<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1999
-----------------------------------------------
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period
from to
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Commission file number:
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HOOVER'S, INC.
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(Exact name of registrant as specified in its charter)
Delaware 74-2559474
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1033 La Posada Drive, Suite #250, Austin, Texas 78752
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(Address of principal executive offices) (Zip Code)
(512) 374-4500
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. /X/ Yes / / No
As of September 30, 1999, 12,166,838 shares of the registrant's common stock
were outstanding, net of 150,000 shares of Treasury Stock.
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PAGE
NUMBER
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PART I. FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited)
Balance Sheets at September 30, 1999 and March 31, 1999..... 3
Statements of Operations for the Three and Six months
ended September 30, 1999 and 1998......................... 4
Statements of Cash Flows for the Six months ended
September 30, 1999 and 1998............................... 5
Notes to Financial Statements............................... 6
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations............. 8
Item 3 Quantitative and Qualitative Disclosures About Market Risk.. 25
PART II. OTHER INFORMATION
Item 1 Legal Proceedings........................................... 26
Item 2 Changes in Securities and Use of Proceeds................... 26
Item 3 Defaults Upon Senior Securities............................. 26
Item 4 Submission of Matter to a Vote of Securities Holders........ 26
Item 5 Other Information........................................... 26
Item 6 Exhibits and Reports on Form 8-K............................ 26
</TABLE>
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HOOVER'S, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,1999 MARCH 31, 1999
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(UNAUDITED)
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ASSETS
Current assets:
Cash and cash equivalents....................................... $62,440,210 $7,814,434
Accounts receivable, less allowance for doubtful
accounts of $94,902 and $32,886 at September 30 and
March 31, 1999, respectively.................................. 1,249,652 866,103
Book inventory, less allowances for excess and
obsolete inventory of $95,738 and $78,025 at September 30
and March 31, 1999, respectively.............................. 46,784 83,513
Prepaid expenses and other current assets....................... 1,907,602 88,920
Total current assets.............................................. 65,644,248 8,852,970
Property, plant and equipment:
Computer and office equipment................................... 2,445,635 1,493,124
Equipment under capital lease................................... 147,028 147,028
Furniture and fixtures.......................................... 448,718 344,723
--------------------------------
3,041,381 1,984,875
Less accumulated depreciation................................... (1,376,661) (888,296)
--------------------------------
Total property, plant and equipment........................... 1,664,720 1,096,579
Other assets...................................................... 1,223,627 126,790
Total assets...................................................... $68,532,595 $10,076,339
================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and commissions................................ $3,997,201 $460,128
Accrued expenses................................................ 1,457,560 693,554
Current portion of long-term debt and capital leases............ 25,897 376,578
Deferred revenue................................................ 2,169,676 1,618,000
--------------------------------
Total current liabilities......................................... 7,650,334 3,148,260
Bank term loan, less current portion.............................. 0 97,628
Obligations under capital leases, less current portion............ 57,230 70,236
--------------------------------
Total liabilities................................................. 7,707,564 3,316,124
Stockholders' equity:
Common stock, $.01 par value, 150,000,000 shares
authorized 12,316,838 and 7,090,725 shares issued
at September 30 and March 31, 1999, respectively.............. 123,168 70,907
Additional paid-in capital...................................... 76,705,911 18,066,854
Unearned stock compensation..................................... (2,272,663) (2,763,999)
Accumulated deficit............................................. (13,581,385) (8,463,547)
Treasury stock at cost 150,000 shares........................... (150,000) (150,000)
--------------------------------
Total stockholders' equity........................................ 60,825,031 6,760,215
--------------------------------
Total liabilities and stockholders' equity........................ $68,532,595 $10,076,339
================================
</TABLE>
SEE ACCOMPANYING NOTES.
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HOOVER'S, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
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SEPTEMBER SEPTEMBER SEPTEMBER SEPTEMBER
30, 1999 30, 1998 30, 1999 30, 1998
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<S> <C> <C> <C> <C>
Revenues:
Online information sales................. $ 2,611,134 $ 1,585,939 $ 4,842,234 $ 2,813,899
Advertising, sponsorship, e-commerce..... 1,059,058 183,890 1,605,048 383,409
CD-ROM and print......................... 157,893 289,788 546,109 721,446
-----------------------------------------------------
Total revenues............................. 3,828,085 2,059,617 6,993,391 3,918,754
Provision for returns of print products.. (5,951) (45,479) (19,784) (74,067)
-----------------------------------------------------
Net revenues............................... 3,822,134 2,014,138 6,973,607 3,844,687
Cost of revenues......................... (1,666,481) (1,361,169) (3,103,209) (2,558,743)
-----------------------------------------------------
Gross profit............................... 2,155,653 652,969 3,870,398 1,285,944
Expenses:
Product development...................... 811,677 130,525 1,474,769 221,359
Sales and marketing...................... 3,233,869 526,184 4,550,267 1,052,687
General and administrative............... 1,528,266 927,410 2,687,222 1,696,491
Non-cash compensation.................... 479,448 0 958,896 0
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Total expenses............................. 6,053,260 1,584,119 9,671,154 2,970,537
Operating loss............................. (3,897,607) (931,150) (5,800,756) (1,684,593)
Interest income ........................... 592,989 42,133 696,207 86,168
Interest expense........................... (1,525) (14,871) (13,288) (23,519)
-----------------------------------------------------
Net loss................................... $(3,306,143) $ (903,888) $(5,117,837) $(1,621,944)
=====================================================
Basic and diluted net loss per share....... $ (0.29) $ (0.18) $ (0.55) $ (0.32)
=====================================================
Shares used in computation of basic and
diluted loss per share..................... 11,327,585 5,138,715 9,316,895 5,106,454
</TABLE>
SEE ACCOMPANYING NOTES.
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HOOVER'S, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
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<CAPTION>
SIX MONTHS ENDED
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SEPTEMBER 30, SEPTEMBER 30,
1999 1998
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OPERATING ACTIVITIES
Net loss................................................... $(5,117,837) $(1,621,944)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................ 687,742 146,717
Amortization of unearned stock compensation, net......... 958,896 -
Changes in operating assets and liabilities:
Accounts receivable................................... (383,548) 95,040
Inventories........................................... 36,729 92,671
Prepaid expenses and other current assets............. (1,968,485) 12,471
Accounts payable and commissions...................... 3,537,073 129,536
Accrued expenses...................................... 764,005 (79,179)
Deferred revenue...................................... 551,675 579,787
-----------------------------
Net cash used in operating activities...................... (933,750) (644,901)
INVESTING ACTIVITIES
Purchases of property, plant and equipment................. (1,056,507) (353,560)
-----------------------------
Net cash used in investing activities...................... (1,056,507) (353,560)
FINANCING ACTIVITIES
Payments on bank term loans................................ (447,628) 361,210
Payments on capital leases................................. (13,686) -
Proceeds from capital leases............................... - 14,423
Net proceeds from capital stock transactions............... 57,077,348 181,949
-----------------------------
Net cash provided (used) by financing activities........... 56,616,033 557,582
Increase (decrease) in cash and cash equivalents........... 54,625,776 (440,879)
Cash and cash equivalents at beginning of period........... 7,814,434 3,860,150
-----------------------------
Cash and cash equivalents at end of period................. $62,440,210 $ 3,419,270
=============================
</TABLE>
SEE ACCOMPANYING NOTES.
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HOOVER'S, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The interim financial statements as of and for the three and six month
periods September 30, 1999 and 1998 have been prepared by us pursuant to the
rules and regulations of the Securities and Exchange Commission (the SEC).
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. These statements are unaudited and, in the opinion of management,
include all adjustments (consisting of normal recurring adjustments and
accruals) necessary to present fairly the results for the periods presented.
The balance sheet at September 30, 1999, has been derived from the
unaudited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles. The results of operations for such periods are not necessarily
indicative of the results expected for a full year or for any future period.
For further information, refer to the financial statements and related
notes included in our Registration Statement on Form S-1.
2. CAPITAL STOCK AND STOCK PLANS
In June 1999, the stockholders approved an increase in authorized common
stock, allowing Hoover's to effect a two-for-one split of the common stock,
which was approved by the board of directors in May 1999. Also in June 1999,
the stockholders approved a .75-for-one reverse split of the common stock.
All share and per share amounts in the financial statements and accompanying
notes reflect both the stock split and the reverse stock split.
Of the stock options granted to employees during the three months ended
June 30, 1999, for 264,000 shares of common stock, 52,500 had exercise prices
below the deemed fair market value of the underlying shares of common stock
on the date of grant. As a result, Hoover's recorded unearned stock
compensation of $468,000 in April 1999. During the year ended March 31, 1999,
the company recorded $3.2 million of unearned stock compensation. $479,000
was amortized to non-cash compensation during each of the three months ended
June 30 and September 30, 1999. The remaining unearned compensation will be
recognized as non-cash compensation over the remaining vesting period of the
options of approximately four years.
On June 11, 1999, we sold 206,044 shares of common stock to NBC for $1.5
million. We also entered into a strategic agreement with NBC to license a
portion of our content for distribution and marketing by NBC, CNBC and
CNBC.com. We recorded deferred costs of approximately $1.2 million dollars in
connection with this transaction. This amount will be amortized over the
period covered by the strategic agreement. Also on June 11, 1999, we sold an
aggregate of 1,022,727 shares of common stock to Knowledge Net Holdings,
L.L.C., an indirect subsidiary of Knowledge Universe, Inc., and to Nextera
Enterprises, Inc., a company controlled by Knowledge Universe, for $7.4
million. We recorded this transaction as a $7.4 million addition to equity.
Knowledge Net Holdings has committed to purchase $2.0 million of services
from Hoover's, beginning in 1999, which may include advertising on our Web
site, sponsorship of feature or content areas of our Web site, licensing of
our company or industry information and/or enterprise subscriptions.
<PAGE>
In June 1999, in connection with our anticipated initial public offering
of our common stock, the stockholders approved the 1999 Employee Stock
Purchase Plan (the Stock Purchase Plan) and we reserved 150,000 shares of our
common stock. The Stock Purchase Plan allows our eligible employees to
purchase shares of common stock at a purchase price equal to 85% of the fair
market value of our common stock. In no event, however, may any participant
purchase more than 600 shares, nor may all participants in the aggregate
purchase more than 75,000 shares, on any one semi-annual purchase date. In
addition, the stockholders approved the 1999 Stock Option Plan (the Plan)
which is intended to serve as the successor plan to our previous stock option
plans. The Plan provides for discretionary option grants and stock issuances
to employees and non-employee board members and consultants, as well as
automatic option grants to non-employee board members. The Plan contains
provisions for salary investment and director fee option grant programs.
Initially, 2.9 million shares were reserved for issuance under this Plan.
During July 1999, we completed an initial public offering of 3,737,500
shares of our common stock, which yielded net proceeds of approximately $48
million.
3. BANK OBLIGATIONS
During the quarter ended September 30, 1999, we repaid in full the
outstanding balance on all bank loans.
4. RELATED PARTY TRANSACTIONS
We purchase certain information included in our databases from a
subsidiary of a stockholder. Hoover's paid approximately $75,000 and $38,000
during the three months ended September 30, 1999 and 1998, and $167,000 and
$77,000 during the six months ended September 30 1999 and 1998, respectively,
for this information. We had outstanding amounts payable of approximately
$45,000 and $14,000 at September 30, 1999 and 1998, respectively, to a vendor
who is also a stockholder.
We have a commitment from a stockholder to purchase from us at least
$2.0 million of advertising, subscriptions, sponsorships, content licensing
or other services from 1999 through September 30, 2001. For the quarter ended
September 30, 1999, we recognized $100,000 of advertising revenues and
$14,000 from content licensing fees pursuant to this agreement.
As part of our strategic agreement with NBC to license a portion of our
content for distribution and marketing by NBC, CNBC and CNBC.com, we are
amortizing $1.2 million in deferred costs. Included in sales and marketing
expenses for the three and six months ended September 30, 1999, is
amortization of $150,000 and $199,000 related to this agreement.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE
FINANCIAL STATEMENTS AND RELATED NOTES THERETO INCLUDED ELSEWHERE IN THIS
QUARTERLY REPORT ON FORM 10-Q. EXCEPT FOR THE HISTORICAL FINANCIAL
INFORMATION CONTAINED HEREIN, THE MATTERS DISCUSSED IN THIS QUARTERLY REPORT
ON FORM 10-Q MAY BE CONSIDERED "FORWARD-LOOKING" STATEMENTS WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION
21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SUCH STATEMENTS
INCLUDE DECLARATIONS REGARDING THE INTENT, BELIEF OR CURRENT EXPECTATIONS OF
HOOVER'S AND ITS MANAGEMENT AND MAY BE SIGNIFIED BY THE WORDS "EXPECTS,"
"ANTICIPATES," "INTENDS," "BELIEVES," OR SIMILAR LANGUAGE. PROSPECTIVE
INVESTORS ARE CAUTIONED THAT ANY SUCH FORWARD-LOOKING STATEMENTS ARE NOT
GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE A NUMBER OF RISKS AND
UNCERTAINTIES. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE INDICATED BY
SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO
SUCH DIFFERENCES INCLUDE THOSE DISCUSSED BELOW, AS WELL AS THOSE DISCUSSED IN
THE HOOVER'S PROSPECTUS DATED JULY 20, 1999.
OVERVIEW
Hoover's is an Internet provider of business information designed to
meet the diverse needs of business organizations, businesspeople and
investment professionals worldwide. We were incorporated in 1990 as The
Reference Press, Inc., and our staff of writers and editors created and
published reference and trade books containing our proprietary information on
companies and industries. Recognizing that our company and industry profiles
would be important resources for online and emerging Internet users, we
licensed our database for distribution on America Online in 1993 and launched
Hoover's Online in 1995. As the Internet has become widely accepted, we have
shifted our focus from publishing only company and industry information in
traditional print media to providing high-quality, low-cost business
information via the Internet.
We have recently expanded Hoover's Online. We have added in-depth
business news, professional and career development information, personal
finance resources, business travel information, and a directory of more than
15,000 best-of-their-kind Web-based business resource links. In order to
increase the frequency of visits to the site, we have added a service that
allows visitors to receive customized e-mail alerts to news on topics that
they have designated. We have also added a portfolio feature that allows our
customers to track companies of interest to them. Our proprietary database
now contains information on more than 300 industries and approximately 15,000
public and private enterprises worldwide. In addition, we have expanded our
coverage by licensing additional company information bringing our total
coverage to more than 50,000 enterprises. Our proprietary database contains
increasing information on non-US companies and we maintain a related Web
site, Hoovers Online - UK, to meet the needs of non-US customers. We also
distribute some of our information through wireless devices.
Our revenues are derived from online information sales, consisting of
individual and enterprise subscriptions and licenses of our editorial
content; advertising, sponsorship and e-commerce; and sales of our company
information on CD-ROM and in print.
ONLINE INFORMATION SALES
<PAGE>
We derive revenues from individual and enterprise subscriptions.
Individual subscriptions are currently sold directly on our Web site for
$14.95 per month or $109.95 per year. We periodically offer pricing discounts
and promotions to new subscribers in order to introduce our product and
services. These offers usually run for a short duration. We also offer annual
enterprise subscriptions ranging from $1,500 for 10 seats to $30,000 for
1,000 seats per year. In addition, larger enterprise subscriptions are sold
using a negotiated price, based on the number of seats. We recognize
subscription revenues on a monthly basis, and we record annual individual and
enterprise subscriptions as deferred revenues which are amortized into
revenues over the term of the subscription. We also currently derive revenues
by licensing portions of our database for re-distribution through customized
data feeds to online services. Our licensing fees vary depending on factors
such as the number of users and the amount of proprietary content licensed.
Licensing agreements may be structured as fixed monthly fees or negotiated
revenue sharing. We have migrated several of these arrangements away from
licensing contracts to Hoover's Online enterprise subscriptions in order to
be consistent with our goal of providing the highest level of service to the
end user.
ADVERTISING, SPONSORSHIPS AND E-COMMERCE
We derive revenues from the sale of banner and button advertisements,
sponsorships, and e-commerce on our Web site. Advertisement and sponsorship
prices are based on a price per thousand impressions or a fixed monthly fee.
Revenues are recognized as the impressions are delivered or ratably over the
contract period, provided that no significant obligations remain. We also
derive e-commerce revenues from advertisers and other partners who pay either
a fee per transaction or a percentage of sales generated directly from their
advertisement on our Web site or from their special sponsorship of an area
within our Web site.
CD-ROM AND PRINT SALES
We sell CD-ROMs and print products containing company information. We
recognize these revenues when the goods are shipped. For our sale of CD-ROMs
and print products, we provide an allowance for returns when the products are
shipped.
COSTS AND EXPENSES
Our cost of revenues includes editorial personnel costs, expenses
associated with licensing of third-party content, direct expenses associated
with our Web site, such as hosting, and other service fees and commissions
paid to advertising agencies. Our product development expenses include
technology personnel costs and related consulting fees. Sales and marketing
expenses include sales and marketing personnel costs, including commissions,
as well as all marketing, advertising and promotional expenses. General and
administrative expenses consist of compensation for administrative and
executive staff, which we consider to be finance, project management, office
network and human resource personnel, as well as fees for professional
services, travel, depreciation and general office expenses.
RESULTS OF OPERATIONS
The following table sets forth, for the periods illustrated, certain
statement of operations data expressed as a percentage of total revenues:
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<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
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Revenues:
Online information sales....... 68% 77% 69% 72%
Advertising, sponsorships,
e-commerce..................... 28% 9% 23% 10%
CD-ROM and print............... 4% 14% 8% 18%
Total revenues.................... 100% 100% 100% 100%
Provision for returns of
print products.............. - 2% - 2%
Net revenues...................... 100% 98% 100% 98%
Cost of revenues............... 44% 66% 45% 65%
Gross profit...................... 56% 32% 55% 33%
Expenses:
Product development............ 21% 6% 21% 6%
Sales and marketing............ 84% 26% 65% 27%
General and administrative..... 40% 45% 38% 43%
Non-cash compensation.......... 13% - 14% -
Total expenses.................... 158% 77% 138% 76%
Operating loss.................... (102%) (45%) (83%) (43%)
Interest income................... 16% 2% 10% 2%
Interest expense.................. - (1%) - -
Net loss.......................... (86%) (44%) (73%) (41%)
</TABLE>
REVENUES. Total revenues for the three months ended September 30, 1999,
increased 86% to $3.8 million from $2 million for the three months ended
September 30, 1998. Total revenues for the six months ended September 30,
1999, increased 78% to $7.0 million from $3.9 million for the comparable
six-month period in the prior year.
Our online information sales increased 65% to $2.6 million for the three
months ended September 30, 1999, from $1.6 million for the comparable quarter
one year ago. Consistent increases were seen in the six-month period with
online information sales increasing 72% to $4.8 million from $2.8 million for
the comparable six-month period in the prior year. Revenues from Internet
subscribers increased 80% to $2 million from $1.1 million for the three
months ended September 30, 1998, and 90% to $3.8 million from $2.0 million
for the six-month period ended September 30, 1999, due to the increase in the
number of individual and enterprise subscribers. Total subscribers grew 122%
to 141,000 as of September 30, 1999, from approximately 65,000 as of
September 30, 1998. The growth in the number of individual subscribers, to
35,500 as of September 30, 1999, from 24,000 as of September 30, 1998, was
primarily due to increased traffic to our Web site. The growth from 31,000
individual subscribers as of June 30, 1999, was primarily due to increased
traffic and a special promotion offered for former subscribers to Microsoft
Investor. For the three months ended September 30, 1999, Hoover's Online
attracted approximately 2 million unique visitors, who accounted for
approximately 49 million page views, compared to 1.4 million unique visitors
and 20 million page views during the three months ended September 30, 1998.
Sales leads provided by the additional traffic to our Web site and our
increased number of salespeople contributed to the increase in new enterprise
subscription accounts. As of
<PAGE>
September 30, 1999, we had more than 1,900 enterprise accounts, representing
an estimated 105,500 seats, compared to 872 enterprise accounts, representing
an estimated 40,000 seats, as of September 30, 1998.
Licensing revenues increased 29% to $612,000 for the three months ended
September 30, 1999, from $475,000 for the three months ended September 30,
1998, due to higher royalty payments from licensees. For the six-month period
ended September 30, 1999, licensing revenues increased 30% to $1.1 million
from $827,000 in the same period one year ago. Royalty payments are based on
use of Hoover's content or other revenue-sharing arrangements. We expect that
over time our customers will access our products primarily through Hoover's
Online and therefore our licensing arrangements with third-party proprietary
and Web services may decline as a percentage of our total revenues and in
absolute dollars.
Revenues from advertising, sponsorships and e-commerce increased 476% to
$1.1 million for the three months ended September 30, 1999, from $184,000 for
the three months ended September 30, 1998. For the six months ended September
30, 1999, revenues in this category increased 319% to $1,6 million from
$383,000 for the six months ended September 30, 1998. The increased number of
page views, the redesign of Hoover's Online, and new advertising sales
personnel contributed to the increase.
Revenues from CD-ROM and print products decreased 46% to $158,000 for
the three months ended September 30, 1999, from $290,000 for the comparable
quarter one year ago. Revenues in this area for the six months ended
September 30, 1999, decreased 24% to $546,000 from $721,000 for the six
months ended September 30, 1998. Decreases were due to a reduced emphasis in
this area and a migration to our Web-based product.
COST OF REVENUES. Cost of revenues for the three months ended September
30, 1999 increased 22% to $1.7 million from $1.4 million in the three months
ended September 30, 1998. Cost of revenues for the six months ended September
30, 1999, increased 21% to $3.1 million from $2.6 million for the same period
in the prior year. The increase in cost of revenues was primarily due to an
increase in compensation for existing and new editorial personnel, as well as
increases in expenses associated with third-party content. As a percentage of
revenues, cost of revenues for the three months ended September 30, 1999 was
lower, at 44% of revenues compared to 66% in the comparable quarter one year
ago. This decrease occurred primarily because the editorial costs associated
with creation and maintenance of the company database are relatively fixed
without regard to the level of revenues.
PRODUCT DEVELOPMENT. Product development expenses for the three months
ended September 30, 1999, increased more than 522% to $812,000 from $131,000
in the three months ended September 30, 1998. Product development expenses
for the six months ended September 30, 1999, increased 566% to $1.5 million
from $221,000 for the same period in the prior year. This increase was due to
the hiring of additional programmers and analysts, and to increased amounts
paid to outside consultants and designers. We increased our personnel and
consulting costs in order to plan for, implement and maintain our technology
upgrades and the expansion of Hoover's Online, The Business Network. We
expect that we will continue to incur product development costs although at
lower levels for the remainder of our fiscal year.
SALES AND MARKETING. Sales and marketing expenses for the three months
ended September 30, 1999, increased 515% to $3.2 million from $526,000 for
the three months ended September 30, 1998. Sales and marketing expenses for
the six months ended September 30, 1999, increased 332% to $4.6 million from
$1 million for the same period in the prior year. The increase in sales and
marketing expenses was due primarily to the launch of our national media
<PAGE>
advertising campaign, an increase in the number of enterprise and advertising
sales representatives, and an increase in the number of marketing and
business development personnel. We expect that sales and marketing expenses
will continue to grow for the remainder of our fiscal year.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the
three months ended September 30, 1999, increased 65% to $1.5 million from
$927,000 for the three months ended September 30, 1998. General and
administrative expenses for the six months ended September 30, 1999,
increased 58% to $2.7 million from $1.7 million for the same period in the
prior year. The increase was primarily due to an increase in fees for
professional services and travel, and an increase in salaries of existing
executive and administrative staff, as well as to the addition of
administrative and finance personnel. General office expenses increased due
to facility expansion, both in Austin and New York, and credit card
processing fees increased due to a higher number of individual subscription
payments. Depreciation increased due to an increase in capital expenditures.
INTEREST INCOME AND EXPENSE. Interest income for the three months ended
September 30, 1999, increased 1307% to $593,000 from $42,000 for the three
months ended September 30, 1998. Interest income for the six months ended
September 30, 1999 increased 708% to $696,000 from $86,000 for the same
period in the prior year. The increase was due to our increased cash
position. We received net cash proceeds of $48 million from the Company's
initial public offering in July 1999, as well as $9 million in proceeds
received upon our sale of common stock to NBC, Knowledge Net Holdings and
Nextera in June 1999. Interest expense decreased to $1,500 and $13,000 in the
three and six months ended September 30, 1999, from $15,000 and $24,000 in
the three and six months ended September 30, 1998, due to our decreased bank
debt.
TAXES. We have incurred significant operating losses for all periods
from inception (February 1990) through September 30, 1999. We have recorded a
valuation allowance for 100% of our net deferred tax assets because our
historical operating results indicate it is more likely than not that the net
deferred tax assets will not be realized because of uncertainties regarding
our ability to generate sufficient taxable income during the carryforward
period to utilize the net operating loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
We used $934,000 net cash in operating activities during the six months
ended September 30, 1999, compared to $645,000 in the comparable quarter one
year ago. Net cash used in operating activities resulted from net operating
losses partially offset by increases in deferred revenues, accrued expenses
and accounts payable.
During the six months ended September 30, 1999, we invested $1,057,000
net cash primarily related to purchases of computer equipment and payments
for software licenses. This compared to $353,000 in during the six months
ended September 30, 1998.
As of September 30, 1999, we had $62.4 million of cash and cash
equivalents. Our principal commitments at September 30, 1999, consisted of
obligations under capital leases. Our accounts payable balance as of
September 30, 1999, was $4 million that consisted of short-term accounts, due
within 30 days, and commissions due to employees.
We may in the future pursue additional acquisitions of businesses,
products and technologies or enter into joint-venture arrangements that could
complement or expand our
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business. Any material acquisition or joint venture could result in a
decrease to our working capital, depending on the amount, timing and nature
of the consideration to be paid.
We believe that our existing cash and cash equivalents will be
sufficient to meet our anticipated cash requirements for working capital and
capital expenditures for at least the next 12 months. Beyond the next 12
months, our significant commitments consist of repayment of lease commitments
for facilities and telephone equipment. We also intend to invest in sales and
marketing promotions and continue to build an infrastructure to meet the
needs of a public company. Although we currently expect to meet the cash
requirements of such commitments, expenditures and ongoing operating expenses
from working capital, in order to meet our long-term liquidity needs, we may
need to raise additional funds, seek an additional credit facility or seek
other financing arrangements.
YEAR 2000 READINESS DISCLOSURE
Many existing computer programs use only two digits to identify a year.
These programs were designed and developed without addressing the impact of
the upcoming change in the century. If not corrected, many computer software
applications could fail or create erroneous results by, at or beyond the year
2000. We use software, computer technology and other services internally
developed and provided by third-party vendors that may fail due to the year
2000. We are dependent on telecommunications vendors to maintain our network.
In addition, we are dependent on financial and other information provided
electronically by our vendors and partners, as well as on general research
information obtained electronically. We are also dependent on financial
institutions involved in the processing of our customers' credit card
payments for subscriptions and other products and on a third party that hosts
our servers.
Over the last year we have planned and implemented a year 2000
compliance project to assess the readiness of internally-developed and
third-party software, content, and business systems.
We have completed a year 2000 compliance review of our internally
developed proprietary software. This review has included testing to determine
how our systems will function at and beyond the year 2000. Since inception,
we have internally developed substantially all of the systems for the
operation of our Web site. These systems include the software used to provide
our Web site's search, customer interaction, and transaction-processing and
distribution functions, as well as monitoring and back-up capabilities. Based
on our assessment to date, we believe that our internally developed
proprietary software is year 2000 compliant.
We have completed a year 2000 compliance review of our content
publishing system and our significant content partners. Based on our
assessment of their data and our publishing processes, we believe that our
internally-developed database and the data provided to us from third parties
is year 2000 compliant.
We have assessed the year 2000 readiness of our third-party supplied
software, hosting service, computer technology and other services, which
include software for use in our accounting, database and security systems.
The failure of such software or systems to be year 2000 compliant could have
a material impact on our corporate accounting functions and the operation of
our Web site. We are dependent on these third-party suppliers to correct any
year 2000 compliance problems, which exposes us to certain risks. As part of
the assessment of the year 2000 compliance of these systems, we have sought
assurances from these vendors that their software, computer technology and
other services are year 2000 compliant. Based on our
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assessment and testing of these products and services, as well as the
assurances obtained, we believe that our third-party supplied software,
computer technology and other services are year 2000 compliant.
Based on the results of this assessment, we have developed and
implemented a remediation plan with respect to third-party software,
third-party vendors and computer technology and services that failed to be
year 2000 compliant. The expenses associated with this assessment and
remediation were not material and therefore, we did not develop a budget for
these expenses. The failure of our software and computer systems and of our
third-party suppliers to be year 2000 compliant would have a material adverse
effect on us.
We have completed an assessment of our Web site's hardware and software
to determine year 2000 compliance. All software and systems were categorized
as either compliant or non-compliant. We assessed each non-compliant issue to
determine how to correct for year 2000 readiness. Non-compliant software and
systems have been or are expected to be corrected by the installation of a
patch or the purchase and implementation of new software or equipment during
the remainder of the calendar year.
The year 2000 readiness of the general infrastructure necessary to
support our operations is difficult to assess. For instance, we depend on the
integrity and stability of the Internet to provide our services. We also
depend on the year 2000 compliance of the computer systems and financial
services used by consumers and businesses. Thus, the infrastructure necessary
to support our operations consists of a network of computers and
telecommunications systems located throughout the world and operated by
numerous unrelated entities and individuals, none of which has the ability to
control or manage the year 2000 issues that may impact the entire
infrastructure. Our ability to assess the reliability of this infrastructure
is limited and relies solely on generally available news reports, surveys and
comparable industry data. A significant disruption in the ability of
consumers to reliably access the Internet or portions of it or to use their
credit cards would have an adverse effect on demand for our services and
would have a material adverse effect on us.
We have funded our year 2000 assessment activities from available
working capital and have not separately accounted for these costs in the
past. These costs have not been material to date.
At this time, we have not yet developed a contingency plan to address
situations that may result if we or our vendors are unable to achieve year
2000 compliance because we currently do not believe that such a plan is
necessary. The cost of developing and implementing such a plan, if necessary,
could be material. Any failure of our material systems, our vendors' material
systems or the Internet to be year 2000 compliant could have a material
adverse consequence for us. Such consequences could include difficulties in
operating our Web site effectively or conducting other fundamental parts of
our business.
RISKS RELATED TO OUR BUSINESS
WE HAVE A HISTORY OF LOSSES AND EXPECT FUTURE LOSSES.
We incurred net losses for each of the previous fiscal years and $5.1
million for the six months ended September 30, 1999. At September 30, 1999,
we had an accumulated deficit of $13.6 million. We expect operating losses
and negative cash flow to continue for the foreseeable future as we continue
to incur significant operating expenses and to make investments to enhance
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Hoover's Online. We intend to continue our marketing and promotional spending
to increase our audience. We may never generate sufficient revenues to
achieve profitability. Even if we do achieve profitability, we may not
sustain or increase profitability on a quarterly or annual basis in the
future.
OUR BUSINESS IS SUBJECT TO QUARTERLY FLUCTUATIONS IN OPERATING RESULTS WHICH
MAY NEGATIVELY IMPACT THE PRICE OF OUR STOCK.
Our quarterly operating results may fluctuate significantly in the
future due to a variety of factors. These include the following factors,
which are generally outside of our control:
- seasonal trends relating to subscriber usage of our services;
- the demand for Internet advertising and seasonal trends relating to
Internet advertising spending;
- the extent to which we experience increased competition in the
markets for Internet services and advertising; and
- economic conditions specific to the Internet, as well as general
economic and market conditions.
Other factors which cause our quarterly operating results to fluctuate
significantly, which are at least partially under our control, include:
- the rate of subscriber acquisitions;
- the timing and effectiveness of our marketing efforts to acquire
visitors and subscribers and to promote our brand;
- the timing and effectiveness of any co-branding arrangements or
other strategic alliances into which we enter;
- expenses related to upgrading our computer systems and related
infrastructure; and
- changes in our operating expenses.
In addition, our operating expenses are based on our expectations of our
future revenues, some of which are relatively fixed in the short term. We may
be unable to reduce our expenses quickly enough to offset any unexpected
revenue shortfall, which could have a material adverse effect on our
business, operating results and financial condition.
Due to all of the foregoing factors and the other risks discussed in
this section, quarter-to-quarter comparisons of our operating results as an
indication of future performance may not be appropriate. It is possible that
in some future periods our quarterly operating results may fall below the
expectations of public market analysts and investors. In this event, the
price of our common stock is likely to fall.
SEASONAL TRENDS IN OUR ADVERTISING REVENUES MAY CAUSE VOLATILITY IN OUR STOCK
PRICE.
We have experienced seasonal trends in our traffic and advertising
revenues. We believe that advertising sales in traditional media, such as
television and radio, are generally lower in the
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first and third quarters of each calendar year. Moreover, traffic on Hoover's
Online and the Web sites of others with whom we license or co-brand our
products is lower during the summer and year-end vacation and holiday periods
when business usage of the Internet and Hoover's Online typically declines.
Subscriber growth may decline during low traffic periods. Our operating
results may be affected if we experience seasonality in future periods.
OUR FAILURE TO SIGNIFICANTLY INCREASE THE NUMBER OF OUR SUBSCRIBERS OR RETAIN
OUR CURRENT SUBSCRIBERS WOULD ADVERSELY AFFECT OUR BUSINESS.
Our future success is highly dependent on attracting Internet users who
are willing to subscribe to online business information services. We believe
that marketing relationships, direct marketing, advertising, public relations
campaigns and offering new and enhanced content and services help attract
visitors and subscribers. We have launched a national advertising and
marketing campaign and have an estimated total campaign cost for the current
fiscal year of approximately $10 million. We have currently spent
approximately 30% of this estimated amount. On a percentage basis, we do not
believe that our increased marketing expense has or will lead to an
equivalent percentage increase in visitors and subscribers due to the large
component of brand awareness. In addition, the number of Internet users
willing to pay for online business information may not continue to increase.
If the market for subscription-based online business information develops
more slowly than we expect, or if our efforts to attract new subscribers are
not successful or cost-effective, our operating results and financial
condition may be materially and adversely affected.
We also believe that our long-term success depends largely on our
ability to retain our existing subscribers. We continue to invest significant
resources in our network infrastructure and customer and technical support
capabilities to provide high levels of customer service. We cannot be certain
that these investments will maintain or improve subscriber retention. In
addition, as Internet subscribers are offered competing information products
and services they may discontinue or limit their use of our Web site. Any
loss of significant numbers of subscribers would have a material adverse
effect on our business, operating results and financial condition.
WE ARE DEVELOPING AND ENHANCING OUR SERVICES AND FEATURES THAT MAY NOT BE
ATTRACTIVE TO OUR EXISTING AUDIENCE AND MAY NOT INCREASE OUR AUDIENCE.
We have recently expanded the content, services and features offered on
Hoover's Online by developing online resource centers in areas such as
professional development, business travel, in-depth business news, and
personal finance, and directories of business links. Management will continue
to spend a significant amount of time developing these and other potentially
new online resource centers. We intend to use our marketing activities in
order to publicize our new and enhanced offerings and to attract new visitors
to Hoover's Online. We may not attract sponsors that provide compelling
content or products for our online resource centers. Furthermore, the
increase in marketing expenditures and activities may not continue to attract
additional visitors or may fail to attract visitors who enjoy our content and
service offerings. Our business, operating results and financial condition
will be adversely affected if we experience difficulties in introducing new
and enhanced services or if these services are not accepted by new or
existing visitors.
OUR BUSINESS INFORMATION AND SERVICES MAY NOT ATTRACT AN AUDIENCE WITH
DEMOGRAPHIC CHARACTERISTICS DESIRABLE TO OUR ADVERTISERS.
Our future success depends on our ability to deliver compelling business
information and
<PAGE>
services that will attract an audience with demographic characteristics
valuable to our advertisers. If we are unable to continue to develop business
information and services that attract an audience desirable to advertisers,
it could have a material adverse effect on our business, operating results
and financial condition.
OUR FAILURE TO SUCCESSFULLY DEVELOP OUR ADVERTISING SALES FORCE COULD REDUCE OUR
ADVERTISING REVENUES OR LIMIT THE GROWTH OF OUR ADVERTISING REVENUES.
Currently, we are developing and expanding our internal advertising
sales force. Our business would be adversely affected if we do not develop
and maintain an effective advertising sales force. We depend on our sales
force to sell advertising and sponsorships on Hoover's Online. This involves
a number of risks, including:
- we may not be able to hire, retain, integrate and motivate
additional advertising sales personnel in light of intense competition
from other companies;
- new advertising sales personnel generally require a significant
amount of time to become productive; and
- our advertising sales force has only recently begun selling
sponsorships.
FAILURE TO PROVIDE A SUCCESSFUL ONLINE ADVERTISING ENVIRONMENT WOULD ADVERSELY
AFFECT OUR BUSINESS.
If advertisers perceive the Internet in general or Hoover's Online in
particular to be a limited or ineffective advertising medium, they may be
reluctant to advertise online or on our Web site. We compete with other Web
sites, television, radio and print media for a share of advertisers' total
advertising budgets. Unlike traditional advertising media, no standards have
been widely accepted to measure the effectiveness of advertising on the
Internet. If widely accepted standards do not emerge, existing advertisers
may discontinue or decrease their Internet advertising. If standards emerge
and we are unable to offer advertisers effective advertising options as
measured by the standards, advertisers may not continue advertising on our
Web site. Furthermore, advertisers that have traditionally relied upon other
advertising media may be reluctant to advertise on the Internet. Our
business, operating results and financial condition would be materially and
adversely affected if the market for Internet advertising declines or
develops more slowly than expected.
Different pricing models are used to sell advertising on the Internet.
Prevalent pricing models consist of cost per click through, cost per thousand
impressions, cost per placement and e-commerce or transaction share. If our
base audience decreases, we will have to charge lower advertising rates for
those transactions utilizing cost per thousand impressions. Cost per
placement is a relatively new model and advertisers may not accept it. The
e-commerce or transaction share model is based on revenue sharing. Therefore,
if we don't attract a sufficiently large audience willing to purchase from
our advertisers, our revenues generated from advertisements sold under this
model will decrease.
It is difficult to predict which advertising pricing models, if any,
will emerge as industry standards. This uncertainty makes it difficult to
project our future advertising rates and revenues. We cannot assure you that
we will be successful under alternative pricing models that may emerge.
Moreover, software programs that limit or prevent advertising from being
delivered to an Internet user's computer are available. Widespread adoption
of this software could materially
<PAGE>
adversely affect the commercial viability of Internet advertising, which
could materially adversely affect our advertising revenues.
IF WE ARE NOT SUCCESSFUL IN INCREASING BRAND AWARENESS OF, AND TRAFFIC TO,
HOOVER'S ONLINE, OUR BUSINESS WOULD BE MATERIALLY AND ADVERSELY AFFECTED.
The future success of Hoover's Online will depend, in part, on our
ability to increase our brand awareness. In order to build brand awareness
and increase traffic to Hoover's Online, we must succeed in our marketing
efforts and provide high-quality services. As part of our brand-building
efforts, we have substantially increased our marketing budget, and have
developed and launched a national advertising campaign which, over a full
year, will cost approximately $10 million. Our ability to increase
advertising and subscription revenues from Hoover's Online will depend in
part on the success of this marketing campaign and our ability to increase
the number of visitors and subscribers to our Web site. If our marketing
efforts are unsuccessful or if we cannot increase our brand awareness and
traffic to our Web site, our business, operating results and financial
condition would be materially and adversely affected.
INCREASED COMPETITION COULD MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS.
Many Web sites compete for the attention and spending of businesspeople
and advertisers, particularly in the business information area. We expect
this competition to continue to increase. We compete for subscribers,
visitors advertisers, and content providers with many types of companies,
such as:
- subscription-based Web sites focused on business, such as The Wall
Street Journal Interactive Edition;
- providers of company information, such as Dun & Bradstreet, Market
Guide and Standard & Poor's;
- providers of proprietary business information, such as Bloomberg
Business News, Dow Jones Reuters Business Interactive, LLC;
- business information aggregators, such as Dialog, LEXIS-NEXIS and
OneSource;
- consumer-oriented Web sites, such as Excite and Lycos; and
- other Web sites with a business orientation or a business channel.
We also compete with a number of organizations with which we have other
business relationships, including LEXIS-NEXIS, Bloomberg, Microsoft and
America Online. We form strategic relationships with these organizations in
order to increase the size of our audience by introducing Hoover's Online to
a greater number of people. Hoover's information is valued by these
organizations and is licensed to them. If these entities view us as a
substantial competitive threat, they may not renew any strategic relationship
agreements currently in place and our audience may decrease.
Some of our existing competitors, as well as a number of potential new
competitors, have longer operating histories, greater name recognition,
larger customer bases and significantly
<PAGE>
greater financial, technical and marketing resources than we do. This may
allow them to devote greater resources than we can to the development and
promotion of their services. These competitors may also undertake more
far-reaching marketing campaigns, adopt more aggressive pricing policies,
including offering their business information for free, and make more
attractive offers to existing and potential new employees, businesses with
whom we have strategic relationships and advertisers. Our competitors may
develop content that is equal or superior to ours or that achieves greater
market acceptance than ours. It is also possible that new competitors may
emerge and rapidly acquire significant market share.
We believe that the Internet industry has seen, and will continue to
see, significant merger and acquisition activity. Some of our competitors may
make strategic acquisitions or establish cooperative relationships among
themselves or with third parties to increase their ability to rapidly gain
market share. If we do not reach critical mass, or do not achieve significant
market share, our ability to compete in a consolidating market could be
negatively impacted.
As a result of these factors, we may not be able to compete successfully
for advertisers, visitors or staff, which could materially adversely affect
our business, operating results and financial condition. Increased
competition could result in price reductions, reduced margins or loss of
market share, any of which could materially adversely affect our business,
operating results and financial condition.
OUR FUTURE SUCCESS DEPENDS ON OUR EDITORIAL STAFF.
We depend upon the efforts of our writers, researchers and other
editorial staff to produce original, timely, comprehensive and trustworthy
content. Competition for these personnel is intense, and we may not be able
to retain existing or attract additional highly qualified staff in the
future. If we lose the services of a significant number of our editorial
staff or are unable to continue to attract additional qualified staff, our
business, operating results and financial condition could be materially
adversely affected.
RAPID GROWTH IN OUR FUTURE OPERATIONS COULD CONTINUE TO STRAIN OUR MANAGERIAL,
OPERATIONAL AND FINANCIAL RESOURCES.
We have experienced rapid growth in our operations. We expect that the
number of our employees will continue to increase for the foreseeable future.
This rapid growth has placed, and any additional growth will continue to
place, a significant strain on our managerial, operational and financial
resources. As a result, we will need to continue to improve our operational
and financial systems and managerial controls and procedures. Our future
success will also depend on our ability to expand, train and manage our
workforce, in particular our sales and marketing organization. We will also
have to maintain close coordination among our technical, accounting, finance,
marketing, sales and editorial personnel. If we are unable to accomplish any
of these objectives, our business, operating results and financial condition
could be materially adversely affected.
WE ARE DEPENDENT ON OUR STRATEGIC RELATIONSHIPS AND OUR BUSINESS WOULD BE
MATERIALLY ADVERSELY AFFECTED IF WE WERE TO LOSE OUR EXISTING RELATIONSHIPS OR
FAIL TO GAIN ADDITIONAL STRATEGIC RELATIONSHIPS.
We depend on the following strategic relationships:
- CONTENT PROVIDERS. A number of organizations provide us with
content that we
<PAGE>
integrate into our products. If our relationships with these content
providers were terminated, we would have to eliminate their information
from our products and services. We may also need to locate alternate
content providers and integrate their information into our products and
services. Extracting previously integrated information, locating a new
provider and integrating their information may take time and may
interrupt the provision of affected services. We cannot assure that we
would be able to replace the content we currently receive from our
content providers in a timely manner.
- MARKETING RELATIONSHIPS. We have various marketing relationships
with other Web sites pursuant to which they display our content and logo
and provide a link back to Hoover's Online. The success of some
marketing relationships depends on the amount of increased viewer
traffic we receive from that organization's Web site. These
relationships may not generate the number of new viewers that we expect.
Termination of our marketing relationships may decrease the number of
visitors to our Web site and may adversely affect our revenues.
- SPONSORS. To facilitate the expansion of our services and
features, we have obtained sponsors for resource centers on Hoover's
Online. Sponsors may provide content and/or advertising for the resource
center. In return, sponsors would receive the opportunity to interact
with visitors to the resource center. The success of our sponsorship
relationships depends on the quality of the content and products that
the sponsors and we provide. If we fail to attract and retain sponsors
for our online resource centers or if our sponsors fail to provide
content and products attractive to our audience, we may lose subscribers
and our audience may be reduced.
- LICENSEES. We license our proprietary information to a number of
organizations. If any of these licensees were to terminate their
agreements with us, we might experience a decrease in our revenues. We
may choose not to license our content to distributors or renew existing
agreements in an effort to gain new direct customers to Hoover's Online.
This strategy may result in more revenue lost from the license fees,
which may not be offset, by other revenues.
ACQUISITIONS MAY DISRUPT OR OTHERWISE HAVE A NEGATIVE IMPACT ON OUR BUSINESS.
We plan to acquire or make investments in complementary businesses,
products and technologies. Future acquisitions and investments are subject to
the following risks:
- acquisitions may cause a disruption in our ongoing business,
distract our management and make it difficult to maintain our standards,
controls and procedures;
- we may not be able to integrate successfully the services, content,
products and personnel of any acquisition into our operations;
- we may be required to incur debt or issue debt or equity
securities, which may be dilutive to existing stockholders, to pay for
acquisitions. We also may be required to assume debt or contingent
liabilities, amortize goodwill and other intangibles or write-off
in-process research and development and other acquisition-related
expenses; and
- we may not derive the intended benefits of any acquisition and we
may lose our entire investment.
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EXPANSION INTO NON-U.S. MARKETS MAY BE DIFFICULT.
The growth of the Internet outside of the United States has and may
continue to progress at a slower rate and may not be adopted by business
people outside the United States. Impact of language and other cultural
differences could result in a product offering that is not accepted and may
not be financially successful.
WE MAY EXPERIENCE CAPACITY CONSTRAINTS OR SYSTEM FAILURES THAT COULD DAMAGE
OUR BUSINESS.
If our systems cannot be expanded to cope with increased demand or fail
to perform effectively, we could experience:
- disruptions in service;
- slower response times;
- reduced customer satisfaction; or
- delays in the introduction of new products and services,
any of which could impair our reputation, damage the Hoover's brand and
materially adversely affect our business, operating results and financial
condition.
Our ability to provide high-quality customer service also depends on the
efficient and uninterrupted operation of our computer and communications
hardware systems. Hoover's Online experienced one major interruption due to a
power outage in Austin, Texas, in September 1997. As a result of this
interruption, our servers were inaccessible beginning from the moment the
back-up generators of our hosting facility expired until power was restored.
We have also experienced minor interruptions due to software bugs and
upgrades and disk drive failures. These minor interruptions temporarily
limited the capacity of our current technology infrastructure and resulted in
increased calls to our customer service personnel. Our systems and operations
also are vulnerable to damage or interruption from human error, natural
disasters, telecommunication failures, break-ins, sabotage, computer viruses,
intentional acts of vandalism and similar events. We currently do not have
complete redundancy and we do not have alternative providers of hosting
services that are available on short-term notice. We are still developing a
formal disaster recovery plan. We cannot assure that any plan we adopt will
be sufficient. We do not carry sufficient business interruption insurance to
compensate for losses that could occur.
WE MAY BE SUBJECT TO LEGAL CLAIMS IN CONNECTION WITH THE CONTENT WE PUBLISH
AND DISTRIBUTE AND OUR USE OF SOFTWARE LICENSES FOR OUR WEB SITE.
We may be subject to claims for defamation, negligence, copyright or
trademark infringement based on other theories relating to the information we
publish on our Web site, on the Web sites of others with whom we license or
co-brand our products or in our books. These types of claims have been
brought, sometimes successfully, against online services, as well as other
print publications in the past. We could also be subject to claims based upon
the content that is accessible from Hoover's Online through links to other
Web sites. We may also be subject to claims for software license infringement
based on the software and other technologies that we utilize on our Web site.
Our insurance may not adequately protect us against these types of claims.
<PAGE>
CONCERNS REGARDING SECURITY OF TRANSACTIONS AND TRANSMITTING CONFIDENTIAL
INFORMATION OVER THE INTERNET MAY NEGATIVELY AFFECT OUR REVENUES.
We believe that concern regarding the security of confidential
information transmitted over the Internet, such as credit card numbers,
prevents many potential customers, especially those outside of the United
States, from engaging in online transactions. If we do not add sufficient
security features to Hoover's Online, our revenues generated from
subscriptions and e-commerce may decline or there may be additional legal
exposure to us.
Our infrastructure is potentially vulnerable to physical or electronic
break-ins, viruses or similar problems. If a person circumvents our security
measures, he or she could misappropriate proprietary information or cause
interruptions in our operations. Security breaches that result in access to
confidential information could damage our reputation and expose us to a risk
of loss or liability. We may be required to make significant investments and
efforts to protect against or remedy security breaches. As e-commerce becomes
more prevalent, our audience will become more concerned about security. If we
do not adequately address these concerns, our business, operating results and
financial condition could be materially adversely affected.
THE LOSS OF ANY OF OUR KEY PERSONNEL OR OUR FAILURE TO ATTRACT ADDITIONAL
PERSONNEL COULD HAVE A MATERIAL AND ADVERSE EFFECT ON OUR BUSINESS.
Our future success will depend, in substantial part, on the continued
service of our senior management, particularly Patrick J. Spain, our Chairman
of the Board, President and Chief Executive Officer. None of our senior
management has entered into an employment agreement with us. We do not
maintain key-person life insurance on any of our employees. The loss of the
services of one or more of our key personnel could have a material adverse
effect on our business, operating results and financial condition. Our future
success will also depend on our continuing ability to attract, retain and
motivate highly qualified technical, customer support, financial and
accounting and managerial personnel. Competition for these personnel is
intense, and we cannot assure that we will be able to retain our key
personnel or that we will be able to attract, assimilate or retain other
highly qualified personnel in the future. We have from time to time in the
past experienced, and we expect to continue to experience in the future,
difficulty in hiring and retaining employees with appropriate qualifications.
IF WE FAIL TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS OR FACE A
CLAIM OF INTELLECTUAL PROPERTY INFRINGEMENT BY A THIRD PARTY, WE COULD LOSE
OUR INTELLECTUAL PROPERTY RIGHTS OR BE LIABLE FOR SIGNIFICANT DAMAGES.
We rely primarily on a combination of copyrights, trademarks, trade
secret laws, our user policy, licensing agreements and restrictions on
disclosure to protect our intellectual property. Despite these precautions,
it may be possible for a third party to copy or otherwise obtain and use the
content on our Web site or our other intellectual property without
authorization. We cannot assure that our precautions will prevent
misappropriation or infringement of our intellectual property. Failure to
protect our intellectual property in a meaningful manner could have a
material adverse effect on our business, operating results and financial
condition. In addition, we may need to engage in litigation in order to
enforce our intellectual property rights in the future or to determine the
validity and scope of the proprietary rights of others. Any litigation could
result in substantial costs and diversion of management and other resources,
either of which could have a material adverse effect on our business,
operating results and financial condition.
Because we license some data and content from third parties our exposure
to copyright
<PAGE>
infringement actions may increase. We rely upon these third parties for the
origin and ownership of licensed content. We generally obtain representations
of the origins and ownership of licensed content and generally obtain
indemnification to cover any breach of any representations. However, we
cannot assure you that these representations will be accurate or that
indemnification will be sufficient to provide adequate compensation for any
breach of these representations.
We cannot assure you that infringement or other claims will not be
asserted or prosecuted against us in the future, whether resulting from our
internally developed intellectual property or licenses or content from third
parties. Any future assertions or prosecutions could materially adversely
affect our business, operating results and financial condition. Any claims,
with or without merit, could be time-consuming, result in costly litigation
and diversion of technical and management personnel or require us to
introduce new content or trademarks, develop non-infringing technology or
enter into royalty or licensing agreements. These royalty or licensing
agreements, if required, may not be available on acceptable terms, if at all.
In the event a claim of infringement is successful and we fail or are unable
to introduce new content, develop non-infringing technology or license the
infringed or similar technology on a timely basis, our business, operating
results and financial condition could be materially and adversely affected.
PROBLEMS RELATING TO THE YEAR 2000 ISSUE COULD ADVERSELY AFFECT US.
Many existing computer programs use only two digits to identify a year.
These programs were designed and developed without addressing the impact of
the upcoming change in the century. If not corrected, many computer software
applications could fail or create erroneous results by, at or beyond the year
2000. Over the last year we have planned and implemented a year 2000
compliance project to assess the readiness of internally-developed and
third-party software, content, and business systems.
The year 2000 issue may affect several areas, including:
INTERNALLY DEVELOPED SOFTWARE. We have substantially completed a year
2000 compliance review of our internally developed proprietary software. This
review has included testing to determine how our systems will function at and
beyond the year 2000. Based on our assessment to date, we believe that our
internally developed proprietary software is year 2000 compliant.
CONTENT PUBLISHING SYSTEM AND CONTENT PROVIDERS. We have completed a
year 2000 compliance review of our content publishing system and our
significant content providers. Based on our assessment of their data and our
publishing processes, we believe that our content publishing system and the
data provided to us from third parties is year 2000 compliant.
THIRD-PARTY SUPPLIERS. We have assessed the year 2000 readiness of our
third-party supplied software, computer technology and other services, which
include software for use in our accounting, database and security systems.
The failure of such software or systems to be year 2000 compliant could have
a material impact on our corporate accounting functions and the operation of
our Web site. As part of the assessment of the year 2000 compliance of these
systems, we have sought assurances from these vendors that their software,
computer technology and other services are year 2000 compliant. Expenses
associated with this assessment and remediation activities have not been
material, therefore, we did not develop a budget for these expenses. The
failure of our software and computer systems and of our third-party suppliers
to be year 2000 compliant would have a material adverse effect on us. Based
on our assessment and testing of these products and services, as well as the
assurances obtained, we believe that our third party supplied software,
computer technology and other services are year 2000 compliant.
<PAGE>
WEB SITE UPGRADES. Our recent Web server upgrades were performed to
accommodate growth in our business and to provide greater scalability, not in
response to year 2000 compliance requirements. We believe our upgraded
servers are year 2000 compliant. At this time, we have not yet developed a
contingency plan to address situations that may result if our vendors or we
are unable to achieve year 2000 compliance because we currently do not
believe that such a plan is necessary. The cost of developing and
implementing such a plan, if necessary, could be material. Any failure of our
material systems, our vendors' material systems or the Internet to be year
2000 compliant could have a material adverse consequence for us. Consequences
may include difficulties in operating our Web site effectively or conducting
other fundamental parts of our business. For instance, we rely on
computer-based systems for our day-to-day operations. In a worst case
scenario, we could lose the ability to serve the Web site and account billing
would not be processed correctly.
RISKS RELATED TO THE INTERNET INDUSTRY
WE DEPEND ON THE CONTINUED GROWTH IN USE AND EFFICIENT OPERATION OF THE
INTERNET.
The Internet-based information market is new and rapidly evolving. Our
business would be materially adversely affected if Internet usage does not
continue to grow or grows more slowly than anticipated. Internet usage may be
inhibited for a number of reasons, including:
- inadequate network infrastructure;
- security concerns;
- inconsistent quality of service, and
- unavailability of cost-effective, high-speed access to the Internet.
Our audience depends on Internet service providers, online service
providers and other Web-site operators for access to Hoover's Online. Many of
these services have experienced significant service outages in the past and
could experience service outages, delays and other difficulties due to system
failure unrelated to our systems. These occurrences could cause our visitors
to perceive the Internet in general or our Web site in particular as
unreliable and, therefore, cause them to use other media to obtain their
company and business information. We also depend on third-party information
providers to deliver information and data feeds to us on a timely basis. Our
Web site could experience disruptions or interruptions in service due to the
failure or delay in the transmission or receipt of this information, which
could have a material adverse effect on our business, operating results and
financial condition.
WE CANNOT PREDICT THE SIZE OR VIABILITY OF THE ONLINE INFORMATION SERVICES
MARKET.
The market for our online business information services is rapidly
evolving and is characterized by an increasing number of market entrants. As
is typical of a rapidly evolving industry, demand and market acceptance for
recently introduced services is subject to a high level of uncertainty and
risk. Because the market for online business information services is new and
evolving, it is difficult to predict the future growth rate, if any, and size
of this market. We cannot assure you that the market for our online business
information services will continue to develop. If the use of online business
information services fails to continue to grow, our ability to establish
other online services would be materially and adversely affected. In
addition, our business
<PAGE>
strategy includes extending our online business information services model to
additional segments of business information. We cannot assure that we will be
successful in our efforts.
IF WE CANNOT KEEP PACE WITH RAPIDLY CHANGING TECHNOLOGY AND DEMANDS OF OUR
CUSTOMERS, WE MAY BE UNABLE TO ENHANCE OUR EXISTING SERVICES OR INTRODUCE NEW
SERVICES.
The market in which we operate is characterized by rapidly changing
technology, evolving industry standards, frequent new service announcements,
introductions and enhancements and evolving customer demands. The emerging
nature of the Internet and the electronic distribution of business
information including distribution through wireless channels and products
exacerbate these market characteristics. Accordingly, our future success will
depend on our ability to adapt to rapidly changing technologies and industry
standards, and our ability to continually improve the performance, features
and reliability of our services in response to both evolving customer demands
and competitive service offerings. Our inability to adapt successfully to
these changes in a timely manner could have a material and adverse effect on
our business, operating results and financial condition. Furthermore, we may
experience difficulties that could delay or prevent the successful design,
development, testing, introduction or marketing of new services. Any
enhancements to existing services may not adequately meet the requirements of
our current and prospective customers or achieve any degree of significant
market acceptance. If we are unable, for technological or other reasons, to
develop and introduce new services or enhancements to existing services in a
timely manner or in response to changing market conditions or customer
requirements, or if our services or enhancements contain defects or do not
achieve a significant degree of market acceptance, our business, results of
operations and financial condition would be materially adversely affected.
PRIVACY CONCERNS MAY PREVENT OUR USE OF COOKIES.
Web sites typically place information known as cookies on a user's hard
drive without the user's knowledge or consent. Web sites use cookies for a
variety of reasons. This technology enables our subscribers to access our
premium services without entering their password upon each visit.
Additionally, it allows us to limit the frequency with which a viewer is
shown a particular ad. Any reduction or limitation in the use of cookies
could adversely affect our ability to target advertising effectively.
Commonly used Internet browsers allow users to modify their browser settings
to remove cookies at any time or to prevent cookies from being stored on
their hard drives. In addition, some Internet commentators, privacy advocates
and governmental bodies have suggested limiting or eliminating the use of
cookies. The use of cookies may become more restrictive in certain non-US
markets, which could impact the rate or success of expansion into those
markets.
WE MAY BECOME SUBJECT TO BURDENSOME GOVERNMENT REGULATION AND LEGAL
UNCERTAINTIES.
The laws governing the Internet remain largely unsettled, even in areas
where there has been some legislative action. It may take years to determine
whether and how existing laws, including those governing intellectual
property, privacy, libel and taxation, apply to the Internet generally and
the electronic distribution of business information in particular.
Legislation could reduce the growth in the use of the Internet generally and
decrease the acceptance of the Internet as a communications and commercial
medium, which could have a material adverse effect on our business, operating
results and financial condition. In addition, the growing popularity and use
of the Internet has burdened the existing telecommunications infrastructure
and many areas with high Internet usage have begun to experience
interruptions in phone service. As a result, some local telephone carriers
have petitioned governmental agencies to regulate Internet service
<PAGE>
providers and online service providers in a manner similar to long-distance
telephone carriers and to impose access fees on Internet service providers
and online service providers. If any of these petitions or the relief that
they seek is granted, the costs of communicating on the Internet could
increase substantially, potentially adversely affecting the growth on the
Internet. Further, due to the global nature of the Internet, it is possible
that, although transmissions relating to our services originate in the State
of Texas, governments of other states, the United States or foreign countries
might attempt to regulate our service or levy sales or other taxes on our
activities. In Texas, sales of goods over the Internet are taxed the same as
sales of personal property through traditional channels. As a result,
Internet companies like us, based in Texas, may be at a competitive
disadvantage to Internet companies based outside of Texas with respect to
sales to Texas-based customers. We cannot assure you that violations of local
or other laws will not be alleged or charged by governmental authorities,
that we might not unintentionally violate these laws or that in the future
these laws will not be modified or new laws enacted. Any of these
developments could have a material adverse effect on our business, operating
results and financial condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Hoover's has capital lease obligations, which result in the risk that
interest expense, or the fair value of capital lease obligations might be
impacted by changes in market interest rates. However, because these are not
significant, market risks related to financial instruments are not material.
On July 26, 1999, upon the closing of our initial public offering of
common stock, we received approximately $48 million in proceeds from the
underwriters of the offering. To date, these proceeds have been invested in
money market funds backed by short-term government securities and other
short-term, investment-grade, interest-bearing instruments. Market risks
related to these financial instruments are not material.
Additional information related to quantitative and qualitative
disclosures regarding market risk is set forth in the risk factors under Item
2 above. Such information is incorporated by reference herein.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not currently subject to any material legal proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The effective date of our first registration statement, filed on Form
S-1 under the Securities Act of 1933 (No. 333-78109) relating to our initial
public offering of our common stock, became effective July 20, 1999. Offering
proceeds, net of aggregate expenses of approximately $1 million, were $48
million. The Company has used approximately $750,000 of the net offering
proceeds for working capital purposes, $750,000 for the purchase and
installation of computer and related equipment and software and $46.5 million
has been invested in money market funds backed by government securities and
other short-term, investment-grade, interest-bearing instruments pending
further application of such proceeds.
<PAGE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITIES HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibit is filed as part of this report:
27.01 Financial Data Schedule (EDGAR version only)
(b) We filed no reports on Form 8-K filed during the three
months ended September 30, 1999.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOOVER'S, INC
<TABLE>
<S> <C>
November 15, 1999 /s/ Patrick J. Spain
- ---------------------------------- ---------------------------------------
Date Patrick J. Spain
CHAIRMAN OF THE BOARD,
CHIEF EXECUTIVE OFFICER
AND PRESIDENT
(PRINCIPAL EXECUTIVE OFFICER)
November 15, 1999 /s/ Lynn Atchison
- ---------------------------------- --------------------------------------
Date Lynn Atchison
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
(PRINCIPAL ACCOUNTING OFFICER)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONDENSED FINANCIAL STATEMENTS FOR HOOVER'S INC. FOR THE THREE
AND SIX MONTHS ENDED SEPTEMBER 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 62,440
<SECURITIES> 227
<RECEIVABLES> 1,345
<ALLOWANCES> 95
<INVENTORY> 47
<CURRENT-ASSETS> 65,644
<PP&E> 3,041
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0
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