Austin, Texas metropolitan markets.
(2) Summary of Significant Accounting Policies
Revenue Recognition
Product sales are recognized when the grocery order is delivered to the
customer. Interactive marketing revenues are recognized over the life of the
contract as services are provided. Member and retailer revenues consist of
grocery retailer fees and fees from consumers. Grocery retailer fees consist of
contractual fees which are recognized on a straight-line basis over the life of
the contract. Fees from consumers are recognized as earned. Licensing revenues
are recognized as such services are provided.
Cost of Goods Sold
Cost of goods sold consists of the groceries purchased on behalf of the
Company's members, net of product returns and net of performance based fees
received from grocery retailers.
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 three months or less.
Marketable Securities
Investments in marketable securities are classified as "held-to-maturity"
securities or as "available-for-sale" securities. Held-to-maturity securities
are reported at amortized cost and available-for-sale securities are reported at
fair value, based on the quoted market price of each individual security on the
balance sheet date. Unrealized gains and losses on available-for-sale securities
are excluded from earnings and are included in stockholders' equity as
"accumulated other comprehensive income unrealized gain on available-for-sales
securities".
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 $513,000, $849,000 and $148,000 in consumer product software
development costs in 1998, 1997 and 1996, respectively. Amortization expense in
1998 totaled $353,000. No amortization expense was recorded in 1997 and 1996. In
December 1998, the remaining capitalized software development costs of
$1,158,000 were written-off and are included in depreciation and amortization in
the statement of operations. The write-off included the costs associated with
Version 5.0 of the Company's software which will no longer be utilized and
supported by the Company. In addition, the Company's development cycle for the
HTML version has accelerated due to the rapid change in internet technology. As
the Company's HTML product is continuously updated and the technology is
constantly changing, the Company has written-off these costs as of December 31,
1998.
Goodwill
Goodwill was being amortized on a straight-line basis over its estimated
useful life of eight years. During December 1998, goodwill of $78,000 was
written-off as it was determined to have no future value.
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.
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.
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.
Earnings per Share
The Company applies SFAS No. 128, Earnings Per Share, 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). However, since the diluted net loss per share would be
anti-dilutive, the basic net loss per share is used.
Potentially diluted securities outstanding, which include options and
warrants, were 2,655,000, 2,634,000 and 1,723,000 as of December 31, 1998, 1997
and 1996, respectively.
Quarterly Results
The accompanying unaudited quarterly results 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.
(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 are material to the Company's operations. A number of
these agreements are terminable prior to expiration by either party with short
notice.
The Company's Chicago market, serviced through an agreement with
Jewel/Osco, accounted for approximately 42%, 44%, and 67% of the Company's
revenues for the years ended December 31, 1998, 1997 and 1996, respectively.
(4) Marketable Securities
At December 31, 1998 and 1997, respectively, the Company's marketable
securities, consisted of (in thousands):
<TABLE>
<CAPTION>
Gross Gross
unrealized unrealized
December 31, 1998 Amortized holding holding losses
cost gains Fair Value
-------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Current investments:
Securities held-to-maturity:
Corporate debt securities.......... $ 200 $ -- $ -- $ 200
Securities available-for-sale:
Government obligations............. 3,936 6 -- 3,942
Corporate debt securities.......... 11,671 24 (1) 11,694
-------------- -------------- --------------- --------------
$ 15,807 $ 30 $ (1) $15,836
============== ============== =============== ==============
Non-current investments:
Securities available-for-sale:
Government Obligations............. $ 5,561 $ 34 $ (13) $ 5,582
Corporate debt securities.......... 9,598 38 (5) 9,631
-------------- -------------- --------------- --------------
$ 15,159 $ 72 $ (18) $15,213
============== ============== =============== ==============
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
unrealized unrealized
December 31, 1997 Amortized holding holding losses
cost gains Fair Value
-------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Current investments:
Securities held-to-maturity:
Commercial paper................... $ 7,604 $ -- $ -- $ 7,604
Securities available-for-sale:
Commercial paper................... 787 -- -- 787
Corporate debt securities.......... 407 -- -- 407
============== ============== =============== ==============
$ 8,798 $ -- $ -- $ 8,798
============== ============== =============== ==============
</TABLE>
At December 31, 1998 maturities of debt securities classified as
available-for-sale and held-to-maturity were as follows (in thousands):
Amortized cost Fair Value
--------------- ---------------
Securities held-to-maturity:
Due through 1999..................... $ 200 $ 200
Securities available-for-sale:
Due within one year................... 15,607 15,636
Due after one year through five years 15,159 15,213
=============== ===============
$ 30,966 $ 31,049
=============== ===============
Using the specific identification method, the gross realized gains and
gross realized losses on the sale of available-for-sale securities were
approximately $33,000 and $0, respectively for the year ended December 31, 1998.
No such securities were sold in 1997.
(5) Commitments and Contingencies
Capital Leases
The Company has capitalized certain equipment and furniture acquired
through capital leases. The future minimum lease payments as of December 31,
1998 are as follows (in thousands):
1999 ...................................... $ 656
2000....................................... 291
2001....................................... 77
2002....................................... 51
---------------
1,075
Less amount representing interest.......... 90
---------------
985
Less current obligations................... 590
===============
$ 395
===============
Costs and related accumulated amortization for equipment under capital
leases totaled $1,828,000 and $951,000 respectively, as of December 31, 1998;
and $2,143,000 and $840,000, respectively, as of December 31, 1997. Amortization
expense totaled $757,000, $542,000 and $184,000 for the years ended December 31,
1998, 1997 and 1996, respectively.
Operating Leases
The Company leases its office facilities, warehouses and trucks under
non-cancelable operating leases. Rent expense on total operating leases totaled
$823,000, $462,000 and $238,000 for the years ended December 31, 1998, 1997 and
1996, respectively. Total future minimum lease payments under non-cancelable
operating leases as of December 31, 1998 are as follows (in thousands):
1999............................ $ 1,302
2000............................ 1,324
2001............................ 1,316
2002............................ 1,154
2003 and beyond................. 1,687
--------------------
$ 6,783
====================
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, 1998, declining at certain times during the lease
term. The letter of credit expires on November 21, 1999; however, it is expected
to be renewed annually over the life of the lease. The Company also maintains an
unsecured letter of credit for warehouse space amounting to $332,000 as of
December 31, 1998. The letter of credit expires on October 15, 1999 and 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, 1997 and
1996, the amount charged to general and administrative expenses totaled $73,000
and $175,000, respectively. The partnership agreement was terminated upon the
Conversion.
(7) Peapod LP Equity Programs
Peapod LP 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 discount from estimated fair market value of the stock
at the date of issuance. This program was terminated in 1997 prior to the
Conversion.
Peapod LP also had a director purchase plan whereby each director of the
Peapod LP 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, 1996, 86,341 shares were issued and
$44,000 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 $222,000 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 $428,000 of expense was reflected in the financial
statements.
(8) Options for Stock
The Company 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 life 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 (in thousands, except per
share data):
1998 1997 1996
Net loss:
As reported............... $(21,565) $(12,979) $(9,566)
Pro forma................. (25,124) (15,837) (9,828)
Net loss per share:
As reported-- basic and diluted..$ (1.27) $ (0.87) $ (0.82)
Pro forma-- basic and diluted.... (1.48) (1.06) (0.84)
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 1998, 1997 and 1996, respectively: no expected dividend yield;
expected volatility of 50, 50 and 20 percent; risk free interest rates of 5.5%,
6.5% and 6.5%, and expected lives of seven years. The weighted average fair
value of options granted was $3.81 in 1998, $8.10 in 1997 and $2.46 in 1996.
Additional information on stock options is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Options price price Options price
Options
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year...... 2,573,956 $ 7.60 1,654,946 $ 2.76 1,472,446 $ 2.20
Granted............................... 1,352,979 7.00 1,179,200 13.70 285,000 6.00
Forfeited/cancelled................... (961,149) 13.31 (46,650) 12.65 (102,500) 3.78
Exercised............................. (342,122) 2.87 (213,540) 2.70 --
Outstanding at end of year............ 2,623,664 $ 5.76 2,573,956 $ 7.60 1,654,946 $ 2.76
Options exercisable at year end....... 1,328,505 $ 4.37 1,150,138 $ 2.45 1,140,172 $ 2.11
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1998:
Weighted
average Weighted Weighted
remaining average average
Range of Options contractual exercise Options exercise
exercise outstanding life price exercisable price
prices
$ 1.33-- 1.76 506,906 4.3 years $ 1.52 506,906 $ 1.52
1.77-- 3.52 445,126 5.6 2.54 292,572 2.36
3.53-- 5.28 5,000 7.7 4.88 -- --
5.29-- 7.04 681,184 7.1 6.21 178,149 6.43
7.05-- 8.80 837,297 6.9 7.84 297,309 7.85
15.84--17.60 148,151 6.9 16.19 53,569 16.19
============= ===========
2,623,664 6.2 years $ 5.76 1,328,505 $ 4.37
============= ============= ========== =========== ========
(9) Warrants
Contractually, all warrants issued by Peapod LP were converted into
warrants for shares of the Company on a one for one basis. All warrants expire
by November 2006. Company stock warrant activity for the years ended December
31, 1998, 1997 and 1996 is summarized below:
Weighted
average
exercise Exercise
Warrants price Price
------------ --------- ----------
Outstanding on January 1, 1996........... 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 on December 31, 1997......... 59,716 2.40 1.33--7.00
Exercised................................ (28,793) 2.21 2.21
------------
Outstanding and exercisable on
December 31, 1998................... 30,923 $ 2.57 $1.33--7.00
============ =========
(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 $839,000 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 years ended December 31,
1998 and 1997 due to the Company's loss before 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 $8,494,000. The effective tax rate differs from the U.S. statutory
rate. The following table reconciles the provision for income taxes using the
U.S. statutory rate with the provision at the effective rate (in thousands):
1998 1997
------------------ ------------
Tax benefit at U.S. Federal income tax rate of 34%...$ (7,332) $ (2,888)
Increase (reduction) in taxes resulting from:
State income tax benefit, net of Federal effect. (1,294) (506)
Increase in valuation allowance................. 9,865 3,373
Other........................................... (1,239) 21
----------------- -------------
Income tax provision............... $ -- $ --
================= =============
Significant components of the Company's deferred tax assets and liabilities
at December 31, 1998 and 1997 are as follows (in thousands):
1998 1997
----------------- ----------------
Deferred tax assets:
Allowance for doubtful accounts..... $ 115 $ 141
Deferred revenues................... 518 787
Other .............................. 644 364
Net operating loss.................. 12,800 3,397
----------------- ----------------
Gross deferred tax assets...... 14,077 4,689
Less valuation allowance....... (14,077) (4,212)
----------------- ----------------
Net deferred tax assets... -- 477
----------------- ----------------
Deferred tax liabilities:
Fixed assets...................... -- (78)
Capitalized software.............. -- (399)
----------------- ----------------
Gross deferred tax liabilities -- (477)
================= ================
Deferred income taxes............ $ -- $ --
================= ================
The net change in the total valuation allowance for the years ended
December 31, 1998 and 1997 was an increase of $9,865,000 and $3,373,000,
respectively. As of December 31, 1998, the Company has approximately $32,000,000
of net operating loss carryforwards, $9,900,000 expiring in 2012 and $22,100,000
expiring in 2018.
(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, 1998.
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. The total number of
shares issuable under the Purchase Plan is 150,000. During 1998, 16,213 shares
were issued under the Purchases Plan at prices ranging from $4.46 to $5.95.
During 1997, no shares were issued in connection with the Purchase Plan.
(12) Quarterly Results (Unaudited)
The following provides an unaudited summary of quarterly financial
data. Certain amounts presented in the Company's quarterly reports on Form 10-Q
have been reclassified below to conform to the presentation in the accompanying
1998 statement of operations.
<TABLE>
<CAPTION>
1998
(in thousands, except share and per share data)
----------------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues:
Net product sales..................... $ 15,495 $ 14,438 $ 13,057 $ 14,315
Member and retailer................... 2,793 2,606 2,306 1,945
Interactive marketing................. 526 436 263 235
Licensing............................. 50 50 50 700
-------------- -------------- -------------- --------------
Total revenues................... 18,864 17,530 15,676 17,195
Costs and expenses:
Cost of goods sold.................... 14,573 13,586 12,295 13,449
Fulfillment operations................ 4,518 4,262 4,114 4,302
General and administrative............ 1,737 2,091 1,925 2,276
Marketing and selling................. 1,672 1,455 1,462 2,956
System development and maintenance.... 610 821 999 956
Depreciation and amortization......... 463 509 529 1,763
-------------- -------------- -------------- --------------
Total costs and expenses......... 23,573 22,724 21,324 25,702
-------------- -------------- -------------- --------------
Operating loss............................. (4,709) (5,194) (5,648) (8,507)
Other income (expense):
Interest income....................... 783 752 609 539
Interest expense...................... (56) (33) (44) (57)
-------------- -------------- -------------- --------------
Net loss................................... $ (3,982) $ (4,475) $ (5,083) $ (8,025)
-------------- -------------- -------------- --------------
Basic and diluted net loss per share....... $ (0.24) $ (0.26) $ (0.30) $ (0.47)
============== ============== ============== ==============
Shares used to compute basic and diluted
Net loss per share..................... 16,859,437 16,925,120 17,074,771 17,066,961
============== ============== ============== ==============
</TABLE>
<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:
Net product sales..................... $ 9,216 $ 10,177 $ 10,208 $ 13,886
Member and retailer................... 2,470 3,271 2,784 2,709
Interactive marketing................. 425 565 614 618
-------------- -------------- -------------- --------------
Total revenues................... 12,111 14,013 13,606 17,213
Costs and expenses:
Cost of goods sold.................... 8,623 9,539 9,599 13,062
Fulfillment operations................ 3,335 3,703 3,505 3,926
General and administrative............ 1,195 2,059 1,490 1,191
Marketing and selling................. 1,437 1,233 1,935 3,121
System development and maintenance.... 376 303 378 639
Depreciation and amortization......... 212 378 366 278
-------------- -------------- -------------- --------------
Total costs and expenses......... 15,178 17,215 17,273 22,217
-------------- -------------- -------------- --------------
Operating loss............................. (3,067) (3,202) (3,667) (5,004)
Other income (expense):
Interest income....................... 135 201 866 842
Interest expense...................... (15) (30) (13) (25)
-------------- -------------- -------------- --------------
Net loss................................... $ (2,947) $ (3,031) $ (2,814) $ (4,187)
-------------- -------------- -------------- --------------
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>
(13) Split Pea Software, Inc.
On December 31, 1998, the Company concluded a restructuring transaction which
established its licensing business within a newly-formed company called Split
Pea Software, Inc. ("Split Pea"). A group of the new company's senior managers
hold majority equity ownership of Split Pea. The Company owns a minority
interest of 40% of the voting common stock of Split Pea. All future licensing
services will be provided by Split Pea which will collect all future licensing
revenue.
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 6, 1999) 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 6, 1999 in connection with its 1999 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 6, 1999 in connection with its 1999 Annual Meeting of
Stockholders.
(c) The following sets forth certain information concerning each of the
Company's executive officers.
Andrew B. Parkinson, age 41, is a co-founder of the Company and has been
its Chairman, President and Chief Executive Officer 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.
John C. Walden, age 39, 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 internet 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.
Thomas P. Parkinson, age 38, is a co-founder of the Company and has
been its Executive Vice President-Chief Technology Officer and a director since
its founding in 1989. He has had primary responsibility for directing consumer
product development and technology research and development since the Company's
founding and he is the principal architect of Peapod's software. Prior to
founding the Company in 1989, Mr. Parkinson held various field sales and sales
management positions with Procter & Gamble Co. Thomas Parkinson is the brother
of Andrew Parkinson, the Company's Chairman, President and Chief Executive
Officer.
Timothy M. Dorgan, age 46, joined the Company in 1994 in his current
role, Executive Vice President-Marketing. Mr. Dorgan is responsible for the
overall development and management of the Company's marketing activities,
including interactive marketing services. Prior to joining Peapod, from 1992 to
1994, Mr. Dorgan served as President of Ketchum Advertising-Chicago, a
multinational 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.
John A. Furton, age 34, is a co-founder of the Company and serves as Senior
Vice President-Chief Information Officer. He joined the Company in 1990. Mr.
Furton is responsible for all enterprise technology development including
fulfillment and logistics, merchandising and administrative and financial
systems as well as the Company's data center and network operations.
Additionally, Mr. Furton is responsible for the Company's market development
activities, which include structuring and managing its external business
relationships with supermarkets and other merchandising partners. Prior to this,
Mr. Furton was Vice President of Operations where he managed order fulfillment
services. Mr. Furton joined the Company from Kraft Foods, Inc. in Chicago.
Carl E. Alguire, age 41, 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 the Company,
from 1989 to 1994, Mr. Alguire was Vice President of Expressline/Mercury
Delivery, 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.
Dan Rabinowitz, age 36, currently serves as Vice President-Chief
Financial Officer. He joined the Company in 1995 as Director of Finance and
served in that capacity until February 1998. At that time, he became the
Company's Vice President-Financial Planning & Control and Treasurer. Prior to
joining the Company, Mr. Rabinowitz served as Associate Director for Geneva
Capital Markets, a middle markets mergers and acquisitions firm from 1993
through 1995, and Director of Finance at Technology Solutions Company from 1991
through 1993.
William J. Christopher, age 41, currently serves as Vice
President-Member Services. He joined the Company in 1996 as Director-Member
Services and served in that capacity until 1997. Prior to joining the Company,
from 1991 to 1996, Mr. Christopher held various general management positions at
McMaster-Carr Supply.
Michael P. Brennan, age 35, currently serves as Vice President-Product
Management. He joined the Company in 1997 as Director-Grocery Formats and served
in that capacity until 1998. Prior to joining the Company, from 1990 to 1996,
Mr. Brennan held various positions culminating at Principal for the management
consulting firm A.T. Kearney.
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 6, 1999) 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 6,
1999) 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 6, 1999) is
incorporated herein by reference.
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:
Independent Auditor's Report.
Balance Sheets as of December 31, 1998 and 1997.
Statements of Operations for the years ended December 31, 1998, 1997
and 1996.
Statements of Comprehensive Income for the years ended December 31,
1998, 1997 and 1996.
Statements of Stockholders' Equity for the years ended December 31,
1998, 1997 and 1996.
Statements of Cash Flows for the years ended December 31, 1998, 1997
and 1996.
Notes to Financial Statements.
(a)(2) Financial Statement Schedule
Report of Independent Public Accountants on Financial Statement
Schedule.
Schedule II -- Valuation and Qualifying Accounts.
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)
*10.8 -- 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, 1998.
<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, 1997 and 1998, and the related statements of operations,
comprehensive income, stockholders' equity and cash flows for each of the years
in the three-year period ended December 31, 1998. 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.
/s/KPMG LLP
Chicago, Illinois
February 5, 1999
<PAGE>
PEAPOD, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
Represents allowance for doubtful accounts 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
year expenses Deductions end of year
- -------------------------------------------------------------------------------
(in thousands)
Year ended December 31, 1996 $ 27 $ 24 $ (9) $ 42
Year ended December 31, 1997 42 481 (171) 352
Year ended December 31, 1998 352 318 (383) 287
<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 30, 1999 /s/ Andrew B. Parkinson
----------------------------
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
/s/Dan Rabinowitz Vice President and Chief
- ---------------------------------- Financial Officer
Dan Rabinowitz } March 30, 1999
/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
/s/Robert Goodale Director
- ----------------------------------
Robert Goodale
/s/Mark Van Steklenberg Director
- ----------------------------------
Mark Van Steklenberg
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 5, 1999, related to the balance sheets of Peapod, Inc. as of
December 31, 1998 and 1997, and the related statements of operations,
comprehensive income, stockholders' equity and cash flows for each of the years
in the three-year period ended December 31, 1998, and related financial
statement schedule, which reports appear in the December 31, 1998 annual report
on Form 10-K of Peapod, Inc.
/s/KPMG LLP
Chicago, Illinois
March 29, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> US DOLLARS
<MULTIPLIER> 1,000
<CIK> 0001036992
<NAME> PEAPOD, INC.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 4,341
<SECURITIES> 15,836
<RECEIVABLES> 2,516
<ALLOWANCES> (287)
<INVENTORY> 0
<CURRENT-ASSETS> 23,853
<PP&E> 6,157
<DEPRECIATION> (2,252)
<TOTAL-ASSETS> 42,971
<CURRENT-LIABILITIES> 8,522
<BONDS> 0
0
0
<COMMON> 172
<OTHER-SE> 33,434
<TOTAL-LIABILITY-AND-EQUITY> 42,971
<SALES> 57,305
<TOTAL-REVENUES> 69,265
<CGS> 53,903
<TOTAL-COSTS> 93,323
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 190
<INCOME-PRETAX> (21,565)
<INCOME-TAX> 0
<INCOME-CONTINUING> (21,565)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (21,565)
<EPS-PRIMARY> (1.27)
<EPS-DILUTED> (1.27)
<FN>
This schedule contains summary financial information extracted from the
balance sheet as of December 31, 1998 and the statements of operations for the
twelve months ended December 31, 1998 and is qualified in its entirety by
reference to such financial statements.
</FN>
</TABLE>
