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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 31, 2000
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or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number:
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Hoover's, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 74-2559474
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1033 La Posada Drive, Austin, Texas 78752
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(Address of principal executive offices) (ZIP Code)
(512) 374-4500
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH
EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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None None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK $0.01 PAR VALUE
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. /X/ Yes / / No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based upon the closing sale price of Common Stock on May 31,
2000 as reported on the Nasdaq National Market, was approximately $47.1 million
(affiliates being, for these purposes only, directors, executive officers and
holders of more than 5% of the Registrant's Common Stock.)
As of June 16, 2000, the registrant had 12,989,542 outstanding shares of
Common Stock, net of 150,000 shares of Treasury Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's 2000 Annual Meeting of
Stockholders are incorporated by reference into Part III of this Form 10-K.
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HOOVER'S INC.
2000 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
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PAGE
PART I.
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ITEM 1: Business........................................................... 3
ITEM 2: Properties........................................................ 21
ITEM 3: Legal Proceedings................................................. 22
ITEM 4: Submission of Matters to a Vote of Securities Holders............. 22
PART II.
ITEM 5: Market for the Registrant's Common Equity and
Related Stockholder Matters..................................... 22
ITEM 6: Selected Financial Data........................................... 22
ITEM 7: Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................ 24
ITEM 7A: Quantitative and Qualitative Disclosures About Market Risk ....... 30
ITEM 8: Financial Statements and Supplementary Data....................... 30
ITEM 9: Changes In and Disagreements with Accountants and Accounting
and Financial Disclosure..................................... 31
PART III.
ITEM 10: Directors and Executive Officers of the Registrant................ 31
ITEM 11: Executive Compensation............................................ 31
ITEM 12: Security Ownership of Certain Beneficial Owners and Management.... 31
ITEM 13: Certain Relationships and Related Transactions.................... 31
PART IV.
ITEM 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K... 31
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PART I.
ITEM 1: BUSINESS
In addition to the historical information contained herein, the
discussion in this Form 10-K contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934 that involve risks and
uncertainties, such as statements concerning: growth and future operating
results; volatility of our stock price; developments in our markets and
strategic focus; new and enhanced products and services; potential
acquisitions and the integration of acquired businesses; products and
technologies; continued growth and use of the Internet; strategic
relationships; and future economic, business and regulatory conditions. The
cautionary statements made in this Form 10-K should be read as being
applicable to all related forward-looking statements whenever they appear in
this Form 10-K. Our actual results could differ materially from the results
discussed in the forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, those
discussed under the section captioned "Factors That May Affect Future Results"
in Item 1 of this Form 10-K as well as those cautionary statements and other
factors set forth elsewhere herein.
In this Annual Report on Form 10-K, the words "may," "will,"
"should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential," "continue," or the negative of these terms or other
comparable terminology identify forward-looking expressions.
OVERVIEW
Hoover's, Inc. (Nasdaq: HOOV) operates Hoover's Online, an Internet
site where businesspeople come to conduct research, make decisions and act on
their decisions. We provide searching, sorting and personalization tools that
businesspeople apply to our proprietary and aggregated third-party
information to help get their jobs done. Our Web site is located at
WWW.HOOVERS.COM. Hoover's Online is a portal that provides more than 3
million businesspeople with timely and reliable information and research
tools, which allow them to get answers to their questions and make informed
decisions on a daily basis. We also provide an e-commerce marketplace in
which businesspeople can act on those decisions to purchase business
information, products and services.
Our core asset is a proprietary database of authoritative and useful
business information regarding what we believe to be the world's largest, most
influential and fastest-growing companies and industries. Our database,
combined with third-party business information, news, a directory of business
Web sites, and biographical and product information, as well as business
travel, personal finance and career tools, makes Hoover's Online a one-stop
source for businesspeople seeking to have their questions answered.
Hoover's Online provides high-quality, proprietary business
information via the Internet and hand-held Web-enabled devices, such as Palm
Pilots, to the businessperson who seeks answers to specific business-related
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
business audience, who, as a group, are affluent, highly educated and willing
to conduct business over the Internet.
Our proprietary editorial content is a recognized source of
authoritative, engagingly written and useful information on over 300
industries and approximately 16,000 public and private enterprises worldwide.
We have a staff of more than 120 writers, editors, researchers and online
producers dedicated exclusively to creating and publishing Hoover's Online and
the proprietary company and industry database. We have one of the largest
online databases of company-specific information measured in terms of both
breadth and depth of coverage, and we continually expand and update our
database. Our database is complemented by third-party company databases,
including CorpTech, Harris InfoSource and
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infoUSA.com, which allow our users to access information on a greater number
of companies. We also provide information on initial public offerings through
IPO Central, which is a widely trafficked source for the latest on initial
public stock offerings. We offer feature stories, news, career information,
personal finance information, SEC documents and management biographical
information as well as brokerage research and credit reports. Additionally, we
offer our branded searching, sorting and personalization tools to make our
information more useful to businesspeople.
We generate revenues from the following sources:
- Advertising and e-commerce;
- Online information sales, consisting of individual subscriptions
and enterprise-wide subscriptions;
- Licensing and syndication of our editorial content and tools; and
- Sales of our proprietary company information in both CD-ROM and
print.
We were among the first Internet companies to deploy a tiered pricing
model: advertising-supported free information, paid subscriptions for in-depth
information, and pay-per-view e-commerce for specialized information. In
addition to the above revenue streams, we also receive licensing and
syndication revenues from third parties for use of our content and tools.
Hoover's Online attracted 3.1 million unique visitors during the quarter ended
March 31, 2000, resulting in more than 95 million page views. We use our
high-quality, free information to attract a large business audience, and then
sell advertising as well as e-commerce opportunities to companies seeking to
reach that audience. A portion of this audience will provide additional
revenues in the form of individual and enterprise memberships. As of March 31,
2000, we had 206,000 paid seats. Of these 206,000 seats, over 46,000 were
individual memberships paid for on an individual basis. The balance of these
seats were attributable to 2,447 enterprise memberships, which we estimate
represented approximately 160,000 seats and are paid for on an enterprise or
company basis rather than on an individual basis.
INDUSTRY BACKGROUND AND MARKET OPPORTUNITY
Providing information, tools and the opportunity to purchase products
and services to businesspeople over the Internet represents a large and
growing market opportunity. Growth in this market is being driven by increased
Internet usage by businesspeople and the companies for which they work.
- Forrester Research, a research firm that analyzes technology
changes and their impact on business, consumers and society, in
its report "The New Business Portals," estimates that by 2004
businesses will be providing Internet access to approximately 200
million workers worldwide.
- Companies and businesspeople are increasingly recognizing that
productivity and competitiveness depend on access to timely and
reliable online information about customers, competitors,
executives, products, industries, business trends, breaking news
and market data. 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
and individual businesspeople are willing to pay for business
information that gives them a competitive edge.
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STRATEGY
Hoover's intends to grow its share of the expanding market to become the
leading Web portal for businesspeople by focusing on the following strategies.
GROW OUR AUDIENCE. We plan to grow our audience by continuing to partner with
high-volume business and consumer Web sites. We plan to focus on online and
direct response advertising as well as public relations to raise awareness of
our company and our products with the media and the business public.
To further extend our reach, we have incorporated a number of
initiatives. In the business-to-business space, we have invested in, and/or
developed strategic alliances with, a number of vertical industry sites and
several of the emerging application service providers (ASPs) to expand
distribution. We have also entered into an agreement to incorporate our tools
and information into salesforce.com, a sales automation ASP, and Agillion,
which provides tools for small business through an ASP model. In 1999, we
entered into strategic agreements with, and invested in, Intellifact.com,
which provides broad industry and geographic information, and Vault.com, a
vertical employment community. In April 2000, we invested in VercomNet, a
Netherlands-based vertical Web site that organizes professional communities in
various industry sectors.
To further meet the needs of businesspeople worldwide, we intend to
pursue acquisitions of, and strategic relationships with, companies with
complementary services and technologies and to expand our information and
services to cover more business organizations in international markets.
INCREASE USAGE BY OUR AUDIENCE. To increase usage, we are adding new searching
and sorting tools, including one that will provide an optional natural
language interface. Subsequent to our year-end, we added the "My Hoover's"
feature to our Web site, which allows for personalization and customization by
the user. We plan to expand our content offering in the area of additional
companies, industries, people and products during the upcoming fiscal year.
We are also working on initiatives to address the needs of our mobile
users. Over the course of the year, we entered into an agreement with AvantGo,
allowing customers who utilize Palm and other PDAs to access our company
capsules and newsletters. Over the course of the coming year, we will continue
to look at other ways to extend our applications to mobile phone delivery. In
June 2000 we entered into an agreement with 2ROAM, Inc., which will allow us
to deliver information to other portable devices, such as mobile telephones.
MAXIMIZE REVENUES FROM CUSTOMERS. Our customers are highly educated, wealthy
and more likely than the average user to purchase products and services over
the Internet, which creates a desirable demographic for advertisers. We plan
to increase the advertising revenue per user through customer-targeting
capabilities on the site and through the introduction of highly targeted
newsletters, designed to increase the amount that we can charge advertisers
and sponsors.
We plan to continue adding e-commerce opportunities to our Web site
in an effort to increase revenues from our customers. More e-commerce partners
will provide more buying opportunities on the site and we plan to integrate
these in the search results and within other tools and content on the site.
As more companies look for online services to enhance productivity,
we plan to increase our telesales staff to gain a greater share of this
growing enterprise market. This revenue stream, which consists of annual
subscriptions paid in advance, provides for greater visibility and
predictability of revenue.
FOCUS ON PROFITABILITY AND GROSS MARGINS. We plan to spread our investments in
our proprietary database and technology over more people and page views on the
site. We believe that these investments, along with increases in revenues from
our customers, will drive improvement in gross margin and, ultimately,
operating profits.
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PRODUCTS AND SERVICES
We provide high-quality, cost-effective and useful business
information, products and services that are essential to businesspeople while
providing an attractive environment for organizations with which we have
advertising or e-commerce relationships. During the past year we transformed
Hoover's Online from a company information site into a businessperson's portal.
We also provide search and sort tools that make our information more
accessible and valuable. Users can search our database and our entire Web site
by company name, stock exchange ticker symbol, keyword or the name of an
officer. Subscribers can search using more extensive criteria, including
geographic region, company size or company type, to name just a few. We have
expanded these tools over time, making our services easier to use. For
example, our branded search tools can find results even when searches include
common misspellings, former names or shortened names of enterprises. We
provide personalization tools on the site that allow our users to select news
from their preferred sources and create customized, savable searches that
collect results from their favorite business sites.
During the past year we added features and enhancements to the site,
including new searching, sorting and personalization tools; a business
directory; a news aggregation engine that makes Hoover's the one-stop source
for business news on the Web; business travel information and tools; improved
personal finance functionality (including a portfolio system) and career
search capabilities.
THE HOOVER'S ONLINE WEB SITE
To meet the needs of our users, our Web site is currently divided
into six channels. Hoover's Online combines free and subscription information
and e-commerce opportunities. Hoover's proprietary information is interwoven
throughout the Web site and advertising and sponsorship opportunities appear
throughout the channels. Each channel includes a directory of editorially
selected links to other business information on the Internet.
COMPANIES & INDUSTRIES -- The Companies & Industries Channel focuses on
Hoover's proprietary database and also contains information on enterprises
from third-party sources such as CorpTech, Harris InfoSource and infoUSA. This
channel also contains additional proprietary in-depth company information and
tools, which are accessible through a subscription.
MONEY -- The Money Channel serves the needs of personal investors and market
researchers through proprietary features written by the Money Channel editors
and through market and upcoming stock information provided by third-party
vendors, including a portfolio tool. The centerpiece of the Money Channel is
Hoover's IPO Central. Users can access Hoover's company information about
companies that have filed to go public and can follow the aftermarket
performance of initial public offerings. Additionally, the Money Channel
offers personal finance information about insurance, real estate, automobiles,
retirement, taxes and bill management.
CAREER DEVELOPMENT -- The Career Development Channel combines Hoover's search
tools and company information to aid job seekers in researching opportunities
and companies. Members can search for company information by region and
industry and gain insight into companies' corporate cultures.
NEWS CENTER -- Our editors review the Internet's top publications to provide
links to top business news. Through our business news aggregation engine, the
News Channel features current company, IPO, market, industry and general news
stories from Reuters, CBS MarketWatch and other vendors.
BUSINESS TRAVEL -- The Business Travel Channel features Hoover's Destination
Guides for major business destinations with links to restaurants, hotels,
attractions and airports. The Travel Channel Directory includes links to
travel sites on the Internet. The Business Travel Channel focuses exclusively
on the specific needs of business travelers.
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PURCHASING CENTER -- The Purchasing Center Channel offers for sale a variety
of business and consumer products and services through alliances with vendors
and third-party distributors. Currently, we offer online research reports,
downloadable mailing lists, business tools, books and office supplies, in
addition to other business products.
We also operate Hoover's United Kingdom (www.hoovers.co.uk), a free business
Web site that focuses on the needs of the British businessperson. The site
features free company overviews of non-U.S. entities, currency conversion
tools for financial data, industry information, news geared for the UK market
and a directory of editorially selected links to what we believe are the best
global business Web sites. Hoover's, Inc., completed a redesign and relaunch
of its Hoover's United Kingdom site on April 1, 2000.
HOOVER'S ONLINE PREMIUM CONTENT, SERVICES & TOOLS
We continue to add premium content, services and tools geared toward
our paying subscribers.
The Hoover's Company Profile includes a strategic overview, history,
news links, expanded list of officers, products and operations information and
a comprehensive list of key competitors. Our subscribers have access to
certain in-depth and historical financials reports on other selected
companies. These reports include detailed and historical financial statements,
employment information and market and other comparison data.
Power Tool is our branded search and sort engine that allows our
subscribers to compile lists using any combination of the following
categories: industry, location, sales, sales growth, employee number, employee
growth and company type. Hoover's Advanced IPO Search permits subscribers to
search for IPOs by any combination of the following: location, underwriter,
industry, SIC code, filing or trading date, offering amount, price range and
annual sales.
We currently offer additional features and tools for enterprise-wide
members, such as downloadable spreadsheets, additional printing capabilities,
and Competitive Landscapes, in which users can compare the market and
comparison data for a company and its top three competitors. Enterprise
subscribers also receive certain limited redistribution rights not available
to individual subscribers.
SALES & MARKETING
HOOVER'S BUSINESS MODEL
We use proprietary and aggregated content, combined with tools and
technology to attract our business audience. That audience generates
advertising, e-commerce and subscription revenues. We also license certain
content and tools to third parties to generate licensing and syndication
revenues. Our proprietary information on companies and industries is used to
publish books and CD-ROM, from which we also derive revenues.
ADVERTISING AND E-COMMERCE
We offer a variety of advertising options that may be purchased
individually or in packages. We offer banners and button advertisements on our
site, which 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 the Hoover's Online audience. Banners and buttons are
generally sold under short-term insertion orders based on a price per thousand
impressions served. During the year we had 147 advertisers, including EDS,
Knowledge Universe, Ameritrade, SportsLine and Mydiscountbroker.com.
We generate e-commerce revenues from advertisers or sponsors that pay
either a fee per transaction or a percentage of sales directly generated by
their placement on Hoover's Online. These fees can originate from buttons,
banners or in-context text links within Hoover's Online. During the year we
had 27 e-commerce partners including Multex.com (investment research reports),
Financial Engines
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(financial information), Dow Jones (news articles archive), Clickdata (mailing
lists), beyond.com (hardware & software), Bravanta (formerly BravoGifts)
(corporate gifts), Amazon.com (books and other) and USADATA.com (market
research).
A number of our e-commerce contracts contain advertising components
whereby the organization pays us an advertising fee in addition to revenue
sharing. Generally, our e-commerce contracts have a term of one year, although
a few of the contracts have three-to six-month terms.
Our advertising and e-commerce sales force is consists 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. Our total sales force has grown to 12 employees from six
at the beginning of the fiscal year. During the year we opened an office in
New York City and plan to open an office in San Francisco in July 2000 to
support the growth in personnel. We will continue to build our sales force
over the next year.
SUBSCRIBERS
Our individual members are primarily businesspeople. We attract
individual subscribers primarily through our online offering of free business
information, including our proprietary database of company information.
Individual memberships currently cost either $14.95 a month or
$109.95 annually. Visitors subscribe by completing the online membership form
or by sending their completed subscription form to our customer support staff
either by e-mail or facsimile.
Enterprise memberships are sold primarily to corporations, but also
include public and academic libraries. These are sold on a multiple seat basis
and include features not available to our individual members. We publish
membership prices for groups ranging from 10 to 1,000 people. We have larger
accounts, for which the pricing was specifically negotiated.
Our inside enterprise sales force pursues enterprise memberships from
leads generated from visitors to Hoover's Online and direct marketing
programs. This group, located in Austin, Texas, has grown to 16 employees from
six at the beginning of the year. We will continue to build our inside
enterprise sales force over the next year.
This effort is supplemented by our outside sales force that calls on
and makes proposals to large corporate customers, most of which are identified
through their presence on, use of, or inquiries to Hoover's Online.
LICENSING AND SYNDICATION
We license and syndicate portions of our database and certain tools
to third parties for redistribution. Our customers range from traditional
online service providers such as Dow Jones and LEXIS-NEXIS, to other Web
sites, such as CNBC.com and Microsoft Network. We provide our customers with
either a customized data feed of our proprietary company information, or a
co-branded set of Web pages designed for the customer. License and syndication
fees are based upon variables, such as the amount of information and number of
tools, the number of seats, the number of capsules viewed or the number of
terminals.
CD-ROM & PRINT
We continue to publish CD-ROMs and reference books containing
information from our database of company information and from third parties
for direct sale to end-user customers. We produce these products annually and
sell them directly to libraries and individuals through traditional direct
marketing
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techniques, including the production and mailing of catalogs, postcards 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 year. However, revenues from these
products will continue to decline as a percentage of our total revenues.
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 co-branded and
integrated into partners' Web sites. A customized, co-branded company capsule
may feature links to portions of the other Web site as well as links back to
our Web site for additional information. By incorporating links back to our
Web site, we can introduce our information to a broader audience while
displaying our free advertising-supported company information within the
context of the other Web site.
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 the value of our brand name and introduce
new audiences to our information.
Examples of our marketing relationships include those with Yahoo!,
Microsoft Network, CBS MarketWatch and America Online. 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
aggressively pursuing additional marketing relationships.
CONTENT PROVIDERS
As of March 31, 2000, we utilized approximately 50 content providers
in our product offerings and services. We require our content providers to
maintain standards for quality, timeliness and customer service similar to our
own high standards. 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 and tools for our visitors and subscribers.
For more than six 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 April of 2000, we entered into a
relationship with 10-K Wizard to provide our visitors with access to real-time
electronic SEC documents.
In addition to company information provided by third parties such as
CorpTech, Harris InfoSource and infoUSA, we plan to continue to expand company
coverage from other third-party information sources.
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:
- Web sites focused on subscription business models, such as The
Wall Street Journal Interactive Edition;
- providers of company information, such as Dun & Bradstreet,
MarketGuide (a division of Multex) and Standard & Poor's;
- providers of proprietary business information, such as Bloomberg
Business News, Dow Jones and Reuters News Service;
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- business information aggregators, such as Dialog, NewsEdge,
LEXIS-NEXIS and OneSource;
- Web-based business information providers, such as Netscape and
Yahoo!; and
- other Web sites with a business orientation or a business
channel, such as Office.com, Work.com and Business.com.
We compete with a number of organizations with which we have
strategic relationships, such as Bloomberg, Dow Jones, Multex, Reuters, and
Yahoo!
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.
CUSTOMER SERVICE & 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 is available by phone and e-mail and 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 TECHNOLOGY AND OPERATIONS
We are currently running our service on Sun enterprise-class servers.
We use Oracle for our database engine and Vignette's StoryServer for both
management and content delivery applications. We use Oracle's Context Search
Engine for our internal applications and a combination of Infoseek's Ultraseek
and our custom CGIs for performing searches on the Web site. Quest's database
replication software is used to move data from our content management system
to our content delivery system. Our procedures include daily tape back-ups for
all systems; however, we do not currently have a full set of backup servers in
place to continue service if we experience a major hardware failure. We are
currently putting in place a co-location strategy that will be implemented
over the next few months.
Hoover's Online is hosted by Broadwing, Inc. Broadwing provides
comprehensive technical facilities management, including continuous monitoring
services, multiple high-volume access lines to the Internet, uninterrupted
power supply, a generator, security, and protection from disaster. We are
currently establishing a co-location configuration to be hosted by a second
facility. By establishing a primary hosting facility and a secondary hosting
facility, we expect to reduce the risk of service failure and expand our
ability to handle increased traffic.
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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 be 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.
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 customers and strategic partners.
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 claim that we have violated a patent or infringed a
copyright, trademark or other proprietary right 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.
EMPLOYEES
As of March 31, 2000, we employed a staff of 240. In addition, we
employ freelance 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 relationships with our
employees are good. Competition for qualified personnel in our industry is
intense.
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FACTORS THAT MAY AFFECT FUTURE RESULTS
In addition to the other information in this Form 10-K, the following factors
should be considered in evaluating our company and our business.
WE HAVE A HISTORY OF LOSSES AND EXPECT FUTURE LOSSES.
We have incurred a net loss for each fiscal year since our inception,
including a net loss of $9.5 million for the year ended March 31, 2000. At
March 31, 2000, we had an accumulated deficit of $18.0 million. We expect
operating losses and negative cash flow to carry on as we continue to incur
significant operating expenses and to make investments to enhance Hoover's
Online. We intend to continue our marketing and promotional spending to
increase our audience. If we continue to spend a disproportionate share of our
revenue for marketing and customer acquisition we may not 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 THAT
MAY NEGATIVELY IMPACT THE PRICE OF OUR STOCK.
Our quarterly operating results may fluctuate significantly in the
future due to a variety of factors. These include the following factors, which
are generally outside of our control:
- seasonal trends relating to usage of our services;
- seasonal trends relating to Internet advertising spending;
- the extent to which we experience increased competition in the
markets for Internet services and advertising; and
- economic conditions specific to the Internet, as well as general
economic and market conditions.
Other factors that could cause our quarterly operating results to
fluctuate significantly, which are at least partially under our control,
include:
- the timing and effectiveness of our marketing efforts to acquire
users and subscribers and to promote our brand;
- the rate of subscriber acquisitions;
- the timing and effectiveness of e-commerce expansion efforts;
- the timing and effectiveness of any co-branding and traffic-
generating arrangements or other strategic alliances into which
we enter; 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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SEASONAL TRENDS IN OUR ADVERTISING REVENUES MAY CAUSE VOLATILITY IN OUR STOCK
PRICE.
We have experienced seasonal trends in our traffic and advertising
revenues. We believe that advertising sales in traditional media, such as
television and radio, are generally lower in the first and third quarters of
each calendar year. Moreover, traffic on Hoover's Online and the Web sites of
others with whom we license or co-brand our products is lower during the
summer and year-end vacation and holiday periods when business usage of the
Internet and Hoover's Online typically declines. Subscriber growth may decline
during low-traffic periods. Our operating results may be affected if we
experience seasonality in future periods.
OUR FAILURE TO SIGNIFICANTLY INCREASE THE NUMBER OF OUR SUBSCRIBERS OR RETAIN
OUR CURRENT SUBSCRIBERS WOULD ADVERSELY AFFECT OUR BUSINESS.
Our future success is highly dependent on attracting Internet users
who are willing to subscribe to online business information services. While we
believe that marketing relationships, direct marketing, advertising, public
relations campaigns and offering new and enhanced content and services help
attract visitors and subscribers, the number of Internet users willing to pay
for online business information may not continue to increase. If the market
for subscription-based online business information develops more slowly than
we expect, or if our efforts to attract new subscribers are not successful or
cost-effective, our operating results and financial condition may be
materially and adversely affected.
We also believe that our long-term success depends largely on our
ability to retain our existing subscribers. We continue to invest significant
resources in our network infrastructure and customer and technical support
capabilities to provide high levels of customer service. We cannot be certain
that these investments will maintain or improve subscriber retention. In
addition, as Internet subscribers are offered competing information products
and services, they may discontinue or limit their use of our Web site. Any
loss of significant numbers of subscribers would have a material adverse
effect on our business, operating results and financial condition.
WE ARE DEVELOPING AND ENHANCING OUR SERVICES AND FEATURES WHICH MAY NOT BE
ATTRACTIVE TO OUR EXISTING AUDIENCE AND MAY NOT INCREASE OUR AUDIENCE.
We continue to expand content and tools offered on Hoover's Online by
developing online resource centers in areas such as professional development,
business travel and in-depth business news, and creating directories of
business links and personal finance. Management will continue to spend a
significant amount of time developing these and other potentially new online
services. We intend to use our marketing activities in order to publicize our
new and enhanced offerings and to attract new visitors to Hoover's Online. We
may not attract sponsors that provide compelling content or products for our
online resource centers. Furthermore, the increase in marketing expenditures
and activities may not continue to attract additional visitors or may fail to
attract visitors who enjoy our content and service offerings. Our business,
operating results and financial condition will be adversely affected if we
experience difficulties in introducing new and enhanced services or if new or
existing visitors do not accept these services.
OUR FAILURE TO EXPAND AND MAINTAIN OUR ADVERTISING AND E-COMMERCE SALES FORCE
COULD REDUCE OUR ADVERTISING AND E-COMMERCE REVENUES OR LIMIT THE GROWTH OF
OUR ADVERTISING AND E-COMMERCE REVENUES.
Currently, we are expanding our internal advertising and e-commerce
sales force. Our business would be adversely affected if we do not maintain an
effective sales force. We depend on our sales force to sell advertising and
enter into e-commerce agreements. 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; and
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- new advertising sales personnel generally require a significant
amount of time to become productive.
FAILURE TO PROVIDE A SUCCESSFUL ONLINE ADVERTISING ENVIRONMENT OR
OPPORTUNITIES FOR E-COMMERCE ON OUR SITE WOULD ADVERSELY AFFECT OUR BUSINESS.
Advertising and e-commerce have become a larger percentage of our
revenue and we expect this trend to continue. 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, and radio and
print media for a share of advertisers' total advertising budgets. Unlike
traditional advertising media, standards continue to evolve 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. 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 continue to 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 and
e-commerce partners, our revenues generated from these sources 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 adversely affect our advertising
revenues.
Tools and technology used on the site will be an important factor in
the success of e-commerce transactions. Failure to add these tools to the site
could result in a reduced number of goods and services purchased from the site
and could adversely affect our e-commerce revenues.
WE DEPEND ON THIRD PARTIES TO TRACK AND MEASURE THE DELIVERY OF ADVERTISEMENTS
AND IT COULD BE DIFFICULT TO REPLACE THESE SERVICES.
It is important to our advertisers that we accurately measure the
demographics of our user base and the delivery of advertisements on our Web
sites. We depend on third parties to provide these measurement services. If
they were unable to provide these services in the future, we would be required
to perform them ourselves or obtain them from another provider. This could
cause us to incur additional costs or cause interruptions in our business
during the time we are replacing these services. We are implementing
additional systems designed to record demographic data on our users. If we do
not develop these systems successfully, we may not be able to accurately
measure the demographic characteristics of our users. Companies may not
advertise on our Web sites or may pay less for advertising if they do not
perceive our measurements or measurements made by third parties to be reliable.
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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 our Web site, we must succeed in our marketing efforts and
provide high-quality services. Our ability to increase advertising and
subscription revenues from our Web site will depend in part on the success of
our marketing campaigns and our ability to increase the number of visitors and
subscribers to our Web site. If our marketing efforts are unsuccessful or if
we cannot increase our brand awareness and traffic to our Web site, our
business, operating results and financial condition would be materially and
adversely affected.
INCREASED COMPETITION COULD MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS.
Many Web sites compete for the attention and spending of
businesspeople and advertisers, particularly in the business information area.
We expect this competition to continue to increase. We compete for
subscribers, visitors, advertisers and content providers with many types of
companies, such as:
- subscription-based Web sites focused on business, such as The
Wall Street Journal Interactive Edition;
- providers of company information, such as Dun & Bradstreet,
Multex and Standard & Poor's;
- providers of proprietary business information, such as Bloomberg
Business News, Dow Jones and Reuters Business Interactive, LLC;
- business information aggregators, such as Dialog, LEXIS-NEXIS and
OneSource;
- consumer-oriented Web sites, such as Excite and Yahoo!; and
- other Web sites with a business orientation or a business
channel, such as Office.com, Work.com and Business.com.
We also compete with a number of organizations with which we have
other business relationships, including LEXIS-NEXIS, Bloomberg, Microsoft and
America Online. We form strategic relationships with these organizations in
order to increase the size of our audience by introducing Hoover's Online to a
greater number of people. Our 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 believe that the Internet industry has seen, and will continue to
see, significant merger and acquisition activity. Some of our competitors may
make strategic acquisitions or establish cooperative relationships among
themselves or with third parties to increase their ability to rapidly gain
market share. If we do not reach critical mass, or do not achieve significant
market share, our ability to compete in a consolidating market could be
negatively impacted.
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As a result of these factors, we may not be able to compete
successfully for advertisers, users or staff, which could materially adversely
affect our business, operating results and financial condition. Increased
competition could result in price reductions, reduced margins or loss of
market share, any of which could materially adversely affect our business,
operating results and financial condition.
OUR FUTURE SUCCESS DEPENDS ON OUR EDITORIAL STAFF AND OUR ABILITY TO HIRE AND
RETAIN QUALIFIED EMPLOYEES IN ALL AREAS.
We depend upon the efforts of our writers, researchers and other
editorial staff to produce original, timely, comprehensive and trustworthy
content. We depend on our sales staff to continue to grow, specifically in the
area of enterprise subscriptions and advertising and e-commerce. We also
depend on technology staff for product development and enhancements. The job
market in Austin, Texas, and elsewhere in the United States is extremely
tight. Competition for personnel is intense, and we may not be able to retain
existing employees or attract additional highly qualified staff in the future.
If we lose the services of a significant number of our staff or are unable to
continue to attract additional qualified staff, our business, operating
results and financial condition could be materially adversely affected.
RAPID GROWTH IN OUR FUTURE OPERATIONS COULD CONTINUE TO STRAIN OUR MANAGERIAL,
OPERATIONAL AND FINANCIAL RESOURCES.
We have experienced rapid growth in our operations. We believe that
we will need to continue to expand our business and operations in order to
support our growing business, and 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 staff. We will also have to maintain close coordination among our
technical, accounting, finance, marketing, sales and editorial personnel. If
we are unable to accomplish any of these objectives, our business, operating
results and financial condition could be materially adversely affected.
WE ARE DEPENDENT ON OUR STRATEGIC RELATIONSHIPS AND OUR BUSINESS WOULD BE
MATERIALLY ADVERSELY AFFECTED IF WE WERE TO LOSE OUR EXISTING RELATIONSHIPS OR
FAIL TO GAIN ADDITIONAL STRATEGIC RELATIONSHIPS.
We depend on the following strategic relationships:
- CONTENT PROVIDERS. A number of organizations provide us with
content that we integrate into our products. If our relationships
with these content providers were terminated, we would have to
eliminate their information from our products and services. We
may also need to locate alternate content providers and integrate
their information into our products and services. Extracting
previously integrated information, locating a new provider and
integrating their information may take time and may interrupt the
provision of affected services. We cannot assure you that we
would be able to replace the content we currently receive from
our content providers in a timely manner.
- SPONSORS. To facilitate the expansion of our services and
features, we have obtained sponsors for resource centers on
Hoover's Online. A resource center is a location on our Web site
dedicated to a specific topic. Sponsors may provide content and/or
advertising for the resource center. In return, sponsors receive
the opportunity to interact with visitors to the resource center.
The success of our sponsorship relationships depends on the
quality of the content and products that the sponsors and we
provide. If we fail to attract and retain sponsors for our online
resource centers or if our sponsors fail to provide content and
products attractive to our audience, we may lose subscribers and
our audience may be reduced.
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- MARKETING/DISTRIBUTION PARTNERS. To provide access to our
premium content to a broader audience, we have entered into
relationships to integrate customized versions of our company
capsules into frequently visited and well-known Web sites,
such as the Microsoft Network and America Online. These
relationships may also provide links 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 our brand awareness
resulting in a fewer number of visitors to our Web site, which
may adversely affect our revenues.
ACQUISITIONS MAY DISRUPT OR OTHERWISE HAVE A NEGATIVE IMPACT ON OUR BUSINESS.
We plan to acquire or make investments in complementary businesses,
products and technologies. Future acquisitions and investments are subject to
the following risks:
- acquisitions may cause a disruption in our ongoing business,
distract our management and make it difficult to maintain our
standards, controls and procedures;
- we may not be able to integrate successfully the services,
content, products and personnel of any acquisition into our
operations;
- we may be required to incur debt or issue debt or equity
securities, which may be dilutive to existing stockholders, to pay
for acquisitions;
- we may be required to assume debt or contingent liabilities,
amortize goodwill and other intangibles or writeoff 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.
EXPANSION INTO NON-U.S. MARKETS MAY BE DIFFICULT.
The growth of the Internet outside of the United States may not
progress or may not be adopted by businesspeople outside of the United States.
The impact of language and other cultural differences could result in a
product offering that is not accepted and may not be financially successful.
These difficulties may be heightened by differing regulatory schemes affecting
the Internet in these countries. Strategic relationships may be necessary to
facilitate this expansion and our business may be adversely affected if we
fail to gain new or effective relationships in this area.
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;
- delays in the introduction of new products and services; or
- vulnerability to attacks (including denial of service attacks) by
third parties;
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any of which could impair our reputation, damage the Hoover's brand and
materially adversely affect our business, operating results and financial
condition.
Our ability to provide high-quality customer service also depends on
the efficient and uninterrupted operation of our computer and communications
hardware systems. We have also experienced minor interruptions due to software
bugs, upgrades and hosting facility connectivity failures. 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 plan to develop a formal
disaster recovery plan. We cannot assure you that any plan we adopt will be
sufficient. We may not carry sufficient business interruption insurance to
compensate for losses that could occur.
WE MAY BE SUBJECT TO LEGAL CLAIMS IN CONNECTION WITH THE CONTENT WE PUBLISH
AND DISTRIBUTE AND OUR USE OF SOFTWARE LICENSES FOR OUR WEB SITE.
We may be subject to claims for defamation, negligence, or copyright
or trademark infringement based on other theories relating to the information
we publish on our Web site, on the Web sites of others with whom we license or
co-brand our products, or in our books. These types of claims have been
brought, sometimes successfully, against online services, as well as other
print publications in the past. Due to the global nature of the Internet, we
may be subject to such claims asserted under the laws of foreign countries,
which may differ substantially from U.S. laws. We could also be subject to
claims based upon the content that is accessible from Hoover's Online through
links to other Web sites. We may also be subject to claims for software
license infringement based on the software and other technologies that we
utilize on our Web site. Our insurance may not adequately protect us against
these types of claims.
CONCERNS REGARDING SECURITY OF TRANSACTIONS AND TRANSMITTING CONFIDENTIAL
INFORMATION OVER THE INTERNET MAY NEGATIVELY AFFECT OUR REVENUES.
We believe that concern regarding the security of confidential
information transmitted over the Internet, such as credit card numbers,
prevents many potential customers, especially those outside of the United
States, from engaging in online transactions.
Our infrastructure is potentially vulnerable to physical or
electronic break-ins, viruses or similar problems. If a person circumvents our
security measures, they 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 may become more concerned about security. If we
do not adequately address these concerns, our business, operating results and
financial condition could be materially adversely affected.
THE LOSS OF ANY OF OUR KEY PERSONNEL OR OUR FAILURE TO ATTRACT ADDITIONAL
PERSONNEL COULD HAVE A MATERIAL AND ADVERSE EFFECT ON OUR BUSINESS.
Our future success will depend, in substantial part, on the continued
service of our senior management, particularly Patrick J. Spain, our Chairman
of the Board, President and Chief Executive Officer. None of our senior
management has entered into an employment agreement with us. We do not
maintain key-person life insurance on any of our employees. During the year we
experienced turnover in certain key positions. The loss of the services of one
or more of our key personnel could have a material adverse effect on our
business, operating results and financial condition. Our future success will
also depend on our continuing ability to attract, retain and motivate highly
qualified technical, customer support, financial, accounting and managerial
personnel. Competition for such 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
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we expect to continue to experience in the future, difficulty in hiring and
retaining employees with appropriate qualifications.
IF WE FAIL TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS OR FACE A
CLAIM OF INTELLECTUAL PROPERTY INFRINGEMENT BY A THIRD PARTY, WE COULD LOSE
OUR INTELLECTUAL PROPERTY RIGHTS OR BE LIABLE FOR SIGNIFICANT DAMAGES.
We rely primarily on a combination of copyrights, trademarks, trade
secret laws, our user policy, licensing agreements and restrictions on
disclosure to protect our intellectual property. Despite these precautions, it
may be possible for a third party to copy or otherwise obtain and use the
content on our Web site or our other intellectual property without
authorization. We cannot assure 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
adverse effect on our business, operating results and financial condition. In
addition, we may need to engage in litigation in order to enforce our
intellectual property rights in the future or to determine the validity and
scope of the proprietary rights of others. Any litigation could result in
substantial costs and diversion of management and other resources, either of
which could have a material adverse effect on our business, operating results
and financial condition.
Because we license some data and content from third parties, our
exposure to copyright infringement actions may increase. We rely upon these
third parties for the origin and ownership of licensed content. We generally
obtain representations of the origins and ownership of licensed content, as
well as 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. Due to the global nature of the Internet, we may be subject to such
claims asserted under the laws of foreign countries, which may differ
substantially from United States laws. 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.
OUR COMMON STOCK PRICE IS VOLATILE AND COULD FLUCTUATE SIGNIFICANTLY.
The trading price of our stock has been and may continue to be
subject to wide fluctuations. Our stock price may fluctuate in response to a
number of events and factors, such as quarterly variations in operating
results; announcements of new products, technology or strategic relationships
by us or our competitors; changes in financial estimates and recommendations
by securities analysts; the operating and stock price performance of other
companies that investors may deem comparable; and news reports relating to
trends in our markets. In addition, the stock markets in general, and the
market prices for Internet-related companies in particular, have experienced
extreme volatility that often has been unrelated to the operating performance
of such companies. These broad market and industry fluctuations may adversely
affect the price of our common stock, regardless of our operating performance.
WE DEPEND ON THE CONTINUED GROWTH IN USE AND EFFICIENT OPERATION OF THE
INTERNET.
The Internet-based information market is rapidly evolving. Our
business would be materially adversely affected if Internet usage does not
continue to grow or grows more slowly than anticipated.
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Internet usage may be inhibited for a number of reasons, including:
- inadequate network infrastructure;
- security concerns;
- inconsistent quality of service; and
- unavailability of cost-effective, high-speed access to the
Internet.
Our audience depends on Internet service providers, online service
providers and other Web-site operators for access to our Web site. Many of
these services have experienced significant service outages in the past and
could experience service outages, delays and other difficulties due to system
failure unrelated to our systems. These occurrences could cause our visitors
to perceive the Internet in general or our Web site in particular as
unreliable and, therefore, cause them to use other media to obtain their
company and business information. We also depend on third-party information
providers to deliver information and data feeds to us on a timely basis. Our
Web site could experience disruptions or interruptions in service due to the
failure or delay in the transmission or receipt of this information, which
could have a material adverse effect on our business, operating results and
financial condition.
WE CANNOT PREDICT THE SIZE OR VIABILITY OF THE ONLINE INFORMATION SERVICES
MARKET.
The market for our online business information services is rapidly
evolving and is characterized by an increasing number of market entrants. As
is typical of a rapidly evolving industry, demand and market acceptance for
recently introduced services are subject to a high level of uncertainty and
risk. Because of these factors, 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 THE DEMANDS OF OUR
CUSTOMERS, WE MAY BE UNABLE TO ENHANCE OUR EXISTING SERVICES OR INTRODUCE NEW
SERVICES.
The market in which we operate is characterized by rapidly changing
technology; evolving industry standards; frequent new service announcements,
introductions and enhancements; and evolving customer demands. The emerging
nature of the Internet and the electronic distribution of business
information, including distribution through wireless channels and products,
exacerbate these market characteristics. Accordingly, our future success will
depend on our ability to adapt to rapidly changing technologies and industry
standards, and our ability to continually improve the performance, features
and reliability of our services in response to both evolving customer demands
and competitive service offerings. Our inability to adapt successfully to
these changes in a timely manner could have a material and adverse effect on
our business, operating results and financial condition. Furthermore, we may
experience difficulties that could delay or prevent the successful design,
development, testing, introduction or marketing of new services. Any
enhancements to existing services may not adequately meet the requirements of
our current and prospective customers or achieve any degree of significant
market acceptance. If we are unable, for technological or other reasons, to
develop and introduce new services or enhancements to existing services in a
timely manner or in response to changing market conditions or customer
requirements, or if our services or enhancements contain defects or do not
achieve a significant degree of market acceptance, our business, results of
operations and financial condition would be materially adversely affected.
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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 effectively target advertising.
Commonly used Internet browsers allow users to modify their browser settings
to remove cookies at any time or to prevent cookies from being stored on
their hard drives. In addition, some Internet commentators, privacy advocates
and governmental bodies have suggested limiting or eliminating the use of
cookies. The use of cookies may become more restrictive in certain non-U.S.
markets, which could impact the rate or success of expansion into those
markets.
WE MAY BECOME SUBJECT TO BURDENSOME GOVERNMENT REGULATION AND LEGAL
UNCERTAINTIES.
The laws governing the Internet remain largely unsettled, even in
areas where there has been some legislative action. It may take years to
determine whether and how existing laws, including those governing
intellectual property, privacy, libel and taxation, apply to the Internet
generally and the electronic distribution of business information in
particular. Legislation could reduce the growth in the use of the Internet
generally and decrease the acceptance of the Internet as a communications and
commercial medium, which could have a materially adverse effect on our
business, operating results and financial condition. In addition, the growing
popularity and use of the Internet has burdened the existing
telecommunications infrastructure and many areas with high Internet usage
have begun to experience interruptions in phone service. As a result, some
local telephone carriers have petitioned governmental agencies to regulate
Internet service 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 of 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, Texas-based Internet companies like us may be at a competitive
disadvantage to Internet companies based outside of Texas with respect to
sales to Texas-based customers. We cannot assure you that violations of local
or other laws will not be alleged or charged by governmental authorities,
that we might not unintentionally violate these laws or that in the future
these laws will not be modified or new laws enacted. Any of these
developments could have a material adverse effect on our business, operating
results and financial condition.
ITEM 2: PROPERTIES
Our corporate headquarters is located in Austin, Texas, at 1033 La
Posada Drive, where we occupy approximately 39,000 square feet under leases
that expire in April 2001. We also lease a 3,500 square foot office in New
York at 4 West 58th Street in Manhattan. We also lease 1,725 square feet in
San Francisco, California, at 605 Market Street.
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. We have also recently signed a lease for new
office space in Austin , Texas. This lease commences on May 1, 2001, upon the
expiration of our existing Austin lease. See further discussion in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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ITEM 3: LEGAL PROCEEDINGS
None.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None.
PART II.
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Our common stock has traded on the Nasdaq National Market under the
symbol "HOOV" since July 21, 1999. The following lists the high and low per
share sales prices reported on the Nasdaq National Market for our common
stock for the periods indicated.
<TABLE>
<CAPTION>
High Low
---------------------------
<S> <C> <C>
Quarter ended September 30, 1999 (commencing July 21, 1999)................ $33.00 $8.13
Quarter ended December 31, 1999............................................ $14.25 $8.75
Quarter ended March 31, 2000............................................... $13.69 $8.50
</TABLE>
As of June 16, 2000, there were 12,939,542 shares of our common
stock outstanding, net of 150,000 shares held in Treasury Stock, held by
approximately 7,000 holders of record. We have never declared or paid any
cash dividends on our common stock and presently intends to retain our future
earnings, if any, to fund the development and growth of our business and,
therefore, do not anticipate paying any cash dividends in the foreseeable
future.
ITEM 6: SELECTED FINANCIAL DATA
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."
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA YEAR ENDED MARCH 31,
--------------------
STATEMENT OF OPERATIONS DATA 2000 1999 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
REVENUES:
Advertising and e-commerce $6,688 $961 $1,182 $514 $71
Subscriptions 8,743 4,784 1,464 301 18
Licensing 2,082 1,980 1,233 891 631
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<PAGE>
YEAR ENDED MARCH 31,
--------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
CD-ROM and print 1,560 1,637 1,591 2,254 1,901
----------------------------------------------------------------------
Total Revenues 19,073 9,362 5,470 3,960 2,621
Provision for return of print products (53) (133) (288) (600) (210)
----------------------------------------------------------------------
Net Revenues 19,020 9,229 5,182 3,360 2,411
Cost of revenues (7,436) (5,002) (3,035) (2,129) (1,461)
----------------------------------------------------------------------
Gross Profit 11,584 4,227 2,147 1,231 950
EXPENSES:
Product Development 2,005 566 391 201 195
Sales and marketing 12,590 2,184 1,501 865 427
General and administrative 7,104 3,402 2,125 1,038 594
Non-cash compensation 1,702 451 -- -- --
Total expenses 23,401 6,603 4,017 2,104 1,216
----------------------------------------------------------------------
Operating loss (11,817) (2,376) (1,870) (873) (266)
Interest income 2,308 177 129 5 1
Interest expense (19) (56) (47) (76) (52)
----------------------------------------------------------------------
Net Loss (9,528) (2,255) (1,788) (944) (317)
======================================================================
Basic and diluted net loss per share ($.88) ($.42) ($.39) ($.27) ($.10)
Shares used in computing basic and diluted 10,840,753 5,314,092 4,569,038 3,526,707 3,145,936
net loss per share
NET INCOME (LOSS) BEFORE NON-CASH ($7,826) ($1,804) ($1,788) ($944) ($317)
COMPENSATION
</TABLE>
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS AS OF MARCH 31,
---------------
BALANCE SHEET DATA 2000 1999 1998 1997 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Cash and Cash Equivalents $42,881 $ 7,814 $ 3,860 $ 579 $ 41
Total Assets 64,515 10,076 5,772 1,583 1,000
Working Capital 54,275 5,705 3,427 162 (18)
Long-term debt and capital lease 38 168 172 79 -
obligations, less current portion
Total stockholders equity $57,946 $ 6,760 $ 3,995 $ 606 $ 73
</TABLE>
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<PAGE>
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE
FINANCIAL STATEMENTS AND RELATED NOTES THERETO INCLUDED ELSEWHERE IN THIS ANNUAL
REPORT ON FORM 10-K. EXCEPT FOR THE HISTORICAL FINANCIAL INFORMATION CONTAINED
HEREIN, THE MATTERS DISCUSSED IN THIS ANNUAL REPORT ON FORM 10-K MAY BE
CONSIDERED "FORWARD-LOOKING" STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED. SUCH STATEMENTS INCLUDE DECLARATIONS REGARDING THE
INTENT, BELIEF OR CURRENT EXPECTATIONS OF HOOVER'S AND ITS MANAGEMENT AND MAY BE
SIGNIFIED BY THE WORDS "EXPECTS," "ANTICIPATES," "INTENDS," "BELIEVES," OR
SIMILAR LANGUAGE. PROSPECTIVE INVESTORS ARE CAUTIONED THAT ANY SUCH
FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE
A NUMBER OF RISKS AND UNCERTAINTIES. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE INDICATED BY SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE DISCUSSED BELOW, AS WELL AS THOSE
DISCUSSED IN THE SECTION, "FACTORS THAT MAY AFFECT FUTURE RESULTS."
OVERVIEW
Hoover's, Inc., provides an Internet-based service, Hoover's Online,
where businesspeople research, learn about, and buy business information,
products and services. At the core of Hoover's is a body of proprietary and
aggregated business information that, when combined with our proprietary search
technologies, allows businesspeople to get timely, accurate and reliable answers
to their questions. By answering their questions, we also have created a market
for our 3.1 million visitors to purchase products, services and specialty
information conveniently and quickly over the Web.
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
the advantages of online distribution, we began publishing our database on
America Online in 1993 and launched Hoover's Online, our Internet service, in
1995. We have continued to shift our focus from publishing only company and
industry information to providing other services for businesspeople via the
Internet.
Hoover's Online includes in-depth company and business information,
business news, professional and career development information, personal finance
resources, business travel information, and a directory of Web-based business
resource links. In order to increase the frequency of visits to the site, we
have added a service that allows visitors to receive customized e-mail alerts to
news on topics that they have selected. We have also added a portfolio feature
that allows our customers to track companies of interest to them. Our
proprietary database now contains information on more than 300 industries and
approximately 16,000 public and private enterprises worldwide. In addition, we
have expanded our coverage by licensing additional company information, bringing
our total coverage to more than 50,000 enterprises. Our proprietary database
contains increasing amounts of information on non-U.S. companies and we maintain
a related Web site, Hoover's UK, to meet the needs of both non-U.S. customers
and U.S. customers seeking information on business overseas. We also distribute
some of our information through wireless devices.
Our revenues are derived from advertising and e-commerce, subscriptions
consisting of individual and enterprise accounts, licensing of our editorial
content and sales of our company information on CD-ROM and in print.
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<PAGE>
ADVERTISING AND E-COMMERCE REVENUE
We derive revenues from the sale of banner and button advertisements,
sponsorships, and e-commerce on our Web site. Advertisement and sponsorship
prices are based on a price per thousand impressions or a fixed monthly fee.
Revenues are recognized as the impressions are delivered or ratably over the
contract period, provided that no significant obligations remain. We also derive
e-commerce revenues from advertisers and other partners who pay either a fee per
transaction or a percentage of sales generated directly from their advertisement
on our Web site or from their special sponsorship of an area within our Web
site.
SUBSCRIPTIONS REVENUE
We derive revenues from individual and enterprise subscriptions. Individual
subscriptions are currently sold directly on our Web site for $14.95 per month
or $109.95 per year. We periodically offer pricing discounts and promotions to
new subscribers in order to introduce our product and services. These offers
usually run for a short duration. We also offer annual enterprise subscriptions
ranging from $1,500 for 10 seats to $30,000 for 1,000 seats per year. In
addition, larger enterprise subscriptions are sold using a negotiated price,
based on the number of active seats. Subscription sales are recognized as
service is provided under the terms of online subscription agreements. Payments
received in advance of providing services are recorded as deferred revenue and
amortized into revenue over the term of the agreement.
LICENSING REVENUE
We license portions of our database and certain tools for
redistribution through customized data feeds to online services and to other Web
sites. Our licensing fees vary depending on factors such as the number of users
and the amount of proprietary content licensed. Licensing agreements may be
structured as fixed monthly fees or negotiated revenue sharing. We have
converted several of these arrangements from licensing contracts to enterprise
subscriptions.
CD-ROM AND PRINT SALES
We sell CD-ROMs and print products containing company information. We
recognize these revenues when the goods are shipped. For our sale of CD-ROMs and
print products, we provide an allowance for returns when the products are
shipped.
COSTS AND EXPENSES
Our cost of revenues includes editorial personnel costs, expenses
associated with licensing of third-party content, direct expenses associated
with our Web site, such as hosting, and other service fees and commissions paid
to advertising agencies. Our product development expenses include technology
personnel costs and related consulting fees. Sales and marketing expenses
include sales and marketing personnel costs, including commissions, as well as
all marketing, advertising and promotional expenses. General and administrative
expenses consist of compensation for administrative and executive staff, which
we consider to be finance, project management, office network and human resource
personnel, as well as fees for professional services, travel, depreciation and
general office expenses. During the fourth quarter of fiscal 1999, we recorded
deferred compensation expense 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 subsequently determined
fair
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<PAGE>
market 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 year ended
March 31, 2000, was approximately $1.7 million.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED MARCH 31, 2000, COMPARED TO FISCAL YEAR ENDED MARCH 31, 1999
REVENUES. Net revenues for fiscal 2000 increased 106% to $19.0 million
from $9.2 million for fiscal 1999.
Revenues from advertising and e-commerce increased 596% to $6.7 million
for fiscal 2000, from $1.0 million in fiscal 1999. This was due in part to the
significant growth in traffic to Hoover's Online. For the last quarter ended
March 31, 2000, Hoover's Online attracted approximately 3 million unique
visitors, who accounted for approximately 95 million page views, compared to 2
million unique visitors and 31 million page views during the quarter ended March
31, 1999. In addition to the increased number of page views, the redesign of
Hoover's Online, which provided more sponsorship areas, and additional
advertising sales personnel supported this increase.
Our subscription revenues increased 83% to $8.7 million for fiscal
2000, from $4.8 million for fiscal 1999. This increase in revenues is due to the
increase in the number of individual subscribers and enterprise accounts. Total
paid subscribers grew 106% to approximately 206,000 as of March 31, 2000, from
approximately 100,000 as of March 31, 1999. The growth in the number of
individual subscribers, to 46,000 as of March 31, 2000, from 29,000 as of March
31, 1999, was primarily due to increased traffic to our Web site.
The growth in traffic to our Web site resulted in an increased number
of leads for enterprise accounts. That, combined with an increased number of
telesales employees, contributed to the increase in new enterprise subscription
accounts during the year. As of March 31, 2000, we had 2,447 enterprise
accounts, representing an estimated 160,000 seats, compared to approximately
1,300 enterprise accounts, representing an estimated 70,000 seats, as of March
31, 1999, increases of 87% and 129%, respectively.
Licensing revenues increased 5% to $2.1 million in fiscal 2000, from
$2.0 million for fiscal 1999. Royalty payments are based on use of Hoover's
content or other revenue-sharing arrangements and our increase in revenues for
the year was due to higher sales by our licensing partners. We expect that over
time our customers will access our products primarily through Hoover's Online
and therefore our licensing arrangements with third-party proprietary and Web
services may decline as a percentage of our total revenues and in absolute
dollars.
Net revenues from CD-ROM and print products decreased 5% to $1.5
million for the year ended March 31, 2000, from $1.6 million for the comparable
period one year ago. Decreases were due to a reduced emphasis in this area and a
migration of customers to our Web-based services.
COST OF REVENUES. Cost of revenues for fiscal 2000 increased 49% to
$7.4 million, from $5.0 million in fiscal 1999. The increase in cost of revenues
was primarily due to an increase in compensation for existing and new editorial
personnel, as well as increases in expenses associated with third-party content.
As a percentage of revenues, cost of revenues for the year ended March 31, 2000,
was lower, at 39% of revenues, compared to 53% for the comparable period one
year ago. This decrease occurred primarily because the editorial costs
associated with creation and maintenance of the company database are relatively
fixed without regard to the level of revenues.
PRODUCT DEVELOPMENT. Product development expenses for fiscal 2000
increased 254% to $2.0 million, from $566,000 in fiscal 1999. This increase was
due to the hiring of additional programmers and analysts, and to increased
amounts paid to outside consultants and designers. We increased our personnel
and consulting costs in order to plan for, implement and maintain our technology
upgrades and the expansion of Hoover's Online.
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<PAGE>
SALES AND MARKETING. Sales and marketing expenses for fiscal 2000
increased 476% to $12.6 million, from $2.2 million in fiscal 1999. The increase
in sales and marketing expenses was due primarily to our national media
advertising campaign, which launched in September 1999 and ran until November
1999. Also, an increase in the number of enterprise and advertising sales
representatives, and an increase in the number of marketing and business
development personnel contributed to the increase.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for
fiscal 2000 increased 109% to $7.1 million, from $3.4 million for fiscal 1999.
The increase was primarily due to an increase of 150% in fees for professional
services, primarily related to investor relations, consulting, and legal
expenses. Salaries of existing executive and administrative staff as well the
addition of administrative and finance personnel also increased 98%. During the
year we hired a Vice President-General Counsel, and incurred a full year of
salary expense for other executive personnel hired in 1999. General office
expenses increased 154% due to facility expansion, both in Austin and New York.
Credit card processing fees increased 25% due to a higher number of individual
subscription payments. Depreciation increased 149% due to an increase in capital
expenditures.
INTEREST INCOME AND EXPENSE. Interest income for fiscal 2000
increased 1,204% to $2.3 million, from $177,000 in fiscal 1999. The increase
was due to our increased cash and short-term investments. We received net
cash proceeds of $47 million from the Company's initial public offering in
July 1999, as well as $9 million in proceeds received upon our sale of common
stock to NBC, Knowledge Net Holdings and Nextera in June 1999. Interest
expense decreased to $18,500 for the year ended March 31, 2000, from $56,000
for the year ended March 31, 1999, due to the payment in full of our bank
debt during the year.
TAXES. We have incurred significant operating losses for all periods
from inception (February 1990) through March 31, 2000. We have recorded a
valuation allowance for 100% of our net deferred tax assets because our
historical operating results indicate that the net deferred tax assets may 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, 1999, COMPARED TO FISCAL YEAR ENDED MARCH 31, 1998
REVENUES. Net revenues for fiscal 1999 increased 78% to $9.2 million,
from $5.2 million in fiscal 1998.
Our subscription revenue provided the most growth, increasing 227% to
$4.8 million in fiscal 1999 from $1.5 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 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 6 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 and e-commerce revenues were lower than
fiscal 1998 by 19%. In fiscal 1998 we had an agreement with Infoseek that 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
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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 and 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 expense is
related to additional content that was 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 and analysts, and fees paid to outside consultants.
We increased our personnel and consulting costs in order to plan and implement
technology upgrades that 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 $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.
LIQUIDITY AND CAPITAL RESOURCES
We used $5.9 million net cash in operating activities during the twelve
months ended March 31, 2000, compared to $4,000 in the twelve months ended March
31, 1999. Net cash used in operating
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activities resulted from net operating losses partially offset by increases
in deferred revenues and accrued expenses.
We used $16.3 million in investing activities in fiscal 2000 compared
to $788,000 in fiscal 1999. Net cash used in investing activities was primarily
related to the purchase of short-term securities, purchases of computer and
network equipment as well as leasehold improvements.
We obtained cash from financing activities of $57.3 million in fiscal
2000 compared to $4.7 million in fiscal 1999, primarily through the Initial
Public Offering of our common stock. In addition, in 1998, we utilized revolving
credit lines secured by accounts receivable and computer equipment to fund
operations.
As of March 31, 2000, we had $57 million of cash, cash equivalents and
short-term investments. Our principal commitments at March 31, 2000 consisted of
obligations under capital leases. Our accounts payable balance as of March 31,
2000 was $592,000 that consisted of short-term accounts, due within 30 days, and
commissions due to employees. Our accrued expenses of $2.7 million primarily
includes amounts due to vendors for advertising, marketing, and professional
expenses for which we have not been invoiced as well as unused vacation due to
employees.
At March 31, 2000, we had no existing term loans or lines of credit
with any banks. At March 31, 1999, we had a $550,000 term loan that matured
effective on December 31, 2000; a $200,000 term loan that matured effective on
January 12, 2000; and a $150,000 revolving line of credit with a bank. The line
of credit expired on March 31, 1999, and the term loans were paid off in
September 1999.
During June 2000, the Company entered into a non cancelable lease
for additional long-term office space in Austin, Texas. This lease commences
on May 1, 2001, with total minimum payments over the 10 year lease term of
$11.2 million, plus operating expenses.
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 our existing cash and cash equivalents will be
sufficient to meet our anticipated cash requirements for working capital and
capital expenditures for at least the next 12 months. Beyond the next 12 months,
our significant commitments consist of repayment of lease commitments for
facilities and telephone equipment. We also intend to invest in sales and
marketing promotions and continue to build an infrastructure to meet the needs
of a public company. Although we currently expect to meet the cash requirements
of such commitments, expenditures and ongoing operating expenses from working
capital, in order to meet our long-term liquidity needs, we may need or choose
to raise additional funds, seek an additional credit facility or seek other
financing arrangements.
YEAR 2000 READINESS DISCLOSURE
Over the last year we planned and implemented a year 2000 compliance project to
assess the readiness of internally developed and third-party software, content,
and business systems. Based on this assessment and the fact that we have
experienced no significant problems subsequent to December 31, 1999, we believe
that our internally developed software, our content publishing system, and
third-party supplied software is year 2000 compliant. We cannot assure that we
will not have technology failures in the future as a result of year 2000 issues.
However, we do not believe this will have a material effect.
RECENTLY ISSUED ACCOUNTING STATEMENTS
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS 133 establishes new accounting and
reporting standards for derivative financial instruments and for hedging
activities. SFAS 133 requires Hoover's to measure all derivatives at fair value
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and to recognize them in the balance sheet as an asset or liability, depending
on Hoover's rights or obligations under the applicable derivative contract.
Hoover's will adopt SFAS 133 no later than the first quarter of fiscal year
2001. The Company is analyzing the potential effects of SFAS 133 and does not
expect that SFAS 133 will have a material impact on Hoover's consolidated
results of operations, financial position or cash flows. However, certain
warrants held by Hoover's could be material.
In December 1999, the Securities and Exchange Commission staff released Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB
No. 101"), which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements. The Company does not expect the
application of SAB No. 101 to have a material impact on the Company's financial
condition or results of operations.
The FASB recently issued Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation. Interpretation No. 44 provides
guidance related to the implementation of APB Opinion No. 25, Accounting for
Stock Issued to Employees. The Company does not believe Interpretation No. 44
will have a material impact on the Company's financial condition or results of
operations.
In March 2000, the Emerging Issues Task Force of the FASB reached a consensus
on EITF 00-2, Accounting for Web-Site Development Costs. The consensus
provides guidance on the treatment of Web-site development costs. The
consensus is to be applied prospectively for fiscal quarters beginning after
June 30, 2000. The Company does not believe the consensus will have a
material impact on the Company's financial condition or results of operations
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
During the year ended March 31, 1998, Hoover's had floating rate
borrowings and capital lease obligations which resulted in the risk that
interest expense of the fair value of capital lease obligations might be
impacted by changes in market interest rates. However, because these
borrowings were not significant, market risks related to financial
instruments were not material.
Hoover's has capital lease obligations, which result in the risk that
interest expense or the fair value of capital lease obligations might be
impacted by changes in market interest rates. However, market risks associated
with capital leases are not significant.
On July 26, 1999, upon the closing of our initial public offering
of common stock, we received approximately $47 million in net proceeds from
the underwriters of the offering. To date, the majority of these proceeds
have been invested in money market funds backed by short-term government
securities and other short-term, investment-grade, interest-bearing
instruments classified as "available for sale." These instruments are also
subject to the risk that interest income or fair value might be affected by
changes in market interest rates. A one-percent decrease in market rates
would likely reduce our interest income by approximately $500,000 but we do
not expect it would materially affect the fair value of these instruments. As
of March 31, 2000, all of these investments mature in less than one year.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(a) 1. Financial Statements.
The information required by this Item is filed as an Exhibit
to this Form 10-K.
(b) 2. Supplementary Data.
Not Applicable.
Page 30
<PAGE>
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III.
Certain information required by Part III is omitted from this Report
because we will file a definitive Proxy Statement pursuant to Regulation 14A no
later than 120 days after the end of the fiscal year covered by this report, and
certain information to be included therein is incorporated herein by reference.
ITEM 10: DIRECTORS AND OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference to
the Proxy Statement under the sections captioned "Proposal 1 - Election of
Directors," "Executive Compensation - Directors and Executive Officers" and
"Compliance with Section 16(a) of the Securities Exchange Act of 1934."
ITEM 11: EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to
the Proxy Statement under the section captioned "Executive Compensation."
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to
the Proxy Statement under the section captioned "Principal Stockholders."
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to
the Proxy Statement under the section captioned "Executive Compensation -
Certain Transactions with Management."
PART IV.
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
--------------------
The following financial statements of Hoover's, Inc., are filed
as part of this Form 10-K on the pages indicated:
Page 31
<PAGE>
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS PAGE
----------------------------- ----
<S> <C> <C> <C>
Report of Independent Auditors................................... 34
Balance Sheets as of March 31, 2000, and 1999.................... 35
Statements of Operations for the years ended March 31, 2000,
1999 and 1998.................................................... 36
Statements of Stockholders' Equity for the years ended March
31, 2000, 1999 and 1998.......................................... 37
Statements of Cash Flows for the years ended March 31, 2000,
1999 and 1998.................................................... 38
Notes to Financial Statements.................................... 39
2. FINANCIAL STATEMENT SCHEDULES
None.
(b) Reports on Form 8-K
None.
(c) EXHIBITS. The exhibits to the Form 10-K have been included only
with the copy of this Form 10-K filed with the Securities and
Exchange Commission. Copies of individual exhibits will be
furnished to stockholders upon requests to Hoover's and payment
of a reasonable fee.
EXHIBIT NUMBER
--------------
3.1* --- Form of Amended and Restated Certificate of Incorporation of
Hoover's, Inc., as amended
3.3* --- Form of Amended and Restated Bylaws of Hoover's, Inc., as
amended.
4.1* --- Specimen certificate for shares of common stock.
4.3* --- Form of Warrant.
10.1* --- Amendment No. 1 to Stock Purchase Agreement dated as of June
25, 1999, by and between Hoover's, Inc., and Media General,
Inc.
10.2* --- Amended Restated Stock Purchase Agreement dated June 24,
1999, by and between Hoover's, Inc. and Warner Books, Inc.
10.3* --- Distributor Agreement dated June 1, 1999, by and between
Hoover's, Inc., and Media General Financial Services, Inc.
10.4* --- La Costa Green Office Building Lease Agreement, as amended,
dated March 12, 1996, by and between The Reference Press,
Inc., and KP/Miller Realty Growth.
10.5* --- Imperial Bank Security and Loan Agreements dated June 17,
1997, and April 2, 1998.
10.6* --- Form of Indemnification Agreement between Hoover's, Inc.,
and each of its directors and executive officers.
10.7* --- Form of Hoover's, Inc., 1999 Stock Incentive Plan.
Page 32
<PAGE>
10.8* --- Stock Purchase Agreement dated as of June 11, 1999, by and
between Hoover's, Inc., and Knowledge Net Holdings, L.L.C.
10.9* --- Strategic Relationship Agreement dated as of June 11, 1999,
by and between Hoover's, Inc., and Knowledge Net Holdings,
L.L.C.
10.10* --- Amendment No. 1 to Stock Purchase Agreement dated as of
June 11, 1999, by and among Hoover's, Inc., Knowledge Net
Holdings, Inc., and Nextera Enterprises, Inc.
10.11* --- Stock Purchase Agreement dates as of September 4, 1997, by
and between Hoover's, Inc., and Media General, Inc.
10.12 --- Sublease Agreement for the 6th floor, 4 West 58th St., New
York, New York, between Hoover's, Inc., and joan and david
helpern incorporated dated July 23, 1999.
23.1 --- Consent of Ernst & Young, L.L.P.
24.1 --- Power of Attorney.
27.1 --- Financial Data Schedule for year ended March 31, 2000.
</TABLE>
*Indicates an exhibit previously filed with the Securities and Exchange
Commission as an exhibit to our Registration Statement on Form S-1,
Registration No. 333-78109, such exhibit incorporated herein by reference.
Page 33
<PAGE>
Exhibit 1. Consolidated Financial Statements
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, 2000, 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,
2000. 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 auditing standards generally accepted
in the United States. 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,
2000, and 1999, and the results of its operations and its cash flows for each of
the three years in the period ended March 31, 2000, in conformity with
accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Austin, Texas
April 27, 2000, except for Note 11,
as to which the date is June 27, 2000
Page 34
<PAGE>
HOOVER'S, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31,
---------
2000 1999
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................................... $42,881 $ 7,814
Short-term investments........................................................ 14,043 --
Accounts receivable, less allowance for doubtful accounts of $292 and $33 at
March 31, 2000 and March 31, 1999, respectively.............................. 3,581 866
Book inventory, less allowances for excess and obsolete inventory of $67 and
$78 at March 31, 2000 and March 31, 1999, respectively......................... 58 84
Prepaid expenses and other current assets...................................... 243 89
-----------------------------------
Total current assets............................................................. 60,806 8,853
Property, plant and equipment:
Computer and office equipment.................................................. 3,371 1,493
Equipment under capital lease.................................................. 147 147
Furniture and fixtures......................................................... 785 345
-----------------------------------
4,303 1,985
Less accumulated depreciation.................................................. (1,919) (889)
-----------------------------------
Total property, plant and equipment.............................................. 2,384 1,096
Other assets..................................................................... 1,325 127
Total assets..................................................................... $64,515 $10,076
===================================
LIABILITIES
Current liabilities:
Accounts payable and commissions............................................... $ 592 $ 460
Accrued expenses............................................................... 2,656 694
Current portion of long-term debt and capital leases........................... 25 376
Deferred revenue............................................................... 3,258 1,618
-----------------------------------
Total current liabilities........................................................ 6,531 3,148
Bank term loan, less current portion............................................. -- 98
Obligations under capital leases, less current portion........................... 38 70
-----------------------------------
Total liabilities................................................................ 6,569 3,316
Stockholders' equity:
Common stock, $.01 par value, 150,000,000 shares authorized 12,706,792 and
7,090,725 shares issued at March 31, 2000, and March 31, 1999, respectively.. 127 71
Additional paid-in capital..................................................... 77,491 18,067
Unearned stock compensation.................................................... (1,530) (2,764)
Accumulated deficit............................................................ (17,992) (8,464)
Treasury stock at cost - 150,000 shares....................................... (150) (150)
-----------------------------------
Total stockholders' equity....................................................... 57,946 6,760
-----------------------------------
Total liabilities and stockholders' equity....................................... $64,515 $10,076
===================================
</TABLE>
SEE ACCOMPANYING NOTES.
Page 35
<PAGE>
HOOVER'S, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------------
2000 1999 1998
------------- ---------- ----------
<S> <C> <C> <C>
Revenues
Advertising and e-commerce....................... $ 6,688 $ 961 $ 1,182
Subscriptions.................................... 8,743 4,784 1,464
Licensing........................................ 2,082 1,980 1,233
CD-ROM and print................................. 1,560 1,637 1,591
----------------------------------------
Total revenues..................................... 19,073 9,362 5,470
Provision for returns of print products.......... (53) (133) (288)
----------------------------------------
Net revenues....................................... 19,020 9,229 5,182
Cost of revenues................................. (7,436) (5,002) (3,035)
----------------------------------------
Gross profit....................................... 11,584 4,227 2,147
Expenses:
Product development.............................. 2,005 566 391
Sales and marketing.............................. 12,590 2,184 1,501
General and administrative....................... 7,104 3,402 2,125
Non-cash compensation............................ 1,702 451 --
----------------------------------------
Total expenses..................................... 23,401 6,603 4,017
Operating loss..................................... (11,817) (2,376) (1,870)
Interest income ................................... 2,308 177 129
Interest expense................................... (19) (56) (47)
----------------------------------------
Net loss........................................... $ (9,528) $ (2,255) (1,788)
========================================
Basic and diluted net loss per share............... $ (0.88) $ (0.42) $ (0.39)
========================================
Shares used in computation of basic and diluted
loss per share................................... 10,840,753 5,314,092 4,569,038
</TABLE>
SEE ACCOMPANYING NOTES.
Page 36
<PAGE>
HOOVER'S, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Shares of Common Additional Unearned Total
Common Stock Paid-In Stock Accumulated Treasury Stockholders'
Stock Par Value Capital Compensation Deficit Stock Equity
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1997......... 4,064,025 $ 40 $ 5,136 -- $ (4,421) $ (150) $ 605
Exercise of options............... 24,900 1 33 -- -- -- 34
Exercise of warrants.............. 232,050 2 849 -- -- -- 851
Issuances of common stock......... 900,000 9 4,283 -- -- -- 4,292
Net loss.......................... -- -- -- -- (1,788) -- (1,788)
----------------------------------------------------------------------------------------------
Balance at March 31, 1998......... 5,220,975 52 10,301 -- (6,209) (150) 3,994
Exercise of options............... 193,500 2 261 -- -- -- 263
Exercise of warrants.............. 1,676,250 17 4,290 -- -- -- 4,307
Unearned stock compensation....... -- -- 3,215 (3,215) -- -- --
Amortization of unearned stock
compensation...................... -- -- -- 451 -- -- 451
Net loss.......................... -- -- -- -- (2,255) -- (2,255)
----------------------------------------------------------------------------------------------
Balance at March 31, 1999......... 7,090,725 71 18,067 (2,764) (8,464) (150) 6,760
Exercise of options............... 431,951 4 875 -- -- -- 879
Exercise of warrants.............. 191,839 2 357 -- -- -- 359
Unearned stock compensation....... -- -- 468 (468) -- -- --
Initial Public Offering, net...... 3,737,500 37 47,392 -- -- -- 47,429
Private Placements of common
stock........................... 1,231,863 12 10,152 -- -- -- 10,164
Employee Stock Purchase Plan...... 22,914 1 180 -- -- -- 181
Amortization of unearned stock
compensation.................... -- -- -- 1,702 -- -- 1,702
Net loss.......................... -- -- -- -- (9,528) -- (9,528)
----------------------------------------------------------------------------------------------
Balance at March 31, 2000......... 12,706,792 $127 $77,491 $(1,530) $(17,992) $(150) $57,946
==============================================================================================
</TABLE>
See accompanying Notes.
Page 37
<PAGE>
HOOVER'S, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------
2000 1999 1998
-------- ------- -------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss............................................................ $ (9,528) $(2,255) $(1,788)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation...................................................... 1,030 415 272
Amortization...................................................... 499 -- --
Amortization of unearned stock compensation....................... 1,702 451 --
Changes in operating assets and liabilities:
Accounts receivable............................................ (2,715) 68 (557)
Inventories.................................................... 26 56 91
Prepaid expenses and other current assets...................... (154) 8 (46)
Other Assets................................................... (500) (110) 198
Accounts payable and commissions............................... 132 251 (69)
Accrued expenses............................................... 1,962 142 265
Deferred revenue............................................... 1,640 970 589
--------------------------------
Net cash used in operating activities............................... (5,906) (4) (1,045)
INVESTING ACTIVITIES
Purchases of property, plant and equipment, net..................... (2,318) (788) (584)
Purchase of short term securities................................... (14,043) -- --
--------------------------------
Net cash used in investing activities............................... (16,361) (788) (584)
FINANCING ACTIVITIES
Payments on lines of credit from stockholders....................... -- -- (350)
Proceeds from bank term loans....................................... -- 497 200
Payments on bank term loans......................................... (448) (287) (94)
Payments on capital leases.......................................... (33) (34) (22)
Net proceeds from capital stock transactions........................ 57,815 4,570 5,176
--------------------------------
Net cash provided by financing activities........................... 57,334 4,746 4,910
Increase in cash and cash equivalents............................... 35,067 3,954 3,281
Cash and cash equivalents at beginning of year...................... 7,814 3,860 579
--------------------------------
Cash and cash equivalents at end of year............................ $ 42,881 $ 7,814 $ 3,860
</TABLE>
SEE ACCOMPANYING NOTES.
Page 38
<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. At the core of all products and
services is a proprietary database of worldwide company and industry
information. Hoover's sells advertising and sponsorships, conducts e-commerce
activity, and sells online subscriptions to certain of its information on
Hoover's Online. Hoover's also has a line of print products.
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
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.
We also derive e-commerce revenues from advertisers and other partners who pay
either a fee per transaction or a percentage of sales generated directly from
their advertisement on our Web site or from their special sponsorship of an
area within our Web site provided that no significant remaining obligations
exist and collection of the resulting receivable is probable.
The Company recorded barter revenue and expense of $634,000 during the year
ended March 31, 2000. No barter revenue or expense was recorded during the
years ended March 31, 1999, and 1998, respectively.
Page 39
<PAGE>
Subscription sales are recognized as service is provided under the terms of
online subscription agreements. Payments received in advance of providing
services are recorded as deferred revenue and amortized into revenue over the
term of the agreement.
Licensing sales are recognized as service is provided under the terms of
licensing agreements. Payments received in advance of providing services are
recorded as deferred revenue and recorded as revenue when earned.
CD-ROM and print product revenues are recognized when goods are shipped to
customers. At the time of sale, an allowance for returns is established.
ADVERTISING COSTS
Hoover's expenses advertising costs as incurred. These expenses were
approximately $2,067,000, $478,000 and $275,000 for the years ended March 31,
2000, 1999 and 1998, 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 the Hoover's Online
systems and site. 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 ("FASB") 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.
Page 40
<PAGE>
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, 2000,
1999 and 1998 were 10,840,753, 5,314,092 and 4,569,038, 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.
CONCENTRATIONS OF CREDIT RISKS
Financial instruments that potentially subject the Company to concentrations
of credit risk consist of short-term investments, trade receivables and
inventory. The Company's short-term investments, which are included in cash
and cash equivalents and short-term investments for reporting purposes, are
placed with high credit quality financial institutions and issuers. The
Company performs periodic credit evaluations of its customer's financial
condition and generally does not require collateral. The following table
summarizes the changes in valuation allowances for trade receivables and
inventory (in thousands):
<TABLE>
<CAPTION>
BALANCE AT PROVISIONS DEDUCTIONS BALANCE AT
BEGINNING OF CHARGED TO FROM END OF
PERIOD EXPENSE RESERVES PERIOD
--------------------------------------------------------
<S> <C> <C> <C> <C>
YEAR ENDED MARCH 31, 1998:
Allowance for Doubtful Accounts......................... 14 20 -- 34
Inventory obsolescence reserve ......................... 49 25 21 53
Return Reserves ........................................ 177 280 299 158
YEAR ENDED MARCH 31, 1999:
Allowance for Doubtful Accounts ........................ 34 -- 1 33
Inventory obsolescence reserve ......................... 53 40 15 78
Return Reserves ........................................ 158 59 160 57
YEAR ENDED MARCH 31, 2000:
Allowance for Doubtful Accounts ........................ 33 338 79 292
Inventory obsolescence reserve ......................... 78 69 80 67
Return Reserves ........................................ 57 -- 57 --
</TABLE>
RECLASSIFICATIONS
Reclassifications have been made to the 1998 and 1999 financial statements to
conform to the 2000 presentation.
Page 41
<PAGE>
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS 133 establishes new accounting and
reporting standards for derivative financial instruments and for hedging
activities. SFAS 133 requires Hoover's to measure all derivatives at fair
value and to recognize them in the balance sheet as an asset or liability,
depending on Hoover's rights or obligations under the applicable derivative
contract. Hoover's will adopt SFAS 133 no later than the first quarter of
fiscal year 2001. The Company is analyzing the potential effects of SFAS 133
and does not expect that SFAS 133 will have a material impact on Hoover's
consolidated results of operations, financial position or cash flows. However,
certain warrants held by Hoover's could be material.
In December 1999, the Securities and Exchange Commission staff released Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB
No. 101"), which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements. The Company does not expect the
application of SAB No. 101 to have a material impact on the Company's
financial condition or results of operations.
The FASB recently issued Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation. Interpretation No. 44 provides
guidance related to the implementation of APB Opinion No. 25, Accounting for
Stock Issued to Employees. The Company does not believe Interpretation No. 44
will have a material impact on the Company's financial condition or results of
operations.
In March 2000, the Emerging Issues Task Force of the FASB consensus EITF 00-2,
Accounting for Web-Site Development Costs. The consensus provides guidance on
the treatment of Web-site development costs. The consensus is to be applied
prospectively for fiscal quarters beginning after June 30, 2000. The Company
does not believe the release will have a material impact on the Company's
financial condition or results of operations.
2. CAPITAL STOCK AND WARRANTS
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 adviser 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.
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. Changes to the stockholder's agreement required Hoover's 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, and contained other approval
provisions regarding the adoption of capital and operating budgets, incurrence
of indebtedness over $500,000 and for certain executive compensation
arrangements or changes. The Stockholders Agreement terminated on its own
terms upon the Hoover's Initial Public Offering of its common stock in July
1999.
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.
Page 42
<PAGE>
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 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 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 June 1999, the stockholders approved an increase in authorized common
stock, allowing Hoover's to effect a two-for-one split of the common stock,
which was approved by the board of directors in May 1999. Also in June 1999,
the stockholders approved a .75-for-one reverse split of the common stock. All
share and per share amounts in the financial statements and accompanying notes
have been restated to reflect both the two-for-one split and the reverse stock
split.
In June 1999, Hoover's sold an aggregate of 1,022,727 shares of its common
stock to a company for an aggregate purchase price of $7.4 million. Hoover's
concurrently entered into an agreement with the company pursuant to which the
company will purchase from Hoover's at fair value, at least $2.0 million of
various services, which may include advertising on Hoover's Web site,
sponsorship of feature or content areas of Hoover's Web site, licensing of
Hoover's company or industry information and/or enterprise subscriptions.
In June 1999, Hoover's sold an aggregate of 206,045 shares of its common stock
to a Company for an aggregate purchase price of $1.5 million. These shares
were sold in conjunction with a content collaboration agreement by Hoover's
below the current market value resulting in Hoover's recording a $1.2 million
intangible to be amortized over two years.
In connection with the June 1999 Private Placements, Hoover's also issued
3,091 shares common stock to a financial advisor.
In July 1999, the Company completed an Initial Public Offering in which the
Company sold 3,737,500 shares of its Common Stock for net proceeds of $47.4
million.
At March 31, 2000, and 1999, the following warrants to purchase shares of
common stock were outstanding and exercisable, primarily to existing
stockholders:
<TABLE>
<CAPTION>
SHARES ISSUABLE
UPON EXERCISE
-------------------------------
2000 1999
---- ----
<S> <C> <C>
Expire June 2000, price $1.33 per share. 18,750 56,250
Expire December 2001, price $2.00 per share -- 37,500
Expire December 2000, price $3.33 per share 599,085 662,520
Expire March 2002, price $3.67 per share -- 6,750
Expire September 2002, price $3.67 per share -- 40,500
Expire December 2007, price $4.33 per share 60,000 82,500
Expire July 2000, price $4.67 per share 750,000 750,000
===============================
1,427,835 1,636,020
===============================
</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, 2000, was $4.05. There were no additional warrants granted during the year
ended March 31, 2000. At March 31, 2000 and 1999, 1,427,835 and 1,636,020
shares of common stock were reserved for outstanding warrants.
Page 43
<PAGE>
3. STOCK OPTIONS AND TRANSACTIONS
Hoover's has several incentive and non-qualifying stock option plans to grant
options and issue stock to key employees, board members and other individuals.
In July 1999, the Company adopted the 1999 Employee Stock Purchase Plan
("ESPP") whereby eligible employees can purchase shares of the Company's
common stock. The Company has reserved 150,000 shares of common stock for
issuance under the ESPP. Payroll deductions may not exceed 15% of the
participant's base salary for each semiannual period of participation. The
purchase price per share shall not be less than 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 semiannual purchase date.
In no event, may any participant purchase more than 600 shares on any one
semiannual purchase date, nor may all participants in the aggregate purchase
more than 75,000 shares on any one semiannual purchase date. Unless sooner
terminated by the Board, the Plan shall terminate upon the earliest of (i) the
last business day in July 2009, (ii) the date on which all shares available
for issuance under the Plan shall have been sold pursuant to purchase rights
exercised under the Plan, or (iii) the date on which all purchase rights are
exercised in connection with a Corporate Transaction. As of March 31, 2000,
22,914 shares were issued under the ESPP.
Under the 1999 Stock Incentive Plan (the "Plan"), employees, non-employee
members of the Board, and consultants may be granted options to purchase
shares of common stock, stock appreciation rights, or be issued shares of the
Company's common stock directly. The term of each option is no more than ten
years from the date of grant. There were 3,228,441 shares authorized at March
31, 2000, of which 529,866 are available for future grant. The aggregate
number of shares authorized shall automatically increase each year by a number
equal to the lesser of 2% of the shares of Common Stock then outstanding or
375,000 shares.
During the years ended March 31, 2000, and March 31, 1999, the Company granted
52,500 options and 214,500 options, respectively, at exercise prices below the
subsequently determined fair market value of the underlying shares of common
stock on the dates of grant. As a result, Hoover's recorded unearned stock
compensation of $467,560 and $3,214,602 for the years ended March 31, 2000,
and 1999. These amounts are being amortized over the vesting periods of the
applicable options, resulting in amortization of $1,701,503 and $450,603 for
the years ended March 31, 2000, and 1999, respectively.
A summary of the Company's stock option activity and related information
through March 31, 2000, is as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES WEIGHTED AVERAGE EXERCISE PRICE
------------------------ -------------------------------
<S> <C> <C>
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
Options granted ........................... 760,150 $11.32
Options forfeited ......................... (181,825) $ 5.62
Options exercised ......................... (431,951) $ 2.03
---------------------------------------------------------
Total options outstanding at March 31, 2000 2,272,024 $ 5.65
=========================================================
</TABLE>
Page 44
<PAGE>
A total of 1,108,774, 1,113,675, and 906,780 outstanding options are
exercisable as of March 31, 2000, 1999 and 1998, respectively.
The following is a summary of options outstanding and exercisable as of March
31, 2000:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
--------------------------------------------------------------------------------------------------
NUMBER OF WEIGHTED WEIGHTED NUMBER OF WEIGHTED WEIGHTED
SHARES AVERAGE AVERAGE SHARES AVERAGE AVERAGE
SUBJECT TO REMAINING EXERCISE SUBJECT TO REMAINING EXERCISE
OPTIONS CONTRACTUAL PRICE OPTIONS CONTRACTUAL PRICE
OUTSTANDING LIFE (IN YEARS) EXERCISABLE LIFE (IN YEARS)
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
RANGE OF
EXERCISE PRICES
$1.00 ......... 501,899 2.9 $ 1.00 501,899 2.9 $ 1.00
$2.00 ......... 143,750 6.2 2.00 143,750 6.2 $ 2.00
$3.67-$4.33 ... 715,875 7.7 3.98 370,331 7.5 $ 3.86
$4.67-$5.66 ... 234,750 8.8 5.43 45,544 8.8 $ 5.36
$8.75-$10.88 .. 124,900 9.9 9.84 -- -- --
$11.06-$14.00 . 550,850 9.5 12.40 47,250 9.3 14.00
--------- ------ ------ --------- ------ ------
2,272,024 7.2 $ 5.65 1,108,774 5.4 $ 2.82
</TABLE>
Pro forma information regarding net loss and loss per share is required by
SFAS 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The
fair value of options granted prior to the Company's filing its Initial
Public Offering on May 7, 1999, were estimated at the date of grant using a
minimum value option pricing model (0% volatility). The fair value of options
granted subsequent to the initial filing date through March 31, 2000, were
estimated at the date of grant using the Black-Scholes pricing model and a
volatility of 86%. The fair value of options was estimated under both pricing
models with the following weighted-average assumptions:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Risk-free interest rate ........................................ 6.5% 6% 6.5%
Weighted average expected life of the options .................. 4 years 4 years 4 years
Dividend rate .................................................. 0% 0% 0%
Weighted average fair value of options granted:
Exercise price equal to fair value of stock on date of grant ... $7.80 $.92 $.87
Exercise price less than fair value of stock on date of grant .. $11.80 $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>
YEAR ENDED MARCH 31,
--------------------
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Pro forma stock-based compensation expense ... $ 2,020,000 $ 487,000 $ 205,000
Pro forma net loss ........................... (9,846,000) (2,291,213) (1,992,511)
Pro forma basic and diluted net loss per share (.91) (.43) (.44)
</TABLE>
Page 45
<PAGE>
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, 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
As of March 31, 2000, Hoover's had federal net operating loss carryforwards of
approximately $13,813,000. The net operating loss carryforwards will expire
beginning in 2005, if not utilized.
Utilization of the 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>
2000 1999
----------- -----------
<S> <C> <C>
Deferred tax assets: ..............................
Capitalized costs ................................. $ 86,744 $ 4,514
Tax loss carryforwards ............................ $ 5,110,728 $ 2,752,588
Reserves for sales and inventory .................. $ 145,568 $ 62,321
Accrued expenses and other ........................ $ 238,608 $ 69,676
----------- -----------
Net deferred tax asset ............................ $ 5,581,648 $ 2,889,099
Valuation allowance for net deferred tax asset .... (5,581,648) (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 $2,693,000
during the year ended March 31, 2000. Approximately $955,000 of the valuation
allowance for deferred tax assets relates to benefits for stock option
deductions that were realized and will be allocated directly to contributed
capital.
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>
YEAR ENDED MARCH 31,
--------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate........................... (34.0)% (34.0)% (34.0)%
State taxes, net of federal benefit.............. (2.3) (2.4) (3.0)
Non-cash compensation expense.................... 7.9 6.8 --
Other............................................ 0.2 0.6 0.7
Change in valuation allowance.................... 28.2 29.0 36.3
---- ---- ----
0.0% 0.0% 0.0%
</TABLE>
Page 46
<PAGE>
5. LEASE COMMITMENTS
Hoover's has entered into noncancelable operating leases for office space.
Future minimum payments due under these leases and subsequent amendments are
as follows for each of the years ending March 31:
<TABLE>
<CAPTION>
<S> <C>
2001................................................. $709,570
2002................................................. 193,902
2003................................................. 110,250
-----------
$1,013,722
</TABLE>
Rent expense for the years ended March 31, 2000, 1999 and 1999 totaled
$598,810, $354,129 and $253,507, 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, 2000, future minimum lease payments under these capital leases
are as follows:
<TABLE>
<CAPTION>
<S> <C>
2001................................................ $25,459
2002................................................ 25,459
2003................................................ 21,389
---------
$72,307
Less amount representing interest.................... (9,054)
Net present value.................................... 63,253
Less current portion................................ 24,827
Long-term capital lease obligations................ $38,426
</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, 2000, 1999 or 1998. Borrowings accrued interest at prime plus 2%
and were collateralized by any trade accounts receivable due from that
stockholder. During the year ended March 31, 1998, Hoover's incurred
approximately $9,000 of interest expense under this line of credit. No
interest expense was incurred under this line of credit during the years
ended March 31, 2000, and 1999. Hoover's also maintained a $100,000 line of
credit agreement with a group of stockholders. There were no amounts due
under this line of credit at March 31, 2000, 1999 or 1998. All stockholder
lines of credit were terminated effective March 31, 1999.
7. BANK OBLIGATIONS
At March 31, 2000, Hoover's had no loans or revolving lines of credit with
banks. At March 31, 1999, Hoover's had 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, 2000, 1999 and 1998 there were no
borrowings outstanding under the line of credit, and $0, $447,625 and
$237,500, respectively, outstanding under the term loans. The bank
Page 47
<PAGE>
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 $436,000, $274,000
and $134,000 during the years ended March 31, 2000, 1999 and 1998
respectively, for this information.
During fiscal 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 approximately $75,000 and
$64,000 during the years ended March 31, 2000, and 1999, respectively, for
this information.
Hoover's had outstanding amounts payable of approximately $75,000 and $33,000
at March 31, 2000, 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, 2000, 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 four years in Hoover's contributions. Hoover's matching
contributions were $44,000, $25,000, and $16,000 during the years ended March
31, 2000, 1999, and 1998, respectively. Hoover's also pays the expenses of
the plan that are insignificant.
Page 48
<PAGE>
HOOVER'S, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. GEOGRAPHIC INFORMATION AND SIGNIFICANT CUSTOMERS
Revenues for the years ended March 31 were as follows:
<TABLE>
<CAPTION>
2000 1999 1988
----------- ----------- -----------
<S> <C> <C> <C>
United States................................... $18,110,988 $ 8,736,905 $ 5,348,362
Foreign countries .............................. 962,521 624,635 121,206
-------------------------------------------------------------
Total .......................................... $19,073,509 $ 9,361,540 $ 5,469,568
</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 in 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, 2000, 1999 or 1998.
Subscription sales consist of the following:
<TABLE>
<CAPTION>
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Individual subscriptions ........................ $5,336,627 $3,481,429 $1,224,452
Enterprise subscriptions......................... 3,406,173 1,302,500 239,167
-------------------------------------------------------------
Total ........................................... $8,742,800 $4,783,929 $1,463,619
</TABLE>
11. SUBSEQUENT EVENTS
During June 2000, the Company entered into a non-cancelable, lease for
additional long-term office space in Austin, Texas. This lease commences on
May 1, 2001, with total minimum payments over the 10 year lease term of $11.2
million, plus operating expenses.
Page 49
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOOVER'S, INC
June 29, 2000 /s Patrick J. Spain
------------------------ --------------------------------------
Date Patrick J. Spain
CHAIRMAN OF THE BOARD,
CHIEF EXECUTIVE OFFICER
AND PRESIDENT
(PRINCIPAL EXECUTIVE OFFICER)
June 29, 2000 /s Lynn Atchison
------------------------ --------------------------------------
Date Lynn Atchison
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER)
Page 50
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby severally constitutes and appoints Patrick J. Spain and
Lynn Atchison, and each or any of them, his true and lawful attorneys-in-fact
and agents, each with the power of substitution and resubstitution, for him in
any and all capacities, to sign any and all amendments to this Annual Report on
Form 10-K and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each said attorney-in-fact and agent, or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
------------------------------ ------------------------------- -------------
<S> <C> <C>
Chairman of the Board, Chief June 29, 2000
/s/ Patrick J. Spain Executive Office and President
------------------------------ (Principal executive Officer)
Patrick J. Spain
Senior Vice President and June 29, 2000
Chief Financial Officer
/s/ Lynn Atchison (Principal financial officer)
------------------------------
Lynn Atchison
/s/ William S. Berkley Director June 29, 2000
------------------------------
William S. Berkley
/s/ Alan Chai Director June 29, 2000
------------------------------
Alan Chai
/s/ Steven Fink Director June 29, 2000
------------------------------
Steven Fink
/s/ Thomas J. Hillman Director June 29, 2000
------------------------------
Thomas J. Hillman
/s/ Gary E. Hoover Director June 29, 2000
------------------------------
Gary E. Hoover
/s/ Larry Kirshbaum Director June 29, 2000
------------------------------
Larry Kirshbaum
/s/ Stephen R. Zacharias Director June 29, 2000
------------------------------
Stephen R. Zacharias
</TABLE>
Page 51
