<PAGE>
PROSPECTUS
FILE PURSUANT TO RULE 424(b)(4)
REGISTRATION NO. 333-78109
3,250,000 SHARES
[LOGO]
COMMON STOCK
This is the initial public offering by Hoover's, Inc. of shares of its common
stock.
The common stock has been approved for quotation on the Nasdaq National Market
under the symbol "HOOV."
INVESTING IN THE COMMON STOCK INVOLVES MATERIAL RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 7.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNTS HOOVER'S
<S> <C> <C> <C>
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Per Share $14.00 $0.98 $13.02
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Total $45,500,000 $3,185,000 $42,315,000
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</TABLE>
We have granted the underwriters the right to purchase up to an additional
487,500 shares of common stock to cover over-allotments.
J.P. Morgan & Co. is acting as the sole bookrunner for the offering.
------------------------
JOINT LEAD MANAGERS
J.P. MORGAN & CO. LEHMAN BROTHERS
----------------
VOLPE BROWN WHELAN & COMPANY WIT CAPITAL CORPORATION
July 20, 1999
<PAGE>
Art
The inside front cover contains a gatefold with a number of Hoover's Online
screen shots. The screen shots consist of the Hoover's Online home page, a
company profile, a company capsule, financials of a company, the Store, Industry
Zone, Lead Finder, IPO Central, Stock Screener and Hoover's Online U.K.
<PAGE>
Table of Contents
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Page
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Prospectus Summary.............................. 3
Summary Financial Information................... 6
Risk Factors.................................... 7
Use of Proceeds................................. 19
Dividend Policy................................. 19
Capitalization.................................. 20
Dilution........................................ 21
Selected Financial Data......................... 22
Forward-looking Statements...................... 23
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 24
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Page
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Business........................................ 35
Management...................................... 50
Certain Transactions............................ 59
Principal Stockholders.......................... 61
Description of Capital Stock.................... 63
Shares Eligible for Future Sale................. 66
Underwriting.................................... 67
Legal Matters................................... 69
Experts......................................... 69
Available Information........................... 70
Index to Financial Statements................... F-1
</TABLE>
In deciding whether to buy our common stock, you should rely only on the
information contained in this prospectus. To understand this offering fully, you
should read this entire prospectus carefully, including the financial statements
and notes. Individual sections of the prospectus, such as the section entitled
"Prospectus Summary," are not complete and do not contain all of the information
that you should consider before investing in Hoover's. We have not authorized
anyone to provide you with information different from that contained in this
prospectus. We are offering to sell, and seeking offers to buy, shares of common
stock only in jurisdictions where offers and sales are permitted. The
information contained in this prospectus is accurate only as of the date of this
prospectus, regardless of the time of delivery of this prospectus or of any sale
of our common stock.
Until August 16, 1999, all dealers that buy, sell or trade our common stock,
whether or not participating in this offering, may be required to deliver a
prospectus. This requirement is in addition to the dealers' obligation to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
<PAGE>
Prospectus Summary
You should read this summary together with the more detailed information and our
financial statements and related notes appearing elsewhere in this prospectus.
All references to shares of common stock in this prospectus reflect a 2-for-1
split of our common stock which became effective on June 8, 1999 and a
0.75-for-1 split of our common stock effective June 29, 1999. Except as
otherwise specified, the information in this prospectus assumes that the
underwriters do not exercise the option we have granted to them to purchase
additional shares in this offering.
Our Business
Hoover's is an Internet provider of company and industry information designed to
meet the diverse needs of business organizations, businesspeople and investment
professionals worldwide. Our Web site is Hoover's Online located at
WWW.HOOVERS.COM. We were one of the first to provide high-quality, proprietary
business information on the Internet to the mission-oriented businessperson, who
seeks answers to specific questions. Visitors to our Web site use our
information for their professional endeavors, including financial and
competitive research, as well as for their personal activities, including career
development and personal investment. We provide our advertisers, sponsors and
the businesses with whom we have e-commerce relationships with a large,
demographically desirable audience, who as a group, we believe are affluent,
highly educated and willing to conduct business over the Internet. For the
quarter ended March 31, 1999, our Web site attracted approximately two million
unique visitors and the total number of pages they accessed on our Web site,
known as page views, was over 30 million during that period. Our core asset is
our proprietary editorial content which includes information on approximately
14,000 public and private enterprises worldwide and 45 industry sectors. We
continually expand and update our database of company and industry information
as well as offer our branded search and sort tools, such as Lead Finder and
StockScreener, to make our information more useful to businesspeople. We also
provide information on initial public offerings through IPO Central, feature
stories, news, career information, personal finance information, SEC documents,
management biographical information, brokerage reports and credit reports.
We have developed a loyal audience by offering:
- - proprietary, trusted editorial content;
- - a focus on the needs of businesspeople;
- - tiered levels of service: free, paid subscription and pay-per-view; and
- - an efficient Internet sales channel.
We generate revenues from the following sources:
- - online information sales, consisting of subscriptions and licenses of our
editorial content;
- - advertising, sponsorship and e-commerce; and
- - sales of our company information in CD-ROM and print.
We provide subscription-based business information services on the Internet,
with an estimated 100,000 paying users, also known as seats, as of March 31,
1999. Of these 100,000 seats, over 29,000 were individual subscribers which pay
on an individual basis and the balance were attributable to over 1,300 corporate
and academic accounts, known as enterprise accounts or subscribers, which we
estimate represented over 70,000 seats which are paid for on an enterprise or
company basis, rather than on an individual basis. As we have built our
subscriber base, however, we have incurred net losses. We incurred a net loss of
$2.3 million for the fiscal year ended March 31, 1999 and a net loss of $1.8
million for fiscal 1998.
3
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In addition to our Hoover's Online Web site, we distribute our content through
several online channels in a format that includes our name and logo along with
the distributing channel's name and logo. This is known as co-branding. We
co-brand our information on the following widely followed Web sites: America
Online, Go/ Infoseek, Microsoft Network and Yahoo!. We license our information
for distribution through leading business and financial information services,
including Bloomberg, Dow Jones, LEXIS-NEXIS, Microsoft Network, OneSource and
Reuters who were our largest licensees based on revenues in fiscal 1999. In June
1999, we licensed a portion of our content for distribution by NBC, CNBC and
CNBC.com. We also co-brand material with online versions of the following
newspapers: THE NEW YORK TIMES, THE WASHINGTON POST and THE LOS ANGELES TIMES.
We generate e-commerce revenues from our paid relationships with e-commerce
companies such as Amazon.com, Multex.com and Winstar Telebase from whom we
derived the most e-commerce revenue in fiscal 1999. Through our e-commerce
relationships, we offer digital products delivered over the Internet, such as
Dun & Bradstreet credit reports and brokerage research reports distributed by
Multex.com, as well as physical products. The businesses with whom we have
e-commerce relationships purchase advertisements on our Web site, known as
banners and buttons, pay us commissions for sending new customers to their Web
sites and/or pay us a percentage of the total transaction revenues generated
through Hoover's Online.
Our principal executive offices are located at 1033 La Posada Drive #250,
Austin, Texas 78752. Our telephone number is (512) 374-4500. Our Web site is
WWW.HOOVERS.COM. The information contained on our Web site is not incorporated
by reference into this prospectus.
4
<PAGE>
The Offering
The following information regarding shares outstanding is as of March 31, 1999.
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Common stock offered by Hoover's....... 3,250,000 shares
Common stock to be outstanding after
the offering......................... 11,422,587 shares
Use of proceeds........................ We intend to use the net proceeds from the offering
to fund increased marketing, for further
development of Hoover's Online, for potential
acquisitions, and for other general corporate
purposes.
Proposed Nasdaq National Market
Symbol............................... "HOOV"
</TABLE>
The outstanding share information set forth above excludes:
- - 2,125,650 shares issuable upon the exercise of stock options outstanding under
our stock option plans, with a weighted average exercise price of $2.88 per
share;
- - 2,979,645 shares reserved for issuance under our 1999 Stock Incentive Plan;
- - 1,636,020 shares issuable upon exercise of outstanding warrants with a
weighted average exercise price of $3.91 per share; and
- - 150,000 shares reserved for issuance under our 1999 Employee Stock Purchase
Plan.
The outstanding share information set forth above includes:
- - 206,044 shares issued to National Broadcasting Company, Inc. in June 1999;
- - 971,591 shares issued to Knowledge Net Holdings, L.L.C. in June 1999;
- - 51,136 shares issued to Nextera Enterprises, Inc. in June 1999; and
- - 3,091 shares issued to Wit Capital Corporation in June 1999.
5
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Summary Financial Information
The following table contains our summary financial data which should be read
together with our financial statements and related notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The pro forma column in the second table below reflects our sale of common stock
in the June 1999 transactions. The pro forma as adjusted column reflects the
issuance of 3,250,000 shares of common stock in this offering.
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Year Ended March 31,
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<CAPTION>
1997 1998 1999
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<S> <C> <C> <C>
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
Statement of Operations Data:
Net revenues........................................................... $ 3,360 $ 5,182 $ 9,229
Gross profit........................................................... 1,231 2,147 4,227
Net loss............................................................... (944) (1,788) (2,255)
Basic and diluted net loss per share................................... $ (0.27) $ (0.39) $ (0.42)
Shares used in computing basic and diluted net loss per share.......... 3,526,707 4,569,038 5,314,092
</TABLE>
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<CAPTION>
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As of March 31, 1999
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Pro Forma
Actual Pro Forma As Adjusted
--------- ----------- -----------
DOLLARS IN THOUSANDS
Balance Sheet Data:
Cash and cash equivalents..................................................... $ 7,814 $ 16,692 $ 58,257
Total assets.................................................................. 10,076 20,055 61,620
Working capital............................................................... 5,705 14,583 56,148
Long-term debt and capital lease obligations, less current portion............ 168 168 168
Total stockholders' equity.................................................... 6,760 16,739 58,304
</TABLE>
6
<PAGE>
Risk Factors
BEFORE YOU INVEST IN OUR COMMON STOCK, YOU SHOULD BE AWARE OF VARIOUS RISKS,
INCLUDING THOSE DESCRIBED BELOW. YOU SHOULD CAREFULLY CONSIDER THESE RISKS,
TOGETHER WITH ALL THE OTHER INFORMATION INCLUDED IN THIS PROSPECTUS, BEFORE YOU
DECIDE WHETHER TO PURCHASE SHARES OF OUR COMMON STOCK.
Risks Related to our Business
WE HAVE A HISTORY OF LOSSES AND EXPECT FUTURE LOSSES.
We incurred net losses of $944,000 in fiscal 1997, $1.8 million in fiscal 1998
and $2.3 million in fiscal 1999. At March 31, 1999, we had an accumulated
deficit of $8.5 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 Hoover's Online. We intend
to substantially increase 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 loss was $931,000, $308,000 and $384,000 for each of the
quarters ended September 30, 1998, December 31, 1998 and March 31, 1999. Our
quarterly operating results may fluctuate significantly in the future due to a
variety of factors. These factors 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;
- - our ability to protect our systems from any telecommunications failures, power
loss, or software-related system failures;
- - 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 new subscriber acquisitions;
- - the timing and effectiveness of our marketing efforts to acquire subscribers
and 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.
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Due to all of the foregoing factors and the other risks discussed in this
section, you should not rely on quarter-to-quarter comparisons of our operating
results as an indication of future performance. 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 advertising revenues and in our
traffic. We believe that advertising sales in traditional media, such as
television and radio, are generally lower in the first and third quarters of
each calendar year. Moreover, viewer 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
Internet users and subscribers. We intend to spend approximately $10 million of
the net proceeds of this offering on a new marketing campaign designed to
increase the number of our subscribers. On a percentage basis, we do not believe
that our increased marketing expense will lead to an equivalent percentage
increase in new subscribers. Therefore, we believe our incremental cost of
acquiring subscribers will increase. However, we do not calculate the actual
incremental costs of acquiring new subscribers, as such efforts benefit other
revenue generating activities as well as attracting new subscribers. 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, some new
subscribers do not become consistent users of Internet services and 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 NEW AND ENHANCED SERVICES AND FEATURES THAT MAY NOT BE
ATTRACTIVE TO OUR EXISTING AUDIENCE AND MAY NOT INCREASE OUR AUDIENCE.
We intend to expand the content, services and features offered on Hoover's
Online by developing online resource centers in areas such as professional
development and business travel. Management will spend a significant amount of
time developing our online resource centers. We intend to increase substantially
our marketing expenses and 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
fail to attract additional viewers 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 viewers.
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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 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 and 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 own advertising sales force. As
of March 31, 1999, our advertising sales group consisted of four members. We
intend to significantly increase our 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. We currently use all of
these models except for cost per click through. 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
adversely affect the commercial viability of Internet advertising, which could
materially and adversely affect our advertising revenues.
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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 we intend to spend
approximately $10 million of the net proceeds of this offering on a new
marketing campaign. 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:
- - tiered Web sites focused on business, such as The Wall Street Journal
Interactive Edition;
- - providers of company information, such as Dun & Bradstreet, MarketGuide and
Standard & Poor's;
- - providers of proprietary business information, such as Bloomberg Business
News, Dow Jones and Reuters News Service;
- - 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 whom we have strategic
relationships, including THE WALL STREET JOURNAL, LEXIS-NEXIS and Bloomberg. 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 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 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.
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OUR FUTURE SUCCESS DEPENDS ON OUR EDITORIAL STAFF.
We depend upon the efforts of our editorial staff to produce original, timely,
comprehensive and trustworthy content. As of March 31, 1999, our editorial staff
consisted of over 100 writers, editors, researchers and online producers.
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 and 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. As of March 31, 1999, we had
grown to a total of 162 full-time employees, from 48 full-time employees on
March 31, 1997. 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 and adversely affected.
WE ARE DEPENDENT ON OUR STRATEGIC RELATIONSHIPS AND OUR BUSINESS WOULD BE
MATERIALLY AND 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. As of March 31, 1999, 20 organizations provided us with
content that we integrated into our products. We have contracts with 15 of our
content providers that generally range from one to three years in duration and
that generally are not terminable at will by either party. If our
relationships with these content providers were terminated, we would have to
extract 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 you that we
would be able to replace the content we currently receive from our content
providers in a timely manner.
- - LICENSEES. As of March 31, 1999, we licensed our proprietary information to
approximately 30 organizations. If any of these licensees were to terminate
their agreements with us, we may experience a decrease in our overall
revenues. Termination of our license agreements may also adversely affect our
reputation.
- - 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 each of our 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 are
seeking sponsors for resource centers we are developing for Hoover's Online.
We do not currently have resource centers. A resource center is a location on
the Web site to be dedicated to a specific topic, such as professional
development or business
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travel. 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. We believe that those sponsors who provide
content will increase their opportunity for visitor interaction. The success
of our sponsorship relationships will depend on the quality of the content and
products that the sponsors provide. If we fail to attract 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.
In June 1999, Knowledge Net Holdings agreed to purchase from us at least $2.0
million of advertising, subscriptions, sponsorships, content licensing or other
services from October 1, 1999 to September 30, 2001. In addition, it agreed to
spend $250,000 of the $2.0 million by December 1999. We have agreed with
Knowledge Net to determine by March 31, 2000 what services will be provided to
Knowledge Net and to provide those services at the market rate prevailing at
that time. Under the terms of this contract, either party may terminate the
agreement for a material breach of the contract by or upon the bankruptcy or
insolvency of the other party. If we are unable to determine which services will
be purchased or at what rate they are to be provided, we may not obtain the
anticipated benefits of this contract.
Many companies that we may approach for a strategic relationship may have
conflicting relationships with others. As a result, these companies may be
reluctant to enter into strategic relationships with us. Our business, operating
results and financial condition could be materially and adversely affected if we
do not establish additional, and maintain existing, strategic relationships on
commercially reasonable terms or if our strategic relationships do not result in
an increase in the number of subscribers or traffic to Hoover's Online. In
addition, strategic relationships may be difficult to implement and may not
provide the anticipated benefits.
WE HAVE INSTALLED NEW HARDWARE AND SOFTWARE SYSTEMS FOR OUR WEB SITE THAT WE MAY
NOT BE ABLE TO IMPLEMENT EFFECTIVELY.
We have recently upgraded and expanded our hardware and software systems to
service the increased levels of traffic on our Web site and to support new
high-performance applications. In addition, we are implementing a new content
management system. We have and will continue to rely upon third-party
consultants for some of this work. We expect total expenditures to be
approximately $1.3 million to $1.8 million for these upgrades and expansions of
our hardware and software systems. We may not be able to complete these
installations in a timely manner, and our personnel may be unable to manage the
new systems effectively. Any delay in installing new systems or in our ability
to integrate the systems into our operations could delay our offering of new and
enhanced services. Additionally, the new systems may fail to perform as we
expect. Material deviations from our expectations could require us to incur
significant expenses to correct, upgrade or replace the new systems.
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 and 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
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<PAGE>
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 you 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.
We may be subject to claims for defamation, negligence, copyright or trademark
infringement or 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. Our insurance
may not adequately protect us against these types of claims.
CONCERNS REGARDING SECURITY OF TRANSACTIONS AND TRANSMITTING CONFIDENTIAL
INFORMATION OVER THE INTERNET MAY NEGATIVELY IMPACT 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 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 and 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 and 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 you 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.
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<PAGE>
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.
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 you 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 and 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, such as Media
General Financial Services, our exposure to copyright infringement actions may
increase. We rely upon these third parties as to the origin and ownership of
licensed content. We generally obtain representations as to 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
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<PAGE>
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. We expect to complete these tests during the summer of 1999.
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 internally-developed database and the data provided to us
from third parties is year 2000 compliant.
THIRD-PARTY SUPPLIERS. We are currently assessing 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. We expect this
assessment process to be completed during the summer of 1999. We expect to
complete any required remediation during the summer of 1999. At this time, the
expenses associated with this assessment and potential remediation plan that may
be incurred in the future cannot be determined; therefore, we have not developed
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.
WEB SITE UPGRADES. We completed an initial assessment of our 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 summer of 1999. 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 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.
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
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<PAGE>
- - 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
new and 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 strategy
includes extending our online business information services model to additional
segments of business information. We cannot assure you 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. These market characteristics are
exacerbated by the emerging nature of the Internet and the electronic
distribution of business information. 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 and adversely affected.
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
and 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
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<PAGE>
have petitioned governmental agencies to regulate Internet service 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 in 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 that are 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 and adverse effect on our business,
operating results and financial condition.
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.
Risks Related to the Offering
AS AN INTERNET-RELATED COMPANY, THE MARKET PRICE OF OUR SHARES MAY EXPERIENCE
EXTREME PRICE AND VOLUME FLUCTUATIONS WHICH WOULD INCREASE THE LIKELIHOOD OF US
BECOMING SUBJECT TO SECURITIES LITIGATION.
The stock market has, from time to time, experienced extreme price and volume
fluctuations. The market prices of the securities of Internet-related companies
have been especially volatile, including fluctuations that are often unrelated
to the operating performance of the affected companies. Broad market
fluctuations of this type may adversely affect the market price of our common
stock.
The market price of our common stock could be subject to significant
fluctuations due to a variety of factors, including:
- - public announcements concerning us or our competitors, or the Internet
industry;
- - fluctuations in our operating results;
- - introductions of new products or services by us or our competitors;
- - changes in analysts' earnings estimates; and
- - announcements of technological innovations.
In the past, companies that have experienced volatility in the market price of
their stock have been the target of securities class action litigation. If we
were sued in a securities class action, we could incur substantial costs and
suffer from a diversion of our management's attention and resources, potentially
resulting in a material adverse effect on our business, operating results and
financial condition.
CONTROL BY PRINCIPAL STOCKHOLDERS, EXECUTIVE OFFICERS AND DIRECTORS.
Our executive officers, directors and existing 5% and greater stockholders will
beneficially own or control, collectively, 7,421,237 shares of the common stock,
representing approximately 65% of the voting power after
17
<PAGE>
this offering. After this offering, such persons, if they were to act together,
will be in a position to elect and remove directors and control the outcome of
most matters submitted to stockholders for a vote. Additionally, such persons
would be able to influence significantly a proposed amendment to our certificate
of incorporation, a merger proposal, a proposed substantial sale of assets or
other major corporate transaction or a non-negotiated takeover attempt. Such
concentration of ownership may discourage a potential acquiror from making an
offer to buy our company, which, in turn, could adversely affect the market
price of our common stock.
A THIRD PARTY'S ABILITY TO ACQUIRE US MIGHT BE MORE DIFFICULT BECAUSE OF OUR
ANTI-TAKEOVER PROVISIONS.
Our certificate of incorporation and bylaws and Delaware law contain provisions
that could make it more difficult for a third party to acquire us, even though
the acquisition might be beneficial to you and our other stockholders. If an
acquisition is delayed or prevented, the market price of our common stock could
be adversely affected.
MANAGEMENT HAS BROAD DISCRETION REGARDING THE USE OF PROCEEDS FROM THIS
OFFERING.
Our management will have broad discretion in how we use the net proceeds of this
offering. You must rely on the judgment of management regarding the application
of the proceeds of this offering. Our management may use the net proceeds of
this offering for purposes which may not prove to be beneficial to our company.
FUTURE SALES OF SHARES OF OUR COMMON STOCK MAY NEGATIVELY AFFECT OUR STOCK
PRICE.
If our stockholders sell substantial amounts of our common stock, including
shares issuable upon the exercise of outstanding options and warrants, in the
public market following this offering, the market price of our common stock
could be adversely affected. These sales also might make it more difficult for
us to sell equity securities in the future at a time and price that we deem
appropriate. Immediately after this offering, we will have outstanding
11,422,587 shares of common stock. Of these shares, the 3,250,000 shares being
offered in this offering will be freely tradable. Our directors, executive
officers and security holders, holding in the aggregate 7,916,638 of our shares,
have signed lock-up agreements stating that they will not sell, directly or
indirectly, any common stock without the prior written consent of J.P. Morgan
Securities Inc. for a period of 150 days from the date of this prospectus.
However, J.P. Morgan Securities Inc. may, in its sole discretion and at any time
or from time to time, without notice, release all or any portion of the
securities subject to the lock-up agreements.
INVESTORS IN THIS OFFERING WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION.
You will incur immediate and substantial dilution in net tangible book value per
share of $7.99 per share. To the extent outstanding options and warrants to
purchase common stock are exercised, you will incur further dilution. Please see
the "Dilution" section of this prospectus for further information.
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Use of Proceeds
We will receive approximately $41.6 million from our sale of 3,250,000 shares of
common stock, net of estimated expenses and estimated underwriting discounts and
commissions payable by us. If the underwriters exercise their over-allotment
option in full, we will receive an additional $6.3 million in net proceeds.
The principal purposes of this offering are to increase our equity capital, to
create a public market for our common stock, to facilitate future access by us
to the public equity markets and to provide increased visibility of Hoover's in
a marketplace where many of our competitors are publicly-held companies. We
currently intend to use up to approximately $10 million of the net proceeds of
this offering for increased marketing activities. We expect to use the remainder
of the net proceeds to extend our range of services in conjunction with our
expansion of Hoover's Online and for other general corporate purposes, including
expansion of our sales and marketing activities and the acquisition of
complementary businesses and of content and distribution relationships. While
there are no current commitments with respect to any material transactions, we
evaluate acquisition opportunities from time to time. Pending such uses, we
intend to invest the net proceeds in government securities and other short-term,
investment-grade, interest-bearing instruments.
Dividend Policy
We have not declared or paid any cash dividends on our capital stock and we do
not intend to pay any cash dividends on our common stock in the foreseeable
future. We currently intend to retain future earnings, if any, to fund the
development and growth of our business and we are currently subject to covenants
which may restrict our payment of cash dividends under our term loans with a
bank. Future cash dividends, if any, will be determined by our board of
directors and will be dependent upon our operating results, financial condition,
capital requirements and such other factors as our board of directors deems
relevant.
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Capitalization
The following table sets forth our capitalization as of March 31, 1999:
- - on an actual basis;
- - on a pro forma basis to reflect our sale of common stock in the June 1999
transactions and amendments to our certificate of incorporation in June 1999
to authorize preferred stock and to increase our authorized common stock; and
- - on a pro forma as adjusted basis to reflect our receipt of the estimated net
proceeds from our sale of 3,250,000 shares of common stock in this offering
after deducting underwriting discounts and commissions and estimated offering
expenses.
<TABLE>
<CAPTION>
-----------------------------------
<S> <C> <C> <C>
As of March 31, 1999
-----------------------------------
<CAPTION>
Pro Forma
Actual Pro Forma As Adjusted
--------- ----------- -----------
<S> <C> <C> <C>
DOLLARS IN THOUSANDS, EXCEPT SHARE DATA
Long-term debt and capital lease obligations, less current portion............ $ 168 $ 168 $ 168
Stockholders' equity:
Preferred stock, $0.01 par value, no shares authorized, actual; 10,000,000
shares authorized, pro forma and pro forma as adjusted; none issued,
actual, pro forma and pro forma as adjusted................................ -- -- --
Common stock, $0.01 par value, 7,500,000 shares authorized, actual;
150,000,000 shares authorized, pro forma and pro forma as adjusted;
7,090,725 shares issued, actual; 8,322,587 shares issued, pro forma; and
11,572,587 shares issued, pro forma as adjusted............................ 71 83 116
Additional paid-in capital.................................................... 18,067 28,034 69,566
Unearned stock compensation................................................... (2,764) (2,764) (2,764)
Accumulated deficit........................................................... (8,464) (8,464) (8,464)
Treasury stock at cost--150,000 shares........................................ (150) (150) (150)
--------- ----------- -----------
Total stockholders' equity................................................ 6,760 16,739 58,304
--------- ----------- -----------
Total capitalization.................................................... $ 6,928 $ 16,907 $ 58,472
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
The outstanding share information set forth above excludes:
- - 2,125,650 shares issuable upon the exercise of stock options outstanding under
our stock option plans, with a weighted average exercise price of $2.88 per
share;
- - 2,979,645 shares reserved for issuance under our 1999 Stock Incentive Plan;
- - 1,636,020 shares issuable upon exercise of outstanding warrants with a
weighted average exercise price of $3.91 per share; and
- - 150,000 shares reserved for issuance under our 1999 Employee Stock Purchase
Plan.
Please see "Management--Director Compensation," "--Stock Option Plans,"
"--Employee Stock Purchase Plan," "Certain Transactions" and notes 2 and 3 of
the notes to our financial statements.
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Dilution
Our pro forma net tangible book value at March 31, 1999 was approximately $15.6
million, or $1.90 per share of common stock. Pro forma net tangible book value
per share represents the amount of our total tangible assets reduced by the
amount of our total liabilities, divided by the number of shares of common stock
outstanding, assuming our sale of shares of common stock in the June 1999
transactions. After giving effect to our sale of 3,250,000 shares of common
stock in this offering and after deducting estimated underwriting discounts and
commissions and estimated offering expenses payable by us, our pro forma net
tangible book value at March 31, 1999 would have been approximately $57.2
million, or $5.01 per share. This represents an immediate increase in pro forma
net tangible book value of $3.11 per share to our existing stockholders and an
immediate dilution of $7.99 per share to new investors purchasing shares of
common stock in this offering. The following table illustrates this per share
dilution:
<TABLE>
<CAPTION>
--------------------
<S> <C> <C>
Initial public offering price per share............................................. $ 14.00
Pro forma net tangible book value per share at March 31, 1999....................... $ 1.90
Increase per share attributable to new investors.................................... 3.11
---------
Pro forma net tangible book value per share after this offering..................... 5.01
---------
Dilution per share to new investors................................................. $ 7.99
---------
---------
</TABLE>
The following table sets forth, on a pro forma basis as of March 31, 1999, the
number of shares of common stock purchased from us, the total consideration paid
to us and the average price per share paid to us by existing stockholders and by
investors purchasing shares of common stock in this offering, before deducting
estimated underwriting discounts and commissions and estimated offering expenses
of this offering:
<TABLE>
<CAPTION>
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Shares Purchased Total Consideration
------------------------- -------------------------- Average Price
Number Percent Amount Percent Per Share
------------ ----------- ------------- ----------- -------------
Existing stockholders............................. 8,172,587 71.5% $ 24,616,585(1) 35.1% $ 3.01
New investors..................................... 3,250,000 28.5 45,500,000 64.9 14.00
------------ ----- ------------- -----
Total........................................... 11,422,587 100.0% $ 70,116,585 100.0%
------------ ----- ------------- -----
------------ ----- ------------- -----
</TABLE>
- ------------------------
(1) Excludes the value of financial advisory services rendered by Wit Capital,
for which we issued 3,091 shares, in connection with our sale of common stock in
the June 1999 transactions.
The foregoing tables assume no exercise of stock options or warrants outstanding
as of March 31, 1999. Options to purchase 2,125,650 shares of common stock were
outstanding as of March 31, 1999 with a weighted average exercise price of $2.88
per share. Warrants to purchase 1,636,020 shares of common stock were
outstanding as of March 31, 1999 with a weighted average exercise price of $3.91
per share. To the extent these options and warrants are exercised, investors in
this offering will experience further dilution.
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Selected Financial Data
The following selected financial data should be read together with the section
of this prospectus entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations," our financial statements and the related
notes and the other financial information included elsewhere in this prospectus.
The statement of operations data for the years ended March 31, 1997, 1998 and
1999 and the balance sheet data at March 31, 1998 and 1999 are derived from
audited financial statements included elsewhere in this prospectus. The
statement of operations data for the years ended March 31, 1995 and 1996 and the
balance sheet data at March 31, 1995, 1996 and 1997 are derived from audited
financial statements not included in this prospectus.
<TABLE>
<CAPTION>
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year Ended March 31,
---------------------------------------------------------------
1995 1996 1997 1998 1999
----------- ----------- ----------- ----------- -----------
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
Statement of Operations Data:
Revenues:
Online information sales....................... $ 215 $ 649 $ 1,192 $ 2,696 $ 6,764
Advertising, sponsorships, e-commerce.......... -- 71 514 1,182 961
CD-ROM and print............................... 1,362 1,901 2,254 1,591 1,637
----------- ----------- ----------- ----------- -----------
Total revenues................................... 1,577 2,621 3,960 5,469 9,362
Provision for returns of print products........ (126) (210) (600) (287) (133)
----------- ----------- ----------- ----------- -----------
Net revenues..................................... 1,451 2,411 3,360 5,182 9,229
Cost of revenues............................... 1,192 1,461 2,129 3,035 5,002
----------- ----------- ----------- ----------- -----------
Gross profit..................................... 259 950 1,231 2,147 4,227
Expenses:
Product development............................ 22 195 201 391 566
Sales and marketing............................ 372 427 865 1,501 2,184
General and administrative..................... 447 594 1,038 2,125 3,402
Non-cash compensation.......................... -- -- -- -- 451
----------- ----------- ----------- ----------- -----------
Total expenses................................... 841 1,216 2,104 4,017 6,603
----------- ----------- ----------- ----------- -----------
Operating loss................................... (582) (266) (873) (1,870) (2,376)
Interest income................................ -- 1 5 129 177
Interest expense............................... (31) (52) (76) (47) (56)
----------- ----------- ----------- ----------- -----------
Net loss......................................... $ (613) $ (317) $ (944) $ (1,788) $ (2,255)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Basic and diluted net loss per share............. $ (0.27) $ (0.10) $ (0.27) $ (0.39) $ (0.42)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Shares used in computing basic and diluted net
loss per share(1).............................. 2,234,715 3,145,936 3,526,707 4,569,038 5,314,092
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
As of March 31,
---------------------------------------------------------------
1995 1996 1997 1998 1999
----------- ----------- ----------- ----------- -----------
DOLLARS IN THOUSANDS
Balance Sheet Data:
Cash and cash equivalents........................ $ 26 $ 41 $ 579 $ 3,860 $ 7,814
Total assets..................................... 482 1,000 1,583 5,772 10,076
Working capital.................................. (397) (18) 162 3,427 5,705
Long-term debt and capital lease obligations,
less current portion........................... -- -- 79 172 168
Total stockholders' equity (deficit)............. (319) 73 606 3,995 6,760
</TABLE>
- ------------------------
(1) See note 1 of the notes to our financial statements for the determination
of shares used in computing basic and diluted net loss per share.
22
<PAGE>
Forward-looking Statements
This prospectus contains forward-looking statements that involve substantial
risks and uncertainties. You can identify these statements by forward-looking
words such as "may," "will," "expect," "intend," "anticipate," "believe,"
"estimate" and "continue" or similar words. You should read statements that
contain these words carefully because they discuss our future expectations,
contain projections of our future results of operations or of our financial
condition or state other forward-looking information. We believe that it is
important to communicate our future expectations to our investors. However,
there may be events in the future that we are not able to accurately predict or
control. The factors listed in the sections captioned "Risk Factors" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," as well as any cautionary language in this prospectus, provide
examples of risks, uncertainties and events that may cause our actual results to
differ materially from the expectations we describe in our forward-looking
statements. Before you invest in our common stock, you should be aware that the
occurrence of the events described in the "Risk Factors" section and the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" section and elsewhere in this prospectus could have a material
adverse effect on our business, operating results and financial condition.
23
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH OUR
FINANCIAL STATEMENTS AND THE RELATED NOTES APPEARING ELSEWHERE IN THIS
PROSPECTUS.
Overview
Hoover's is a Internet provider of company and industry 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 our information in traditional print media to providing high-quality,
low-cost business information via the Internet. Our proprietary database now
contains information on 45 industries and approximately 14,000 public and
private enterprises worldwide.
Revenues from online sources have increased at a compound annual growth rate of
145% since 1995 and have grown from 14% of total revenues in 1995 to 83%
currently. For the quarter ended March 31, 1999, Hoover's Online attracted
approximately two million unique visitors, who accounted for over 30 million
page views. As of March 31, 1999, we had over 29,000 individual subscribers
which pay on an individual basis and we had over 1,300 enterprise accounts,
which we estimate represented over 70,000 seats which are paid for on an
enterprise or company basis, rather than an individual basis.
Hoover's Online is being expanded to provide additional business-oriented
content, tools and features. We intend to add resource centers for performing
mission-oriented tasks in areas such as professional development, career
planning, personal finance and business travel. During our expansion, we plan to
substantially increase our marketing and promotional efforts, using both online
and traditional media to increase brand awareness and introduce new customers to
Hoover's Online.
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 in CD-ROM and print.
Recent Information
For the quarter ended June 30, 1999, total revenues increased $1.3 million, or
70%, to $3.2 million from $1.9 million for the quarter ended June 30, 1998. Net
loss increased $1.1 million, or 152%, to $1.8 million for the quarter ended June
30, 1999 from $0.7 million for the quarter ended June 30, 1998. For the quarter
ended June 30, 1999, Hoover's Online attracted approximately 1.9 million unique
visitors, who accounted for over 35 million page views.
Online information sales
SUBSCRIPTIONS. Approximately half of our revenues were generated 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. All of
our individual subscribers pay by credit card, and individual subscriptions are
automatically renewed at the end of each month or annual period, unless
cancelled. We also offer annual enterprise subscriptions ranging from $1,500 to
$30,000 per year, based on the number of users within the enterprise. 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.
24
<PAGE>
LICENSES. We also derive significant revenues by licensing portions of our
database for re-distribution through customized data feeds to online services
such as Bloomberg, Dow Jones, LEXIS-NEXIS, Microsoft Network, OneSource, as well
as Reuters, who were our six largest licensees based on revenues in fiscal 1999,
and represented 21% of our online information sales in fiscal 1999 as well as
licenses to Web sites. As an extension of our enterprise subscriptions, we
license information directly to corporate intranets or extranets such as
Andersen Worldwide's KnowledgeSpace.com. 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. Licenses to corporate intranets start at $36,000 per
year. Revenues are recognized ratably over the contract period.
Advertising, sponsorships and e-commerce
ADVERTISING. We derive revenues from the sale of banner and button
advertisements on our Web site. These advertisements may be displayed on a run
of site basis or may be targeted to a particular audience. These are generally
sold under short-term contracts and priced based on a price per thousand
impressions. An impression occurs anytime an advertisement on our Web site
appears on a page being viewed. We measure impressions internally and with
third-party services using the Internet Advertising Bureau's standards for
measurement. Our pricing per thousand impressions varies depending on the length
of the contract and the position of the advertisement on the Web site. Revenues
are recognized as the impressions are delivered.
SPONSORSHIPS. We derive revenues from the sale of sponsorships to advertisers
who request fixed placement on our Web site. Sponsorships integrate an
advertiser's message with Hoover's Online content in a number of creative,
contextual ways. Sponsorships may be ongoing or tailored to specific events.
Sponsorships are generally priced as a fixed monthly fee depending on the
placement on the Web site and may include a guaranteed number of impressions.
Revenues are generally recognized ratably over the contract period, provided
that no significant obligations remain.
E-COMMERCE. We derive e-commerce revenues from advertisers who pay either a fee
per transaction or a percentage of sales generated directly from their
advertisement on our Web site. In addition, we receive a share of revenues from
sales of the pay-per-view products provided by our content providers.
We also offer arrangements that include advertising, sponsorships and e-commerce
components. For example, our agreement with one customer provides for a fixed
monthly placement fee, payments to us for new customers sent to the customer's
Web site and a share of their Web sales generated by direct links from 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. In
September 1997, we discontinued producing new books suitable for distribution
through bookstores. We expect to continue to produce and sell CD-ROMs and print
products to non-bookstore distributors and to consumers for at least the next
two years. However, we expect revenues from these products to decline as a
percentage of our total revenues.
Costs and expenses
Our cost of revenues include 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 expense includes 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.
25
<PAGE>
During the fourth quarter of fiscal 1999, we recorded deferred compensation of
$3.2 million in connection with the grant of stock options to employees. The
exercise prices of each grant were determined by the board of directors based on
a variety of factors relevant at the time of each grant, including prices paid
in private transactions among stockholders. The $3.2 million represents the
difference between the deemed value of the common stock at the date of the
grant, for accounting purposes, and the exercise price of the related options.
The deferred compensation will result in non-cash compensation expense over the
four year vesting period of these options. Non-cash compensation for the quarter
ended March 31, 1999 was approximately $451,000.
Losses
We have incurred significant losses since our inception, including a net loss of
$2.3 million for the fiscal year ended March 31, 1999 and a net loss of $1.8
million for the year ended March 31, 1998. Our accumulated deficit at March 31,
1999 was $8.5 million. We expect to continue to incur significant operating
expenses to expand and enhance our content and services and to significantly
increase our marketing efforts. As a result, we will need to generate
substantial revenue increases to achieve profitability, which may not occur.
Results of Operations
The following table sets forth, for the periods illustrated, certain statement
of operations data expressed as a percentage of total revenues:
<TABLE>
<CAPTION>
-------------------------------
<S> <C> <C> <C>
Year Ended March 31,
-------------------------------
1997 1998 1999
--------- --------- ---------
Revenues:
Online information sales....................................................... 30% 49% 72%
Advertising, sponsorships, e-commerce.......................................... 13 22 10
CD-ROM and print............................................................... 57 29 18
--------- --------- ---------
Total revenues................................................................... 100 100 100
Provision for returns of print products........................................ (15) (5) (1)
--------- --------- ---------
Net revenues..................................................................... 85 95 99
Cost of revenues............................................................... 54 55 53
--------- --------- ---------
Gross profit..................................................................... 31 39 45
Expenses:
Product development............................................................ 5 7 6
Sales and marketing............................................................ 22 27 23
General and administrative..................................................... 26 39 36
Non-cash compensation.......................................................... -- -- 5
--------- --------- ---------
Total expenses................................................................... 53 73 70
--------- --------- ---------
Operating loss................................................................... (22) (34) (25)
Interest income.................................................................. -- 2 2
Interest expense................................................................. (2) (1) (1)
--------- --------- ---------
Net loss......................................................................... (24) (33) (24)
--------- --------- ---------
--------- --------- ---------
</TABLE>
FISCAL YEAR ENDED MARCH 31, 1999 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1998
REVENUES. Total revenues for fiscal 1999 increased 71% to $9.4 million from
$5.5 million in fiscal 1998.
Our online information sales provided the most growth, increasing 151% to $6.8
million in fiscal 1999 from $2.7 million in fiscal 1998. Revenues from
individual subscribers increased 184% to $3.5 million from $1.2 million in
fiscal 1998 due to the increase in number of subscribers and the effects of a
full year of revenues related to the previous year's growth in subscriber count.
The growth in the number of new
26
<PAGE>
subscribers was a result of increased traffic to our Web site with page views
increasing to over 11 million per month by March 1999 from six million per month
in March 1998. Revenues from enterprise subscriptions for fiscal 1999 increased
445% to $1.3 million from $239,000 in fiscal 1998 due to the increase in the
number of enterprise accounts. Sales leads provided by the additional traffic to
our Web site and our increased number of salespeople contributed to the increase
in new accounts. As of March 31, 1999, we had over 29,000 individual subscribers
and over 1,300 enterprise accounts, compared to 17,000 individual subscribers
and 468 enterprise accounts as of March 31, 1998. Licensing revenues for fiscal
1999 increased 61% to $2.0 million from $1.2 million in fiscal 1998 due to
higher royalty payments from licensees. Royalty payments are based on usage of
Hoover's content or other revenue sharing arrangements.
During fiscal 1999, advertising, sponsorships and e-commerce revenues were lower
than fiscal 1998 by 19%. In fiscal 1998 we had an agreement with Infoseek which
gave Infoseek exclusive rights to sell advertising on our Web site. Beginning in
April 1997, Infoseek was required to pay us minimum payments to the extent that
its sales of our advertising did not meet or exceed agreed upon minimum
advertising levels. During fiscal 1998, Infoseek paid us $678,000 under the
minimum payment provisions of the agreement. Infoseek's exclusive rights to sell
our advertising were terminated as of October 1, 1997 at which time we began to
build an internal advertising sales force. During fiscal 1999 we did not receive
minimum payments from Infoseek.
Revenues from CD-ROM and print products for fiscal 1999 increased 3% from fiscal
1998, due to a higher volume of products shipped. Substantially all of our
provision for returns of print products relates to trade books shipped to
bookstores. The provision for returns declined in fiscal 1999 as a percentage of
CD-ROM and print revenues as a result of our decision in September 1997 to
discontinue producing new books suitable for distribution through bookstores.
COST OF REVENUES. Cost of revenues for fiscal 1999 increased 65% to $5.0
million from $3.0 million in fiscal 1998. As a percentage of revenues, fiscal
1999 costs were slightly lower than fiscal 1998. The increase in cost of
revenues was primarily due to a $1.5 million, or 80%, increase in compensation
for existing and new editorial personnel, and a $287,000, or 149%, increase in
expenses associated with third-party content. In fiscal 1999, we added ten
full-time editorial personnel, including our Vice President, Editor-in-Chief,
and used over 20 temporary writers, editors and support staff to add and enhance
company and industry information. The increase in third-party content expenses
related to additional content provided to our Web site and higher costs
associated with existing content.
PRODUCT DEVELOPMENT. Product development expenses for fiscal 1999 increased 45%
to $566,000 from $391,000 in fiscal 1998. This increase was due to additional
programmers, analysts, and amounts paid to outside consultants. We increased our
personnel and consulting costs in order to plan and implement technology
upgrades which are currently in progress.
SALES AND MARKETING. Sales and marketing expenses for fiscal 1999 increased 46%
to $2.2 million from $1.5 million in fiscal 1998. The increase in sales and
marketing expenses was due primarily to an increase in the number of enterprise
sales representatives and an increase in the number of marketing and business
development personnel.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for fiscal 1999
increased 60% to $3.4 million from $2.1 million in fiscal 1998. The increase was
primarily due to a $457,000, or 96%, increase in fees for professional services
and travel and a $452,000, or 57%, increase in salaries of existing executive
and administrative staff as well as the addition of administrative, finance,
project management and human resource personnel. General office expenses
increased $228,000, or 39%, due to facility expansion as well as increases in
credit card processing fees on individual subscription payments. Depreciation
increased $141,000, or 52%, due to an increase in capital expenditures.
INTEREST INCOME AND EXPENSE. Interest income for fiscal 1999 increased 37% to
$177,000 from $129,000 in fiscal 1998. The increase was due to our increased
cash position for fiscal 1999 which was primarily due to the
27
<PAGE>
$4.5 million in proceeds received upon the sale of our equity securities to
Media General in September 1997. Interest expense of $56,000 in fiscal 1999
increased from $47,000 in fiscal 1998 primarily from our increased bank debt and
capital leases used to finance equipment purchases.
TAXES. We have incurred significant operating losses for all periods from
inception (February 1990) through March 31, 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.
FISCAL YEAR ENDED MARCH 31, 1998 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1997
REVENUES. Total revenues for fiscal 1998 increased 38% to $5.5 million from
$4.0 million in fiscal 1997.
Our online information sales provided the most growth, increasing 126% to $2.7
million from $1.2 million. Revenues from individual subscribers increased 388%
to $1.2 million from $251,000 in fiscal 1997 due to an increase in the number of
subscribers and an increase in our subscription prices. Revenues from enterprise
subscriptions for fiscal 1998 increased 761% to $239,000 from $28,000 in fiscal
1997 as we formally organized an enterprise sales force and established our
product pricing strategy for enterprise sales. Licensing revenues for fiscal
1998 increased 35% to $1.2 million from $913,000 in fiscal 1997 due to increased
royalty payments from existing licensees and the addition of new licensees.
Advertising revenues for fiscal 1998 increased 130% to $1.2 million from
$514,000 in fiscal 1997. In 1998, we had an agreement with Infoseek which gave
them exclusive rights to sell advertising on our Web site and required Infoseek
to pay us minimum monthly payments. During fiscal 1998, Infoseek paid us
$678,000 under the minimum payment provision of the agreement.
Revenues from CD-ROM and print products for fiscal 1998 decreased 29% to $1.6
million from $2.2 million in fiscal 1997. This decrease was a direct result of
our decrease in trade books sold in bookstores. Beginning in September 1997, we
discontinued producing new books suitable for distribution through bookstores,
and our trade sales dropped dramatically. Our decision to cease this line of
business was the result of a high product return rate and low margin on the sale
of these products. The discontinuation of new trade titles led to a decrease in
our provision for returns of print products in absolute terms as well as a
percentage of CD-ROM and print revenue.
COST OF REVENUES. Cost of revenues for fiscal 1998 increased 43% to $3.0
million from $2.1 million in fiscal 1997. This increase was due primarily to a
$1.0 million, or 118%, increase in compensation for editorial personnel from
fiscal 1997 due to the addition of over 50 full-time editorial personnel, which
was partially offset by a $220,000, or 28%, decrease in costs associated with
print products.
PRODUCT DEVELOPMENT. Product development expenses for fiscal 1998 increased 95%
to $391,000 from $201,000 in fiscal 1997. This increase was due to increased
headcount as well as design and programming fees for Hoover's Online
enhancements.
SALES AND MARKETING. Sales and marketing expenses for fiscal 1998 increased 74%
to $1.5 million from $865,000 in fiscal 1997. The increase in sales and
marketing expenses was due primarily to an increase in the number of enterprise
sales representatives and an increase in the number of marketing and business
development personnel.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for fiscal 1998
increased 105% to $2.1 million from $1.0 million in fiscal 1997. Compensation
for administrative and executive staff increased $346,000, or 77%, due primarily
to the hiring of our Chief Operating Officer, Director of Human Resources and
other administrative positions as well as salary increases. Fees for
professional services and travel increased $178,000, or 60%, due to increased
travel and increased use of outside professionals. Depreciation increased
28
<PAGE>
$183,000, or 203%, due to an increase in our depreciable assets, primarily due
to the purchase of new computers and software. General office expenses increased
$380,000, or 189%, due to facility expansion, higher overall headcount as well
as increases in credit card processing fees on individual subscription payments.
INTEREST INCOME AND EXPENSE. Interest income for fiscal 1998 was $129,000
compared to interest income in fiscal 1997 of $5,000. Interest income was
attributable to the net proceeds we received from the issuance of equity
securities in 1997. Interest expense of $47,000 arose primarily from our bank
debt and capital leases used to finance equipment purchases. Interest expense in
fiscal 1998 was lower than fiscal 1997 due to lower amounts of short term debt
over the year.
29
<PAGE>
Quarterly Results of Operations
The following table sets forth certain unaudited statements of operations data
for the eight quarters ended March 31, 1999, as well as the percentage of net
revenues represented by each item. These data have been derived from unaudited
interim financial statements prepared on the same basis as the audited financial
statements contained in this prospectus and, in the opinion of management,
include all adjustments, consisting only of normal recurring adjustments,
considered necessary for a fair presentation of such information when read in
conjunction with the financial statements and related notes appearing elsewhere
in this prospectus. These unaudited interim financial statements are not
necessarily indicative of future operating results.
<TABLE>
<CAPTION>
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Quarter Ended
---------------------------------------------------------------
June 30, Sept. 30, Dec. 31, Mar. 31, June 30,
1997 1997 1997 1998 1998
----------- ----------- ----------- ----------- -----------
DOLLARS IN THOUSANDS
Statement of Operations Data:
Revenues:
Online information sales.............................. $ 378 $ 500 $ 713 $ 1,105 $ 1,228
Advertising, sponsorships, e-commerce................. 55 38 239 172 199
Advertising representation contract with related
party................................................ 186 275 150 67 --
CD-ROM and print...................................... 431 394 249 517 432
----------- ----------- ----------- ----------- -----------
Total revenues.......................................... 1,050 1,207 1,351 1,861 1,859
Provision for returns of print products............... (65) (114) (63) (46) (29)
----------- ----------- ----------- ----------- -----------
Net revenues............................................ 985 1,093 1,288 1,815 1,830
Cost of revenues...................................... 545 633 848 1,009 1,198
----------- ----------- ----------- ----------- -----------
Gross profit............................................ 440 460 440 806 632
Expenses:
Product development................................... 99 106 111 75 90
Sales & marketing..................................... 235 284 424 558 526
General and administrative............................ 353 447 580 745 769
Non-cash compensation................................. -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Total expenses.......................................... 687 837 1,115 1,378 1,385
----------- ----------- ----------- ----------- -----------
Operating loss.......................................... (247) (377) (675) (572) (753)
Interest income....................................... 3 16 59 51 44
Interest expense...................................... (13) (13) (10) (10) (9)
----------- ----------- ----------- ----------- -----------
Net loss................................................ $ (257) $ (374) $ (626) $ (531) $ (718)
----------- ----------- ----------- ----------- -----------
Income (loss) before non-cash compensation.............. $ (257) $ (374) $ (626) $ (531) $ (718)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
As a Percentage of Total Revenues:
Revenues:
Online information sales.............................. 36% 41% 53% 59% 66%
Advertising, sponsorships, e-commerce................. 5 3 18 9 11
Advertising representation contract with related
party................................................ 18 23 11 4 --
CD-ROM and print...................................... 41 33 18 28 23
----------- ----------- ----------- ----------- -----------
Total revenues.......................................... 100 100 100 100 100
Provision for returns of print products............... (6) (9) (5) (2) (2)
----------- ----------- ----------- ----------- -----------
Net revenues............................................ 94 91 95 98 98
Cost of revenues...................................... 52 52 63 54 64
----------- ----------- ----------- ----------- -----------
Gross profit............................................ 42 38 33 43 34
Expenses:
Product development................................... 9 9 8 4 5
Sales and marketing................................... 22 24 31 30 28
General and administrative............................ 34 37 43 40 41
Non-cash compensation................................. -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Total expenses.......................................... 65 69 83 74 75
----------- ----------- ----------- ----------- -----------
Operating loss.......................................... (24) (31) (50) (31) (41)
Interest income....................................... -- 1 4 3 2
Interest expense...................................... (1) (1) (1) (1) --
----------- ----------- ----------- ----------- -----------
Net loss................................................ (24 )% (31 )% (46 )% (29 )% (39)%
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Income (loss) before non-cash compensation.............. (24 )% (31 )% (46 )% (29 )% (39)%
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
<CAPTION>
<S> <C> <C> <C>
Sept. 30, Dec. 31, Mar. 31,
1998 1998 1999
----------- ----------- -----------
DOLLARS IN THOUSANDS
Statement of Operations Data:
Revenues:
Online information sales.............................. $ 1,586 $ 1,714 $ 2,236
Advertising, sponsorships, e-commerce................. 184 262 316
Advertising representation contract with related
party................................................ -- -- --
CD-ROM and print...................................... 290 332 583
----------- ----------- -----------
Total revenues.......................................... 2,060 2,308 3,135
Provision for returns of print products............... (45) (36) (23)
----------- ----------- -----------
Net revenues............................................ 2,015 2,272 3,112
Cost of revenues...................................... 1,368 1,159 1,277
----------- ----------- -----------
Gross profit............................................ 647 1,113 1,835
Expenses:
Product development................................... 124 141 211
Sales & marketing..................................... 526 554 578
General and administrative............................ 928 726 979
Non-cash compensation................................. -- -- 451
----------- ----------- -----------
Total expenses.......................................... 1,578 1,421 2,219
----------- ----------- -----------
Operating loss.......................................... (931) (308) (384)
Interest income....................................... 42 40 51
Interest expense...................................... (15) (18) (14)
----------- ----------- -----------
Net loss................................................ $ (904) $ (286) $ (347)
----------- ----------- -----------
Income (loss) before non-cash compensation.............. $ (904) $ (286) $ 104
----------- ----------- -----------
----------- ----------- -----------
As a Percentage of Total Revenues:
Revenues:
Online information sales.............................. 77% 75% 71%
Advertising, sponsorships, e-commerce................. 9 11 10
Advertising representation contract with related
party................................................ -- -- --
CD-ROM and print...................................... 14 14 19
----------- ----------- -----------
Total revenues.......................................... 100 100 100
Provision for returns of print products............... (2) (2) (1)
----------- ----------- -----------
Net revenues............................................ 98 98 99
Cost of revenues...................................... 66 50 41
----------- ----------- -----------
Gross profit............................................ 31 48 59
Expenses:
Product development................................... 6 6 7
Sales and marketing................................... 26 24 18
General and administrative............................ 45 32 31
Non-cash compensation................................. -- -- 14
----------- ----------- -----------
Total expenses.......................................... 77 61 71
----------- ----------- -----------
Operating loss.......................................... (45) (13) (12)
Interest income....................................... 2 2 2
Interest expense...................................... (1) (1) (1)
----------- ----------- -----------
Net loss................................................ (44 )% (12 )% (11 )%
----------- ----------- -----------
----------- ----------- -----------
Income (loss) before non-cash compensation.............. (44 )% (12 )% 3 %
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
30
<PAGE>
Our total revenues have generally increased each quarter during the eight fiscal
quarters ending March 31, 1999. Online information sales increased to $2.2
million in the fourth quarter of fiscal 1999 from $378,000 in the quarter ended
June 30, 1997. Steady increases each quarter were due to growth in the number of
our individual and enterprise subscribers.
Advertising revenues are affected by the industry's seasonality, with the most
advertising sold in the second and fourth calendar quarters of the year. During
the quarters ended June 30, September 30, and December 31, 1997, we utilized a
third-party sales agent, Infoseek, for the sale of our advertising. Infoseek's
actual advertising sales were significantly lower than the contractually
mandated minimum payments which were received and recorded as revenue during
these quarters. Although the minimum requirements were terminated as of December
31, 1997, we recognized a final amount of $67,000 in the quarter ended March 31,
1998. In October 1997, we began our transition to build our in-house advertising
sales force. We have experienced growth in advertising in each of the four
quarters beginning with the quarter ended June 30, 1998.
CD-ROM and print product sales fluctuate due to the publication dates for our
products. Most titles are updated annually between December and March.
Back-orders and standing orders for new editions create back-logs and therefore
the largest shipments occur during the month the new editions are printed.
Provision for return of print products has gradually decreased over the eight
quarters as we reduced our level of sales to bookstores. After September 1997,
we no longer created new print products for sale into the bookstore industry.
Cost of revenues has grown steadily as we have expanded our editorial
operations. Due to the high number of December year-end companies in our company
and industry database, we employ additional temporary employees each year from
April through September to update the database. In addition, we increased the
number of companies and industries we covered by over 25% during this same
period in 1998. This resulted in a 14% increase in costs of revenues for the
quarter ended September 30, 1998 as compared to the previous quarter. Cost of
revenues in the quarter ended December of 1998 was lower than previous quarters
due to a lower number of temporary personnel. We expect to use temporary
personnel each year during this time period for updating, but do not expect to
see as much fluctuation.
Product development expenses have fluctuated due to consulting and professional
fees paid to outside consultants, designers and programmers. During October of
1997, we made significant changes to Hoover's Online, adding new designs,
features and content. These changes resulted in higher spending levels during
this time period. We also added new features and content in September 1998. We
hired our Vice President, Technology in October 1998 and began to increase our
internal staff of programmers and analysts. We utilized significant third party
systems analysis during the quarter ended March 31, 1999 to support new database
software and hardware systems.
Sales and marketing expenses have increased as we have added new personnel in
sales, marketing, and customer service. Promotional expenses, including
advertising and trade shows have gradually increased and are expected to
significantly increase as part of our new campaigns to increase brand awareness
and increase traffic to the Web site.
General and administrative expenses have generally increased each quarter from
the quarter ended June 30, 1998 through the quarter ended September 30, 1998.
This was due to increases in office and occupancy related to our temporary
growth in editorial staff. General and administrative personnel expenses have
increased, especially since the third quarter of 1998, as we increased our
executive and administrative personnel and invested in our financial, business
and operating infrastructure.
Our quarterly operating results may fluctuate significantly in the future as a
result of many factors, including:
- - the timing of marketing expenditures;
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- - the traffic on our Web site;
- - the demand for individual and enterprise subscriptions;
- - the demand for advertising and sponsorships on our Web site;
- - the demand for services or products that are sold on or through our Web site;
and
- - seasonality.
As a result, we believe that quarter-to-quarter comparisons of our operating
results cannot be relied upon as indicators of future performance.
Liquidity and Capital Resources
Since inception, we have financed our activities primarily through net cash
proceeds from private placements of equity securities as well as exercises of
options and warrants. Total cash invested since inception was $15.0 million
through March 31, 1999. Investments by Media General and other stockholders
during September 1997 significantly increased our cash resources. In February
and March of 1999, stockholders exercised warrants increasing our cash by $4.3
million.
We used $2,550 net cash in operating activities in fiscal 1999 compared to $1.0
million in fiscal 1998. Net cash used in operating activities resulted from net
operating losses and increases in accounts receivable, partially offset by
increases in deferred revenues, accrued expenses and accounts payable.
We used $789,000 net cash in investing activities in fiscal 1999 compared to
$585,000 in fiscal 1998. Net cash used in investing activities was primarily
related to purchases of computer and network equipment, as well as leasehold
improvements.
We obtained cash from financing activities of $4.7 million in fiscal 1999 and
$4.9 million in fiscal 1998, primarily through private placements of equity
securities. In addition, in 1997 and 1998, we utilized revolving credit lines
and loans from stockholders secured by accounts receivable and computer
equipment to fund operations.
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 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 in the future,
beginning in October 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.
As of March 31, 1999, we had $7.8 million of cash and cash equivalents. Our
principal commitments at March 31, 1999 consisted of obligations under bank
obligations and capital leases. On a pro forma basis to reflect our receipt of
the gross proceeds from our sale of common stock in the June 1999 transactions,
we had cash and cash equivalents as of March 31, 1999 of $16.7 million.
At March 31, 1999, we had a $550,000 term loan which matures on December 31,
2000, a $200,000 term loan which matures on January 12, 2000 and a $150,000
revolving line of credit with a bank effective through March 31, 1999 but
expired immediately thereafter. The term loans bear interest at prime plus 1.50%
and the revolving line of credit bears interest at prime plus 1.25%. At March
31, 1999 and 1998, we had no borrowings outstanding under the line of credit,
and $447,628 and $237,500, respectively, outstanding under the term loans.
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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 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 the net proceeds of this offering, together with 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 twelve months, our significant commitments consist of
repayment of an $550,000 term loan and lease commitments for facilities,
telephone and computer equipment. We also intend to increase marketing
activities. 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 general research
information obtained electronically. We are also dependent on financial
institutions involved in the processing of our customer's credit card payments
for subscriptions and other products and 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 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. We expect to complete
these tests during the summer of 1999. 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, such as Media General Financial Services.
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 are currently assessing 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. We expect this assessment process to be
completed during the summer of 1999. Based on the results of this assessment, we
will develop and implement, if necessary, a remediation plan with respect to
third-party software, third-party vendors and computer technology and services
that may fail to be year 2000 compliant. We expect to complete any required
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remediation during the summer of 1999. At this time, the expenses associated
with this assessment and potential remediation plan that may be incurred in the
future cannot be determined; therefore, we have not developed 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 initial assessment of our Web sites' 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
summer of 1999.
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 vendor's 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.
Market Risks Related to Financial Instruments
Hoover's has floating rate borrowings and 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
borrowings are not significant, market risks related to financial instruments
are not material.
Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosure About Segments of an
Enterprise and Related Information" which establishes standards for the way
public companies disclose information about operating segments, products and
services, geographic areas and major customers. We adopted SFAS No. 131
effective April 1, 1998. In June 1998, the FASB issued SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities," which is effective for
fiscal quarters ending after June 15, 1999. We do not expect the adoption of
SFAS No. 133 to have a material impact on our financial statements.
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Business
The following description of our business should be read in conjunction with the
information included elsewhere in this prospectus. This description contains
forward-looking statements that involve risks and uncertainties. Our actual
results could differ significantly from the results discussed in these
forward-looking statements as a result of certain of the factors set forth in
"Risk Factors" and elsewhere in this prospectus.
Overview
Hoover's is an Internet provider of company and industry information designed to
meet the diverse needs of business organizations, businesspeople and investment
professionals worldwide. Our Web site is Hoover's Online located at
WWW.HOOVERS.COM. We were one of the first to provide high-quality, proprietary
business information on the Internet to the mission-oriented businessperson, who
seeks answers to specific questions. Visitors to our Web site use our
information for their professional endeavors, including financial and
competitive research, as well as for their personal activities, including career
development and personal investment. We believe we provide our advertisers with
a large, demographically desirable audience, who as a group, are affluent,
highly educated and willing to conduct business over the Internet.
Our core asset of proprietary editorial content is a recognized source of
authoritative, engagingly written and useful information on over 45 industries
and approximately 14,000 public and private enterprises worldwide. We have a
staff of approximately 100 writers, editors, researchers and online producers.
We have one of the largest online databases of company-specific information
measured in terms of breadth and depth of coverage, and we continually expand
and update our database. Hoover's Online also provides information on initial
public offerings through IPO Central, which is a widely trafficked source for
information on initial public stock offerings. We also offer feature stories,
news, career information, personal finance information, SEC documents,
management biographical information as well as brokerage research and credit
reports. Additionally, we offer our branded search and sort tools, such as Lead
Finder and StockScreener, to make our information more useful to businesspeople.
We generate revenues from the following sources:
- - 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 in CD-ROM and print.
Our online revenues have grown to $7.7 million in fiscal 1999 from $215,000 in
fiscal 1995, representing a compound annual growth rate of over 145%.
We were among the first Internet companies to deploy a tiered business model:
advertising-supported free information, paid subscription based in-depth
information and pay-per-view e-commerce for specialized information. Hoover's
Online attracted approximately two million unique visitors during the quarter
ended March 31, 1999, who accounted for over 30 million page views. We use our
high-quality free information to attract both potential paying subscribers and
customers for our pay-per-view information. As of March 31, 1999, our
subscription service had an estimated 100,000 paying seats. Of these 100,000
seats, over 29,000 were individual subscribers which pay on an individual basis
and the balance were attributable to over 1,300 enterprise accounts, which we
estimate represented over 70,000 seats which are paid for on an enterprise or
company basis rather than an individual basis.
Hoover's Online is designed to be a destination where mission-oriented
businesspeople can fulfill their business information needs on a daily basis. As
we expand Hoover's Online, we intend to add:
- - increased depth and breadth of company and industry information, particularly
private and non-U.S. enterprises, as well as increased news coverage;
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- - information and e-commerce resource centers sponsored by one or more of the
organizations with whom we have advertising or e-commerce relationships where
businesspeople can perform mission-oriented tasks in such areas as
professional development, business travel and company operations;
- - business-oriented tools, including sophisticated searching and sorting,
scheduling, personalization and targeted e-mail alert notification; and
- - personal features, including general news, sports scores, weather forecasts
and portfolio tracking and leisure travel information to address some of the
primary personal interests of our visitors.
Our strategic goal in adding these future enhancements is to increase the
frequency and duration of visits to Hoover's Online.
Industry Background
MARKET OPPORTUNITY
Providing information, products and services to businesspeople over the Internet
represents a large and growing market opportunity. Growth in this market is
being driven by several factors, including:
INCREASING INTERNET USAGE. The Internet has rapidly become a significant global
communications and commerce medium. The tremendous growth of Internet usage has
been spurred by the growing base of personal computers both in the home and
workplace, the continuously improving network infrastructure, the proliferation
of content and the affordability and ease of access. International Data
Corporation, a research firm that covers information technology markets and
trends, estimates that the number of Internet users will grow worldwide from
approximately 159 million at the end of 1998 to approximately 410 million by the
end of 2002. Forrester Research, a research firm that analyzes technology
changes and its impact on business, consumers and society, in its report THE NEW
BUSINESS PORTALS, estimates that in 1998, 48 million workers worldwide had
access to the Internet and that by 2004 businesses will be providing Internet
access to approximately 200 million workers worldwide.
IMPORTANCE OF ONLINE BUSINESS INFORMATION. Companies and businesspeople are
increasingly recognizing that productivity and competitiveness depend on access
to reliable online information about customers, competitors, executives,
industries, business trends, breaking news and market data. Because of its
affordability, convenience and ease of access, the Internet has emerged as an
effective medium for distributing business information. Business organizations
continue to invest heavily in Internet connectivity and networked computing
infrastructures to manage internal information. They now are seeking to leverage
these infrastructures to access, distribute and manage the large amounts of
external business information needed by their workforces. As enterprise
information requirements are reaching unprecedented levels, organizations are
willing to pay for business information that gives them a competitive edge.
Cowles-Simba, a research firm that specializes in the media and information
industry, in its report WEB/ONLINE SERVICES MARKET FOR BUSINESS AND PROFESSIONAL
PUBLISHING, predicts that online business information revenues in the United
States will rise from $27 billion in 1998 to $40 billion in 2002.
EXPANDING ONLINE ADVERTISING AND E-COMMERCE. The Internet enables advertisers
to target their messages to audiences having specific demographic
characteristics and to track the effectiveness of their advertisements based on
impressions delivered and click through rates. Forrester Research estimates that
Internet advertising will grow from $1.5 billion in 1998 to $11 billion in 2002.
E-commerce is revolutionizing the way information and goods are bought and sold
by offering convenience and affordability to consumers and businesses. Forrester
Research estimates that e-commerce will grow from $55 billion in 1998 to $1.1
trillion in 2002, representing a compound annual growth rate of 111%.
INCREASING PERSONAL USE BY BUSINESSPEOPLE. Businesspeople use online business
information not only in connection with their daily work activities, but also
for personal uses, such as investing, professional
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development, job searching, training and travel. Typically, businesspeople visit
only a few business-oriented Web sites a day. These businesspeople and their
organizations demand content from these Web sites that is easily accessible,
up-to-date and that provides value-added research and analysis.
SHORTCOMINGS OF EXISTING INFORMATION PROVIDERS
Despite the magnitude of the market opportunity, existing providers have failed
to provide high-quality business information in a cost-effective manner. Today,
most businesspeople receive electronic business information either through
traditional business information providers or consumer-oriented Web sites.
TRADITIONAL PROVIDERS. Business information providers such as LEXIS-NEXIS and
Dun & Bradstreet fail to meet the needs of many businesspeople for affordable
business information. These information providers offer business information
that is expensive, making them unaffordable for individuals and many
organizations. In addition, some of these companies operate on a pay-per-view or
fee-per-terminal basis which causes budget conscious organizations of any size
to limit the number of people within their organization who have access to the
information. Traditional providers have difficulty changing their business
models, cost structures or distribution capabilities, preventing them from
offering their information enterprise-wide or to individual users.
CONSUMER-ORIENTED WEB SITES. Consumer-oriented Web sites and other financial
data Web sites offer a comparatively broad array of inexpensive, electronic
data. However, their data is typically not of the depth and quality required by
businesspeople. The data is not as reliable or timely as that of traditional
information providers. Consumer-oriented Web sites provide data in a format that
makes it difficult for businesspeople to research and complete mission-oriented
tasks in a timely manner. These Internet data providers typically act solely as
aggregators of information developed by other, primarily consumer-oriented,
sources.
The Hoover's Solution
We provide high-quality, cost-effective and useful business information,
products and services that are essential to businesspeople today and provide an
attractive environment for organizations with whom we have advertising or
e-commerce relationships.
Key elements to the Hoover's solution are:
- - PROPRIETARY, TRUSTED EDITORIAL CONTENT. Our staff of approximately 100
researchers, writers, editors and online producers create and compile
original, engaging and useful business information on approximately 14,000
public and private enterprises worldwide and 45 industries. We offer
easy-to-read content written in a distinctive style that extends far beyond
traditional aggregated content. Our editorial staff is constantly updating our
content, from changes in the financial markets to changes in an organization's
management. We uphold high standards of reliability, quality and timeliness
for the information we provide.
- - FOCUS ON THE NEEDS OF BUSINESSPEOPLE. We understand and focus on the
information needs of businesspeople. We leverage our unique content to offer
products and services that meet both the business and personal needs of
professionals. For example, a visitor may learn quickly about a prospect's
branding strategy, market share, competitive position, financial condition and
history as well as purchase our pay-per-view information and choose
editorially selected links to further information. To meet their personal
needs, a visitor may search for information on career development and personal
investing. Unlike Web sites targeting personal use, we believe Hoover's Online
is generally not excluded by corporate policies limiting access to
non-business Web sites, allowing businesspeople to attend to their personal as
well as business needs while at work.
- - TIERED LEVELS OF SERVICE. We offer our audience three levels of service to
meet their varied business needs.
1. FREE. For each of the approximately 14,000 enterprises that we cover,
visitors can access a brief enterprise overview, its financial
information, a list of up to seven of its top officers, a list and
links to its top three competitors and selected news, SEC documents
on a delayed basis, stock quotes and charts. Visitors can also access
industry information on 45 industry sectors as well as IPO Central,
Career Central and our Company of the Day.
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2. PAID SUBSCRIPTION. In addition to our free services, individual and
enterprise subscribers can access over 3,500 detailed company
profiles, more in-depth information on over 8,000 enterprises
including financial information, strategies and history, all of the
officers of the enterprises covered, all key competitors, segment
data by industry and geography, lists of products and brands and SEC
documents delivered in real-time. In addition, subscribers can
utilize our Power Tool and Lead Finder search and sort tools as well
as access detailed sub-industry lists. Enterprise subscribers have
access to printable formatted reports in Adobe .pdf format.
3. PAY-PER-VIEW. All of our visitors may purchase individual products
and services, such as brokerage research reports from Multex.com as
well as both Dun & Bradstreet and Experian credit reports from
Winstar Telebase on a pay-per-view basis.
- - EFFICIENT INTERNET SALES CHANNEL. By deploying a tiered, Internet-based
distribution model, we are able to introduce our business information and
services at no cost to the visitor. We offer these individuals the opportunity
to subscribe to Hoover's Online at an affordable price, independent of their
enterprise affiliations. We create direct relationships with individuals
within enterprises, which facilitates future enterprise wide sales. Our mass
audience allows us to offer business information on a more cost-effective
basis than traditional providers.
Hoover's Online attracts a large, demographically desirable audience of
businesspeople that makes us attractive to advertisers, sponsors and businesses
with which we have e-commerce relationships. We offer banner and button
advertisements on Hoover's Online, sponsorships for organizations who want to
integrate their advertisements or products with selected content on our Web site
and e-commerce opportunities for organizations who want to sell their products
on our Web site. Moreover, we offer combined arrangements that can integrate
components of advertisement, sponsorship and e-commerce.
Business Strategy
Our goals are to be one of the Internet destinations that businesspeople depend
on daily to perform mission-oriented tasks and to facilitate their
business-related transactions as well as to offer advertisers, sponsors and
e-commerce relationships an attractive environment. The key elements of our
strategy include:
- - INCREASING BRAND AWARENESS. We will continue to build Hoover's brand awareness
and reputation. We intend to build our internal marketing capabilities through
marketing, public relations campaigns and image advertising. We will continue
to increase our name brand and audience through our co-branding relationships
including the following newspapers: THE NEW YORK TIMES, THE WASHINGTON POST
and THE LOS ANGELES TIMES. In June 1999, we entered into an agreement with NBC
to license a portion of our content for distribution and marketing by NBC,
CNBC and CNBC.com and to produce with NBC editorial content for use both
online at CNBC.com and on television on CNBC.
- - ENHANCING AND EXPANDING CORE CONTENT AND TOOLS. We will continue to build the
depth and breadth of our coverage of companies and industries by expanding our
proprietary database and licensing additional company and industry information
from third parties. We will seek to forge new and expanded distribution and
content relationships. In order to increase the frequency and duration of our
viewers' visits to Hoover's Online, we are developing additional services,
tools and online resource centers that businesspeople can use to perform
mission-oriented tasks in areas such as professional development, business
travel and corporate operations. We intend to enhance our personal offerings
in the areas of non-business news, career planning and personal finance. Our
viewers will be able to customize the news and information they receive by
industry, company, job function and other criteria. Moreover, we plan to offer
new and enhanced tools and media formats, including audio, video and wireless
delivery. By enhancing and expanding our core content and tools, we are making
Hoover's Online the destination where businesspeople improve their
professional skills and transact business multiple times a day.
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- - INCREASING THE NUMBER OF VISITORS. We intend to attract more visitors to
Hoover's Online through our marketing relationships, increasing our direct
Internet marketing and advertising on television and radio. We plan to expand
our relationships with frequently visited and well-known Web sites and
establish new relationships that allow us to introduce our proprietary content
to a broader audience. We also intend to create sponsor areas on popular Web
sites frequented by businesspeople.
- - EXPANDING MARKETS AND CHANNELS. To further meet the needs of businesspeople
worldwide, we intend to pursue acquisitions of, and strategic relationships
with, companies with complementary content, services and technologies and to
expand our information and services to cover more business organizations in
international markets. We recently established WWW.HOOVERS.CO.UK to leverage
our coverage of business organizations in the United Kingdom and to begin
establishing our presence in the European market. As businesspeople outside
the United States embrace Internet-based business information and e-commerce,
we will evaluate opening sales offices in Europe, Latin America and Asia.
We believe that this strategy will generate increased revenues from the
following sources:
- - INDIVIDUAL AND ENTERPRISE SUBSCRIPTIONS AND LICENSES. We plan to increase our
subscriber base by increasing the number of visitors to our Web site,
converting both current and new visitors to subscribers and adding new premium
content and services. We intend to create greater customer affinity through
our planned personalization and customization tools, thereby increasing the
frequency and amount of time subscribers spend on our Web site. To increase
the number of our enterprise subscriptions, we plan to significantly increase
the size of our internal sales force in order to sell more enterprise accounts
to organizations and to upgrade existing individual subscribers to enterprise
subscriptions.
- - ADVERTISING, SPONSORSHIP AND E-COMMERCE. We intend to increase our advertising
and e-commerce revenues by capitalizing on the attractive demographics of our
expanding audience. We believe our typical visitor is highly educated,
professional, affluent and comfortable transacting business over the Internet.
As traffic, visit frequency and average time spent at Hoover's Online
increase, our attractiveness to advertisers and e-commerce vendors will be
further enhanced. We also plan to increase the attractiveness of Hoover's
Online to advertisers by ascertaining preferences of our visitors and
targeting those visitors with advertisements, offers and information. We will
continue to seek sponsors for our online resource centers. For instance,
during the 1999 tax season, Intuit sponsored a tax-related resource center. We
will also continue to seek relationships with e-commerce organizations
offering products and services targeted to our audience.
The Hoover's Online Web Site
Hoover's Online provides business information, including detailed company and
industry information, to meet the diverse needs of the mission-oriented
businessperson. This information is created, collected, organized and presented
by an editorial staff of approximately 100 researchers, writers, editors and
Internet content producers.
PROPRIETARY DATABASE
Our proprietary editorial database contains information on approximately 14,000
public and private enterprises worldwide and 45 industries. Our editorial staff
selects companies for coverage using the following criteria:
- - PUBLIC U.S. COMPANIES. We cover every U.S. company traded on the New York
Stock Exchange, American Stock Exchange and Nasdaq National Market System. We
also follow more than 1,200 Nasdaq SmallCap Market companies, as well as a
number of companies that trade on less followed markets, such as Nasdaq's
over-the-counter market. We also add coverage as companies prepare to go
public.
- - PRIVATE U.S. COMPANIES AND OTHER ENTERPRISES. We seek to identify and cover
every private U.S. company with annual revenues greater than $500 million as
well as selected companies with high public profiles. We make a special effort
to cover these companies because we know it is difficult to obtain information
on many of
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them. We also seek to cover the largest universities, agricultural co-ops,
sports leagues and teams, government-owned enterprises, labor organizations,
mutual insurance companies, hospitals, law firms, charities, joint ventures,
foundations, associations and not-for-profit organizations.
- - NON-U.S. COMPANIES AND SUBSIDIARIES. We cover approximately 2,500 of the
companies judged by our editors to be the most influential international
companies, including substantially all non-U.S. companies known to have annual
sales of more than $5 billion as well as a number of foreign subsidiaries of
U.S. companies and U.S. subsidiaries of foreign companies. We are continually
expanding our coverage of non-U.S. companies. We follow all firms whose stocks
trade in the United States through American Depository Receipts. We also cover
all companies included on major global stock market indices, including the
Financial Times Stock Exchange 100 Index, Societe de Bourses Francaises 120,
Deutscher Aktienindex (DAX), Milano Indice Borsa (MIB 30), Nikkei 225 Stock
Average, Mexico Price and Quotation Index, Toronto Stock Exchange 100 Index
and Straits Times Industrial Share Price Index.
In addition to offering a broad amount of information, we provide search and
sort tools that make our information more accessible and valuable. Viewers can
search our database by company name, stock exchange ticker symbol, keyword or by
the name of an officer. Subscribers can search using more extensive criteria,
including geographic region, company size or company type. We have expanded
these tools over time, making our services easier to use. For example, our
branded search and sort tools can accommodate common misspellings of enterprise
names.
We allocate editorial resources to mining the Internet for useful information on
companies. For example, our editors choose and display links to news articles
for thousands of the companies we cover. Viewers can also use Hoover's Online to
search the Internet for more business information by employing our links to
search engines. We also provide links to view SEC documents, credit reports and
other information.
Our researchers and editors also review newswires, electronic information
services, major newspapers and business and industry publications to update our
company information daily as news events warrant. In addition to this rigorous
process of daily monitoring and updating, we give each company in our database
an annual comprehensive review. We use these documents, as well as news
articles, the company's annual report and interviews with company
representatives as the primary sources for our updates. Our company financial
information is updated as soon as a company releases its earnings and again when
it makes its filings with the SEC. Market and comparison data are updated daily.
We obtain our information from the following sources:
- - the covered company;
- - Media General Financial Services for financial data on public companies and
non-U.S. firms with sponsored American Depository Receipts;
- - electronic news services such as Bloomberg and Dow Jones;
- - an extensive collection of specialized trade sources; and
- - a variety of other Internet-based and print information resources.
ADVERTISING-SUPPORTED INFORMATION
The free portion of our Web site contains information on approximately 14,000
enterprises. For each company covered, visitors can access, free of charge, the
following: a brief company overview, financial information, a list of top
officers, a list and links to its top three competitors and selected news, SEC
documents, quotes and charts.
HOOVER'S COMPANY CAPSULES. Our company capsules contain information on
approximately 14,000 public and private enterprises in the United States and
internationally. The capsules consist of basic company and financial information
as well as selected Web links.
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[Full Page Screen Print of Annotated Company Capsule]
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IPO CENTRAL. IPO Central is our branded information source for U.S. companies
that have recently completed an initial public offering or have commenced the
initial public offering process. This service links the user to a subset of our
company capsules, to IPO-related filings from EDGAR Online and to news stories
about the company. Companies covered include those that initially filed with the
SEC on or after May 6, 1996, the first day that all U.S. companies were required
to submit their SEC filings electronically.
STOCKSCREENER. StockScreener allows visitors to use up to 22 criteria to search
for and sort lists of companies. Searchable criteria include: stock exchange,
industry, financial ratios, growth rate, company size, rate of return, profit
margins and volatility. We provide a link back to Hoover's Online capsule for
all companies listed in the Stockscreener results list.
INDUSTRY ZONE. Through Industry Zone, we offer information on selected industry
sectors. Industry Zone features analysis and definitions, as well as links to
industry news and topical books. We also offer 45 Industry Snapshots that
businesspeople can search to learn more about industry trends, jargon and major
companies.
INVESTOR RESOURCES. Investor Resources is a collection of tools that enable
customers to track their portfolios and search for companies' financial
statements, stock quotes, SEC filings and brokerage research reports. This area
also contains links to StockScreener and IPO Central as well as links to
featured investment research through organizations with whom we have strategic
relationships such as Individual Investor Online and Multex.
CAREER CENTER. Career Center enables job seekers and recruiters to research
employment information. For each company on the list of employers, we provide a
link to our company capsule, the company's Web site and company-specific job
openings. We also offer job hunting tips and links to a number of job search and
relocation assistance Web sites as well as Web sites where visitors can locate
industry-focused executive recruiters.
THE STORE. In September 1998, we launched The Store on Hoover's Online to sell
a number of business and consumer products through alliances with vendors and
third-party distributors. Currently, we sell books, compact discs, downloadable
mailing lists, research reports, annual reports, and other business and
consumer-oriented products. We intend to seek relationships with additional
organizations to broaden the scope of products offered through The Store.
HOOVER'S ONLINE PREMIUM CONTENT, SERVICES AND TOOLS
Our premium content, services and tools are only available to our paying
subscribers and include the following:
HOOVER'S COMPANY PROFILES. For approximately 3,500 of the largest,
fastest-growing and most influential companies as judged by our editors,
Hoover's company profiles provide a strategic overview, history, news links,
expanded list of officers and employees, products and operations information and
a comprehensive list of key competitors. Hoover's editors select profiled
companies using their own editorial discretion as well as objective criteria
such as financial significance, news events, market trends and subscriber
interest and demand.
In addition to profiles, our subscribers may access in-depth and historical
financial reports for nearly 8,000 companies. These reports include:
- - detailed financials: up to three years and five quarters of income statements,
balance sheets and cash flow statements;
- - historical financials: up to ten years of selected financial data including,
revenues, net income, number of employees and per share values for dividends
and book value as well as debt ratio, return on equity, current ratio and
other figures for the latest fiscal year end;
- - market data: current stock price, valuation measures and ratios such as
price-to-sales, price-to-cash flow and return on assets. We also include daily
updated information on revenue growth rates, earnings per share and dividends;
and
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- - comparison data: financial ratios, per share data and growth rates compared to
industry and market levels.
EXPANDED LISTS OF OFFICERS. Subscribers have access to an expanded list of a
company's officers, including ages, salaries and links to biographies, when
available.
MORE COMPLETE LIST OF COMPETITORS. For each of our profiled companies, we
include a more complete list of competitors. The comprehensive list includes
companies that are pursuing the same customers as the profiled company. Unlike
other business information providers that offer computer-generated and often
inaccurate lists of industry peers, our list of competitors is selected by our
editorial staff.
PRODUCTS/SERVICES/SEGMENT DATA. Our products/services/segment data section
lists a company's products, services, brand names, divisions, subsidiaries and
joint ventures. Information contained in this section varies by company and the
amount of information available. We have included sales and profit information
by business segment if the company publishes that information.
REAL-TIME SEC DOCUMENTS. Through EDGAR Online, our subscribers can access a
company's SEC filings as soon as they are filed. Non-subscribers must wait 24
hours to access the same data.
WATCHLIST. EDGAR Online Watchlist is an automated e-mail service that alerts
subscribers when U.S. public companies they have selected file documents with
the SEC. Subscribers can track all of the company's filings or choose only
selected filings. Individual subscribers can track up to five companies.
Hoover's business licensees can track up to 10 companies.
BUSINESS BONEYARD. Business Boneyard is a collection of historical profiles of
companies that have been absorbed or dissolved because of merger, acquisition,
market trends or weak management. Business Boneyard includes companies such as
Atari Corporation, Digital Equipment Corporation and Santa Fe Pacific
Corporation.
DETAILED INDUSTRY INFORMATION. We provide lists of companies in selected
industries and their sub-sectors.
SEARCH AND SORT TOOLS. Power Tool and Lead Finder are our branded search and
sort engines that allow our subscribers to compile lists of companies by the
following categories:
- - industry: searches may be made by industry, ranging from advertising,
marketing and banking to biomedics, machinery and textiles.
- - location: searches may be performed by metro area, state or country.
- - annual sales: searches may be limited to companies with a specified level of
sales.
- - company type: searches may be limited to public companies, private companies
or non-profit entities.
Subscribers can search for companies using any one search category or may
combine two or more categories. Lead Finder is targeted to sales people
interested in sales prospecting or finding leads. Search results show all the
information in our database that meet the listed criteria. In addition, we
provide links to company Web sites and company-specific job openings when they
are available.
Future Additions to Hoover's Online
As part of our business strategy, we are developing online resource centers
containing a broad array of business-oriented information, products and
services. We expect each of the resource centers to leverage our extensive
proprietary company and industry database. Each resource center will contain a
directory of business-related Web sites, news related to the activities covered
in that center, a targeted search engine, business tools and personalization
options. We anticipate that many of the resource centers will also contain
licensed third-party information.
Most of this information will be free, with discrete areas of high-value
information available only to subscribers or on a pay-per-view basis. The
resource centers are being designed not just to provide information, but also to
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provide targeted sponsorship or e-commerce opportunities. For example, in
conjunction with our business travel resource center we intend to sell the right
to book airline tickets to a major travel vendor. In addition to our business
travel resource center, we plan to develop a professional development resource
center that will enable customers to manage recruiting and professional
development more effectively. We also intend to establish a business operations
resource center targeting the needs of corporate managers, entrepreneurs and
others involved in the day-to-day oversight of small and large businesses.
Subscribers and Licensees
As of March 31, 1999, we had over 29,000 individual subscribers, over 1,300
enterprise subscribers and approximately 30 licensees.
INDIVIDUAL SUBSCRIBERS
Our individual subscribers are primarily businesspeople, personal investors and
academics. We believe that we attract a highly educated, professional audience.
Many of our subscribers use our information for sales and marketing activities
and competitive analysis. We attract individual subscribers primarily through
our online offerings of free company and industry information, including our
database of company capsules. Our historical data indicates that the number and
demographic characteristics of visitors to Hoover's Online is highly correlated
to the growth of individual subscriptions.
Individual subscriptions currently cost either $14.95 a month or $109.95
annually. Visitors subscribe by completing the online subscription form or by
sending their completed subscription form to our customer support staff either
by e-mail or facsimile. To better understand our customers and their business
information needs, we ask them to disclose their name, address, job title and
company name.
ENTERPRISE SUBSCRIBERS
Enterprise subscriptions are sold to organizations on a multiple seat basis and
include features not available to our individual subscribers. We offer
enterprise subscriptions and publish subscription prices for groups ranging from
10 to 1,000 people. Our enterprise subscribers consist primarily of sales and
marketing professionals, some of whom may have access to other paid information
sources. We also sell enterprise subscriptions to public and academic libraries.
Our inside sales force pursues enterprise subscriptions from leads generated
from visitors to Hoover's Online. We ask potential subscribers a series of
questions to help the visitor select between an individual subscription or an
enterprise subscription. Those who choose an enterprise subscription are
contacted by members of the inside sales force. The salesperson then assists the
subscriber in selecting the size of license most appropriate for the
subscriber's needs, and when appropriate, offers the option of an intranet feed.
LICENSEES
We license portions of our database to third parties for redistribution. Our
licensees range from traditional online service providers such as Dow Jones and
LEXIS-NEXIS, to other Web sites, such as Yahoo! and Go/Infoseek. In June 1999,
we entered into an agreement to license a portion of our content for
distribution and marketing by NBC, CNBC and CNBC.com. We provide our licensees
with a customized data feed of our proprietary company information. Data feeds
vary depending upon the information requested by the licensee, the number of
licensed seats and the fee. License fees are based upon variables, such as the
number of seats, the number of capsules viewed or the number of terminals.
INTRANET SUBSCRIBERS
We provide information from our proprietary database through intranet feeds when
a subscriber has technical or business constraints that prevent the subscriber's
employees from accessing Hoover's Online through the
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Internet. The information we provide through intranet feeds is advertising free.
Moreover, subscribers have control of the information, giving them greater
flexibility at to how to apply the information. In order to obtain an intranet
feed a subscriber must have at least 1,000 seats. Intranet subscriptions start
at $36,000 and are adjusted further depending upon the content licensed, the
number of individuals with access to the content and the frequency of the feed
itself. In fiscal 1999, we derived the largest percentage of our intranet
subscriber revenues from Andersen Worldwide. Andersen Worldwide integrates our
content into its Knowledgespace.com intranet for access by Andersen
professionals.
Advertising, Sponsorships and E-commerce
We are focused on providing our advertisers, sponsors and e-commerce
relationships with a large, demographically desirable audience. We believe
Hoover's Online attracts visitors who as a group are highly educated,
professional, affluent and comfortable transacting business over the Internet.
We display advertisements throughout Hoover's Online and sponsorship,
advertising and e-commerce revenues support the free portions of our Web site.
Our sales force is comprised of account executives and sales staff members. Our
account executives handle high-level relationships with clients and advertising
agencies as well as work closely with our sales staff. We will continue to build
our sales force over the next few months.
ADVERTISING
We offer a variety of advertising options that may be purchased individually or
in packages. We offer banners and button advertisements on our site that can be
rotated on a run of site basis or targeted to a particular audience. Run of site
advertisements appeal to advertisers seeking general brand recognition across
Hoover's audience. Banners and buttons are generally sold under short-term
contracts or insertion orders based on a price per thousand impressions. The
following is a representative list of the organizations that advertised on
Hoover's Online in fiscal 1999 based on their level of spending on Hoover's
Online as well as their representative industries:
Bell Atlantic
British Airways
Chase Manhattan
Cobra Golf
Delta Airlines
E*Trade
Fidelity
Gateway
Intel
Intuit
MasterCard
Nortel
PeopleSoft
PricewaterhouseCoopers
Staples
TCI
Volvo
THE WALL STREET JOURNAL
SPONSORSHIPS
Sponsorships are available to organizations who want fixed placement
advertisements as well as integration and association with our editorial
content. Sponsorships integrate an advertiser's message with Hoover's Online
content in a number of creative, contextual ways. For example, Intuit recently
sponsored a Tax Center designed by our editorial staff to help visitors with
filing their income taxes. Sponsorships are generally priced as a fixed monthly
fee depending on their location on our Web site.
E-COMMERCE
We generate e-commerce revenues from advertisers who pay either a fee per
transaction or a percentage of sales directly generated by their placement on
our Web site. These fees can originate from buttons, banners, or in-context text
links within Hoover's Online. For example, in February 1999, we entered into a
one-year e-commerce and sponsorship agreement with Multex.com. Under this
contract, we integrate opportunities to purchase Multex.com Research Reports
into Hoover's Online editorial and provide a variety of special promotions. We
work with Multex.com to effectively target and position Multex products on our
Web site.
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Under each of our e-commerce contracts, we share a percentage of any sale made
by that organization through our Web site. A number of our e-commerce contracts
contain advertising components whereby the organization pays us an advertising
fee in addition to revenue sharing. Our e-commerce contracts are generally one
year in length. A few of the contracts terminate after six months.
COMBINATION SALES
Many of our agreements combine advertising, sponsorship and e-commerce
component. For instance, current agreements have both advertising and e-commerce
components. Under these contracts, we may guarantee to an organization a fixed
number of impressions per year or a fixed number of customers. In return, the
organization may pay us a per quarter advertising fee and a commission for
sending new customers to their Web site. They also pay us a referral fee on
products that they sell through our Web site.
Marketing and Content Relationships
MARKETING RELATIONSHIPS
We have relationships with frequently visited and well-known Web sites in order
to expand our audience. For many of these relationships, we build customized
versions of our company capsules to be integrated into their Web site. A
customized company capsule may feature links to portions of the other Web site
as well as links back to Hoover's Online for additional information. By
incorporating links back to our Web site, we can introduce our premium
information to a broader audience while displaying our free
advertising-supported company information within the context of the other Web
site. Marketing relationships may provide us with additional content to
incorporate into our Web site. For instance, we integrate stock quotes from CBS
MarketWatch. Our marketing relationships are important for increasing our brand
awareness and attracting new visitors to our Web site. We will continue to
pursue relationships that increase our brand name and introduce new audiences to
our information.
Examples of our marketing relationships include:
GO/INFOSEEK NETWORK. Since September 1995, Infoseek has integrated our
proprietary company capsules, industry and initial public offering information
into the Go/Infoseek network. When a visitor searches for a company on the
Go/Infoseek Web site, the visitor is provided the opportunity to link to a
co-branded company capsule. This relationship delivers a high level of traffic
to Hoover's Online and provides increased branding for our content.
Additionally, we work with Go/Infoseek to promote Hoover's Online subscriptions
for Go/Infoseek visitors.
MICROSOFT NETWORK. Since October of 1995, Hoover's has had a business
relationship with Microsoft regarding a number of products including Microsoft
Network, Microsoft Investor, and MoneyCentral. Subscribers to Microsoft Investor
receive access to our company profiles of public companies as part of their
subscription.
The following table contains a list of our other marketing relationships:
<TABLE>
<S> <C>
America Online THE NEW YORK TIMES
BigCharts THE WASHINGTON POST
CBS MarketWatch Yahoo!
</TABLE>
We believe that marketing relationships of this type are important to our
continued growth and to increase our exposure to our target audience. We intend
to continue to aggressively pursue additional marketing relationships.
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CONTENT PROVIDERS
As of March 31, 1999, we had contracts with 15 content providers to expand our
product offering and services. We also received content from 5 other sources. We
require our content providers to maintain standards for quality, timeliness and
customer service similar to our own. When we find complementary content from a
qualified source, we enter into agreements that allow us to integrate that
content tightly into our products. Our goal is to provide the best collection of
information in context for our visitors and subscribers.
For more than five years, we have contracted with Media General Financial
Services to publish and redistribute their company financial data as part of our
company information database. In July of 1996, we entered into a relationship
with EDGAR Online to provide our visitors with access to EDGAR Online's database
of electronic SEC documents. Since then, we have expanded the relationship to
include additional content and services for Hoover's Online subscribers.
CD-ROM and Print Sales
We continue to publish CD-ROMs and reference books containing information from
our database of company information and from third parties, although we have
discontinued producing books suitable for distribution through bookstores. We
produce these products annually and sell them directly to libraries and
individuals through traditional direct marketing techniques, including the
production and mailing of two catalogs per year, post-cards and other direct
mail pieces and promotion on Hoover's Online. We also sell books published by
other organizations. We expect to continue to produce and sell CD-ROMs and books
for at least the next two years. However, revenues from these products will
continue to decline as a percentage of our total revenues.
Customer Service and Support
We provide customer service and support in response to inquiries from customers
who contact us primarily by e-mail and phone. The customer support staff
generally responds to all e-mail inquiries within 24 hours. We provide a
toll-free telephone line for customer orders. We believe that providing a high
level of customer support free of charge is necessary to retain our current
customers and to acquire new ones.
Web Site Operations and Technology
We have transitioned our Web site from a Silicon Graphics server to Sun
enterprise class servers. Moreover, we have replaced our current database engine
with an Oracle 8 database engine. Oracle has contracted to provide us with
software and support to meet the changes expected in our Web environment. They
have also agreed to provide us with their Context search engine. We are
replacing our flat file content management systems with Vignette's StoryServer
4.2. We perform tape back-ups for all systems daily; however, we do not
currently have backup servers in place to continue service if we experience a
major hardware failure.
Hoover's Online is hosted by IXC Communications. IXC provides comprehensive
technical facilities management, including continuous monitoring services,
multiple high volume access lines to the Internet, uninterrupted power supply,
generator, security and protection from disaster. We are currently establishing
a backup system to be hosted by GTE. By establishing IXC as our primary hosting
facility and GTE as our backup hosting facility, we expect to reduce the risk of
service failure and expand our ability to handle increased traffic.
The upgrades are intended to facilitate expanded service offerings on Hoover's
Online. The hardware upgrades should decrease processing time, and will enable
us to handle an increased number of visitors.
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Competition
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:
- - tiered Web sites focused on business, such as The Wall Street Journal
Interactive Edition;
- - providers of company information, such as Dun & Bradstreet, MarketGuide and
Standard & Poor's;
- - providers of proprietary business information, such as Bloomberg Business
News, Dow Jones and Reuters News Service;
- - 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 whom we have strategic
relationships.
Our ability to compete depends on many factors, including:
- - the originality, timeliness, comprehensiveness and trustworthiness of our
content and that of our competitors;
- - the cost of our services compared to our competitors;
- - the ease of use of services developed either by us or our competitors;
- - the usefulness of our tools;
- - the attractiveness of the demographic characteristics of our audience; and
- - the effectiveness of our sales and marketing efforts.
Government Regulation
We are subject, both directly and indirectly, to various laws and governmental
regulations relating to our business. There are currently few laws or
regulations directly applicable to commercial online services or the Internet.
However, due to increasing popularity and use of commercial online services and
the Internet, it is possible that a number of laws and regulations may be
adopted with respect to commercial online services and the Internet. These laws
and regulations may cover issues including, for example, user privacy, pricing
and characteristics and quality of products and services. Moreover, the
applicability to commercial online services and the Internet of existing laws
governing issues including, for example, property ownership, libel and personal
privacy, is uncertain and could expose us to substantial liability. Any new
legislation or regulation or the application of existing laws and regulations to
the Internet could have a material and adverse effect on our business, results
or operations and financial condition. In Texas, sales of goods over the
Internet are taxed the same as sales of personal property through traditional
channels.
As our services are available over the Internet anywhere in the world, multiple
jurisdictions may claim that we are required to qualify to do business as a
foreign corporation in each of those jurisdictions. Our failure to qualify as a
foreign corporation in a jurisdiction where we are required to do so could
subject us to taxes and penalties for the failure to qualify. It is possible
that state and foreign governments might also attempt to regulate our
transmissions of content on our Web site or on the Web sites of others or
prosecute us for violations of their laws. We cannot assure you that violations
of local laws will not be alleged or charged by state or foreign governments,
that we might not unintentionally violate these laws or that these laws will not
be modified, or new laws enacted, in the future.
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Intellectual Property
Our proprietary database of company information is copyrighted. To protect our
rights to intellectual property, we rely on a combination of copyright law,
trademark, trade secret protection, confidentiality agreements and other
contractual arrangements with our clients, strategic relationships and others.
The protective steps we have taken may be inadequate to deter misappropriation
of our proprietary information. We may be unable to detect the unauthorized use
of, or take appropriate steps to enforce, our intellectual property rights. We
have registered a number of our trademarks in the United States, and we have
pending U.S. applications for other trademarks. Effective trademark, copyright
and trade secret protection may not be available in every country in which we
offer or intend to offer our services. In addition, although we believe that our
proprietary rights do not infringe on the intellectual property rights of
others, other parties may assert infringement claims against us or claims that
we have violated a patent or infringed a copyright, trademark or other
proprietary rights belonging to them. These claims, even if not meritorious,
could result in the expenditure of significant financial and managerial
resources on our part, which could materially and adversely affect our business,
results of operations and financial condition. We incorporate licensed third
party technology in some of our services. In these license agreements, the
licensors have generally agreed to defend, indemnify and hold us harmless with
respect to any claim by a third party that the licensed software infringes any
patent or other proprietary right. We cannot assure you that these provisions
will be adequate to protect us from infringement claims. The loss or inability
to obtain or maintain any of these technology licenses could result in delays in
the introduction of new services.
Human Resources
As of March 31, 1999, we employed 162 full-time employees, consisting of 31 in
sales and marketing and customer service, 98 in editorial, 10 in administration
and 23 in technology, operations and support. In addition, we employ free-lance
business writers and editors. As we continue to grow and introduce more
products, we expect to hire more personnel, particularly in the areas of product
development and technology. None of our current employees are represented by a
labor union. We believe that our relationship with our employees are good.
Competition for qualified personnel in our industry is intense.
Properties
We are headquartered in Austin, Texas. Our principal facility consists of
approximately 23,000 square feet and covers two floors at 1033 La Posada Drive.
The lease for this facility will expire on April 30, 2001. We currently
anticipate that we will require additional space in the next 12 months as we
hire more personnel. We believe that suitable additional space will be available
on commercially reasonable terms to accommodate expansion of our operations.
Legal Proceedings
We are not currently subject to any material legal proceedings.
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Management
Executive Officers and Directors
The following table sets forth certain information concerning the executive
officers and directors of Hoover's:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Name Age Position with the Company
- -------------------------------------------------------------------------------------------------------------------------
Patrick J. Spain+............. 47 Chairman of the Board, Chief Executive Officer and President
Carl G. Shepherd.............. 46 Executive Vice President and Chief Operating Officer
Elisabeth DeMarse............. 44 Executive Vice President, Content, Strategy and Acquisitions
Lynn Atchison................. 39 Senior Vice President, Finance and Chief Financial Officer
Gordon T. Anderson............ 35 Vice President, Editor-in-Chief
Thomas M. Ballard............. 41 Vice President, Technology and Chief Information Officer
William R. Cargill............ 32 Vice President, Marketing
George W. Howe................ 44 Vice President, Sales
Jani Farlow Spede............. 31 Vice President, Advertising and E-commerce
Leslie A. Wolke............... 32 Vice President, Web Operations
William S. Berkley*........... 42 Director
Steven B. Fink................ 48 Director
Alan Chai..................... 46 Director
Thomas J. Hillman+............ 43 Director
Gary E. Hoover*............... 48 Director
Laurence J. Kirshbaum*........ 54 Director
Stephen R. Zacharias+......... 49 Director
</TABLE>
- ------------------------
* Member of Compensation Committee.
+ Member of Audit Committee.
Patrick J. Spain has served as Hoover's Chairman of the Board since September
1994 and as Chief Executive Officer since 1993. Mr. Spain joined Hoover's within
weeks of its founding in 1990 by his long-time friend and business partner Gary
Hoover. Prior to joining Hoover's, Mr. Spain worked as an economic consultant,
an in-house counsel for a high technology company, a real-estate developer, and
as a mergers and acquisitions executive at a subsidiary of a FORTUNE 500
company. He holds a B.A. in Ancient History from the University of Chicago and a
J.D. from Boston University.
Carl G. Shepherd has served as Hoover's Executive Vice President and Chief
Operating Officer since June 1997. From August 1995 to June 1997, Mr. Shepherd
served as Vice President, Business Development of Human Code, a software
development company. From December 1992 to March 1995, Mr. Shepherd served as
Chief Financial Officer of Hanley-Wood, a trade magazine publisher. Mr. Shepherd
has held positions with both consumer and trade magazine publishers including
TEXAS MONTHLY, BUILDER AND REMODELING and the DALLAS MORNING NEWS. Previously,
Mr. Shepherd was a senior manager with Andersen Consulting's New York office.
Mr. Shepherd holds a B.A. in Business Administration from Texas Christian
University and a M.B.A. from the University of Texas.
Elisabeth DeMarse has served as Hoover's Executive Vice President, Content,
Strategy and Acquisitions since April 1999. From February 1999 to April 1999,
Ms. DeMarse was a consultant to Hoover's. From October 1998 to January 1999, Ms.
DeMarse was a consultant to GTCR Golden Rauner, a private equity investment
firm. From December 1988 to July 1998, Ms. DeMarse served as Vice President,
Marketing and Business Development of Bloomberg, a financial information
provider. From October 1985 to December 1988,
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Ms. DeMarse served as a Vice President of Citicorp where she was responsible for
business development. From June 1980 to June 1985, Ms. DeMarse served as
Director of Marketing for Western Union, a provider of communications services.
Ms. DeMarse holds a B.A. from Wellesley College and a M.B.A. from Harvard
Business School.
Lynn Atchison has served as Hoover's Chief Financial Officer and Vice President,
Finance and Administration since May 1996. Ms. Atchison was promoted to Senior
Vice President, Finance in March 1999. From November 1993 to April 1996, Ms.
Atchison served as Chief Financial Officer of Travelogix, a provider of travel
ticketing systems software. Prior to that, Ms. Atchison worked for Trilogy
Development, a provider of sales automation software, and worked for eight years
as a certified public accountant with Ernst & Young. Ms. Atchison holds a B.B.A.
in Accounting from Stephen F. Austin State University.
Gordon T. Anderson has served as Hoover's Vice President, Editor-in-Chief since
May 1998. From August 1996 to May 1998, Mr. Anderson served as Vice President,
Content of Planet Direct, an Internet service company and wholly owned
subsidiary of CMG Information. From January 1989 to August 1996, Mr. Anderson
co-founded and served as Editorial Director of Individual Investor Group, a
media company. As editorial director there, he supervised the company's
editorial operations which grew to include a Web site and two magazines,
INDIVIDUAL INVESTOR and TICKER, an investment newsletter. Mr. Anderson holds a
B.A. in U.S. History from the University of Pennsylvania.
Thomas M. Ballard has served as Hoover's Vice President, Technology and Chief
Information Officer since October 1998. From March 1987 to July 1998, Mr.
Ballard served as Vice President of Medianet/TradeOne, a subsidiary of
Affiliated Computer Services, where he designed, developed and maintained
systems to track marketing, advertising, and financial data for companies in the
high tech industry. Mr. Ballard holds a B.A. in Computer Information Systems
with emphasis on Business Management from Southwest Texas State University.
William R. Cargill has served as Hoover's Vice President, Marketing since April
1999. From October 1998 to March 1999, Mr. Cargill served as Hoover's Director
of Subscriptions and from January 1998 to September 1998 he served as Director,
Strategic Planning and Analysis. From July 1995 to January 1998, Mr. Cargill
held positions as Senior Editor, Marketing Analyst and Writer at Hoover's. From
June 1994 to April 1995, Mr. Cargill was a foreign exchange broker for Compwell
Financial, a brokerage firm. Mr. Cargill holds a B.A. in Mathematics and English
from Vanderbilt University and a M.B.A. from the University of Texas.
George W. Howe has served as Hoover's Vice President, Sales since January 1999.
From March 1997 to December 1988, Mr. Howe served as Vice President, Products
for Standard & Poor's, a provider of business information. From January 1993 to
February 1997, Mr. Howe served as Vice President, Western Region for Standard &
Poor's. While employed by Standard & Poor's, Mr. Howe supervised sales of
client-based solutions in the Equity Security, Compustat and Debt Rating areas.
Mr. Howe also supervised the Investor Relations Products Group's successful
launch of new products, incorporating content from Nasdaq Bulletin Boards and
Canadian companies. Mr. Howe holds a B.A. in political science from Duke
University.
Jani Farlow Spede has served as Hoover's Vice President, Advertising and
E-commerce since March 1999. From December 1996 to March 1999, Ms. Spede served
as Hoover's Vice President, Marketing and Communications. From January 1996 to
December 1996, Ms. Spede served as Hoover's Director, Corporate Communications
and from September 1995 to January 1996, served as Hoover's Publicity Manager.
She directs strategic alliances and customer service for Hoover's. Prior to
joining Hoover's, Ms. Spede directed online strategic planning and coordinated
publicity and community affairs for Shands Hospital at the University of
Florida. Ms. Spede holds a B.S. in English from Ball State University.
Leslie A. Wolke has served as a Vice President since February 1998 and as Vice
President, Web Operations since May 1999. From November 1996 to January 1998,
Ms. Wolke served as Hoover's Director, Business Development. From August 1995 to
October 1996, she served as Hoover's Brand Manager, and from May 1995
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to July 1995, she served as Hoover's Online Production Manager. Prior to joining
Hoover's, Ms. Wolke served as Production Manager for Intelliquest, Inc., a
market research firm, and for The Technology Research Group, Inc., a management
consulting firm. Ms. Wolke received a B.A. in Art History from The University of
Chicago.
William S. Berkley has served as a director of Hoover's since 1991. Mr. Berkley
has served as President and Chief Executive Officer of Tension Envelope, a paper
products company, since 1981. Mr. Berkley holds a B.A. in History from Colorado
College and a M.B.A. from The Amos Tuck School of Business.
Alan Chai has served as a director of Hoover's since December 1990. Mr. Chai has
served as Senior Technology Analyst of Shott Capital Management, LLC, a private
equity firm, since May 1997 where he specializes in the analysis of Internet
companies. Mr. Chai joined Hoover's in 1990 and served in a number of officer
positions, including Vice President, until 1995 and served as a part-time Senior
Contributing Editor until December 1998. Until February 1999, Mr. Chai served as
a director of TravelFest Superstores, a travel-related superstore founded by
Gary Hoover in 1994. Mr. Chai holds a B.A. in Business from the University of
Chicago, a M.B.A. in Finance and Marketing from the University of Chicago and a
M.B.A. in International Business from Catholic University of Leuven, Belgium.
Steven B. Fink has served as a director of Hoover's since June 1999. Mr. Fink
has served as Vice Chairman of Knowledge Universe since January 1995 and serves
as an officer or director of other privately-held affiliates of Knowledge
Universe. From December 1993 to December 1996, Mr. Fink served as Vice President
of MC Group, a business consulting firm. From 1989 to December 1993, Mr. Fink
served as President of East West Capital, an investment firm. Mr. Fink is a
director of Nextera Enterprises, a publicly-held business consulting firm, and
Spring Group PLC, a publicly-held business consulting firm.
Thomas J. Hillman has served as a director of Hoover's since December 1992. Mr.
Hillman has served as President and Chief Executive Officer of Fresh Fish, a
seafood retailer, since January 1986. Since May 1998, Mr. Hillman has served as
a board member of Amerindia, a travel tour operator. From January 1991 to
January 1998, Mr. Hillman served as a director and vice president of Rainforest
Acqualoture Products, a seafood producer. From July 1990 to November 1997, Mr.
Hillman served as Chairman of the Board of National Equity, a mortgage
origination and finance company. Mr. Hillman holds a B.A. in Economics from
Washington University.
Gary E. Hoover is the founder of Hoover's and has been a member of the board of
directors since Hoover's inception in February 1990. From February 1990 to
September 1994, Mr. Hoover served as Hoover's Chairman of the Board of Directors
and from February 1990 to December 1992, served as Hoover's Chief Executive
Officer. Since January 1994, Mr. Hoover has served as Chairman of the board of
directors and Chief Executive Officer of TravelFest Superstores, a
travel-related superstore that he founded. In 1982, Mr. Hoover founded Bookstop,
a book superstore, and later sold the company to Barnes & Noble. Since 1995, Mr.
Hoover has also been a professional speaker on entrepreneurialism. Mr. Hoover
holds a B.A. in Economics from the University of Chicago.
Laurence J. Kirshbaum has served as a director of Hoover's since March 1994. Mr.
Kirshbaum has served as Chairman and Chief Executive Officer of Time Warner
Trade Publishing, a wholly-owned subsidiary of Time Warner, since June 1996.
From April 1984 to June 1996, Mr. Kirshbaum served as President and Chief
Executive Officer of Warner Books, a trade book publisher and wholly-owned
subsidiary of Time Warner Trade Publishing. Mr. Kirshbaum serves as a director
for Engineering Animation, a publicly-held provider of software tools for three
dimensional design and animation. Mr. Kirshbaum holds a B.A in English from the
University of Michigan.
Stephen R. Zacharias has served as a director of Hoover's since September 1997.
Mr. Zacharias has served as Treasurer of Media General, a publicly-held
communications company, since January 1993. Mr. Zacharias holds a B.S. in
Commerce from the University of Virginia.
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Board of Directors and Committees
Our board of directors is currently composed of eight members. Each director
holds office until the next annual meeting of the stockholders or until his
successor is duly elected and qualified. Our certificate of incorporation and
bylaws provide that, beginning with the first annual meeting of stockholders
following the closing of this offering, the board of directors will be divided
into three classes, with each class serving staggered, three-year terms.
The board of directors has created a compensation committee and an audit
committee. The compensation committee makes recommendations to the board of
directors concerning salaries and incentive compensation for our officers and
employees and administers our stock option plans. The members of the
compensation committee are Messrs. Berkley, Hoover and Kirshbaum. The audit
committee makes recommendations to the board of directors regarding the
selection of independent auditors, reviews the results and scope of audits and
other accounting-related services and reviews and evaluates Hoover's internal
control functions. The members of the audit committee are Messrs. Hillman, Spain
and Zacharias.
Director Compensation
In fiscal 1999, each member of our board of directors, except Mr. Spain,
received a warrant to purchase 7,500 shares of common stock at an exercise price
of $4.33 per share. These warrants expire in December 2007. Warrants entitled to
be received by Messrs. Kirshbaum and Zacharias were issued to Warner Books and
Media General respectively. In addition, each director was reimbursed for his
reasonable out-of-pocket expenses incurred in connection with attending meetings
of the board of directors. Mr. Fink became a director of Hoover's in June 1999
and, therefore, did not receive any director compensation in fiscal 1999.
We anticipate that, for an undetermined period following the offering, our
directors will not be paid any fees or cash compensation for service as members
of the board of directors or any committee thereof, but will be reimbursed for
any reasonable out-of-pocket expenses incurred in connection with attending
meetings of the board of directors and any committees thereof. In addition,
directors who are not employees of Hoover's will annually receive automatic
grants of non-qualified options to purchase 1,875 shares of common stock under
our 1999 Stock Incentive Plan. Non-employee directors will also receive an
option to purchase 6,750 shares of common stock upon consummation of this
offering and each non-employee who first joins our board of directors after this
offering will receive an option to purchase 6,750 shares of common stock upon
joining the board.
Limitation of Liability and Indemnification Matters
Our bylaws provide for mandatory indemnification of directors and officers to
the fullest extent permitted by Delaware law. Prior to consummation of this
offering, we intend to obtain additional directors' and officers' liability
insurance and expect to enter into indemnification agreements with all of our
directors and executive officers. In addition, our certificate of incorporation
limits the liability of our directors to us or our stockholders for breaches of
the directors' fiduciary duties to the fullest extent permitted by Delaware law.
Compensation Committee Interlocks and Insider Participation
Our board's compensation committee consists of Messrs. Berkley, Hoover and
Kirshbaum. No member of the compensation committee serves as an officer or
employee of Hoover's. No member of the compensation committee serves as a member
of the board of directors or compensation committee of any entity that has one
or more executive officers serving as a member of our board of directors or our
compensation committee.
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Employment Contracts
Our officers serve at the discretion of the board of directors. We do not
presently have an employment contract in effect with any of our officers.
Executive Compensation
SUMMARY COMPENSATION TABLE. The following table sets forth the compensation
earned by our Chairman of the Board, Chief Executive Officer and President and
our Executive Vice President and Chief Operating Officer, whom we refer to as
the named executive officers, for services rendered in all capacities to us
during the fiscal year ended March 31, 1999. No other employees received salary
and bonus in excess of $100,000 during the fiscal year ended March 31, 1999. The
salaries of Messrs. Spain and Shepherd exclude certain perquisites and other
benefits which did not exceed 10% of that individual's total salary and bonus.
<TABLE>
<CAPTION>
--------------------------------------------------
<S> <C> <C> <C> <C>
Long-Term
Compensation
Annual Compensation Shares
--------------------- Underlying
Name and Principal Positions Fiscal Year Salary Bonus Options
------------- ---------- --------- ------------
Patrick J. Spain ............................................... 1999 $ 144,236 $ 25,000 75,000
CHAIRMAN OF THE BOARD,
CHIEF EXECUTIVE OFFICER AND
PRESIDENT
Carl G. Shepherd ............................................... 1999 $ 97,694 $ 12,000 106,500
EXECUTIVE VICE PRESIDENT AND
CHIEF OPERATING OFFICER
</TABLE>
OPTION GRANTS IN FISCAL 1999. The following table sets forth information
concerning stock options granted to each of the named executive officers during
the year ended March 31, 1999. No stock appreciation rights were granted to
these individuals.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Potential Realizable
Value
of Assumed Annual Rates
Number of of Stock Price
Securities % of Total Appreciation for
Underlying Options Granted Options Term
Options to Employees in Exercise Price Expiration -----------------------
Name Granted Fiscal Year Per Share Date 5% 10%
----------- ----------------- --------------- ----------- ----------- ----------
Patrick J. Spain................ 75,000 11.1% $ 4.33 6/24/08 $ 204,307 $ 517,753
Carl G. Shepherd................ 106,500 15.8 4.33 6/24/08 290,116 735,211
</TABLE>
During the year ended March 31, 1999, we granted employees, including Messrs.
Spain and Shepherd, options to purchase 674,400 shares of common stock under the
1996 Stock Option Plan. Shares underlying options generally vest ratably over a
three- to four-year period. Each option expires on the earlier of ten years from
the date of grant or six months from termination of the optionee's employment
with us.
The amount shown as potential realizable value represent hypothetical gains that
could be achieved for the respective options if exercised at the end of the
option term. The 5% and 10% assumed annual rates of compounded stock price
appreciation are mandated by rules of the Securities and Exchange Commission and
do not represent our estimate or projection of our future common stock prices.
These amounts represent certain assumed rates of appreciation in the value of
our common stock from the fair market value on the date of grant. Actual gains,
if any, on stock option exercises are dependent on the future performance of our
common stock and overall stock market conditions. The amounts reflected in the
table may not necessarily be achieved.
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<PAGE>
YEAR-END OPTION EXERCISES IN FISCAL 1999 AND MARCH 31, 1999 OPTION VALUES. The
following table shows the number of shares covered by both exercisable and
unexercisable stock options held by the named executive officers as of the year
ended March 31, 1999, and the values for exercisable and unexercisable options.
Options are in-the-money if the market value of the shares covered thereby is
greater than the option exercise price. This calculation is based on the initial
public offering price of $14.00 per share, less the exercise price. Messrs.
Spain and Shepherd did not acquire any shares of common stock through exercise
of stock options in fiscal 1999.
<TABLE>
<CAPTION>
-------------------------------------------------
Number of Securities
Underlying Unexercised Value of Unexercised
Options at March 31, In-the-Money Options at
1999 March 31, 1999
------------------------ -----------------------
Name Exercisable Unexercisable Exercisable Unexercisable
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Patrick J. Spain............................... 313,215 136,785 $3,955,130 $1,383,920
Carl G. Shepherd............................... 42,600 170,400 440,200 1,689,800
</TABLE>
Stock Option Plans
PREDECESSOR STOCK OPTION PLANS. Our board of directors has adopted and our
stockholders have approved the 1990 Stock Option Plan, the 1992 Stock Option
Plan, the 1995 Stock Option Plan and the 1996 Stock Option Plan. These stock
option plans provide for the awards of incentive stock option and non-qualified
stock options to our directors, officers and employees. Our board of directors
administers each of the option plans. Employee options generally vest ratably
over a three- to four-year period commencing with the date of grant and expire
ten years after the date of grant, unless terminated earlier.
1999 STOCK INCENTIVE PLAN. The 1999 Stock Incentive Plan is intended to serve
as the successor equity incentive plan to our existing stock option plans. The
1999 plan became effective on June 8, 1999 upon adoption by the board of
directors and approval by the stockholders. Common stock has initially been
authorized for issuance under the 1999 plan in the amount of 2,979,645. This
initial share reserve is comprised of the 2,195,895 shares which remained
available for issuance under predecessor plans on the effective date of the 1999
plan plus an additional increase of 783,750 shares. In addition, the share
reserve will automatically be increased on the last trading day of January each
calendar year, beginning in January 2000, by a number of shares equal to two
percent of the total number of shares of common stock outstanding on the first
trading day of the immediately preceding calendar year, but no such annual
increase shall exceed 375,000 shares. However, in no event may any one
participant in the 1999 plan receive option grants or direct stock issuances for
more than 375,000 shares in the aggregate per calendar year.
Outstanding options under our prior option plans have been incorporated into the
1999 plan, and no further option grants will be made under these plans. The
incorporated options will continue to be governed by their existing terms,
unless the plan administrator elects to extend one or more features of the 1999
plan to those options. However, except as otherwise noted below, the outstanding
options under the predecessor stock option plans contain substantially the same
terms and conditions summarized below for the discretionary option grant program
in effect under the 1999 plan.
The 1999 plan is divided into five separate components:
1. the discretionary option grant program under which eligible individuals in
our employ or service, including officers, non-employee board members and
consultants, may, at the discretion of the plan administrator, be granted
options to purchase shares of common stock at an exercise price determined
by the plan administrator;
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2. the stock issuance program under which such individuals may, in the plan
administrator's discretion, be issued shares of common stock directly,
though the purchase of such shares at a price determined by the plan
administrator or as a bonus tied to the performance of services;
3. the salary investment option grant program under which executive officers
and other highly compensated employees may elect to apply a portion of their
base salary to the acquisition of special below-market stock option grants;
4. the automatic option grant programs under which option grants will
automatically be made at periodic intervals to eligible non-employee board
members to purchase shares of common stock at an exercise price equal to
100% of the fair market value of those shares on the grant date; and
5. the director fee option grant program pursuant to which the non-employee
board members may apply a portion of the annual retainer fee, if any,
otherwise payable to them in cash each year to the acquisition of special
below-market option grants.
The discretionary option grant program and the stock issuance program will be
administered by the compensation committee of the board. The compensation
committee, as plan administrator, will have complete discretion to determine
which eligible individuals are to receive option grants or stock issuances, the
time or times when such option grants or stock issuances are to be made, the
number of shares subject to each such grant or issuance, the status of any
granted option as either an incentive stock option or a non-statutory stock
option under the U.S. federal tax laws, the vesting schedule to be in effect for
the option grant or stock issuance and the maximum term for which any granted
option is to remain outstanding. The administration of the salary investment
option grant program, the automatic option grant program and the director fee
option grant program will be self-executing in accordance with the express
provisions of each program.
The exercise price for the shares of common stock subject to option grants made
under the 1999 plan may be paid in cash or in shares of common stock valued at
fair market value on the exercise date. The option may also be exercised through
a same-day sale program without any cash outlay by the optionee. In addition,
the plan administrator may provide financial assistance to one or more
participants in the 1999 plan in connection with their acquisition of shares, by
allowing such individuals to deliver a full-recourse, interest-bearing
promissory note in payment of the option exercise price and or direct issue
price plus any associated withholding taxes incurred in connection with such
acquisition.
In the event of an acquisition of Hoover's, whether by merger or asset sale or a
sale by the stockholders of more than 50% of the total combined voting power of
Hoover's stock recommended by the board, each outstanding option under the
discretionary option grant program which is not to be assumed by the successor
corporation or otherwise continued will automatically accelerate in full, and
all unvested shares under the discretionary option grant and stock issuance
programs will immediately vest, except to the extent our repurchase rights with
respect to those shares are to be assigned to the successor corporation or
otherwise continued in effect. The plan administrator will have the authority
under the discretionary option grant program to provide that the shares subject
to options granted under that program will automatically vest:
1. upon an acquisition of Hoover's, whether or not those options are assumed or
continued;
2. upon a hostile change in control of Hoover's effected through a successful
tender offer for more than 50% of our outstanding voting stock or by proxy
contest for the election of board members; or
3. in the event the individual's service is terminated, whether involuntarily
or through a resignation for good reason, within a designated period, not to
exceed 18 months, following an acquisition in which those options are
assumed or otherwise continued in effect or a hostile change in control.
56
<PAGE>
The vesting of outstanding shares under the stock issuance program may be
accelerated upon similar terms and conditions. Options currently outstanding
under the predecessor plans will accelerate either at the time of an acquisition
or a change in control.
In the event the plan administrator elects to activate the salary investment
option grant program for one or more calendar years, each executive officer and
other highly compensated employee of Hoovers selected for participation may
elect, prior to the start of the calendar year, to reduce his or her base salary
for that calendar year by a specified dollar amount not less than $10,000 nor
more than $50,000. In return, the individual will automatically be granted, on
the first trading day in the calendar year for which the salary reduction is to
be in effect, a non-statutory option to purchase that number of shares of our
common stock determined by dividing the salary reduction amount by two-thirds of
the fair market value per share of the common stock on the grant date. The
option will be exercisable at a price per share equal to one-third of the fair
market value of the option shares on the grant date. As a result, the total
spread on the option shares at the time of grant will be equal to the salary
reduction amount. The option will become exercisable in a series of 12 equal
monthly installments over the calendar year for which the salary reduction is to
be in effect and will be subject to full and immediate vesting upon certain
changes in the ownership or control of Hoovers.
Stock appreciation rights are authorized for issuance under the discretionary
option grant program which provide the holders with the election to surrender
their outstanding options for an appreciation distribution from Hoover's equal
to the excess of (1) the fair market value of the vested shares of common stock
subject to the surrendered option over (2) the aggregate exercise price payable
for such shares. Such appreciation distribution may be made in cash or in shares
of common stock. There are currently no outstanding stock appreciation rights
under the predecessor plans.
The plan administrator has the authority to effect the cancellation of
outstanding options under the discretionary option grant program, including
options incorporated from the predecessor plans, in return for the grant of new
options for the same or different number of option shares with an exercise price
per share based upon the fair market value of the common stock on the new grant
date.
Under the automatic option grant program, each individual who is serving as a
non-employee member of the board on the date the underwriting agreement for this
offering is executed will receive at that time an option grant for 6,750 shares
of common stock with a exercise price equal to the price per share at which the
common stock is to be sold in the offering. Each individual who first joins the
board after the effective date of the offering as a non-employee board member
will also receive an option grant for 6,750 shares of common stock at the time
of his or her commencement of board service. In addition, at each annual
stockholders meeting, beginning with the 2000 annual meeting, each individual
who is to continue to serve as a non-employee board member will receive an
option grant to purchase 1,875 shares of common stock, whether or not such
individual has been in the prior employ of Hoover's.
Each automatic grant will have an exercise price equal to the fair market value
per share of common stock on the grant date and will have a maximum term of 10
years, subject to earlier termination following the optionee's cessation of
board service. Each automatic option will be immediately exercisable; however,
any shares purchased upon exercise of the option will be subject to repurchase,
at the option exercise price paid per share, should the optionee's service as a
non-employee board member cease prior to vesting in the shares. The 6,750 share
grant will vest in three equal and successive annual installments over the
optionee's period of board service. Each additional 1,875 share grant will vest
upon the optionee's completion of one year of board service measured from the
grant date. However, each outstanding option will immediately vest upon (1)
certain changes in the ownership or control of Hoover's or (2) the death or
disability of the optionee while serving as a board member.
Under the director fee option grant program, each non-employee board member may
elect to apply all or a portion of any annual retainer fee otherwise payable in
cash to the acquisition of a below-market option grant.
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<PAGE>
The option grant will automatically be made on the first trading day in January
for the year for which the election is to be in effect. The option will have an
exercise price per share equal to one-third of the fair market value of the
option shares on the grant date, and the number of shares subject to the option
will be determined by dividing the amount of the retainer fee applied to the
program by two-thirds of the fair market value per share of our common stock on
the grant date. As a result, the total spread on the option, the fair market
value of the option shares on the grant date less the aggregate exercise price
payable for those shares, will be equal to the portion of the retainer fee
subject to the election. The option will become exercisable for the option
shares in a series of 12 successive equal monthly installments upon the
optionee's completion of each month of board service during the calendar year of
the option grant and will be subject to full and immediate vesting upon certain
changes in the ownership or control of Hoover's.
The board may amend or modify the 1999 plan at any time, subject to any required
stockholder approval. The 1999 plan will terminate no later than June 8, 2009.
Employee Stock Purchase Plan
The 1999 Employee Stock Purchase Plan was adopted by the board of directors and
approved by the stockholders on June 8, 1999. The purchase plan is designed to
allow our eligible employees and employees of participating subsidiaries to
purchase shares of common stock, at semi-annual intervals, through their
periodic payroll deductions under the purchase plan. A reserve of 150,000 shares
of common stock has been established for this purpose.
The purchase plan will be implemented in a series of successive offering
periods, each with a maximum duration of 12 months. However, the initial
offering period will begin on the date the underwriting agreement is executed in
connection with this offering and will end on the last business day in July
2000. The next offering will commence on the first business day in August 2000,
and subsequent offering periods will commence as designated by the plan
administrator.
Individuals who are eligible employees on the start date of any offering period
may enter the purchase plan on that start date or on any subsequent semi-annual
entry date, February 1 or August 1 each year. Individuals who become eligible
employees after the start date of the offering period may join the purchase plan
on any subsequent semi-annual entry date within that period.
Payroll deductions may not exceed 15% of the participant's base salary for each
semi-annual period of participation, and the accumulated payroll deductions will
be applied to the purchase of shares on the participant's behalf on each
semi-annual purchase date, the last business day in January and July each year,
at a purchase price per share not less then 85% of the lower of (1) the fair
market value of the common stock on the participant's entry date into the
offering period or (2) the fair market value on the semi-annual purchase date.
In no event, however, may any participant purchase more than 600 shares on any
one semi-annual purchase date, nor may all participants in the aggregate
purchase more than 75,000 shares on any one semi-annual purchase date. Should
the fair market value of the common stock on any semi-annual purchase date be
less than the fair market value of the common stock on the first day of the
offering period, then the current offering period will automatically end and a
new offering period will begin, based on the lower fair market value.
The board may amend or modify the purchase plan following any semi-annual
purchase date. The purchase plan will terminate on the last business day in July
2009, unless sooner terminated by the board.
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Certain Transactions
Media General
In September 1997, Media General purchased 900,000 shares of common stock for
aggregate consideration of $3.3 million. As part of that transaction, we also
sold Media General two warrants for $600,000 per warrant. The first warrant was
exercisable for up to 750,000 shares of common stock at an exercise price of
$4.00 per share, expiring July 15, 1999. Media General exercised this warrant in
March 1999. The second warrant is exercisable for up to 750,000 shares of common
stock at an exercise price of $4.67 per share, expiring July 15, 2000. Until
June 2002, Media General has agreed that it and its affiliates will not directly
or indirectly acquire beneficial ownership, or voting control over, more than
49% of our common stock. Mr. Zacharias, Treasurer of Media General, is a member
of our board of directors. Mr. Zacharias serves on the board of directors
pursuant to a stock purchase agreement between Media General and us that
requires us to elect one person nominated by Media General to our board of
directors. This requirement will terminate upon consummation of this offering.
In June 1996, we entered into a distributor agreement with Media General
Financial Services, a wholly-owned subsidiary of Media General. Under this
agreement, Media General Financial Services has licensed their financial data to
us. We integrate that financial data into our products and services.
Under a contract with Media General Financial Services dated June 1, 1996, we
agreed to pay Media General and Data Downlink Corporation (1) a percentage of
the net advertising revenues, as defined, realized from our StockScreener
service and (2) a percentage of the net revenues generated by any
non-advertising based component of StockScreener. We paid Media General
Financial Services an aggregate of $274,000 under both this agreement and the
distributor agreement in fiscal 1999 and $134,000 in fiscal 1998. The parties
amended these contracts effective June 1, 1999 to provide for Media General's
delivery of additional data under similar revenue sharing terms.
Warner Books
In February 1999, Warner Books exercised warrants to purchase 885,000 shares of
our common stock at an exercise price of $1.50 per share, for an aggregate
consideration of $1,327,500. The warrants were originally issued in connection
with the purchase by Warner Books of shares of our common stock in February
1994. As part of the original issuance, as subsequently amended, Warner Books
has agreed that until June 2002, it and its affiliates will not directly or
indirectly acquire beneficial ownership of, or voting control over, more than
49% of our common stock. Mr. Kirshbaum, Chairman and Chief Executive Officer of
Time Warner Trade Publishing, the parent company of Warner Books, is a member of
our board of directors. Mr. Kirshbaum serves on the board of directors pursuant
to a stock purchase agreement between Warner Books and us that requires us to
elect one person nominated by Warner Books to our board of directors. This
requirement will terminate upon the consummation of this offering. As of June 1,
1999, Warner Books transferred all Hoover's common stock and warrants held by it
to its wholly owned subsidiary, Warner Books Multimedia Corp.
Knowledge Universe
On June 11, 1999, we sold an aggregate of 1,022,727 shares of our common stock
to Knowledge Net Holdings, L.L.C. an indirect subsidiary of Knowledge Universe,
Inc. and Nextera Enterprises, Inc., a company controlled by Knowledge Universe,
for an aggregate purchase price of $7.4 million. Mr. Fink serves on the board of
directors pursuant to a stock purchase agreement between Knowledge Net Holdings
and us that requires us to elect one person nominated by Knowledge Net Holdings
to our board of directors. This requirement will terminate upon consummation of
this offering. Knowledge Net Holdings has agreed that, until June 2002, it and
its affiliates will not directly or indirectly, unless approved by our
disinterested directors, acquire beneficial ownership of, or voting control
over, more than 49% of our common stock. We concurrently entered into an
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<PAGE>
agreement with Knowledge Net Holdings pursuant to which it will purchase from us
at fair value at least $2.0 million of various services, 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.
Registration Rights
We have granted registration rights to a number of our stockholders, including
Media General, Warner Books, Knowledge Net Holdings and Messrs. Berkley, Chai,
Hillman and Hoover. Stockholders with registration rights may require us to
register their shares of common stock if we register the common stock of any of
our stockholders in an underwritten public offering, unless shares are
registered on Form S-8. These registration rights are subject to conditions and
limitations, including the right of the underwriters of an offering to limit the
number of shares included in the registration. Stockholders must pay expenses
related to the registration and distribution of their shares of common stock.
Future Transactions
All future related-party transactions will be required to be approved by a
majority of the board of directors, including a majority of the independent and
disinterested outside directors on the board, and will be on terms no less
favorable to us than we could obtain from unaffiliated third parties.
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<PAGE>
Principal Stockholders
This table sets forth, on a pro forma basis as of March 31, 1999 to reflect our
sale of common stock in the June 1999 transactions, information regarding the
beneficial ownership of our outstanding common stock, both before this offering
and immediately following this offering by:
- - each person who is known by us to own beneficially more than five percent of
our outstanding common stock;
- - each director and each of our named executive officers; and
- - all directors and executive officers as a group.
The following calculations of the percentage of outstanding shares are based on
8,172,587 shares of common stock outstanding on a pro forma basis as of March
31, 1999 and assumes no exercise of the underwriters' over-allotment option.
Beneficial ownership is determined in accordance with the rules of the SEC and
generally includes voting or investment power with respect to securities,
subject to community property laws, where applicable. Shares of common stock
subject to options and warrants that are presently exercisable or exercisable
within 60 days of March 31, 1999 are deemed to be outstanding and beneficially
owned by the person holding such option or warrant for the purpose of computing
the percentage of ownership of that person, but they are not deemed outstanding
for the purpose of computing the percentage of any other person.
Unless otherwise noted, each of the persons listed below has sole voting and
investment power with respect to his, her or its shares.
<TABLE>
<CAPTION>
-----------------------------------------------------
<S> <C> <C> <C>
Percentage of Common Stock
Number of Shares Beneficially Owned
Beneficially ----------------------------------
Name and Address of Beneficial Owner Owned Before Offering After Offering
----------------- ----------------- ---------------
Warner Books, Inc. .............................................. 2,616,780(1) 30.6% 22.0%
Time & Life Building
1271 Avenue of the Americas
New York, New York 10020
Media General, Inc. ............................................. 2,415,000(2) 27.0 19.7
333 Grace Street
Richmond, Virginia 23219
Knowledge Universe, Inc. ........................................ 1,022,727(3) 12.5 8.8
844 Moraga Drive
Los Angeles, California 94049
Patrick J. Spain................................................. 427,635(4) 5.0 3.6
Carl G. Shepherd................................................. 44,100(5) * *
William S. Berkley............................................... 332,743(6) 4.0 2.8
Alan Chai........................................................ 183,255(7) 2.2 1.6
Steven B. Fink................................................... -- -- --
Thomas Hillman................................................... 198,682(8) 2.4 1.7
Gary E. Hoover................................................... 79,440(9) * *
Laurence Kirshbaum .............................................. -- -- --
Stephen R. Zacharias ............................................ -- -- --
All directors and executive officers as a group (17 persons)..... 1,366,730(10) 15.2 11.1
</TABLE>
- ------------------------
* Less than one percent.
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<PAGE>
(1) Includes 375,000 shares of common stock issuable upon exercise of currently
exercisable warrants. Subsequent to March 31, 1999, all such common stock and
warrants were transfered to such stockholder's wholly owned subsidiary, Warner
Books Multimedia Corp.
(2) Includes 765,000 shares of common stock issuable upon exercise of currently
exercisable warrants.
(3) The shares held by such stockholder are held of record by its indirect
subsidiaries, Knowledge Net Holdings, Inc. and Nextera Enterprises, Inc.
(4) Includes 350,715 shares of common stock issuable upon exercise of stock
options which are exercisable within 60 days.
(5) Includes 42,600 shares of common stock issuable upon exercise of stock
options which are exercisable within 60 days.
(6) Includes 15,000 shares of common stock issuable upon exercise of stock
options which are exercisable within 60 days and 48,825 shares of common stock
issuable upon exercise of currently exercisable warrants. This number also
includes 75,984 shares of common stock held by Tension Envelope, Corp. Mr.
Berkley is President and Chief Executive Officer of Tension Envelope.
(7) Includes 102,300 shares of common stock issuable upon exercise of stock
options which are exercisable within 60 days and 22,500 shares of common stock
issuable upon exercise of currently exercisable warrants.
(8) Includes 15,000 shares of common stock issuable upon exercise of stock
options which are exercisable within 60 days and 37,425 shares of common stock
issuable upon exercise of currently exercisable warrants. This number also
includes 57,845 shares of common stock held by JMT Fund, Inc. and 30,879 shares
held by the Hillman Family Partnership.
(9) Includes 15,900 shares of common stock issuable upon exercise of stock
options which are exercisable within 60 days and 60,000 shares of common stock
issuable upon exercise of currently exercisable warrants.
(10) See notes (4) through (9).
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<PAGE>
Description of Capital Stock
Upon completion of this offering, our authorized capital stock will consist of
150,000,000 shares of common stock, $0.01 par value per share, and 10,000,000
shares of preferred stock, $0.01 par value per share, issuable in series. The
following summary is qualified in its entirety by reference to our certificate
of incorporation and bylaws, copies of which are filed as exhibits to the
registration statement of which this prospectus is a part.
Common Stock
Holders of our common stock are entitled to one vote per share on all matters to
be voted upon by the stockholders. The holders of common stock are not entitled
to cumulate voting rights with respect to the election of directors, and as a
result, minority stockholders will not be able to elect directors on the basis
of their votes alone. Subject to preferences that may be applicable to any then
outstanding shares of preferred stock, holders of common stock are entitled to
receive ratably such dividends as may be declared by the board of directors out
of funds legally available therefor. In the event of our liquidation,
dissolution or winding up, holders of common stock are entitled to share ratably
in all assets remaining after payment of liabilities and the liquidation
preference of any then outstanding preferred stock. Holders of common stock have
no preemptive, conversion or other rights to subscribe for additional securities
of Hoover's. There are no redemption or sinking fund provisions applicable to
the common stock. All outstanding shares of common stock are, and all shares of
common stock to be outstanding upon completion of the offering will be, validly
issued, fully paid and nonassessable.
On a pro forma basis as of March 31, 1999 to reflect our sale of common stock in
the June 1999 transactions, there were outstanding 8,172,587 shares of common
stock, options to purchase 2,125,650 shares of common stock and warrants to
purchase 1,636,020 shares of common stock. Upon completion of this offering,
11,422,587 shares of common stock will be outstanding on a pro forma basis,
assuming no exercise of the underwriters' over-allotment option and no exercise
of options or warrants after March 31, 1999.
Preferred Stock
Our board of directors has the authority, without further action by the
stockholders, to issue up to 10,000,000 shares of preferred stock in one or more
series and to fix the rights, preferences, privileges and restrictions thereof,
including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences, sinking fund terms and the number of shares
constituting any series or the designation of such series, without any further
vote or action by stockholders. The issuance of preferred stock could adversely
affect the voting power of holders of our common stock and the likelihood that
such holders will receive dividend payments and payments upon liquidation and
could have the effect of delaying, deferring or preventing a change in control
of Hoover's. Accordingly, the issuance of shares of preferred stock may
discourage bids for the common stock or may otherwise adversely affect the
market price of the common stock. We have no present plan to issue any shares of
preferred stock.
Warrants
We have warrants outstanding for the purchase of 1,636,020 shares of our common
stock with a weighted average exercise price of $3.91 per share. Warrants may be
partially exercised or exercised in full upon payment to us of the exercise
price stated on the face of the warrant. Warrants are adjusted for any stock
dividend, stock split or reverse stock split that we may effect. If we undertake
a reorganization, recapitalization, consolidation or merger, warrant holders
will have the right to purchase the number of securities that the warrant holder
would have been able to receive had the warrant holder been a common stock
holder immediately prior to the
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<PAGE>
reorganization, recapitalization, consolidation or merger. Warrant holders have
also been granted registration rights, as described below, for all common stock
they own. We have agreed to indemnify our warrant holders for any liability they
may incur as a result of our breach of their warrant agreement.
Registration Rights
We have granted registration rights to a number of our stockholders holding
approximately 7,442,250 shares of our common stock in the aggregate.
Stockholders with registration rights may require us to register their shares of
common stock if we register the common stock of any of our stockholders in an
underwritten public offering, unless shares are registered on Form S-8. All of
these registration rights are subject to conditions and limitations, including
the right of the underwriters of an offering to limit the number of shares
included in the registration. Stockholders must pay expenses related to the
registration and distribution of their shares of common stock.
Delaware Anti-Takeover Law and Certain Charter and Bylaw Provisions
DELAWARE ANTI-TAKEOVER STATUTE. We are subject to the provisions of Section 203
of the Delaware General Corporation Law, an anti-takeover law. Subject to
certain exceptions, the statute prohibits a publicly held Delaware corporation
from engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless:
- - prior to such date, the board of directors of the corporation approved either
the business combination or the transaction which resulted in the stockholder
becoming an interested stockholder;
- - upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at least
85% of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding for purposes of determining the number of
shares outstanding those shares owned (1) by persons who are directors and
also officers and (2) by employee stock plans in which employee participants
do not have the right to determine confidentially whether shares held subject
to the plan will be tendered in a tender or exchange offer; or
- - on or subsequent to such date, the business combination is approved by the
board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at least
66 2/3% of the outstanding voting stock which is not owned by the interested
stockholder.
For purposes of Section 203, a "business combination" includes a merger, asset
sale or other transaction resulting in a financial benefit to the interested
stockholder, and an "interested stockholder" is a person who, together with
affiliates and associates, owns, or within three years prior to the date of
determination whether the person is an "interested stockholder," did own, 15% or
more of the corporation's voting stock.
CERTIFICATE OF INCORPORATION. On June 8, 1999, our stockholders approved
certain amendments to the certificate of incorporation to provide, effective
upon the consummation of this offering:
- - for the authorization of the board of directors to issue, without further
action by the stockholders, up to 10,000,000 shares of preferred stock in one
or more series and to fix the rights, preferences, privileges and restrictions
thereof;
- - that any action required or permitted to be taken by our stockholders must be
effected at a duly called annual or special meeting of the stockholders and
may not be effected by a consent in writing;
- - for a classified board of directors; and
- - that vacancies on the board of directors, including newly created
directorships, may be filled by a majority of the directors then in office.
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<PAGE>
BYLAWS. On May 4, 1999, our board of directors approved certain amendments to
our bylaws to provide that, effective upon the consummation of this offering:
- - special meetings of our stockholders may be called only by the Chairman of the
Board, the Chief Executive Officer or a majority of the members of the board
of directors; and
- - our directors may be removed only for cause.
These provisions are intended to enhance the likelihood of continuity and
stability in the composition of the board of directors and in the policies
formulated by the board of directors and to discourage certain types of
transactions that may involve an actual or threatened change of control of
Hoover's. These provisions are designed to reduce our vulnerability to an
unsolicited proposal for a takeover that does not contemplate the acquisition of
all of our outstanding shares, or an unsolicited proposal for the restructuring
or sale of all or part of Hoover's. These provisions, however, could discourage
potential acquisition proposals and could delay or prevent a change in control
of Hoover's. These provisions may also have the effect of preventing changes in
our management.
Transfer Agent and Registrar
Our common stock has been approved for quotation on the Nasdaq National Market
under the symbol "HOOV." The transfer agent and registrar for the common stock
is Continental Stock Transfer & Trust Company, and its address is 2 Broadway,
New York, New York 10004.
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Shares Eligible for Future Sale
Prior to the offering, there has been no public market for our common stock, and
no prediction can be made as to the effect, if any, that sales of shares of
common stock or the availability of shares of common stock for sale will have on
the market price of the common stock prevailing from time to time. Nevertheless,
sales of substantial amounts of common stock in the public market, or the
perception that these sales could occur, could adversely affect the market price
of our common stock and could impair our future ability to raise capital through
the sale of our equity securities.
Upon completion of the offering, after giving effect to our sale of 1,231,862
shares of common stock in the June 1999 transactions and assuming no exercise of
stock options after March 31, 1999, there will be an aggregate of 11,422,587
shares of our common stock outstanding. The 3,250,000 shares offered by this
prospectus, or 3,737,500 shares if the underwriters' option is exercised in
full, will be freely transferable without restriction or limitation under the
Securities Act of 1933, as amended, unless purchased by our "affiliates" as that
term is defined in Rule 144 under the Securities Act. The remaining 8,172,587
shares outstanding upon completion of the offering will be "restricted
securities" within the meaning of Rule 144 under the Securities Act, and are
subject to restrictions under the Securities Act.
Our directors, officers and security holders holding in the aggregate 7,916,638,
of our shares have agreed not to sell, offer for sale, or otherwise dispose of
any of our common stock for a period of 150 days from the date of this
prospectus without the prior written consent of J.P. Morgan Securities Inc. In
addition, during the 150-day period, we have agreed not to file any registration
statement with respect to our common stock or any securities convertible into or
exercisable or exchangeable for common stock without the prior written consent
of J.P. Morgan Securities Inc. Beginning 150 days after the date of this
prospectus, approximately 5,126,325 of the restricted shares will become
available for sale in the public market, subject to the volume and other
limitations of Rule 144.
In general, under Rule 144, as currently in effect, a person, or persons whose
shares are required to be aggregated, who owns shares that were purchased from
us or any of our affiliates at least one year previously, is entitled to sell in
brokers transactions or to market makers, within any three-month period
commencing 90 days after the date of this prospectus, the number of shares of
common stock that does not exceed the greater of (1) one percent of the number
of then outstanding shares, approximately 116,351 shares immediately after the
offering, or (2) the average weekly reported trading volume during the four
calendar weeks preceding the date on which the required notice of sale is filed
with the SEC. Sales under Rule 144 are generally subject to the availability of
current public information about Hoover's. Any person, or persons whose shares
are aggregated, who owns shares that were purchased from us or any of our
affiliates at least two years previously and who has not been an affiliate of
ours at any time during the 90 days preceding the sale, would be entitled to
sell shares under Rule 144(k) without regard to the volume limitations or manner
of sale, public information or notice requirements of Rule 144.
Any of our employees, officers, directors or consultants who have purchased or
were awarded shares or options to purchase shares pursuant to a written
compensatory plan or contract are entitled to rely on the resale provisions of
Rule 701 under the Securities Act, which permits affiliates and non-affiliates
to sell such shares without having to comply with the holding period
restrictions of Rule 144, in each case commencing 90 days after the date of this
prospectus. In addition, non-affiliates may sell such shares without complying
with the public information, volume and notice provisions of Rule 144. Rule 701
is available for our option holders as to all 233,900 shares issued pursuant to
the exercise of options granted prior to this offering.
After the offering, Hoover's intends to file a registration statement on Form
S-8 to register all of the shares of common stock reserved for issuance under
our stock incentive plans and not eligible for sale under Rule 701. Accordingly,
shares issued upon exercise of such options will be freely tradeable by holders
who are not our affiliates and, subject to the volume and other limitations of
Rule 144, by holders who are our affiliates.
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<PAGE>
Underwriting
Under the terms and subject to the conditions contained in an underwriting
agreement dated the date of this prospectus, the underwriters named below, for
whom J.P. Morgan Securities Inc., Lehman Brothers Inc., Volpe Brown Whelan &
Company, LLC and Wit Capital Corporation are acting as representatives, have
severally agreed to purchase, and Hoover's has agreed to sell to them, the
respective number of shares of common stock set forth opposite their names
below.
<TABLE>
<CAPTION>
-------------
Number of
Underwriters Shares
-------------
<S> <C>
J.P. Morgan Securities Inc.................................. 1,105,000
Lehman Brothers Inc......................................... 856,500
Volpe Brown Whelan & Company, LLC........................... 538,500
Wit Capital Corporation..................................... 262,500
Wasserstein Perella Securities, Inc......................... 195,000
E*trade Securities.......................................... 97,500
Morgan Keegan & Company, Inc................................ 97,500
Charles Schwab & Co., Inc................................... 97,500
-------------
Total..................................................... 3,250,000
-------------
-------------
</TABLE>
The underwriters are offering the common stock subject to their acceptance of
the common stock and subject to prior sale. The underwriting agreement provides
that the obligations of the several underwriters to purchase shares of common
stock are subject to receipt of an opinion of their counsel and other
conditions. If any of the shares of common stock are purchased by the
underwriters under the underwriting agreement, all of the shares, other than the
shares covered by the over-allotment option described below, must be purchased.
The underwriters propose initially to offer the shares of common stock directly
to the public at the public offering price set forth on the cover page of this
prospectus and to certain dealers at such price less a concession not in excess
of $0.59 per share. The underwriters may allow, and such dealers may reallow, a
concession not in excess of $0.10 per share to certain other dealers. After the
initial public offering of the common stock, the offering price and other
selling terms may be changed from time to time by the underwriters.
The underwriters have informed us that they do not intend sales to discretionary
accounts to exceed five percent of the total number of shares offered.
We have granted to the underwriters an option, exercisable for 30 days from the
date of this prospectus, to purchase up to 487,500 additional shares of common
stock, on the same terms and conditions as set forth on the cover page hereof.
The underwriters may exercise such option solely to cover over-allotments, if
any, made in connection with the sale of shares of common stock offered hereby.
If the underwriters' option is exercised in full, the total price to public
would be $52,325,000.
The following table shows the per share and total underwriting discounts and
commissions to be paid to the underwriters by Hoover's. Such amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares.
<TABLE>
<CAPTION>
Full
No Exercise Exercise
----------- -----------
<S> <C> <C>
Per Share.......................................................... $ 0.98 $ 0.98
Total.............................................................. $ 3,185,000 $ 3,662,750
</TABLE>
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<PAGE>
Hoover's estimates that the total expenses of the offering, excluding
underwriting discounts and commissions, will be approximately $750,000.00.
Hoover's and its officers, directors and holders of an aggregate of 7,916,638
shares of its common stock have agreed that, without the prior written consent
of J.P. Morgan Securities, Inc., during the period beginning from the date of
this prospectus and continuing to and including the date 150 days after the date
of this prospectus they will not:
- - offer, pledge, announce the intention to sell, sell, contract to sell, sell
any option or contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase or otherwise transfer or
dispose of, directly or indirectly, any shares of common stock or any
securities of Hoover's which are substantially similar to the common stock,
including but not limited to any securities that are convertible into or
exercisable or exchangeable for, or that represent the right to receive common
stock or any such substantially similar securities; or
- - enter into any swap, option, future, forward or other agreement that
transfers, in whole or in part, the economic consequences of ownership of
common stock or any securities substantially similar to the common stock.
The restrictions described in this paragraph shall not apply to (1) the issuance
of shares by Hoover's under its employee stock option or stock purchase plans,
(2) the grant by Hoover's of employee stock options, (3) the issuance of shares
by Hoover's upon exercise of warrants outstanding on the date of this prospectus
and (4) the issuance of common stock in connection with the transactions
described in this prospectus.
The underwriters have reserved for sale, at the initial public offering price,
shares of common stock for distribution by Wit Capital to its customers through
the Internet. Shares in the offering will be allocated among customers of Wit
Capital on a modified first-come, first-served basis.
The underwriters have reserved for sale, at the initial public offering price,
shares of the common stock for some of our directors, officers, employees,
friends and family who, after receiving a preliminary prospectus and a letter
explaining Hoover's directed share program, have expressed an interest in
purchasing such shares of common stock in the offering. These persons are
expected to purchase, in the aggregate, not more than 10% of the common stock
offered in the offering. The number of shares available for sale to the general
public in the offering will be reduced to the extent such persons purchase such
reserved shares. Any reserved shares not so purchased will be offered to the
general public on the same basis as other shares offered hereby.
We have agreed to indemnify the underwriters against certain liabilities, losses
and expenses, including liabilities under the Securities Act, or to contribute
to payments that the underwriters may be required to make in respect thereof.
In connection with the offering, the underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of the common stock.
Specifically, the underwriters may over-allot in connection with the offering,
creating a syndicate short position. In addition, the underwriters may bid for,
and purchase, shares of common stock in the open market to cover syndicate short
positions or to stabilize the price of the common stock. Finally, the
underwriting syndicate may reclaim selling concessions allowed for distributing
the common stock in the offering, if the syndicate repurchases previously
distributed common stock in syndicate covering transactions, in stabilization
transactions or otherwise. Any of these activities may stabilize or maintain the
market price of the common stock above independent market levels. The
underwriters are not required to engage in these activities, and may end any of
these activities at any time.
Prior to the offering, there has been no public market for the common stock. The
initial public offering price for the shares of common stock offered hereby has
been determined by agreement between us and the underwriters. Among the factors
considered in making such determination were the history of and the prospects
for the industry in which we compete, an assessment of our management, our
present operations, our historical
68
<PAGE>
results of operations and the trend of our revenues and earnings, the prospects
for our future earnings, the general condition of the securities markets at the
time of the offering and the prices of similar securities of generally
comparable companies. We cannot assure you that an active trading market will
develop for our common stock or that our common stock will trade in the public
market at or above the initial public offering price.
Wit Capital, a member of the National Association of Securities Dealers, Inc.,
will participate in the offering as one of the managing underwriters. The
National Association of Securities Dealers, Inc. approved the membership of Wit
Capital on September 4, 1997. Since that time, Wit Capital has acted as an
underwriter, e-Manager or selected dealer in over 70 public offerings, including
55 initial public offerings. As an e-manager for an offering, Wit Capital had
primary responsibility for distribution of shares through the Internet for that
offering. As a selected dealer in an offering, Wit Capital was a member of the
selling group but not an underwriter in the offering. Except for its
participation as co-manager of this offering and as described below, Wit Capital
has no relationship with Hoover's or any of its founders or significant
stockholders.
From time to time, in the ordinary course of their respective businesses, some
of the underwriters and their affiliates have engaged in, and may in the future
engage in, commercial and/or investment banking transactions with Hoover's. Wit
Capital acted as financial advisor to Hoover's in connection with its June 1999
sale of common stock to NBC and the related execution of a content collaboration
agreement. Wit Capital was paid $67,500 in cash and was issued 3,091 shares of
Hoover's common stock as compensation for its services.
Legal Matters
The validity of the common stock offered hereby will be passed upon for us by
Brobeck, Phleger & Harrison LLP, Austin, Texas and for the underwriters by Davis
Polk & Wardwell, New York, New York.
Experts
Ernst & Young LLP, independent auditors, have audited our financial statements
and schedule as of March 31, 1998 and 1999, and for each of the three years in
the period ended March 31, 1999, as set forth in their report. We have included
our financial statements and schedule in the prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's report, given on their
authority as experts in accounting and auditing.
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<PAGE>
Available Information
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1, including exhibits, schedules and amendments, under the
Securities Act with respect to the shares of common stock to be sold in this
offering. This prospectus does not contain all the information included in the
registration statement. For further information about us and the shares of our
common stock to be sold in this offering, please refer to this registration
statement.
You may read and copy any contract, agreement or other document filed as an
exhibit to our registration statement or any other information from our filings
at the Securities and Exchange Commission's public reference room at 450 Fifth
Street, N.W., Washington, D.C. 20549. You can request copies of these documents,
upon payment of a duplicating fee, by writing to the Securities and Exchange
Commission. Please call the Securities and Exchange Commission at 1-800-SEC-0330
for further information about the public reference rooms. Our filings with the
Securities and Exchange Commission, including our registration statement, are
also available to you on the Securities and Exchange Commission's Web site,
http://www.sec.gov. As a result of this offering, we will become subject to the
information and reporting requirements of the Securities Exchange Act of 1934,
and will file periodic reports, proxy statements and other information with the
Securities and Exchange Commission.
We intend to furnish our stockholders with annual reports containing audited
financial statements, and make available to our stockholders quarterly reports
for the first three quarters of each fiscal year containing unaudited interim
financial information.
70
<PAGE>
Hoover's, Inc.
Financial Statements
<TABLE>
<S> <C>
Report of Independent Auditors........................................................ F-2
Audited Financial Statements
Balance Sheets as of March 31, 1998 and 1999.......................................... F-3
Statements of Operations for the years ended March 31, 1997, 1998 and 1999............ F-4
Statements of Stockholders' Equity for the years ended March 31, 1997, 1998 and
1999................................................................................ F-5
Statements of Cash Flows for the years ended March 31, 1997, 1998 and 1999............ F-6
Notes to Financial Statements......................................................... F-7
</TABLE>
F-1
<PAGE>
Report of Independent Auditors
Board of Directors and Shareholders
Hoover's, Inc.
We have audited the accompanying balance sheets of Hoover's, Inc. as of March
31, 1998 and 1999, and the related statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended March 31,
1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Hoover's, Inc. at March 31,
1998 and 1999, and the results of its operations and its cash flows for each of
the three years in the period ended March 31, 1999 in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Austin, Texas
April 17, 1999,
except for the June 1999 stock split described in Note 2,
as to which the date is June 8, 1999 and the
reverse stock split described in Note 2, as
to which the date is June 29, 1999
F-2
<PAGE>
Hoover's, Inc.
Balance Sheets
<TABLE>
<CAPTION>
----------------------------
<S> <C> <C>
March 31,
----------------------------
<CAPTION>
1998 1999
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................ $ 3,860,150 $ 7,814,434
Accounts receivable, less allowance for doubtful accounts of $34,133 and $32,886
at March 31, 1998 and 1999, respectively........................................ 700,148 866,103
Receivable from stockholder...................................................... 234,465 --
Book inventory, less allowances for excess and obsolete inventory of $52,772 and
$78,025 at March 31, 1998 and 1999, respectively................................ 139,638 83,513
Prepaid expenses and other current assets........................................ 96,667 88,920
------------- -------------
Total current assets............................................................... 5,031,068 8,852,970
Property, plant and equipment:
Computer and office equipment.................................................... 795,332 1,493,124
Equipment under capital lease.................................................... 164,672 147,028
Furniture and fixtures........................................................... 253,620 344,723
------------- -------------
1,213,624 1,984,875
Less accumulated depreciation.................................................... (489,895) (888,296)
------------- -------------
723,729 1,096,579
Other assets....................................................................... 16,789 126,790
------------- -------------
Total assets....................................................................... $ 5,771,586 $ 10,076,339
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and commissions................................................. $ 209,028 $ 460,128
Accrued expenses................................................................. 551,849 693,554
Current portion of long-term debt and capital leases............................. 196,045 376,578
Deferred revenue................................................................. 647,567 1,618,000
------------- -------------
Total current liabilities.......................................................... 1,604,489 3,148,260
Bank term loan, less current portion............................................... 75,000 97,628
Obligations under capital leases, less current portion............................. 97,224 70,236
------------- -------------
Total liabilities.................................................................. 1,776,713 3,316,124
Stockholders' equity:
Common stock, $.01 par value, 150,000,000 shares authorized, 5,220,975 and
7,090,725 shares issued at March 31, 1998 and 1999, respectively................ 52,210 70,907
Additional paid-in capital....................................................... 10,301,394 18,066,854
Unearned stock compensation...................................................... -- (2,763,999)
Accumulated deficit.............................................................. (6,208,731) (8,463,547)
Treasury stock at cost--150,000 shares........................................... (150,000) (150,000)
------------- -------------
Total stockholders' equity......................................................... 3,994,873 6,760,215
------------- -------------
Total liabilities and stockholders' equity......................................... $ 5,771,586 $ 10,076,339
------------- -------------
------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
Hoover's, Inc.
Statements of Operations
<TABLE>
<CAPTION>
------------------------------------------
<S> <C> <C> <C>
Year ended March 31,
------------------------------------------
<CAPTION>
1997 1998 1999
------------ ------------- -------------
<S> <C> <C> <C>
Revenues:
Online information sales............................................ $ 1,192,193 $ 2,696,254 $ 6,764,024
Advertising, sponsorship, e-commerce................................ 514,124 504,019 960,938
Advertising representation contract with related party.............. -- 678,375 --
CD-ROM and print.................................................... 2,253,496 1,590,920 1,636,578
------------ ------------- -------------
Total revenues........................................................ 3,959,813 5,469,568 9,361,540
Provision for returns of print products............................. (600,286) (287,572) (132,354)
------------ ------------- -------------
Net revenues.......................................................... 3,359,527 5,181,996 9,229,186
Cost of revenues.................................................... 2,129,173 3,034,813 5,002,307
------------ ------------- -------------
Gross profit.......................................................... 1,230,354 2,147,183 4,226,879
Expenses:
Product development................................................. 200,623 390,638 565,936
Sales and marketing................................................. 865,177 1,501,235 2,184,530
General and administrative.......................................... 1,037,458 2,125,455 3,401,777
Non-cash compensation............................................... -- -- 450,603
------------ ------------- -------------
Total expenses........................................................ 2,103,258 4,017,328 6,602,846
------------ ------------- -------------
Operating loss........................................................ (872,904) (1,870,145) (2,375,967)
Interest income ...................................................... 4,888 129,397 177,149
Interest expense...................................................... (76,313) (46,763) (55,998)
------------ ------------- -------------
Net loss.............................................................. $ (944,329) $ (1,787,511) $ (2,254,816)
------------ ------------- -------------
------------ ------------- -------------
Basic and diluted net loss per share.................................. $ (0.27) $ (0.39) $ (0.42)
------------ ------------- -------------
------------ ------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
Hoover's, Inc.
Statements of Stockholders' Equity
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Shares of Common Additional Unearned Total
Common Stock Paid-In Stock Accumulated Treasury Stockholders'
Stock Par Value Capital Compensation Deficit Stock Equity
--------- ----------- ----------- ------------ ----------- --------- ------------
Balance at March 31, 1996........ 3,591,900 $ 35,919 $ 3,993,390 $ -- ($3,476,891) $(150,000) $ 402,418
Exercise of options............ 10,500 105 10,395 -- -- -- 10,500
Exercise of warrants........... 214,605 2,146 283,994 -- -- -- 286,140
Conversion of debt............. 42,480 425 155,335 -- -- -- 155,760
Issuances of common stock...... 204,540 2,045 693,370 -- -- -- 695,415
Net loss....................... -- -- -- -- (944,329) -- (944,329)
--------- ----------- ----------- ------------ ----------- --------- ------------
Balance at March 31, 1997........ 4,064,025 40,640 5,136,484 -- (4,421,220) (150,000) 605,904
Exercise of options............ 24,900 249 33,051 -- -- -- 33,300
Exercise of warrants........... 232,050 2,321 848,529 -- -- -- 850,850
Issuances of common stock...... 900,000 9,000 4,283,330 -- -- -- 4,292,330
Net loss....................... -- -- -- -- (1,787,511) -- (1,787,511)
--------- ----------- ----------- ------------ ----------- --------- ------------
Balance at March 31, 1998........ 5,220,975 52,210 10,301,394 -- (6,208,731) (150,000) 3,994,873
Exercise of options............ 193,500 1,935 261,065 -- -- -- 263,000
Exercise of warrants........... 1,676,250 16,762 4,289,793 -- -- -- 4,306,555
Unearned stock compensation.... -- -- 3,214,602 (3,214,602) -- -- --
Amortization of unearned stock
compensation.................. -- -- -- 450,603 -- -- 450,603
Net loss....................... -- -- -- -- (2,254,816) -- (2,254,816)
--------- ----------- ----------- ------------ ----------- --------- ------------
Balance at March 31, 1999........ 7,090,725 $ 70,907 $18,066,854 $(2,763,999) ($8,463,547) $(150,000) $6,760,215
--------- ----------- ----------- ------------ ----------- --------- ------------
--------- ----------- ----------- ------------ ----------- --------- ------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
Hoover's, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
------------------------------------------
<S> <C> <C> <C>
Year ended March 31,
------------------------------------------
<CAPTION>
1997 1998 1999
------------ ------------- -------------
<S> <C> <C> <C>
Operating activities
Net loss.............................................................. $ (944,329) $ (1,787,511) $ (2,254,816)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation........................................................ 89,993 272,722 414,633
Amortization of unearned stock compensation......................... -- -- 450,603
Loss on sale and disposal of equipment.............................. 4,409 360 1,411
Changes in operating assets and liabilities:
Accounts receivable............................................... 21,104 (557,358) 68,510
Inventories....................................................... (38,934) 91,443 56,125
Prepaid expenses and other current assets......................... (7,188) (46,510) 7,747
Other assets...................................................... 93,762 197,869 (110,001)
Accounts payable and commissions.................................. (146,121) (69,261) 251,100
Accrued expenses.................................................. 98,047 265,011 141,705
Deferred revenue.................................................. 50,125 588,556 970,433
------------ ------------- -------------
Net cash used in operating activities................................. (779,132) (1,044,679) (2,550)
Investing activities
Purchases of property, plant and equipment............................ (230,874) (584,564) (808,394)
Proceeds from sale of equipment....................................... 1,368 -- 19,500
------------ ------------- -------------
Net cash used in investing activities................................. (229,506) (584,564) (788,894)
Financing activities
Payments received on stock purchase receivables....................... 329,218 -- --
Payments on lines of credit from stockholders......................... (50,000) (350,000) --
Proceeds from bank term loans......................................... 131,250 200,000 496,838
Payments on bank term loans........................................... -- (93,750) (286,710)
Payments on capital leases............................................ (11,454) (22,449) (33,955)
Net proceeds from capital stock transactions.......................... 1,147,815 5,176,480 4,569,555
------------ ------------- -------------
Net cash provided by financing activities............................. 1,546,829 4,910,281 4,745,728
Increase in cash and cash equivalents................................. 538,191 3,281,038 3,954,284
Cash and cash equivalents at beginning of year........................ 40,921 579,112 3,860,150
------------ ------------- -------------
Cash and cash equivalents at end of year.............................. $ 579,112 $ 3,860,150 $ 7,814,434
------------ ------------- -------------
------------ ------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
Hoover's, Inc.
Notes to Financial Statements
1. Organization and Significant Accounting Policies
Hoover's, Inc. ("Hoover's") creates, publishes and distributes high quality
company and business information for business organizations, businesspeople and
investment professionals. Hoover's publishes this information on the Internet
through Hoover's Online and related sites, as well as through other third party
online and Internet services. The core product is an online database of company
and industry information on over 14,000 public and private enterprises
worldwide. Hoover's also has a line of print products. Additionally, Hoover's
sells advertising space on its various Internet sites.
CASH AND CASH EQUIVALENTS
Hoover's considers all highly liquid investments with a maturity of three months
or less when purchased and money market mutual fund shares to be cash
equivalents.
ACCOUNTS RECEIVABLE
Accounts receivable are recorded net of an allowance for doubtful accounts.
Hoover's customers are concentrated in the United States. Hoover's performs
limited credit evaluations, generally does not require collateral and
establishes an allowance for doubtful accounts based upon factors surrounding
the credit risk of each customer, historical trends and other information.
Credit losses have not been significant to date.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Hoover's depreciates property,
plant and equipment using the straight line method over estimated useful lives
of three to five years. Depreciation expense includes depreciation of assets
acquired under capital leases.
REVENUE RECOGNITION
Online information sales are recognized as service is provided under the terms
of online subscription and license agreements. Payments received in advance of
providing services are recorded as deferred revenue and amortized into revenue
over the term of the agreement.
Advertising revenues are recognized as impressions are delivered or ratably over
the contract period based on the terms of the specific customer agreements,
provided that no significant remaining obligations exist and collection of the
resulting receivable is probable. If an agreement contains both a minimum
contract period and a minimum impression guarantee, Hoover's recognizes revenue
based on the lesser of the ratio of impressions delivered over the minimum
impressions guaranteed or ratably over the contract period. Sponsorship revenues
are generally recognized over the contract period and e-commerce revenues are
generally recognized as sales are made by e-commerce partners, provided that no
significant remaining obligations exist and collection of the resulting
receivable is probable.
CD-ROM and print product revenues are recognized when goods are shipped to
customers, when consignment inventory is sold by the consignee or upon shipment
by Hoover's agent. At the time of sale an allowance for returns is established.
F-7
<PAGE>
Hoover's, Inc.
Notes to Financial Statements (Continued)
1. Organization and Significant Accounting Policies (Continued)
ADVERTISING COSTS
Hoover's expenses advertising costs as incurred. These expenses were
approximately $174,000, $275,000 and $478,000 for the years ended March 31,
1997, 1998 and 1999, respectively.
COST OF REVENUES
Cost of revenues includes editorial costs, licensing of third-party content,
hosting and communication services and advertising agency discounts.
PRODUCT DEVELOPMENT
Product development expenses primarily include personnel and consulting costs
associated with the design, development and testing of Hoover's systems.
Hoover's generally expenses product development expenses as incurred. Software
development costs are required to be capitalized following establishment of
technological feasibility. To date, costs meeting this criterion have been
insignificant.
ACCOUNTING FOR STOCK-BASED COMPENSATION
As allowed by the Financial Accounting Standards Board's Statement of Financial
Accounting Standards ("SFAS") No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION,
Hoover's accounts for its stock compensation arrangements with employees under
the provisions of Accounting Principles Board Opinion No. 25, ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES ("APB 25"). Hoover's has provided the pro forma and
other disclosures required by SFAS No. 123.
SEGMENT INFORMATION
Effective April 1, 1998, Hoover's adopted SFAS No. 131, DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, which establishes standards
for reporting financial information about operating segments and related
disclosures about products and services, geographic areas and major customers in
annual financial statements and requires reporting selected information about
operating segments in interim financial reports. Hoover's does not believe it
operates in more than one segment because the chief operating decision maker
allocates resources and assesses the performance associated with business
information services and other activities as a single segment.
NET LOSS PER SHARE
Hoover's computes net loss per share in accordance with SFAS No. 128, EARNINGS
PER SHARE, and SEC Staff Accounting Bulletin No. 98 ("SAB 98"). Under SFAS No.
128 and SAB 98, basic net loss per share is computed by dividing net loss by the
weighted average number of shares outstanding. Diluted net loss per share is
computed by dividing net loss by the weighted average number of common shares
and dilutive common share equivalents outstanding. Hoover's calculation of
diluted net loss per share excludes shares of common stock issuable upon
exercise of warrants and employee stock options because inclusion would be
antidilutive.
F-8
<PAGE>
Hoover's, Inc.
Notes to Financial Statements (Continued)
1. Organization and Significant Accounting Policies (Continued)
Under SAB 98, all options, warrants or other potentially dilutive instruments
issued for nominal consideration prior to the anticipated effective date of an
initial public offering are required to be included in the calculation of basic
and diluted net loss per share as if they were outstanding for all periods
presented. Hoover's has not issued any such securities for nominal
consideration.
Weighted average shares outstanding during the years ended March 31, 1997, 1998
and 1999 were 3,526,707, 4,569,038 and 5,314,092 respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
INCOME TAXES
Hoover's accounts for income taxes in accordance with SFAS No. 109, ACCOUNTING
FOR INCOME TAXES. SFAS No. 109 prescribes the use of the liability method
whereby deferred tax asset and liability account balances are determined based
on differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
RECLASSIFICATIONS
Reclassifications have been made to the 1997 and 1998 financial statements to
conform with the 1999 presentation.
2. Capital Stock and Warrants
During the year ended March 31, 1997, Hoover's obtained short-term financing
totaling $155,760 from certain stockholders which was converted later in the
year to 42,480 shares of common stock and warrants to purchase 42,480 shares of
common stock of Hoover's at an exercise price of $3.67 per share.
In March 1997, Hoover's completed a private placement of 204,540 shares of
common stock and warrants to purchase 204,540 shares of common stock of Hoover's
at an exercise price of $3.67 per share for net proceeds of approximately
$695,000. Additionally, Hoover's granted warrants to purchase 37,500 shares of
common stock with an exercise price of $2.00 per share and warrants to purchase
6,750 shares of common stock with an exercise price per share of $3.67 per share
to a financial advisor.
In September 1997, Hoover's completed a private placement of 900,000 shares of
common stock and warrants to purchase 1,500,000 shares of common stock of
Hoover's (one half at an exercise price of $4.00 per share and one half at
exercise price of $4.67 per share) for proceeds of $4,300,000 net of costs.
Hoover's also granted warrants to purchase 40,500 shares of common stock with an
exercise price of $3.67 per share to an investment advisor in conjunction with
this transaction. At the same time, various warrant holders exercised existing
warrants to purchase 232,050 shares of common stock for net proceeds of
$851,000.
F-9
<PAGE>
Hoover's, Inc.
Notes to Financial Statements (Continued)
2. Capital Stock and Warrants (Continued)
In conjunction with the September 1997 private placement, stockholders were
given additional limited rights of first refusal with respect to sales of
Hoover's stock. In addition, Hoover's is now required to obtain approval from
70% of the stockholders before increasing the number of directors, issuing new
stock, warrants or options (except for options already authorized under the
existing Employee Stock Option Plans), selling or disposing of assets (except in
the normal course of business) or merging into or consolidating with any other
corporation. Changes to the Stockholders Agreement also included new provisions
requiring board of directors consent for adopting capital and operating budgets,
incurrence of indebtedness over $500,000 and for certain executive compensation
arrangements or changes. The Stockholders Agreement terminates on its own terms
upon consummation by Hoover's of an offer and sale of shares of its common stock
in an initial public offering.
In December 1997, a stockholder waived certain first refusal and other rights,
previously granted in conjunction with a private placement offering in 1994, in
exchange for warrants to purchase 225,000 shares of common stock of Hoover's at
an exercise price of $3.33 per share. Also during 1997, certain warrant holders
exercised warrants previously issued to purchase 214,605 shares of common stock
of Hoover's at an exercise price of $1.33 per share and were issued new warrants
to purchase 332,520 shares of common stock of Hoover's at an exercise price of
$3.33 per share. Additionally, Hoover's granted warrants to purchase 105,000
shares of common stock with an exercise price of $3.33 per share to members of
the board of directors.
In December 1997, Hoover's effected a ten-for-one split of the common stock. All
share and per share amounts in the financial statements and accompanying notes
have been restated to reflect the ten-for-one stock split.
In February 1999, a warrant holder exercised warrants to purchase 885,000 shares
of common stock for proceeds of $1,327,500. In March 1999, a warrant holder
exercised warrants to purchase 750,000 shares of common stock for proceeds of
$3,000,000. In September 1998, Hoover's granted warrants to purchase 82,500
shares of common stock with exercise prices of $4.33 per share to members of the
board of directors for past service.
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. All share and per share amounts
in the financial statements and accompanying notes have been restated to reflect
this stock split.
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 have been restated to reflect this reverse stock split.
F-10
<PAGE>
Hoover's, Inc.
Notes to Financial Statements (Continued)
2. Capital Stock and Warrants (Continued)
At March 31, 1998 and 1999, the following warrants to purchase shares of common
stock were outstanding and exercisable, primarily to existing stockholders:
<TABLE>
<CAPTION>
------------------------
<S> <C> <C>
Shares Issuable
Upon Exercise
------------------------
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Expire June, 2000, price $1.33 per share........................... 97,500 56,250
Expire March, 1999, price $1.50 per share.......................... 885,000 --
Expire December, 2001, price $2.00 per share....................... 37,500 37,500
Expire December, 2000, price $3.33 per share....................... 662,520 662,520
Expire March, 2002, price $3.67 per share.......................... 6,750 6,750
Expire September, 2002, price $3.67 per share...................... 40,500 40,500
Expire July, 1999, price $4.00 per share........................... 750,000 --
Expire December, 2007, price $4.33 per share....................... -- 82,500
Expire July, 2000, price $4.67 per share........................... 750,000 750,000
----------- -----------
3,229,770 1,636,021
----------- -----------
----------- -----------
</TABLE>
In general, the exercise prices of the warrants is to be adjusted only for
capital restructures and stock splits, and not for subsequent sales of Common
Stock. The weighted average exercise price of warrants outstanding at March 31,
1999 was $3.91. The weighted average fair value of warrants granted during the
year ended March 31, 1999, all to board of directors members, was $4.33.
F-11
<PAGE>
Hoover's, Inc.
Notes to Financial Statements (Continued)
3. Stock Options and Transactions
Hoover's has adopted several incentive and non-qualifying stock option plans to
grant options to key employees, board members and other individuals and has
reserved a total of 4,069,215 shares of Common Stock for issuance under those
plans and the outstanding warrants. Stock options generally vest over three to
four years and have terms up to ten years. Information on stock option activity
is as follows:
<TABLE>
<CAPTION>
------------------------------
<S> <C> <C>
Number of Weighted Average
Shares Exercise Price
----------- -----------------
Total options outstanding at March 31, 1996.................... 941,250 $ 1.00
Options granted.............................................. 343,950 2.00
Options forfeited............................................ (65,250) 1.47
Options exercised............................................ (10,500) 1.00
----------- -----
Total options outstanding at March 31, 1997.................... 1,209,450 1.26
Options granted.............................................. 532,500 3.73
Options forfeited............................................ (24,600) 2.00
Options exercised............................................ (24,900) 1.34
----------- -----
Total options outstanding at March 31, 1998.................... 1,692,450 2.03
Options granted.............................................. 674,400 4.65
Options forfeited............................................ (47,700) 3.60
Options exercised............................................ (193,500) 1.36
----------- -----
Total options outstanding at March 31, 1999.................... 2,125,650 $ 2.88
----------- -----
----------- -----
</TABLE>
The following is a summary of options outstanding and exercisable as of March
31, 1999:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
Outstanding Exercisable
------------------------------------------- -------------------------------------------
Number of Weighted- Number of Weighted-
Shares Average Weighted- Shares Average Weighted-
Subject to Remaining Average Subject to Remaining Average
Range of Options Contractual Life Exercise Options Contractual Life Exercise
Exercise Prices Outstanding (in years) Price Exercisable (in years) Price
----------- ----------------- --------- ----------- ----------------- ---------
<S> <C> <C> <C> <C> <C> <C>
$1.00....................... 720,750 3.6 $1.00 720,750 3.6 $1.00
$2.00....................... 261,750 9.0 2.00 183,225 9.0 2.00
$3.67-4.33.................. 928,650 9.2 4.01 209,700 9.2 3.76
$4.67-5.66.................. 214,500 9.2 5.40 -- -- --
----------- --- --------- ----------- --- ---------
2,125,650 7.3 $2.88 1,113,675 5.6 $1.69
----------- --- --------- ----------- --- ---------
----------- --- --------- ----------- --- ---------
</TABLE>
Of the stock options granted to employees during the year ended March 31, 1999
for 674,400 shares of common stock, 214,500 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 $3,214,602
F-12
<PAGE>
Hoover's, Inc.
Notes to Financial Statements (Continued)
3. Stock Options and Transactions (Continued)
of which $450,603 was amortized to non-cash compensation during the year ended
March 31, 1999. The remaining unearned compensation will be recognized as
non-cash compensation over the remaining vesting period of the options of
approximately 4 years.
Pro forma information regarding net loss is required by SFAS No. 123, and has
been determined as if Hoover's had accounted for its employee stock options
under the fair value method of SFAS No. 123. The fair value for these options
was estimated at the date of grant using a minimum value option pricing model
with the following assumptions:
<TABLE>
<CAPTION>
-------------------------------
<S> <C> <C> <C>
Year ended March 31,
<CAPTION>
-------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Risk-free interest rate........................................ 6.5% 6.5% 6%
Weighted-average expected life of the options.................. 4 years 4 years 4 years
Dividend rate.................................................. 0% 0% 0%
Assumed volatility............................................. 0% 0% 0%
Weighted average fair value of options granted:
Exercise price equal to fair value of stock on date of
grant....................................................... $.65 $.87 $ .92
Exercise price less than fair value of stock on date of
grant....................................................... -- -- $16.14
</TABLE>
For purposes of pro forma disclosure, the estimated fair value of the options is
amortized to expense over the options' vesting period. Hoover's pro forma
information follows:
<TABLE>
<CAPTION>
-------------------------------------------
<S> <C> <C> <C>
Year ended March 31,
<CAPTION>
-------------------------------------------
1997 1998 1999
------------- ------------- -------------
<S> <C> <C> <C>
Pro forma stock-based compensation expense...... $ 73,000 $ 205,000 $ 487,000
Pro forma net loss.............................. (1,017,329) (1,992,511) (2,291,213)
Pro forma basic and diluted net loss per share.. (.29) (.44) (.43)
</TABLE>
Option valuation models incorporate highly subjective assumptions. Because
changes in the subjective assumptions can materially affect the fair value
estimate, the existing models do not necessarily provide a reliable single
measure of the fair value of Hoover's employee stock options. Because the
determination of fair value of all employee stock options granted after such
time as Hoover's becomes a public entity will include an expected volatility
factor and because, for pro forma disclosure purposes, the estimated fair value
of Hoover's employee stock options is treated as if amortized to expense over
the options' vesting period, the effects of applying SFAS No. 123 for pro forma
disclosures are not necessarily indicative of future amounts.
4. Income Taxes
At March 31, 1999, Hoover's had federal net operating loss carryforwards of
approximately $7,400,000. The net operating loss carryforwards will expire at
various dates beginning in 2005, if not utilized. Utilization of the
F-13
<PAGE>
Hoover's, Inc.
Notes to Financial Statements (Continued)
4. Income Taxes (Continued)
net operating losses may be subject to a substantial annual limitation due to
the "change in ownership" provisions of the Internal Revenue Code of 1986. The
annual limitation may result in the expiration of net operating losses before
utilization.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
Hoover's deferred taxes at March 31, are as follows:
<TABLE>
<CAPTION>
----------------------------
<S> <C> <C>
1998 1999
------------- -------------
Deferred tax assets:
Capitalized costs............................................ $ 49,592 $ 4,514
Tax loss carryforwards....................................... 2,045,035 2,752,588
Reserves for sales and inventory............................. 90,647 62,321
Accrued expenses and other................................... 50,447 69,676
------------- -------------
Net deferred tax asset......................................... 2,235,721 2,889,099
Valuation allowance for net deferred tax asset................. (2,235,721) (2,889,099)
------------- -------------
Net deferred taxes............................................. $ -- $ --
------------- -------------
------------- -------------
</TABLE>
Hoover's has established a valuation allowance to offset its deferred tax assets
because Hoover's historical operating results indicate it is more likely than
not that the net deferred tax assets will not be realized because of
uncertainties regarding Hoover's ability to generate sufficient taxable income
during the carryforward period to utilize the net operating loss carryforwards.
The valuation allowance increased by approximately $654,000 during the year
ended March 31, 1999.
Hoover's provision for income taxes differs from the expected tax benefit amount
computed by applying the statutory federal income tax rate of 34% to loss before
income taxes as a result of the following:
<TABLE>
<CAPTION>
-------------------------------
<S> <C> <C> <C>
Year ended March 31,
-------------------------------
<CAPTION>
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Federal statutory rate............................................ (34.0)% (34.0)% (34.0)%
State taxes, net of federal benefit............................... (3.0) (3.0) (2.4)
Non-cash compensation expense..................................... -- -- 6.8
Other............................................................. 0.6 0.7 0.6
Change in valuation allowance..................................... 36.4 36.3 29.0
--------- --------- ---------
0.0% 0.0% 0.0%
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-14
<PAGE>
Hoover's, Inc.
Notes to Financial Statements (Continued)
5. Lease Commitments
Hoover's has entered into a noncancelable operating lease for office space.
Future minimum payments due under this lease and subsequent amendments are as
follows for each of the years ending March 31:
<TABLE>
<S> <C>
2000............................................................. $ 349,320
2001............................................................. 352,379
2002............................................................. 29,386
---------
$ 731,085
---------
---------
</TABLE>
Rent expense for the years ended March 31, 1997, 1998 and 1999 totaled $121,935,
$253,507 and $354,129, respectively.
Hoover's leases certain telephone and computer equipment under long term capital
leases and has the option to purchase the assets at the end of the lease term.
The telephone and computer equipment are included in property, plant and
equipment in the balance sheet and related amortization is included in
depreciation expense. At March 31, 1999, future minimum lease payments under
these capital leases are as follows:
<TABLE>
<S> <C>
2000............................................................. $ 33,696
2001............................................................. 32,368
2002............................................................. 31,872
2003............................................................. 19,595
---------
117,531
Less amount representing interest................................ (20,717)
---------
Net present value................................................ 96,814
Less current portion............................................. 26,578
---------
Long-term capital lease obligations.............................. $ 70,236
---------
---------
</TABLE>
6. Short-Term Borrowings--Stockholders
Until March 31, 1999, Hoover's had a $300,000 line of credit agreement with a
stockholder. There were no amounts outstanding under this line of credit at
March 31, 1998 or 1999. Borrowings accrued interest at prime plus 2% and were
collateralized by any trade accounts receivable due from that stockholder.
During the years ended March 31, 1997 and 1998, Hoover's incurred approximately
$31,000 and $9,000, respectively, of interest expense under this line of credit.
Hoover's also maintained a $100,000 line of credit agreement with a group of
stockholders. There were no amounts outstanding under this line of credit at
March 31, 1998 or 1999. All stockholder lines of credit were terminated
effective March 31, 1999.
7. Bank Obligations
At March 31, 1999, Hoover's has a $550,000 term loan, a $200,000 term loan and a
$150,000 revolving line of credit with a bank. The term loans bear interest at
prime plus 1.50% and the revolving line of credit bears interest at prime plus
1.25%. At March 31, 1998 and 1999, there were no borrowings outstanding under
the line of credit, and $237,500 and $447,628, respectively, outstanding under
the term loans. The term loans
F-15
<PAGE>
Hoover's, Inc.
Notes to Financial Statements (Continued)
7. Bank Obligations (Continued)
require monthly payments of $29,167 principal, plus interest and mature in 2000.
The bank obligations are collateralized by Hoover's receivables, inventory and
property, plant and equipment. The carrying value of the bank obligations
approximates fair value as the interest rates are variable.
8. Related Party Transactions
In March 1997, Hoover's entered into an Advertising Representation/Strategic
Alliance Agreement with a stockholder. The agreement provided that the
stockholder would be the exclusive agent for sales of advertising on Hoover's
Online and related sites. Under the agreement, Hoover's would receive a
percentage of revenue sold, subject to certain minimums. This agreement was
amended effective October 1, 1997 to release the stockholder as Hoover's agent,
but continued to require minimum payments through December 31, 1997. Hoover's
recognized revenue of approximately $678,000 under this agreement during the
year ended March 31, 1998. At March 31, 1998, approximately $235,000 of Hoover's
accounts receivable were due from this stockholder, which was received during
the year ended March 31, 1999.
Hoover's purchases certain information included in its databases from a
subsidiary of a stockholder. Hoover's paid approximately $134,000 and $274,000
during the years ended March 31, 1998 and 1999 respectively, for this
information.
During 1999, Hoover's invested $50,000 in a company from which Hoover's
purchases information. Hoover's has reported this investment in other assets on
the cost basis. Hoover's paid $64,000 during the year ended March 31, 1999 for
information purchased from that company.
Hoover's had outstanding amounts payable of approximately $28,000, $7,000 and
$33,000 at March 31, 1997, 1998 and 1999, respectively, to a vendor who is also
a stockholder.
In 1995, Hoover's entered into an exclusive five-year trade book distribution
agreement in the United States and Canada with a stockholder. Hoover's ceased
producing new trade books during the year ended March 31, 1998. Effective
December 31, 1998, Hoover's ceased distributing trade books under this
agreement. There were no amounts due from the stockholder under the terms of
this agreement at March 31, 1998 or 1999.
9. Defined Contribution Plan
Hoover's sponsors a 401(k) defined contribution plan covering substantially all
employees meeting service and eligibility requirements. Hoover's matches
employee contributions, limited to the lesser of 50% of the employee
contribution or $500. Participants vest immediately in employee contributions
and over 4 years in Hoover's contributions. Hoover's matching contribution was
$16,000 and $52,000 during the years ended March 31, 1998 and 1999. Hoover's
also pays the expenses of the plan which are insignificant.
F-16
<PAGE>
Hoover's, Inc.
Notes to Financial Statements (Continued)
10. Geographic Information and Significant Customers
Revenues for the year ended March 31 were as follows:
<TABLE>
<CAPTION>
----------------------------------------
<S> <C> <C> <C>
1997 1998 1999
------------ ------------ ------------
United States..................................... $ 3,882,702 $ 5,348,362 $ 8,736,905
Foreign countries................................. 77,111 121,206 624,635
------------ ------------ ------------
Total............................................. $ 3,959,813 $ 5,469,568 $ 9,361,540
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
Hoover's considers online subscriber revenues as domestic revenues because these
products are delivered from property located and information gathered within the
United States. Revenues from foreign countries above represent online license
agreements with customers located outside the United States and shipments of
print products, primarily the United Kingdom. Hoover's has no property, plant or
equipment located outside the United States. No customer accounted for more than
10% of Hoover's revenues during the years ended March 31, 1997, 1998 or 1999.
Online information sales are comprised of the following:
<TABLE>
<CAPTION>
----------------------------------------
<S> <C> <C> <C>
1997 1998 1999
------------ ------------ ------------
Individual subscriptions.......................... $ 251,099 $ 1,224,452 $ 3,481,429
Enterprise subscriptions.......................... 27,790 239,167 1,302,500
Licenses.......................................... 913,304 1,232,635 1,980,095
------------ ------------ ------------
$ 1,192,193 $ 2,696,254 $ 6,764,024
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
11. Subsequent Events
On April 1, 1999, Hoover's granted options to purchase 52,500 shares of common
stock with an exercise price of $5.66 per share to an employee. The deemed fair
value of the underlying shares of common stock on the date of grant was $14.57
per share. Hoover's recorded unearned compensation not reflected in these
financial statements of $468,000 in connection with the grant which will be
recognized as non-cash compensation over the 4 year vesting period.
F-17
