Company Name: Peapod, Inc.
Public Availability Date: 11-10-1997 

[INQUIRY LETTER]

SIDLEY & AUSTIN
ONE FIRST NATIONAL PLAZA
CHICAGO, ILLINOIS 60603
TELEPHONE(312) 858-7000

November 05, 1997
Securities Act of 1933, as amended, Rule 144(d)

Mary Kosterlitz, Esq.
Office of the Chief Counsel
Division of Corporation Finance
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549

Re: Peapod, Inc.

Dear Ms. Kosterlitz:

This letter will replace our letter of July 7, 1997 and our supplemental letter of October 22, 1997. On behalf of our client Peapod, Inc., a Delaware corporation ("Peapod"), we respectfully request that you concur with our opinion that the shareholders of Peapod who received shares of common stock of Peapod ("Peapod Common Stock") in exchange for their partnership interests in Peapod LP, an Illinois limited partnership (the "Partnership") and shareholders of Peapod who are receiving their Peapod Common Stock in liquidation of their shares in the general partner, then known as Peapod, Inc. ("PI" or the "General Partner"), should be permitted for purposes of Rule 144 of the Securities Act of 1933, as amended (the "Act"), to "tack" their holding periods for the Peapod Common Stock for the period during which they held interests in the Partnership or PI.

Background

PI, a Delaware corporation, was organized in 1989. In 1992, in order to raise additional capital, PI organized the Partnership, with PI serving as the sole general partner. At the time of the formation of Partnership, substantially all of the assets and all of the liabilities of PI were transferred to Partnership in exchange for interests in Partnership. Concurrently with, and subsequent to, the formation of the Partnership (i.e., during the period 1992-1996), certain investors (the "Limited Partners") contributed cash to Partnership and received limited partnership units in the Partnership.

When the Partnership was formed, it was expressly contemplated by the parties in the limited partnership agreement dated April 30, 1992 (the "Peapod Partnership Agreement") among PI and the Limited Partners, that the assets and business conducted by Partnership might be transferred at any time at the discretion of the General Partner to a corporation to facilitate a public offering of securities or for other reasons deemed by the General Partner to be in the best interests of the business. Consequently, the partners agreed in the Peapod Partnership Agreement that the decision to form a new corporation was to be made solely by the General Partner and that, upon such conversion, the Limited Partners would receive common stock of the new corporation. The Limited Partners did not retain any veto power or other voting power with respect to such a conversion.

On April 4, 1996, the Peapod Partnership Agreement was amended to provide that the conversion to corporate form could also be effectuated by a transfer of Partnership units to one or more corporation in exchange for shares of such corporation. This amendment was adopted by the parties because such transfer of units might be simpler from an administrative standpoint and more tax efficient than an asset transfer. This amendment did not change the basic purpose or effect of the conversion provision -- that the General Partner in its discretion could at any time cause the Partnership to be converted to corporate form with the investors receiving stock in the new corporation.

In 1997 the General Partner decided to proceed with an initial public offering of the business through Peapod, which had been recently formed for this purpose. On May 30, 1997, (prior to Peapod's initial public offering of Peapod Common Stock), pursuant to the conversion provisions of the Peapod Partnership Agreement, the Partnership's business and assets were transferred to Peapod to facilitate the initial public offering. In such conversion (the "Conversion"), all of the equity interests in the Partnership were exchanged for shares of Peapod Common Stock; (ii) the Partnership was dissolved; and (iii) all of the assets and liabilities of Partnership were transferred to Peapod. On June 10, 1997 Peapod's Registration Statement on Form S-1 (File No. 333-24341) was declared effective by the Securities and Exchange Commission (the "SEC") and Peapod commenced its initial public offering. The initial public offering was closed on June 16, 1997. It is anticipated that in January 1998, PI will be liquidated and will distribute its shares of Peapod Common Stock to its shareholders.

Further, the proportionate interests in Peapod of the Limited Partners, the corporate General Partner and the shareholders of the corporate General Partner immediately following the Conversion were the same as their proportionate interests in the Partnership immediately prior to the Conversion. Immediately following the Conversion, each holder of Partnership interests acquired an interest in Peapod by reason of the shares of Peapod Common Stock received by such holder in the Conversion, which such interest in Peapod was substantially proportionate to such holder's interest in the Partnership immediately prior to the Conversion (subject to dilution upon the issuance of additional shares of Peapod Common Stock in the initial public offering). Accordingly, the General Partner acquired an interest in Peapod by reason of the Peapod Common Stock received by General Partner in the Conversion, which such interest in Peapod was substantially proportionate to General Partner's interest in the Partnership immediately prior to the Conversion (subject to dilution upon the issuance of additional shares of Peapod Common Stock in the initial public offering). Consequently, the proportionate interest in Peapod of the General Partner and the stockholders of the General Partner immediately following the Conversion were the same as their proportionate interests in the Partnership immediately prior to the Conversion.

Issues Presented

Two issues are presented. First, whether the Limited Partners of Partnership may "tack" their holding period of Peapod Common Stock with their respective holding periods of Partnership interests? Second, whether shareholders in PI may tack their holding period of Peapod Common Stock with their respective holding periods of PI common stock?

Analysis

We request that you concur with our opinion that, for purposes of Rule 144 under the Act, the shareholders of PI and the Limited Partners of Partnership may tack their respective holding periods for such shares of PI (including their holding period for such shares prior to the formation of Partnership) and their holding periods for Partnership interests, onto their holding periods for the shares of Peapod received in the Conversion.

The Peapod Partnership Agreement from its inception expressly contemplated a conversion of the Partnership and expressly provided that the form of the conversion would be from a partnership to a corporation. Thus, investors in the Partnership understood and agreed at the time of their initial investment that the Partnership would likely be converted into a corporation and that such conversion did not require their consent. We believe that tacking should be permitted because the investors made their investment decision to acquire stock at the time they acquired units and have been at economic risk with respect to their respective investments from the time they acquired their interests in the Partnership.

We believe that the tacking issue and underlying facts presented here closely resemble those presented in Hygeia Sciences, Inc. ("Hygeia") (available March 13, 1986). In Hygeia, a corporation was formed in 1981. In 1984, when Hygeia Sciences, Inc. determined that the business required additional capital and that capital could best be raised by forming a limited partnership, the company formed a partnership and issued limited partnership interests for cash. At the time the partnership was formed, a written agreement contemplated that the partnership business might be transferred to a corporation at a future date. Later, when the business planned to make a public offering, the business of the limited partnership was transferred to a new corporation which was organized for that purpose. The limited partners exchanged their interests in the partnership for shares in the new corporation.

In Hygeia, the SEC staff (the "Staff") permitted tacking by the holders of limited partnership interests and shareholders of the predecessor corporation. The Staff noted that the original agreements expressly contemplated a conversion from a partnership to a corporation. Similarly, in the present situation, the original Peapod Partnership Agreement expressly contemplated a conversion into corporate form in anticipation of a potential public offering. In fact, the conversion rights granted to the General Partner in the Peapod Partnership Agreement was even stronger than those in Hygeia. In Hygeia the decision to form a new corporation was subject to a veto by the limited partners which could be exercised until a public offering by the new corporation. The Peapod Partnership Agreement did not give the Limited Partners any veto power over the conversion.

In Hygeia the shareholders of the predecessor corporation were permitted to tack their holding periods for shares of the predecessor corporation, including their holding periods for such shares prior to the formation of the partnership, onto their holding periods for shares in the newly formed corporation. We believe that the PI shareholders should similarly be allowed to tack their holding periods of PI common stock prior to the formation of the Partnership with their respective holding periods of Peapod Common Stock. As in Hygeia, the shareholders of PI did not experience a shift in the securities held by them at the time the Partnership was formed, and are ending up with corporate stock as a result of the transaction discussed above.

We are aware of the recent letter from the Staff addressed to MarkWest Hydrocarbon, Inc. ("MarkWest") (available March 25, 1997). However, MarkWest is distinguishable from both Hygeia and the present situation. In MarkWest, the original partnership agreement did not contemplate a conversion. It was only by amendment that a provision regarding a possible change of corporate structure was included. Moreover, the amendment to the partnership agreement merely stated in general terms that the "General Partner would have the sole discretion to determine the form of business entity through which the Partnership would be conducted." It did not specify a conversion into a corporation. Consequently, the partners in MarkWest did not at the time that they made their investment make a clear investment decision to acquire stock in a corporation and, consequently, bear the particular economic risk of a conversion into a corporation.

In summary, we believe that tacking under Rule 144 should be permitted in this instance since the Limited Partners and the shareholders of PI have been at economic risk with respect to the Peapod Common Stock from the time they made their original investments. They did not make a new investment decision at the time of the Conversion. We respectfully request a letter from the Staff concurring in the views set forth above.

Attached as Exhibit A is a copy of Section 13.11 of the limited partnership agreement dated April 30, 1992 (the "Peapod Partnership Agreement") among the General Partner and the Limited Partners which provides for the conversion of the Partnership into a corporation. Attached as Exhibit B is the a copy of Section 13.11 of the amended Peapod Partnership Agreement, dated April 4, 1996 which provides for the conversion of the Partnership into a corporation.

Pursuant to Release No. 33-6269 (December 5, 1980), we are enclosing seven additional copies of this request for the convenience of the Staff of the Division.

If you have any questions or require any additional information, please contact the undersigned at (312) 853-7137 or Christine A. Leahy at (312) 853-4168.

Very truly yours,

Sharon R. Flanagan

[STAFF REPLY LETTER]

November 10, 1997

RESPONSE OF THE OFFICE OF CHIEF COUNSEL
DIVISION OF CORPORATION FINANCE

Re: Peapod, Inc. ("Peapod")
Incoming letter dated November 5, 1997

Based on the facts presented, and particularly noting the nature of the agreements entered into by the Limited Partner (as defined in your letter) and the shareholders of PI (as defined in your letter) at the time of the formation of the Partnership (as defined in your letter), the Division is of the view that the Limited Partners may tack their holding periods for the Partnership interests, and the shareholders of PI may tack their holding periods for their PI shares, onto their holding periods for the shares of Peapod received in the Conversion (as defined in your letter). The staff also notes that both the Peapod Partnership Agreement (as defined in your letter), and the April 4, 1996 amendment thereto, expressly contemplate conversion from partnership to corporate form in advance of, and to facilitate, a public offering of securities by the new corporation.

This position is based on the representations made to the Division in your letter. Any different facts or conditions might require the Division to reach a different conclusion.

Sincerely,

Mark Kosterlitz
Special Counsel