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**SECURITIESAND EXCHANGE COMMISSION****Washington, D.C. 20549**

**FORM10–Q**

**(MarkOne)**
| **ý** | **QUARTERLY REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|------------|----------------------------------------------------------------------------------------------|

**For the quarterly period endedJune 30, 2001**

**OR**
| **o** | **TRANSITION REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|-----------------------------------------------------------------------------------------------|

**Commission file number 0-22557**

**PEAPOD, INC.**(Exact name of Registrant as specified inits charter)

| **Delaware**                                                    | **36–4118175**                |
|-----------------------------------------------------------------|------------------------------------|
| ****                                                            | ****                               |
| (State or other  jurisdiction of Incorporation or Organization) | (IRS Employer  Identification No.) |
|                                                            |                               |
| **9933 Woods Drive, Skokie, Illinois  60077**              |
| (Address of principal  executive offices) (ZIP Code)            |
|                                                            |
| **(847) 583-9400**                                              |
| (Registrant's  telephone number, including area code)           |

             Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes  ý   No  o

             Thenumber of shares outstanding of the registrant's common stock, $0.01 par value(“Common Stock”) as of August 12, 2001 was 18,054,262.

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**PART IFINANCIAL INFORMATION**

**ITEM 1.**            **Financial Statements**.

 

**PEAPOD, INC.**

**BALANCE SHEETS(in thousands, except share and per share data)**

|                                                    | **June 30,  2001**                                                                                                                                                                            |       | **December 31,  2000** |       |
|---------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|
|                                                    | ****                                                                                                                                                                                          |       | ****                   |       |
| **Assets**                                              | **(unaudited)**                                                                                                                                                                               |       |                   |       |
| Current  assets:                                        |                                                                                                                                                                                          |       |                   |       |
|                                                    | Cash  and cash equivalents                                                                                                                                                                    | $          | 6,456                  |       | $ | 14,676 |   |
|                                                    | Receivables,  net of allowance for doubtful accounts of $263 and $440 as of June 30, 2001  and December 31, 2000                                                                              | 293        |                   | 397        |   |
|                                                    | Merchandise  inventory                                                                                                                                                                        | 1,039      |                   | 1,662      |   |
|                                                    | Prepaid  expenses                                                                                                                                                                             | 1,466      |                   | 677        |   |
|                                                    | Other  current assets                                                                                                                                                                         | 2,468      |                   | 2,549      |   |
|                                                    |                                                                                                                                                                                               |       |                        |       |
|                                                    | Total  current assets                                                                                                                                                                         | 11,722     |                   | 19,961     |   |
| Property  and equipment:                                |                                                                                                                                                                                          |       |                   |       |
|                                                    | Computer  equipment and software                                                                                                                                                              | 10,066     |                   | 8,212      |   |
|                                                    | Service  equipment and other                                                                                                                                                                  | 5,275      |                   | 5,813      |   |
|                                                    | Leasehold  improvements                                                                                                                                                                       | 10,873     |                   | 9,007      |   |
|                                                    |                                                                                                                                                                                               |       |                        |       |
|                                                    | Property  and equipment, at cost                                                                                                                                                              | 26,214     |                   | 23,032     |   |
|                                                    | Less  accumulated depreciation and amortization                                                                                                                                               | (10,078    | )                      | (8,285     | ) |
|                                                    |                                                                                                                                                                                               |       |                        |       |
| Net  property and equipment                             | 16,136                                                                                                                                                                                        |       | 14,747                 |       |
| Net  goodwill and other intangibles                     | 6,252                                                                                                                                                                                         |       | 7,123                  |       |
| Other  non-current assets                               | 3,035                                                                                                                                                                                         |       | 3,902                  |       |
|                                                    |                                                                                                                                                                                               |       |                        |       |
|                                                    | Total  assets                                                                                                                                                                                 | $          | 37,145                 |       | $ | 45,733 |   |
|                                                    |                                                                                                                                                                                               |       |                        |       |
| **Liabilities and Stockholders’ Equity (Deficit)** |                                                                                                                                                                                          | ** ** |                   | ** ** |
| Current  liabilities:                                   |                                                                                                                                                                                          |       |                   |       |
|                                                    | Accounts  payable                                                                                                                                                                             | $          | 889                    |       | $ | 2,064 |   |
|                                                    | Accounts  payable to related party                                                                                                                                                            | 2,268      |                   | 2,891      |   |
|                                                    | Accrued  compensation                                                                                                                                                                         | 1,304      |                   | 1,926      |   |
|                                                    | Other  accrued liabilities                                                                                                                                                                    | 11,434     |                   | 9,444      |   |
|                                                    | Borrowings  under credit facility                                                                                                                                                             | 24,000     |                   | 3⁄4     |   |
|                                                    | Deferred  revenue                                                                                                                                                                             | 64         |                   | 58         |   |
|                                                    | Current  obligations under capital lease                                                                                                                                                      | 1,888      |                   | 1,965      |   |
|                                                    |                                                                                                                                                                                               |       |                        |       |
|                                                    | Total  current liabilities                                                                                                                                                                    | 41,847     |                   | 18,348     |   |
| Obligations  under capital lease, less current portion  | 3,820                                                                                                                                                                                         |       | 4,829                  |       |
|                                                    |                                                                                                                                                                                               |       |                        |       |
|                                                    | Total  liabilities                                                                                                                                                                            | 45,667     |                   | 23,177     |   |
| Stockholders’  equity (deficit):                   |                                                                                                                                                                                          |       |                   |       |
|                                                    | Preferred  stock, $.01 par value; 10,000,000 shares authorized; 726,371 shares of Series  C convertible preferred stock issued and outstanding (aggregate liquidation  preference of $78,622) | 66,115     |                   | 64,684     |   |
|                                                    | Common  stock, $.01 par value, 100,000,000 shares authorized, 18,507,902 and  18,423,144 shares issued at June 30, 2001 and December 31, 2000                                                 | 185        |                   | 184        |   |
|                                                    | Additional  paid-in capital                                                                                                                                                                   | 70,387     |                   | 74,832     |   |
|                                                    | Accumulated  deficit                                                                                                                                                                          | (143,336   | )                      | (115,271   | ) |
|                                                    | Treasury  stock, at cost, 453,640 shares at June 30, 2001 and December 31, 2000                                                                                                               | (1,873     | )                      | (1,873     | ) |
|                                                    |                                                                                                                                                                                               |       |                        |       |
|                                                    | Total  stockholders’ equity (deficit)                                                                                                                                                    | (8,522     | )                      | 22,556     |   |
|                                                    |                                                                                                                                                                                               |       |                        |       |
|                                                    | Total  liabilities and stockholders' equity (deficit)                                                                                                                                         | $          | 37,145                 |       | $ | 45,733 |   |
|                                                    |                                                                                                                                                                                               |       |                        |       |
|                                                         |                                                                                                                                                                                               |            |                        |            |  |  |  |  |  |

See accompanying notesto financial statements.

 

**STATEMENTS OF OPERATIONS(in thousands, except for share and per share data)(unaudited)**

|                                                            | **Three  months ended June 30,**    |    |
|-----------------------------------------------------------------|-------------------------------------|---------|
|                                                            | ****                                |    |
|                                                            | **2001**                            |    | **2000** |   |
|                                                            | ****                                |    | **** |   |
| Gross  sales                                                    | $                                   | 22,623  |   | $ | 22,732 |   |
| Promotional  discounts and allowances                           | 295                                 |    | 100 |   |
|                                                            |                                     |    |  |   |
| Net  sales                                                      | 22,328                              |    | 22,632 |   |
| Cost  of sales                                                  | 14,864                              |    | 17,574 |   |
|                                                            |                                     |    |  |   |
| Gross  profit                                                   | 7,464                               |    | 5,058 |   |
|                                                            |                                |    |   |   |
| Operating  expenses:                                            |                                |    |   |   |
|                                                            | Fulfillment  operations             | 9,928   |   | 7,796 |   |
|                                                            | General  and administrative         | 3,697   |   | 2,150 |   |
|                                                            | Marketing  and selling              | 3,078   |   | 987 |   |
|                                                            | System  development and maintenance | 759     |   | 1,469 |   |
|                                                            | Depreciation  and amortization      | 1,661   |   | 737 |   |
|                                                            | Nonrecurring  expenses              | 58      |   | 1,490 |   |
|                                                            |                                     |    |  |   |
|                                                            | Total  operating expenses           | 19,181  |   | 14,629 |   |
|                                                            |                                     |    |  |   |
| Operating  loss                                                 | (11,717                             | )       | (9,571 | ) |
| Other  income (expense):                                        |                                |    |   |   |
|                                                            | Net  investment income              | 22      |   | 16 |   |
|                                                            | Non-cash  interest expense          | (433    | ) | (616 | ) |
|                                                            | Interest  expense                   | (485    | ) | (218 | ) |
|                                                            |                                     |    |  |   |
| Net  loss                                                       | (12,613                             | )       | (10,389 | ) |
|                                                            |                                |    |   |   |
| Preferred  stock dividends                                      | (1,540                              | )       | 3⁄4 |   |
|                                                            |                                |    |   |   |
| Non-cash  accretion on preferred stock                          | (720                                | )       | 3⁄4 |   |
|                                                            |                                |    |   |   |
| Non-cash  deemed dividend on preferred stock                    | 3⁄4                              |    | (56,953 | ) |
|                                                            |                                     |    |  |   |
| Net  loss available to common stockholders                      | $                                   | (14,873 | ) | $ | (67,342 | ) |
|                                                            |                                     |    |  |   |
| Net  loss per share -  basic and diluted                        | $                                   | (0.83   | ) | $ | (3.73 | ) |
|                                                            |                                |    |   |   |
| Shares  used to compute net loss per share -  basic and diluted | 18,021,187                          |    | 18,044,710 |   |
|                                                                 |                                     |         |  |  |  |  |  |  |

See accompanying notesto financial statements.

 

**STATEMENTS OF OPERATIONS(in thousands, except for share and per share data)(unaudited)**

|                                                                 | **Six  months ended June 30,**      |    |
|----------------------------------------------------------------------|-------------------------------------|---------|
|                                                                 | ****                                |    |
|                                                                 | **2001**                            |    | **2000** |   |
|                                                                 | ****                                |    | **** |   |
| Gross  sales                                                         | $                                   | 47,897  |   | $ | 47,645 |   |
| Promotional  discounts and allowances                                | 632                                 |    | 239 |   |
|                                                                 |                                     |    |  |   |
| Net  sales                                                           | 47,265                              |    | 47,406 |   |
| Cost  of sales                                                       | 31,827                              |    | 36,790 |   |
|                                                                 |                                     |    |  |   |
| Gross  profit                                                        | 15,438                              |    | 10,616 |   |
|                                                                 |                                |    |   |   |
| Operating  expenses:                                                 |                                |    |   |   |
|                                                                 | Fulfillment  operations             | 22,371  |   | 16,727 |   |
|                                                                 | General  and administrative         | 7,454   |   | 4,189 |   |
|                                                                 | Marketing  and selling              | 6,097   |   | 2,187 |   |
|                                                                 | System  development and maintenance | 1,710   |   | 2,658 |   |
|                                                                 | Depreciation  and amortization      | 3,652   |   | 1,401 |   |
|                                                                 | Nonrecurring  expenses              | 819     |   | 5,608 |   |
|                                                                 |                                     |    |  |   |
|                                                                 | Total  operating expenses           | 42,103  |   | 32,770 |   |
|                                                                 |                                     |    |  |   |
| Operating  loss                                                      | (26,665                             | )       | (22,154 | ) |
| Other  income (expense):                                             |                                |    |   |   |
|                                                                 | Net  investment income (expense)    | 117     |   | (87 | ) |
|                                                                 | Non-cash  interest expense          | (867    | ) | (616 | ) |
|                                                                 | Interest  expense                   | (650    | ) | (274 | ) |
|                                                                 |                                     |    |  |   |
| Net  loss                                                            | (28,065                             | )       | (23,131 | ) |
|                                                                 |                                |    |   |   |
| Preferred  stock dividends                                           | (3,051                              | )       | 3⁄4 |   |
|                                                                 |                                |    |   |   |
| Non-cash  accretion on preferred stock                               | (1,431                              | )       | 3⁄4 |   |
|                                                                 |                                |    |   |   |
| Non-cash  deemed dividend on preferred stock                         | 3⁄4                              |    | (56,953 | ) |
|                                                                 |                                     |    |  |   |
| Net  loss available to common stockholders                           | $                                   | (32,547 | ) | $ | (80,084 | ) |
|                                                                 |                                     |    |  |   |
| Net  loss per share -  basic and diluted                             | $                                   | (1.81   | ) | $ | (4.42 | ) |
|                                                                 |                                |    |   |   |
| Shares  used to compute net loss per share -  basic and diluted | 18,001,458                          |    | 18,125,842 |   |
|                                                                      |                                     |         |  |  |  |  |  |  |

See accompanying notesto financial statements.

 

**STATEMENTS OF COMPREHENSIVE INCOME(in thousands)(unaudited)**

|                         | **Three Months Ended June 30,**                                                             |    |
|------------------------------|---------------------------------------------------------------------------------------------|---------|
|                         | ****                                                                                        |    |
|                         | **2001**                                                                                    |    | **2000** |   |
|                         | ****                                                                                        |    | **** |   |
| Net  loss                    | $                                                                                           | (12,613 | ) | $ | (10,389 | ) |
|                         |                                                                                        |    |   |   |
| Other  comprehensive income: |                                                                                        |    |   |   |
|                         | Unrealized  holding gain on available-for-sale securities:                                  |    |   |   |   |
|                         | Reclassification  adjustment for losses realized during the period and included in net loss | —  |   | 14 |   |
|                         |                                                                                             |    |  |   |
| Comprehensive  loss          | $                                                                                           | (12,613 | ) | $ | (10,375 | ) |
|                         |                                                                                             |    |  |   |
|                              |                                                                                             |         |  |  |  |  |  |  |

Seeaccompanying notes to financial statements.

**STATEMENTS OF COMPREHENSIVE INCOME(in thousands)(unaudited)**

|                                | **Six Months Ended June 30,**                                                               |    |
|-------------------------------------|---------------------------------------------------------------------------------------------|---------|
|                                | ****                                                                                        |    |
|                                | **2001**                                                                                    |    | **2000** |   |
|                                | ****                                                                                        |    | **** |   |
| Net  loss                           | $                                                                                           | (28,065 | ) | $ | (23,131 | ) |
|                                |                                                                                        |    |   |   |
| Other  comprehensive income (loss): |                                                                                        |    |   |   |
|                                | Unrealized  holding gain (loss) on available-for-sale securities:                           |    |   |   |   |
|                                | Unrealized  holding loss arising during the period                                          | —  |   | (1 | ) |
|                                | Reclassification  adjustment for losses realized during the period and included in net loss | —  |   | 119 |   |
|                                |                                                                                             |    |  |   |
| Comprehensive  loss                 | $                                                                                           | (28,065 | ) | $ | (23,013 | ) |
|                                |                                                                                             |    |  |   |
|                                     |                                                                                             |         |  |  |  |  |  |  |

See accompanying notes to financial statements.

 

**STATEMENTSOF CASH FLOWS(in thousands)(unaudited)**

|                                                                         | **Six Months Ended June 30,**                                                               |    |
|------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------|---------|
|                                                                         | ****                                                                                        |    |
|                                                                         | **2001**                                                                                    |    | **2000** |   |
|                                                                         | ****                                                                                        |    | **** |   |
| Cash  flows from operating activities:                                       |                                                                                        |    |   |   |
|                                                                         | Net  loss                                                                                   | $       | (28,065 | ) | $ | (23,131 | ) |
|                                                                         | Adjustments  to reconcile net loss to net cash used in operating activities:                |    |   |   |   |
|                                                                         | Depreciation  and amortization                                                              | 3,652   |   | 1,401 |   |
|                                                                         | Non-cash  interest expense                                                                  | 867     |   | 616 |   |
|                                                                         | Provision  for doubtful accounts                                                            | 89      |   | 166 |   |
|                                                                         | Forgiveness  of debt of officer                                                             | 3⁄4  |   | 1,667 |   |
|                                                                         | Loss  on disposition of fixed assets                                                        | 4       |   | 2 |   |
|                                                                         | Changes  in operating assets and liabilities:                                               |    |   |   |   |
|                                                                         | Decrease  in receivables                                                                    | 15      |   | 643 |   |
|                                                                         | (Increase)  decrease in merchandise inventory                                               | 623     |   | (185 | ) |
|                                                                         | (Increase)  in prepaid expenses                                                             | (976    | ) | (259 | ) |
|                                                                         | (Increase)  decrease in other current assets                                                | 81      |   | (889 | ) |
|                                                                         | Decrease  in restricted cash                                                                | —  |   | 301 |   |
|                                                                         | Increase  (decrease) in accounts payable                                                    | (1,798  | ) | 284 |   |
|                                                                         | Increase  (decrease) in accrued compensation                                                | (622    | ) | 372 |   |
|                                                                         | Increase  (decrease) in other accrued liabilities                                           | (1,061  | ) | 8,654 |   |
|                                                                         | Increase  (decrease) in deferred revenue                                                    | 6       |   | (271 | ) |
|                                                                         |                                                                                             |    |  |   |
|                                                                         | Net  cash used in operating activities                                                      | (27,185 | ) | (10,628 | ) |
| Cash  flows from investing activities:                                       |                                                                                        |    |   |   |
|                                                                         | Property  and equipment purchased                                                           | (4,609  | ) | (1,557 | ) |
|                                                                         | Proceeds  from sales/lease back of equipment                                                | 601     |   | 3⁄4 |   |
|                                                                         | Sales  of marketable securities                                                             | —  |   | 6,388 |   |
|                                                                         | Proceeds  from sale of property and equipment                                               | 21      |   | — |   |
|                                                                         |                                                                                             |    |  |   |
|                                                                         | Net  cash provided by (used in) investing activities                                        | (3,987  | ) | 4,831 |   |
| Cash  flows from financing activities:                                       |                                                                                        |    |   |   |
|                                                                         | Net  proceeds from issuance of preferred stock and warrants                                 | 3⁄4  |   | 64,428 |   |
|                                                                         | Proceeds  from borrowing under credit facility                                              | 24,000  |   | 3⁄4 |   |
|                                                                         | Proceeds  from issuance of stock upon exercise of options and employee stock purchase  plan | 38      |   | 380 |   |
|                                                                         | Payments  on capital lease obligations                                                      | (1,086  | ) | (412 | ) |
|                                                                         |                                                                                             |    |  |   |
|                                                                         | Net  cash provided by financing activities                                                  | 22,952  |   | 64,396 |   |
|                                                                         |                                                                                             |    |  |   |
| Net  increase (decrease) in cash and cash equivalents                        | (8,220                                                                                      | )       | 58,599 |   |
| Cash  and cash equivalents at beginning of period                            | 14,676                                                                                      |    | 3,343 |   |
|                                                                         |                                                                                             |    |  |   |
| Cash  and cash equivalents at end of period                                  | $                                                                                           | 6,456   |   | $ | 61,942 |   |
|                                                                         |                                                                                             |    |  |   |
|                                                                         |                                                                                        |    |   |   |
| Supplemental  disclosure of cash flows information -  interest paid          | $                                                                                           | 319     |   | $ | 361 |   |
| Supplemental  disclosures of noncash investing and financing  activity: |                                                                                        |    |   |   |
|                                                                         | Accrued  preferred stock dividends                                                          | 3,051   |   | 3⁄4 |   |
|                                                                         | Non-cash  accretion on preferred stock                                                      | 1,431   |   | 3⁄4 |   |
|                                                                         | Non-cash  deferred financing costs                                                          | 3⁄4  |   | 5,357 |   |
|                                                                              |                                                                                             |         |  |  |  |  |  |  |  |  |  |

Seeaccompanying notes to financial statements.

 

**NOTES TO FINANCIAL STATEMENTS(unaudited)**

| 1.     | Basis  of Presentation.  The unaudited interim financial statements  included herein have been prepared by the Company, pursuant to the rules and  regulations of the Securities and Exchange Commission.  Certain notes and other information  normally included in financial statements prepared in accordance with accounting  principles generally accepted in the United States of America have been  condensed or omitted from the interim financial statements presented in this  quarterly report on Form 10-Q in accordance with such rules and regulations.  In the opinion of the Company’s  management, the accompanying financial statements include all adjustments,  consisting only of normal recurring adjustments, necessary to state fairly  the financial position of the Company as of June 30, 2001, and the results of  its operations and cash flows for the periods indicated.  The results of operations for the periods  covered are not necessarily indicative of the results to be expected for the  full year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   | These  financial statements should be read in conjunction with the audited financial  statements and notes thereto of the Company for the year ended December 31,  2000, which are included in the Company’s Annual Report on Form 10-K filed  with the Securities and Exchange Commission.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 2.     | Reclassifications.  Certain prior year balances have been  reclassified to conform with the current year presentation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 3.     | Stockholders’  Equity.  On June 30, 2000, the Company issued  preferred securities and warrants under the terms of a purchase agreement,  dated April 14, 2000, (the “Purchase Agreement”) with Koninklijke Ahold N.V.  (“Ahold”.)  Pursuant to the terms of  the Purchase Agreement, the Company sold 726,371 shares of the Company’s  series B convertible redeemable preferred stock, par value $.01 per share  (the “Series B Preferred Stock”) and warrants (the “Warrants”) to purchase  32,894,270 shares of the Company’s common stock for an aggregate purchase  price of $72,637,024.  The Warrants  have an exercise price of $3.75, subject to adjustment, and are immediately  exercisable.  The imputed fair value  of the warrants was calculated to be $56,953,000 using the Black-Scholes  option-pricing model and was recognized in the second quarter of 2000 as a  deemed dividend on the Series B Preferred Stock, increasing the net loss  available to common stockholders.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
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|   | All  of the outstanding shares of Series B Preferred Stock were exchanged on  October 12, 2000 for shares of series C convertible preferred stock, par  value $.01 per share (the “Series C Preferred Stock”).  The Series C Preferred Stock has the same  terms as the Series B Preferred Stock except that, in lieu of a provision for  mandatory redemption by the Company of the Series B Preferred Stock, the  Series C Preferred Stock provides for an increase in the dividend rate on the  Series C Preferred Stock beginning on June 30, 2008.  The Series C Preferred Stock is  convertible into 19,369,873 shares of common stock, subject to adjustment for  certain dilutive issuances, which represented approximately 52% of the  Company’s common stock outstanding as of June 30, 2001 on an as converted  basis.  The Series C Preferred Stock  ranks senior to the common stock with respect to dividends and liquidation  payments, and has a liquidation preference of $100.00 per share, plus all  then accrued and unpaid dividends.   The Series C Preferred Stock accrues cumulative dividends, payable  quarterly, at the rate of 8% per annum until June 30, 2008, and thereafter at  the rate of 16% per annum.  Ahold has  waived its right to receive payment of all accumulated and unpaid dividends  on the Series C Preferred Stock, including future quarterly dividends, until  the completion of a debt or equity financing transaction (a “Financing  Transaction”) including, without limitation, a public offering of capital  stock of Peapod, at which time Peapod is required to use the cash proceeds  from the Financing Transaction to pay all accumulated and compounded  dividends on the Series C Preferred Stock.   As of June 30, 2001, such accrued and unpaid dividends totaled $5,985,000.  Holders of Series C Preferred Stock are  entitled to vote together with the holders of Peapod common stock as a single  class on all matters submitted for a vote to holders of common stock.  The Company may redeem the outstanding  shares of Series C Preferred Stock at any time after April 14, 2008 at a  redemption price per share equal to the liquidation preference for the Series  C Preferred Stock, plus the amount of any accumulated and unpaid dividends as  of the date of the redemption.  The  difference between the net issuance price and the redemption value of the  Series B Preferred Stock, assuming redemption on April 14, 2008, was accreted  (based on the eight-year period to redemption) through charges to additional  paid-in capital prior to conversion of the Series B Preferred Stock to the Series  C Preferred Stock.  The imputed cost  of the increasing dividend rate on the Series C Preferred Stock is being  accreted using the interest method as increases to the carrying amount of the  Series C Preferred Stock through June 30, 2008. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |

| 4.     | Reliance  on Certain Relationships.  In certain markets, the Company purchases  groceries from wholly-owned subsidiaries of Ahold.  Prior to the investment by Ahold on June 30, 2000, all such  purchases were made under existing arm’s-length contracts.  Beginning on July 1, 2000, purchases of  groceries in these markets have transitioned to new terms negotiated in  conjunction with the Purchase Agreement which are believed to be at  arm’s-length terms.  Cost of sales for  the three- and six-month periods ended June 30, 2001 includes $9,396,000 and  $18,843,000, respectively, of groceries purchased from Ahold  subsidiaries.  At June 30, 2001,  $2,268,000 was owed to subsidiaries of Ahold and is presented as accounts  payable to related party.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
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| 5.     | Credit  Facility.  On April 14, 2000, simultaneously with the  signing of the Purchase Agreement, the Company entered into a $20,000,000  secured revolving credit facility with Ahold maturing in April 2003.  On February 26, 2001, the revolving credit  facility with Ahold was increased from $20,000,000 to $50,000,000 on  substantially identical terms as the original facility.  On March 20, 2001, Ahold agreed to  increase the amount Peapod can borrow in any one calendar month under the  credit facility from $3,000,000 to $6,000,000.  Pursuant to security agreements entered into in connection with  the credit facility, the Company’s obligations under the credit facility are  secured by a lien on all of the Company’s personal property, including its  intellectual property.  In connection  with the credit and security agreements, the Company issued to Ahold warrants  to purchase an aggregate of 3,666,667 shares of common stock at an initial  exercise price of $3.00, subject to adjustment, which are immediately  exercisable.  The imputed fair value  of the warrants was calculated to be $5,358,000 using the Black-Scholes  option-pricing model and is being recognized as non-cash interest expense  over the life of the credit facility (at June 30, 2001, $3,035,000 is  recorded as other non-current assets and $433,000 and $867,000, respectively,  was recognized as non-cash interest expense in the three- and six-month  periods ended June 30, 2001).  At June  30, 2001, the Company had borrowings under the credit facility of $24,000,000,  which bear interest from the date of borrowing at 3% over the LIBOR rate at  the date of each borrowing.  The  interest rate will be adjusted every 90 days to the then current LIBOR rate  plus 3% (or at a rate equal to the higher of (i) the rate, which is 1⁄2 of 1%  in excess of the Federal Funds Rate, and (ii) the Prime Lending Rate).  Ahold has waived its right to receive  payment of all accumulated and unpaid interest on borrowings under the credit  facility, including future interest thereon, until a Financing Transaction is  completed, provided that, upon a Financing Transaction, Peapod shall pay all  such accumulated and unpaid interest. |
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|   | If  Ahold exercises any of its warrants prior to April 2003, availability under  the credit facility will be reduced dollar-for-dollar for the exercise price  received.  Total warrants issued to  Ahold, if exercised, would represent an additional approximate 21% of the  common stock outstanding as of June 30, 2001.  As of June 30, 2001, no warrants had been exercised by Ahold.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
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| 6.     | Termination  of Employment.  The Company entered into a Separation  Agreement with William Malloy dated March 15, 2000.  Effective as of that date, William Malloy resigned from his  position as President and Chief Executive Officer and his employment  agreement was terminated.  Under the  terms of the Separation Agreement, the Company paid Mr. Malloy’s salary  through April 30, 2000.  The options  to purchase 1,100,000 and 500,000 shares of the Company’s common stock,  respectively, which were granted to Mr. Malloy pursuant to his employment  agreement, were cancelled, unexercised, and the option agreements relating to  those option grants were terminated.   The $2,500,000 loan, which had been extended to Mr. Malloy in  September of 1999 for the purchase of 311,891 shares of Company common stock,  was cancelled, and the purchase of common stock was rescinded and  cancelled.  The Company recognized a  nonrecurring expense in the first quarter of 2000 of $1,584,000 representing  the difference between the balance of the loan and the fair market value of  the 311,891 shares on the date the Separation Agreement was executed.  Mr. Malloy returned those shares to the  Company and they became treasury stock on April 24, 2000.  Under the terms of the Separation  Agreement, Mr. Malloy’s Severance Agreement was terminated, except as to the  Company’s obligation to maintain directors and officers liability insurance  for Mr. Malloy for a period of three years.   In addition, Mr. Malloy retains certain contractual rights to  indemnification as a former officer and director.  Both the Company and Mr. Malloy signed general releases of any  and all existing claims related to Mr. Malloy’s employment by the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 7.     | Nonrecurring expenses.  During the fourth quarter of 2000, the  Company recorded impairment charges for certain long-lived assets not  expected to be recoverable, lease termination costs, and other facilities  closing costs in connection with decisions to exit certain markets and  abandon certain facilities in continuing markets.  Nonrecurring expenses of $819,000 incurred during the six  months ended June 30, 2001 are attributable to activities relating to the  closing of the Company’s San Francisco distribution center, and consisted  of:  (i) $459,000 of severance and  other payroll costs, (ii) $182,000 of facility closing costs, and (iii)  $178,000 of lease termination costs.   During the quarter ended March 31, 2001, all 92 employees of the San  Francisco distribution center were notified that their employment would be  terminated and the related severance costs were accrued at that time.  All exit costs relating to facility  closings are expected to be paid by the end of 2001, except for certain  contractual obligations such as lease commitments.  Nonrecurring expenses totaled $5,608,000 for the six months  ended June 30, 2000 and resulted from severance expenses of $1,890,000, which  was incurred primarily in connection with William Malloy’s termination of  employment (see Note 6); expenses attributable to a failed financing  transaction of $1,037,000; impaired asset write-offs of $832,000 related to  cancelled and deferred initiatives; and other nonrecurring expenses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
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|   | The  following table depicts the exit charges and related liability balances as of  and for the six month period ended June 30, 2001, primarily related to the  decisions to exit certain markets and abandon certain facilities in  continuing markets (in thousands): |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 
|                              | **Balance in Other  Accrued  Liabilities at  January 1, 2001** |   | **Current Year  Exit Costs** |   | **Payments  through June 30,  2001** |   | **Balance in Other  Accrued  Liabilities at  June 30, 2001** |   |
|-----------------------------------|----------------------------------------------------------------|--------|------------------------------|--------|--------------------------------------|--------|--------------------------------------------------------------|--------|
|                              | ****                                                           |   | ****                         |   | ****                                 |   | ****                                                         |   |
| Lease termination costs           | $                                                              | 345    |                         | $      | 178                                  |   | $                                                            | (193   | ) | $ | 330 |   |
| Severance and other payroll costs | ––                                                   |   | 459                          |   | (459                                 | )      | ––                                                 |   |
| Other facilities closing costs    | 300                                                            |   | 182                          |   | (95                                  | )      | 387                                                          |   |
|                              |                                                                |   |                              |   |                                      |   |                                                              |   |
|                              | $                                                              | 645    |                         | $      | 819                                  |   | $                                                            | (747   | ) | $ | 717 |   |
|                              |                                                                |   |                              |   |                                      |   |                                                              |   |

 
| 8.     | Subsequent events.  On July 16, 2001, Ahold and two of its  wholly owned subsidiaries (Ahold U.S.A. Holdings, Inc., and Bean Acquisition  Corp.) entered into the Agreement and Plan of Merger, dated as of July 16,  2001, as amended (the “Merger Agreement”) with Peapod.  Bean Acquisition Corp. is offering to  purchase any and all of the outstanding shares of Peapod’s common stock par  value $0.01 per share, together with the associated preferred stock purchase  rights of Peapod, (the “Common Stock”) (other than shares held by Ahold or  its affiliates),for $2.15 per share net to the seller in cash, without any  interest, upon the terms and subject to the conditions set forth in an Offer  to Purchase made July 27, 2001 and filed with the Securities and Exchange  Commission on that date.  The tender  offer is not subject to any financing condition or a minimum condition but is  subject to other customary closing conditions.  The offer expires at 12:00 midnight, New York City time on  August 23, 2001, unless the offer is extended.  If the tender offer is completed, it will be followed by a  second-step merger (the “Merger”) of Peapod and Bean Acquisition Corp.  whereby all remaining Peapod stockholders, other than Ahold and its affiliates,  and holders of shares for which appraisal rights have been sought, who do not  tender their shares in the tender offer, will receive $2.15 per share. |
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|   | The  board of directors of Peapod, based on the unanimous recommendation of a  special committee (the “Special Committee”) of independent directors of  Peapod: (i) has determined that the Merger Agreement, the tender offer and  the Merger are fair to and in the best interests of the holders (the  “Holders”) (other than Ahold and its affiliates) of shares of common stock of  Peapod, (ii) has approved and declared advisable the Merger Agreement and the  transactions contemplated thereby, including, without limitation, the tender  offer and the Merger and (iii) has resolved, subject to the terms and  conditions of the Merger Agreement, to recommend that the Holders accept the  tender offer, tender their shares of Common Stock pursuant to the tender  offer and approve and adopt the Merger Agreement and the Merger if submitted  for their approval.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
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|   | In  connection with its earlier acquisition of Peapod convertible preferred  stock, Ahold received antitrust clearance under the Hart Scott Rodino Act and  no further clearance is necessary in connection with the tender offer or  Merger.  Following completion of the  tender offer and Merger, the Company will be an indirect wholly owned  subsidiary of Ahold, will be delisted from NASDAQ and will no longer be  subject to reporting requirements of the Securities Exchange Act of 1934.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
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|   | Upon  a change of control, as defined in Peapod’s stock option plans, all outstanding  stock options will vest and a payments totaling approximately $1,130,000 will  be made to current option holders representing the difference between the  $2.15 offer price and the option exercise price.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
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|   | The  legal proceedings described under Item 1 of Part II of the Form 10-Q were  instituted on July 27, 2001. A description of such legal proceedings are  contained in Item 1 of Part II of this Form 10-Q.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |

 

**Item 2.**             **Management's Discussion and Analysis ofFinancial Condition and Results of Operations.**

**RESULTS OF OPERATIONS**

             Thefollowing table sets forth certain unaudited financial information from theStatements of Operations as a percentage of net sales:

 

|                                | **Three Months Ended****June  30,** |       | **Six Months Ended****June  30,** |       |
|-------------------------------------|-------------------------------------|------------|-----------------------------------|------------|
|                                | ****                                |       | ****                              |       |
|                                | **2001**                            |       | **2000**                          |       | **2001** |   | **2000** |   |
|                                | ****                                | ** ** | ****                              | ** ** | **** | ** ** | **** | ** ** |
| Net  sales                          | 100                                 | %          | 100                               | %          | 100 | % | 100 | % |
| Cost  of sales                      | 67                                  |       | 78                                |       | 67 |   | 78 |   |
|                                |                                     |       |                                   |       |  |   |  |   |
| Gross  profit                       | 33                                  |       | 22                                |       | 33 |   | 22 |   |
|                                |                                |       |                              |       |   |   |   |   |
| Operating  expenses:                |                                |       |                              |       |   |   |   |   |
| Fulfillment  operations             | 44                                  |       | 34                                |       | 47 |   | 35 |   |
| General  and administrative         | 17                                  |       | 10                                |       | 16 |   | 9 |   |
| Marketing  and selling              | 14                                  |       | 4                                 |       | 13 |   | 5 |   |
| System  development and maintenance | 3                                   |       | 6                                 |       | 3 |   | 5 |   |
| Depreciation  and amortization      | 7                                   |       | 3                                 |       | 8 |   | 3 |   |
| Nonrecurring  expenses              | *                                   |       | 7                                 |       | 2 |   | 12 |   |
|                                |                                     |       |                                   |       |  |   |  |   |
| Total  operating expenses           | 85                                  |       | 64                                |       | 89 |   | 69 |   |
|                                |                                     |       |                                   |       |  |   |  |   |
| Operating  loss                     | (52                                 | )          | (42                               | )          | (56 | ) | (47 | ) |
|                                |                                |       |                              |       |   |   |   |   |
| Other  income (expense):            |                                |       |                              |       |   |   |   |   |
| Investment  income (expense)        | *                                   |       | *                                 |       | * |   | * |   |
| Non-cash  interest expense          | (2                                  | )          | (3                                | )          | (2 | ) | (1 | ) |
| Interest  expense                   | (2                                  | )          | (1                                | )          | (1 | ) | (1 | ) |
|                                |                                     |       |                                   |       |  |   |  |   |
| Net  loss                           | (56%                                | )          | (46                               | )%         | (59 | )% | (49 | )% |
|                                |                                     |       |                                   |       |  |   |  |   |

*- Less than 1%

**Comparison of Three MonthsEnded June 30, 2001 and June 30, 2000**

             *Net  sales*.  Net sales are the sales of groceries and related products tocustomers, net of promotional discounts and allowances, subscription, serviceand other fees paid by customers and retail partners, and fees from consumergoods companies for interactive advertising, promotion and researchservices.  Net sales decreased by 1%from $22,632,000 in the quarter ended June 30, 2000 to $22,328,000 in thequarter ended June 30, 2001.  However,on a pro forma basis, removing markets closed from the base and adding marketsopened to the base, net sales were up 50% for the quarter ended June 30, 2001versus the quarter ended June 30, 2000. Net sales for the quarter ended June 30, 2001 includes net sales fromtwo markets opened in 2000 (Southern Connecticut opened June 2000 andWashington, D.C. opened September 2000) and reflects the closing of fourmarkets in September 2000 (Columbus, OH and Houston, Dallas and Austin, TX) andone market in March 2001 (San Francisco, CA).

             Revenuesfrom the sale of groceries and related products increased 4% from $21,170,000in the quarter ended June 30, 2000 to $22,089,000 in the quarter ended June 30,2001.  Orders decreased 7% from 183,500in the quarter ended June 30, 2000 to 171,000 in the quarter ended June 30,2001, while average order size increased 12% from $115.39 to $129.19.  In current markets, orders grew 32% from129,000 orders in the quarter ended June 30, 2000 to 170,000 orders in thequarter ended June 30, 2001. Promotional discounts and allowances, which reduce the amount a customerpays for their grocery order, increased from $100,000 in the three months endedJune 30, 2000 to $295,000 in the three months ended June 30, 2001 as (i) morediscounts were offered in new markets in order to quickly build customerdensity and (ii) the cost of discounts are now the Company’s costs versus theretailers’ costs in all markets in which Ahold operates a grocery chain.  Fees paid by customers and retail partnersdecreased from $1,608,000 in the quarter ended June 30, 2000 to $482,000 in thequarter ended June 30, 2001.  Thisdecrease is attributable to (i) no fees currently being paid by retail supplypartners and (ii) reduced customer fees (although fees charged to customershave been increased in the three months ended June 30, 2001 related to thechanging competitive environment and what the Company’s research showsconsumers are willing to pay for the convenience of the Peapod service).  Customers, measured as customers transactingwithin the last 12 months, decreased 18% from 135,700 at June 30, 2000 to110,600 at June 30, 2001.  This decreasein customers reflects the loss of approximately 38,000 customers upon theclosing of a total of five markets in September 2000 and March 2001 offsetsomewhat by customer additions in the current markets.
             *Cost of**sales*.  Cost of sales, which are the cost ofgroceries and related products, decreased 16% from $17,574,000 in the quarterended June 30, 2000 to $14,864,000 in the quarter ended June 30, 2001.  The decrease resulted primarily fromimproved margins resulting from the Ahold relationship and other improvements inonline merchandising aimed at personalizing the online store and encouragingthe purchase of higher margin items.

             *Fulfillmentoperations*.  Fulfillmentoperations expenses include (i) the direct costs relating to the picking,packing and delivery of customer orders; (ii) salaries and overhead expenses ofeach fulfillment center; (iii) salaries and overhead expenses for eachmetropolitan market; (iv) salaries and overhead expenses for certain fieldsupport functions such as recruiting, training and database merchandising and(v) salaries and overhead expenses for certain corporate support functions suchas customer support, billing and telecom. Fulfillment operations expenses increased 27% from $7,796,000 for thequarter ended June 30, 2000 to $9,928,000 for the quarter ended June 30,2001.  Fulfillment operations expensesof $437,000 incurred during the quarter ended June 30, 2001 are attributable tothe temporary closing of a Streamline facility to modify the equipment andfacility in order to handle increased capacity and to integrate with Peapodsystems and is primarily related to occupancy related expenses and consequentlygenerated no revenues and gross profit. This increase is primarily attributable to (i) the Company now operatingand accounting for all fulfillment functions in all markets, whereas in 2000the Company outsourced much of this function to its retailer partners inexchange for a service fee and (ii) the addition of two fulfillment centersacquired from Streamline in September 2000.

             AtJune 30, 2001, the Company fulfilled customer orders from eight fulfillmentcenters across five metropolitan markets covering 5,099,000 households.  This compares to 23 fulfillment centersacross nine metropolitan markets at June 30, 2000 covering 8,731,000households.  After the first quarter of2000, one new fast-pick center was opened and leases for two warehouses wereacquired, while 16 fulfillment centers were closed in the five markets theCompany has exited, one fulfillment center was closed to consolidate volume inadjacent fulfillment centers and one fulfillment center has been temporarilyclosed to enable retrofitting of certain materials handling equipment andfurther integration of systems.

             *General andadministrative*.  General andadministrative expenses, which include corporate staff, accounting and humanresource functions, and occupancy expenses, increased 72% from $2,150,000 inthe quarter ended June 30, 2000 to $3,697,000 in the quarter ended June 30,2001.  The increase is primarily attributableto an increase in (i) costs in Ahold markets to support the local operations,including functions such as logistics and transportation planning, operationalplanning and development, human resources, marketing and accounting; (ii)operations planning to support the two facilities from the Streamlineacquisition and to support a decentralized organization structure in allmarkets and (iii) a lower allocation of corporate charges for customer supportto fulfillment operations expenses.

             *Marketingand selling*.  Marketing andselling expenses include the cost of customer acquisition and retentionmarketing, such as radio advertising and direct mail, as well as certain costsrelating to public relations and interactive marketing services.  The Company expenses all such costs asincurred.  Marketing and sellingexpenses increased by 212% from $987,000 for the quarter ended June 30, 2000 to$3,078,000 for the quarter ended June 30, 2001.  Marketing and advertising spending was very limited in thequarter ended June 30, 2000 as the Company sought additional financing.  A major marketing effort has occurred in thequarter ended June 30, 2001 aimed at rapidly acquiring customers in the newmarkets entered and supporting continued customer acquisition in all other currentmarkets.

             *Systemdevelopment and maintenance*. System development and maintenance expenses, which include new productdevelopment as well as the maintenance and enhancement of existing systems,decreased 48% from $1,469,000 for the quarter ended June 30, 2000 to $759,000for the quarter ended June 30, 2001. The decrease is primarily attributable to (i) the IT staff working oninternal-use software development projects capitalized in 2001 (no internal usesoftware development costs were capitalized in 2000); (ii) the streamlining ofthe technology development department and a corresponding reduction in IT staffand (iii) lower maintenance costs resulting from the Ahold relationship.

             *Depreciationand amortization*. Depreciation and amortization increased 125% from $737,000 for thequarter ended June 30, 2000 to $1,661,000 for the quarter ended June 30,2001.  This increase primarily resultsfrom equipment and leasehold improvements acquired from Streamline, andincludes $531,000 of amortization of goodwill and other intangibles.
             *Nonrecurringexpenses*.  During the fourthquarter of 2000, the Company recorded impairment charges for certain long-livedassets not expected to be recoverable, lease termination costs, and otherfacilities closing costs in connection with decisions to exit certain marketsand abandon certain facilities in continuing markets.  Nonrecurring expenses of $58,000 incurred during the quarterended June 30, 2001 are attributable to activities relating to the closing ofthe Company’s San Francisco distribution center, and consisted of (i) $32,000of severance and other payroll costs and (ii) $26,000 of facility closingcosts.  All exit costs relating tofacility closings are expected to be paid by the end of 2001, except forcertain contractual obligations such as lease commitments. Nonrecurringexpenses totaled $1,490,000 for the quarter ended June 30, 2000 and resultprimarily from charges associated with licensing obligations of $705,000 andimpaired asset write-offs of $664,000 related to cancelled and deferredinitiatives.

*             Other income (expense).*  Other income (expense) includes interestpaid on capital leases, interest on borrowings and credit facilities, non-cashinterest expense from the amortization of warrants issued with the creditfacility, and investment income and expense. Interest expense increased from $218,000 for the quarter ended June 30,2000 to $485,000 in the quarter ended June 30, 2001 primarily related toadditional capitalized leases acquired from Streamline and borrowings under theAhold credit facility.  Investmentincome for the quarter ended June 30, 2000 was $16,000 compared to $22,000 ofinvestment income for the quarter ended June 30, 2001.  Non-cash interest expense decreased from$616,000 in the three months ended June 30, 2000 to $433,000 in the six monthsended June 30, 2001 primarily related to the imputed fair value of warrantsissued in connection with a bridge loan, which was put in place prior to theestablishment of the credit facility on April 14, 2000.

**Comparison of Six Months Ended June 30, 2001 and June 30,2000**

             *Net  sales*.  Net sales decreased slightly from $47,406,000 in the six monthsended June 30, 2000 to $47,265,000 in the six months ended June 30, 2001.  However, on a pro forma basis, removingmarkets closed from the base and adding markets opened to the base, net saleswere up 51% for the six months ended June 30, 2001 versus the six months endedJune 30, 2000.  Net sales for the sixmonths ended June 30, 2001 includes net sales from two markets opened in 2000(Southern Connecticut opened June 2000 and Washington, D.C. opened September2000) and reflects the closing of four markets in September 2000 (Columbus, OHand Houston, Dallas and Austin, TX) and one market in March 2001 (SanFrancisco, CA).

             Revenuesfrom the sale of groceries and related products increased 6% from $44,020,000in the six months ended June 30, 2000 to $46,848,000 in the six months endedJune 30, 2001. Orders decreased slightly from 389,300 in the six months endedJune 30, 2000 to 376,500 in the six months ended June 30, 2001, while averageorder size increased 10% from $113.07 to $124.43.  In current markets, orders grew 35% from 269,000 orders in thesix months ended June 30, 2000 to 364,000 orders in the six months ended June30, 2001.  Promotional discounts andallowances, which reduce the amount a customer pays for their grocery order,increased from $239,000 in the six months ended June 30, 2000 to $632,000 inthe six months ended June 30, 2001 as (i) more discounts were offered in newmarkets in order to quickly build customer density and (ii) the cost ofdiscounts are now the Company’s costs versus the retailers’ costs in allmarkets in which Ahold operates a grocery chain.  Fees paid by customers and retail partners decreased from$3,327,000 in the six months ended June 30, 2000 to $925,000 in the six monthsended June 30, 2001.  This decrease isattributable to (i) no fees currently being paid by retail supply partners and(ii) reduced customer fees (although fees charged to customers have been increasedin the six months ended June 30, 2001 related to the changing competitiveenvironment and what the Company’s research shows consumers are willing to payfor the convenience of the Peapod service). Customers, measured as customers transacting within the last 12 months,decreased 18% from 135,700 at June 30, 2000 to 110,600 at June 30, 2001.  This decrease in customers reflects thetermination of approximately 38,000 customers upon the closing of a total offive markets in September 2000 and March 2001 offset somewhat by customeradditions in the current markets.

             *Cost of**sales*.  Cost of sales decreased 13% from $36,790,000in the six months ended June 30, 2000 to $31,827,000 in the six months endedJune 30, 2001.  The decrease resultedprimarily from improved margins resulting from the Ahold relationship and otherimprovements in online merchandising aimed at personalizing the online storeand encouraging the purchase of higher margin items.

             *Fulfillmentoperations*.  Fulfillmentoperations expenses increased 31% from $16,727,000 for the six months endedJune 30, 2000 to $21,934,000 for the six months ended June 30, 2001.  Fulfillment operations expenses of $437,000incurred during the quarter ended June 30, 2001 are attributable to thetemporary closing of a Streamline facility to modify the equipment and facilityin order to handle increased capacity and to integrate with Peapod systems andis primarily related to occupancy related expenses and consequently generatedno revenues and gross profit.  This increaseis primarily attributable to (i) the Company now operating and accounting forall fulfillment functions in all markets, whereas in 2000 the Companyoutsourced much of this function to its retailer partners in exchange for aservice fee and (ii) the addition of two fulfillment centers acquired fromStreamline in September 2000.
             *General andadministrative*.  General andadministrative expenses increased 78% from $4,189,000 in the six months endedJune 30, 2000 to $7,454,000 in the six months ended June 30, 2001.  The increase is primarily attributable to anincrease in (i) costs in Ahold markets to support the local operations,including functions such as logistics and transportation planning, operationalplanning and development, human resources, marketing and accounting; (ii)operations planning to support the two facilities from the Streamlineacquisition and to support a decentralized organization structure in allmarkets and (iii) a lower allocation of corporate charges for customer supportto fulfillment operations expenses.

             *Marketingand selling*.  Marketing andselling expenses increased by 179% from $2,187,000 for the six months endedJune 30, 2000 to $6,097,000 for the six months ended June 30, 2001.  Marketing and advertising spending was verylimited in the six months ended June 30, 2000 as the Company sought additionalfinancing.  A major marketing effort hasoccurred in the six months ended June 30, 2001 aimed at rapidly acquiringcustomers in the new markets entered and supporting continued customeracquisition in all other current markets.

             *Systemdevelopment and maintenance*. System development and maintenance expenses decreased 36% from$2,658,000 for the six months ended June 30, 2000 to $1,710,000 for the sixmonths ended June 30, 2001.  Thedecrease is primarily attributable to (i) the IT staff working on internal-usesoftware development projects capitalized in 2001 (no internal use softwaredevelopment costs were capitalized in 2000); (ii) the streamlining of thetechnology development department and a corresponding reduction in IT staff and(iii) lower maintenance costs resulting from the Ahold relationship.

             *Depreciationand amortization*. Depreciation and amortization increased 161% from $1,401,000 for the sixmonths ended June 30, 2000 to $3,652,000 for the six months ended June 30,2001.  This increase primarily resultsfrom equipment and leasehold improvements acquired from Streamline, andincludes $1,061,000 of amortization of goodwill and other intangibles.

             *Nonrecurringexpenses*.  During the fourthquarter of 2000, the Company recorded impairment charges for certain long-livedassets not expected to be recoverable, lease termination costs, and otherfacilities closing costs in connection with decisions to exit certain marketsand abandon certain facilities in continuing markets.  Nonrecurring expenses of $819,000 incurred during the six monthsended June 30, 2001 are attributable to activities relating to the closing ofthe Company’s San Francisco distribution center, and consisted of: (i) $459,000of severance and other payroll costs, (ii) $182,000 of facility closing costs,and (iii) $178,000 of lease termination costs. All exit costs relating to facility closings are expected to be paid bythe end of 2001, except for certain contractual obligations such as leasecommitments. Nonrecurring expenses totaled $5,608,000 for the six months endedJune 30, 2000 and resulted from severance expenses of $1,890,000, which wasincurred primarily in connection with William Malloy’s termination ofemployment (see Note 6 in Notes to Financial Statements); impaired assetwrite-offs of $1,496,000 related to cancelled and deferred initiatives;expenses attributable to a failed financing transaction of $1,037,000; chargesassociated with licensing obligations of $705,000; and other nonrecurringexpenses.

*             Other income (expense).*  Interest expense increased from $274,000 forthe six months ended June 30, 2000 to $650,000 in the six months ended June 30,2001 primarily related to additional capitalized leases acquired fromStreamline and borrowings under the Ahold credit facility.  Investment income (expense) for the sixmonths ended June 30, 2000 was a charge of $87,000 due to realized lossesincurred from the sale of investments prior to maturity compared to $117,000 ofinvestment income for the six months ended June 30, 2001.  Non-cash interest expense increased from$616,000 in the six months ended June 30, 2000 to $867,000 in the six monthsended June 30, 2001 primarily related to additional months of expenses in 2001as the credit facility began in April 2000.

**LIQUIDITY AND CAPITAL RESOURCES**

             Cashused in operating activities increased from $10,628,000 in the first six monthsof 2000 to $27,209,000 in the first six months of 2001.  The change in cash used in operatingactivities was primarily attributable to increased net losses, an increase inother current assets and decreases in current liabilities.  As of June 30, 2001, the Company had$6,456,000 in cash and cash equivalents and $26,000,000 of available creditunder its $50,000,000 revolving credit facility with Ahold.  The Company uses its working capital to fundongoing operations, marketing programs and geographic expansion and to furtherdevelop its products and services.

             TheCompany’s principal sources of liquidity consist of $6,456,000 of cash as ofJune 30, 2001 and availability of $26,000,000 under the revolving creditfacility with Ahold as of June 30, 2001. Pursuant to a waiver letter (the “Waiver”), Ahold agreed to allow theCompany to defer until the Company completes a financing transaction (i)payment of dividends due and that accrue with respect to shares of Series CPreferred Stock (and the previously held Series B Preferred Stock) and (ii)payment of interest under the credit facility. The dividends on the preferred stock and the interest under the creditfacility will continue to accumulate in accordance with their respectiveterms.  Further, under the terms of theWaiver, the Company will be required to pay any accumulated and unpaiddividends due on the preferred stock and any overdue interest under the creditfacility with proceeds from any financing transaction that the Companycompletes.  In addition, under the termsof the credit facility, upon completion of certain financings by the Company,the commitment under the credit facility will be permanently reduced by theamount of the net cash proceeds from such financing(s) and any amountoutstanding under the credit facility up to the amount of such net cashproceeds will become due and payable. After completion of a financing by the Company, payment of dividends onthe preferred stock and interest under the credit facility will no longer bedeferred and will become due and payable in accordance with their terms.

             TheCompany anticipates, in light of the Waiver from Ahold, that the cash on handas of June 30, 2001 together with the credit facility will be sufficient tofund the Company’s operations and capital requirements for the remainder of2001.  However, no assurance can begiven that changing business circumstances will not require additional capitalfor reasons that are not currently anticipated or that the necessary capitalwill then be available to the Company on favorable terms, or at all.  The Company expects to require additionalcapital to fund its cash needs in 2002 and beyond.  If the tender offer and Merger contemplated by the MergerAgreement are not completed, the Company will be required to raise additionalfunds to support its business plan for 2002 and beyond.  The Company cannot be certain thatadditional financing will be available on favorable terms or at all.

             TheCompany believes that inflation has not had a material effect on itsoperations.

**RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS**

             InJune 2001, the Financial Accounting Standards Board (“FASB”) issued Statementof Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations”,which supersedes APB Opinion No. 16, “Business Combinations” and SFAS No. 38,“Accounting for Preacquisition Contingencies of Purchased Enterprises.”  SFAS No. 141 addresses financial accountingand reporting for business combinations and requires that all businesscombinations within the scope of SFAS No. 141 be accounted for using only thepurchase method.  SFAS No. 141 isrequired to be adopted for all business combinations initiated after June 30,2001.  Management has assessed theimpact of the adoption of SFAS No. 141 on its financial statements and believesthe impact will not be material.

             Alsoin June 2001, the FASB issued SFAS No. 142, “Goodwill and Other IntangibleAssets”, which supercedes APB Opinion No. 17, “Intangible Assets”.  SFAS No. 142 addresses how intangible assetsthat are acquired individually or with a group of other assets (but not thoseacquired in a business combination) should be accounted for in financialstatements upon their acquisition.  SFASNo. 142 also addresses how goodwill and other intangible assets should beaccounted for after they have been initially recognized in the financial statements.  The provisions of SFAS No. 142 are requiredto be applied starting with fiscal years beginning after December 15,2001.  SFAS No. 142 is required to beapplied at the beginning of an entity’s fiscal year and to be applied to allgoodwill and other intangible assets recognized in its financial statements atthat date.  Management is currentlyevaluating the impact that adoption of SFAS No. 142 will have on its financialstatements.
**Item 3. Quantitative andQualitative Disclosures about Market Risk**

             AtJune 30, 2001, the Company had borrowings under the credit facility of$24,000,000, which bear interest from the date of borrowing at 3% over theLIBOR rate at the date of each borrowing. The interest rate will be adjusted, to a rate selected by Peapod, every90 days to the then current LIBOR rate plus 3% (or to a rate equal to thehigher of (i) the rate, which is 1⁄2 of 1% in excess of the Federal Funds Rate,and (ii) the Prime Lending Rate).

**PART IIOTHER INFORMATION**

**Item 1.**             **Legal Proceedings**

             OnJuly 27, 2001, a complaint was filed by a purported holder of shares of CommonsStock in the Court of Chancery of the State of Delaware for New Castle Countyon behalf of a putative class of Holders relating to the Merger Agreement andthe transactions contemplated thereby. The case is captioned Richard Hartley v. Peapod, Inc., et al., CivilAction No. 19025.  A copy of thecomplaint (the "Hartley Complaint") is filed as Exhibit (d)(23) tothe Schedule TO, and this summary is qualified in its entirety by reference tothe Hartley Complaint.  The defendantsin the action are Peapod, Ahold, Ahold U.S.A. Holdings, Inc., Bean AcquisitionCorp. and Peapod's directors (Andrew B. Parkinson, Mark Van Stekelenburg, BrianHotarek, Ronald Van Solt, Mark C. Van Gelder, Maarten Dorhout Mees, Mark E.Smith, Trygve E. Myhren, Drayton McLane, William J. Grize and GaryPreston).  The Hartley Complaint allegesthat each of the defendants are fiduciaries of the plaintiff and the othermembers of the putative class and that each of the defendants is breaching itsor his fiduciary duties because Ahold is acquiring shares of Common Stock ownedby members of the class on allegedly unfair terms and at an allegedly unfairprice.  The plaintiff seeks, among otherthings, to have the Court: (1) enjoin the defendants from proceeding with, orcause them to rescind, the tender offer and the Merger; (2) award damages tothe Holders; (3) impose a constructive trust on the assets and stock receivedby the defendants; and (4) award the plaintiff fees and costs.  The defendants believe that these claims arewithout merit and intend to defend the Hartley Complaint vigorously

             OnAugust 1, 2001, the Hartley Complaint was amended to include an additionalcount alleging that the defendants breached their fiduciary duty ofdisclosure.  The Hartley Complaintalleges that the defendants failed to disclose all material facts in connectionwith the tender offer, made material misstatements and failed to disclose factsnecessary to avoid making materially misleading partial disclosures.  The specific allegations in the amendedHartley Complaint include the purported (1) failure to disclose that the Peapodstrategic plans, setting forth Peapod management’s $110 million plan and $115million plan, were created by or under the direction of Ahold, (2) incompleteexplanation of the strategic plans, (3) failure to disclose the actions theSpecial Committee took to verify the bona fides and viability of the strategicplans, (4) failure to disclose some alleged valuations of Peapod prepared byAhold which allegedly show a valuation higher than $2.15 per share, (5)misleading disclosure that the Special Committee members were independent,though one was allegedly a former Ahold employee, (6) misleading disclosureabout the potential delisting of the Shares from the Nasdaq National Market,alleging that they could be listed on the Nasdaq Small Cap Market, (7)misleading disclosure that Royal Ahold believes the $2.15 per share price isfair and (8) misleading disclosure of Ahold’s purpose for the tenderoffer.  The defendants believe that theadditional claims are without merit, and intend to defend the Hartley Complaintvigorously.”

**Item 4.              Submissionof Matters to a Vote of Security Holders**

             Peapodheld its annual meeting of stockholders on May 15, 2001.  The following are the items that were votedthereon by holders of common stock and Series C Preferred Stock and the votingresults thereof:

1. Two Class II Directors were elected by the holders of common stock andSeries C Preferred Stock, voting together as a class:
NomineeForWithholdAndrew B. Parkinson31,861,61327,421Mark VanStekelenburg31,834,14654,888
2. Two Class II Directors were elected by the holders of Series C PreferredStock:
NomineeForWithholdBrian  Hoterak726,371-0-Ronald  van Solt726,371-0-
**Item 5. OtherInformation**

             SafeHarbor Statement under the Private Securities Litigation Reform Act of 1995.

             Exceptfor historical matters contained herein, the matters discussed in this report,including statements herein regarding Peapod's competitive strengths and marketposition, its business strategy, its sufficiency of resources and ability toobtain financing, markets for Peapod’s products, general trends and trends inPeapod’s operations or financial results, Peapod’s expansion strategy andPeapod’s future prospects and profitability, are forward-looking and are madepursuant to the safe harbor provisions of the Private Securities LitigationReform Act of 1995.  Investors are cautionedthat these forward-looking statements reflect numerous assumptions and involverisks and uncertainties that may affect Peapod's business and prospects andcause actual results to differ materially from these forward-lookingstatements.  Such risks include, withoutlimitation:  (1) the sufficiency of theCompany's resources and its ability to obtain financing in the event that thetender offer and merger are not completed; (2) the Company's limited operatinghistory; (3) the complexity of the Company's business systems; (4) theCompany's ability to manage its growth and expansion strategy; (5) theCompany's relationship with Ahold and its affiliates; (6) the Company's abilityto leverage its brand name; (7) the Company's ability to respond to rapid technologicalchange; (8) the impact of future losses and negative cash flow; (9) the impactof significant future capital investments; (10) competition from traditionaland online retailers; (11) the success of the Internet as a medium for groceryshopping; (12) the Company's ability to build brand identity and customerloyalty; (13) the Company's ability to attract and retain key personnel; and(14) the risk factors identified in the Company's Annual Report on Form 10-Kfor the period ended December 31, 2000 and risk factors identified from time totime in any other filings made by the Company with the Securities and ExchangeCommission.

**Item 6.**             **Exhibits and Reports on Form 8-K.**
(a)Exhibits  - The following exhibits are filed herewith or are incorporated herein:     Exhibit  No. Description   10.1 Assignment  of Option to Purchase and Grant of Option to Purchase dated as of March 29,  2001 by and between Peapod, Inc. and ARP Lake Zurich LLC (incorporated by  reference to the Schedule TO filed by Koninklijke Ahold N.V., Ahold U.S.A.  Holdings, Inc. and Bean Acquisition Corp. on July 27, 2001 (the “Schedule  TO”)).     10.2 Option  Agreement, dated as of January 4, 200, between Peapod, Inc. and McLane Group,  L.P. (incorporated by reference to the Schedule TO).     10.3 Peapod  Management Agreement Outline of Terms between Peapod, Inc. and McLane Group,  L.P., dated November 8, 2000 (incorporated by reference to the Schedule  14D-9/A filed by Peapod, Inc. on August 8, 2001).     10.4 Software  License Agreement between M-Group Systems, Inc. and Peapod, Inc., dated  October 11, 1999 (incorporated by reference to the Schedule 14D-9/A filed by  Peapod, Inc. on August 8, 2001).    (b)Reports  on Form 8-K    None 
 

**SIGNATURE**

             Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.
 Peapod, Inc. (Registrant)  August  9, 2001     /s/    Andrew B. Parkinson Andrew  B. Parkinson Chief  Financial Officer