HOOVERS INC, 10-Q, 2000-02-14

HOOVERS INC
10-Q, 2000-02-14
BUSINESS SERVICES, NEC

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the quarterly period ended December 31, 1999
--------------------------------

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from to
--------------------- -------------------
Commission file number:
--------------------------------------------------

HOOVER'S, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)

Delaware 74-2559474
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

1033 La Posada Drive, Suite #250, Austin, Texas 78752
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)

(512) 374-4500
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)

- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. /X/ Yes / / No

As of December 31, 1999, 12,289,802 shares of the registrant's common stock
were outstanding, net of 150,000 shares of Treasury Stock.
- --------------------------------------------------------------------------------

<PAGE>

PAGE
PART I. FINANCIAL INFORMATION NUMBER
------
<S> <C> <C>

ITEM 1 Financial Statements (Unaudited)

Balance Sheets at December 31, 1999, and March 31, 1999...................3

Statements of Operations for the Three and Nine Months Ended
December 31, 1999 and 1998..............................................4

Statements of Cash Flows for the Nine Months Ended
December 31, 1999 and 1998..............................................5

Notes to Financial Statements.............................................6

ITEM 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations...........................8

ITEM 3 Quantitative and Qualitative Disclosures About Market Risk...............25

PART II. OTHER INFORMATION

ITEM 1 Legal Proceedings........................................................25

ITEM 2 Changes in Securities and Use of Proceeds................................25

ITEM 3 Defaults Upon Senior Securities..........................................25

ITEM 4 Submission of Matter to a Vote of Securities Holders.....................25

ITEM 5 Other Information........................................................28

ITEM 6 Exhibits and Reports on Form 8-K.........................................28

</TABLE>

2
<PAGE>

PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

HOOVER'S, INC.

BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1999 MARCH 31, 1999
----------------- --------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................................................. $ 43,293 $ 7,814
Short-term investments ..................................................................... 14,043 0
Accounts receivable, less allowance for doubtful accounts of $79,880 and $32,886 at
December 31 and March 31, 1999, respectively ............................................. 2,378 866
Book inventory, less allowances for excess and obsolete inventory of $101,928 and $78,025 at
December 31 and March 31, 1999, respectively.............................................. 105 84
Prepaid expenses and other current assets .................................................. 426 89
----------------- --------------

Total current assets ......................................................................... 60,245 8,853
Property, plant and equipment:
Computer and office equipment .............................................................. 2,853 1,493
Equipment under capital lease .............................................................. 147 147
Furniture and fixtures ..................................................................... 597 345
----------------- --------------

3,597 1,985
Less accumulated depreciation .............................................................. (1,690) (889)
----------------- --------------

Total property, plant and equipment .......................................................... 1,907 1,096
Other assets ................................................................................. 1,074 127

Total assets ................................................................................. $ 63,226 $ 10,076
================= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and commissions ........................................................... $ 327 $ 460
Accrued expenses ........................................................................... 1,509 694
Current portion of long-term debt and capital leases ....................................... 34 376
Deferred revenue ........................................................................... 2,591 1,618
----------------- --------------

Total current liabilities .................................................................... 4,461 3,148
Bank term loan, less current portion ......................................................... 0 97
Obligations under capital leases, less current portion ....................................... 37 71
----------------- --------------

Total liabilities ............................................................................ 4,498 3,316
Stockholders' equity:
Common stock, $.01 par value, 150,000,000 shares authorized 12,439,802 and 7,090,725 shares
issued at December 31 and March 31, 1999, respectively...................................... 124 71
Additional paid-in capital ................................................................. 76,717 18,067
Unearned stock compensation ................................................................ (1,809) (2,764)
Accumulated deficit ........................................................................ (16,154) (8,464)
Treasury stock at cost - 150,000 shares ................................................... (150) (150)
----------------- --------------
Total stockholders' equity ................................................................... 58,728 6,760
----------------- --------------
Total liabilities and stockholders' equity ................................................... $ 63,226 $ 10,076
================= ==============
</TABLE>

SEE ACCOMPANYING NOTES.

3
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HOOVER'S, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Advertising and e-commerce .................. $ 2,435 $ 262 $ 4,041 $ 646
Subscription revenue ........................ 2,322 1,271 6,091 3,258
Licensing ................................... 347 443 1,420 1,269
CD-ROM and print ............................ 370 332 916 1,054
------------ ------------ ------------ ------------
Total revenues ................................ 5,474 2,308 12,468 6,227
Provision for returns of print products ..... (13) (36) (33) (110)
------------ ------------ ------------ ------------
Net revenues .................................. 5,461 2,272 12,435 6,117
Cost of revenues ............................ (1,936) (1,158) (5,039) (3,725)
------------ ------------ ------------ ------------
Gross profit .................................. 3,525 1,114 7,396 2,392
Expenses:
Product development ......................... 257 141 1,731 355
Sales and marketing ......................... 4,313 554 8,864 1,606
General and administrative .................. 1,860 727 4,547 2,423
Non-cash compensation ....................... 464 1,423 0 0
------------ ------------ ------------ ------------
Total expenses ................................ 6,894 1,422 16,565 4,384
Operating loss ................................ (3,369) (308) (9,169) (1,992)
Interest income ............................... 801 40 1,496 126
Interest expense .............................. (4) (18) (17) (42)
============ ============ ============ ============
Net loss ...................................... $ (2,572) $ (286) $ (7,690) $ (1,908)
============ ============ ============ ============
Basic and diluted net loss per share .......... $ (0.21) $ (0.05) $ (0.74) $ (0.37)
============ ============ ============ ============
Shares used in computation of basic and diluted
loss per share ............................. 12,250,444 5,211,920 10,347,550 5,142,781
</TABLE>

SEE ACCOMPANYING NOTES.

4
<PAGE>

HOOVER'S, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------------------------
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- -----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss ........................................................ $ (7,690) $ (1,908)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization ................................. 1,151 94
Amortization of unearned stock compensation, net .............. 1,372 --
Changes in operating assets and liabilities:
Accounts receivable ........................................ (1,512) 153
Inventories ................................................ (21) 29
Prepaid expenses and other current assets .................. (437) (1)
Accounts payable and commissions ........................... (133) 98
Accrued expenses ........................................... 816 (133)
Deferred revenue ........................................... 973 889
----------------- -----------------
Net cash used in operating activities ........................... (5,481) (779)

INVESTING ACTIVITIES
Purchases of property, plant and equipment ...................... (1,612) (267)
Purchase of short term securities ............................... (14,043) --
----------------- -----------------
Net cash used in investing activities ........................... (15,655) (267)

FINANCING ACTIVITIES
Proceeds from bank term loans ................................... -- 497
Payments on bank term loans ..................................... (448) (208)
Proceeds from capital leases .................................... -- 14
Payments on capital leases ...................................... (26) (41)
Net proceeds from capital stock transactions .................... 57,089 236
----------------- -----------------
Net cash provided by financing activities ....................... 56,615 498

Increase (decrease) in cash and cash equivalents ................ 35,479 (548)
Cash and cash equivalents at beginning of year .................. 7,814 3,860
----------------- -----------------
Cash and cash equivalents at end of year ........................ $43,293 $3,312
</TABLE>

SEE ACCOMPANYING NOTES.

<PAGE>

HOOVER'S, INC.

NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)

1. BASIS OF PRESENTATION

The interim financial statements as of and for the three and nine
month periods ended December 31, 1999 and 1998 have been prepared by us
pursuant to the rules and regulations of the Securities and Exchange
Commission (the SEC). Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. These statements are unaudited and, in the
opinion of management, include all adjustments (consisting of normal
recurring adjustments and accruals) necessary to present fairly the results
for the periods presented.

The balance sheet at December 31, 1999, has been derived from the
unaudited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles. The results of operations for such periods are not necessarily
indicative of the results expected for a full year or for any future period.

For further information, refer to the financial statements and
related notes included in our Registration Statement on Form S-1.

2. CAPITAL STOCK AND STOCK PLANS

In June 1999, the stockholders approved an increase in authorized
common stock, allowing Hoover's to effect a two-for-one split of the common
stock, which was approved by the board of directors in May 1999. Also in June
1999, the stockholders approved a .75-for-one reverse split of the common
stock. All share and per share amounts in the financial statements and
accompanying notes reflect both the stock split and the reverse stock split.

Of the stock options granted to employees during the three months
ended June 30, 1999, for 264,000 shares of common stock, 52,500 had exercise
prices below the deemed fair market value of the underlying shares of common
stock on the date of grant. As a result, Hoover's recorded unearned stock
compensation of $468,000 in April 1999. During the year ended March 31, 1999,
the company recorded $3.2 million of unearned stock compensation. $479,000
was amortized to non-cash compensation during each of the three months ended
June 30 and September 30, 1999, while $464,000 was amortized to non-cash
compensation for the three months ended December 31, 1999. The remaining
unearned compensation will be recognized as non-cash compensation over the
remaining vesting period of the options of approximately four years.

On June 11, 1999, we sold 206,044 shares of common stock to NBC for
$1.5 million. We also entered into a strategic agreement with NBC to license
a portion of our content for distribution and marketing by NBC, CNBC and
CNBC.com. We recorded deferred costs of approximately $1.2 million dollars in
connection with this transaction. This amount is currently being amortized
over the period covered by the strategic agreement. Also on June 11, 1999, we
sold an aggregate of 1,022,727 shares of common stock to Knowledge Net
Holdings, L.L.C., an indirect subsidiary of Knowledge Universe, Inc., and to
Nextera Enterprises, Inc., a company controlled by Knowledge Universe, for
$7.4 million. We recorded this transaction as a $7.4 million addition to
equity. Knowledge Net Holdings has committed to purchase $2.0 million of
services from Hoover's, beginning in 1999, which may include advertising on
our Web site, sponsorship of feature or content areas of our Web site,
licensing of our company or industry information and/or enterprise
subscriptions.

In June 1999, in connection with our anticipated initial public
offering of our common stock, the stockholders approved the 1999 Employee
Stock Purchase Plan (the Stock Purchase Plan) and we reserved 150,000 shares
of our common stock. The Stock Purchase Plan allows our eligible employees to
purchase shares of common stock at a purchase price equal to 85% of the fair
market value of our common stock. In no event, however, may any participant
purchase more than 600 shares, nor may all participants in the aggregate

<PAGE>

purchase more than 75,000 shares, on any one semi-annual purchase date. In
addition, the stockholders approved the 1999 Stock Option Plan (the Plan)
which is intended to serve as the successor plan to our previous stock option
plans. The Plan provides for discretionary option grants and stock issuances
to employees and non-employee board members and consultants, as well as
automatic option grants to non-employee board members. The Plan contains
provisions for salary investment and director fee option grant programs.
Initially, 2.9 million shares were reserved for issuance under this Plan.

During July 1999, we completed an initial public offering of
3,737,500 shares of our common stock, which yielded net proceeds of
approximately $48 million.

3. BANK OBLIGATIONS

There are no outstanding bank obligations as of December 31, 1999.

4. RELATED PARTY TRANSACTIONS

We purchase certain information included in our databases from a
subsidiary of a stockholder. Hoover's paid approximately $110,000 and $54,000
during the three months ended December 31, 1999 and 1998, and $284,000 and
$185,000 during the nine months ended December 31, 1999 and 1998,
respectively, for this information. We had outstanding amounts payable of
approximately $56,000 and $34,000 at December 31, 1999, and March 31, 1999,
respectively, to a vendor who is also a stockholder.

We have a commitment from a stockholder to purchase from us at least
$2.0 million of advertising, subscriptions, sponsorships, content licensing
or other services from 1999 through September 30, 2001. For the quarter ended
December 31, 1999, we recognized $150,000 of advertising revenues and $14,000
from content licensing fees pursuant to this agreement. For the nine months
ended December 31, 1999, we recognized $250,000 of advertising revenues and
$28,000 from content licensing fees pursuant to this agreement.

As part of our strategic agreement with NBC to license a portion of
our content for distribution and marketing by NBC, CNBC and CNBC.com, we are
amortizing $1.2 million in deferred costs. Included in sales and marketing
expenses for the three and nine months ended December 31, 1999, is
amortization of $150,000 and $349,000 related to this agreement.

<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE
FINANCIAL STATEMENTS AND RELATED NOTES THERETO INCLUDED ELSEWHERE IN THIS
QUARTERLY REPORT ON FORM 10-Q. EXCEPT FOR THE HISTORICAL FINANCIAL
INFORMATION CONTAINED HEREIN, THE MATTERS DISCUSSED IN THIS QUARTERLY REPORT
ON FORM 10-Q MAY BE CONSIDERED "FORWARD-LOOKING" STATEMENTS WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION
21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SUCH STATEMENTS
INCLUDE DECLARATIONS REGARDING THE INTENT, BELIEF OR CURRENT EXPECTATIONS OF
HOOVER'S AND ITS MANAGEMENT AND MAY BE SIGNIFIED BY THE WORDS "EXPECTS,"
"ANTICIPATES," "INTENDS," "BELIEVES," OR SIMILAR LANGUAGE. PROSPECTIVE
INVESTORS ARE CAUTIONED THAT ANY SUCH FORWARD-LOOKING STATEMENTS ARE NOT
GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE A NUMBER OF RISKS AND
UNCERTAINTIES. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE INDICATED BY
SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO
SUCH DIFFERENCES INCLUDE THOSE DISCUSSED BELOW, AS WELL AS THOSE DISCUSSED IN
THE HOOVER'S PROSPECTUS DATED JULY 20, 1999.

OVERVIEW

Hoover's, Inc. provides an Internet-based service, Hoover's
Online, where business people do 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 business people to get timely,
accurate and reliable answers to their questions. By answering their
questions, we also have created a market for our 2.4 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 valuable services for
business people 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 more than
15,000 best-of-their-kind Web-based business resource links. In order to
increase the frequency of visits to the site, we have added a service that
allows visitors to receive customized e-mail alerts to news on topics that
they have designated. We have also added a portfolio feature that allows our
customers to track companies of interest to them. Our proprietary database
now contains information on more than 300 industries and approximately 15,000
public and private enterprises worldwide. In addition, we have expanded our
coverage by licensing additional company information bringing our total
coverage to more than 50,000 enterprises. Our proprietary database contains
increasing amounts of information on non-US companies and we maintain a
related Web site, Hoover's Online - UK, to meet the needs of both non-US
customers and US-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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ADVERTISING AND E-COMMERCE

We derive revenues from the sale of banner and button advertisements,
sponsorships, and e-commerce on our Web site. Advertisement and sponsorship
prices are based on a price per thousand impressions or a fixed monthly fee.
Revenues are recognized as the impressions are delivered or ratably over the
contract period, provided that no significant obligations remain. We also
derive e-commerce revenues from advertisers and other partners who pay either
a fee per transaction or a percentage of sales generated directly from their
advertisement on our Web site or from their special sponsorship of an area
within our Web site.

SUBSCRIPTION 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. We recognize
subscription revenues on a monthly basis, and we record annual individual and
enterprise subscriptions as deferred revenues, which are amortized into
revenues over the term of the subscription.

LICENSING

We also currently derive revenues by licensing portions of our
database for re-distribution through customized data feeds to online
services. Our licensing fees vary depending on factors such as the number of
users and the amount of proprietary content licensed. Licensing agreements
may be structured as fixed monthly fees or negotiated revenue sharing. We
have migrated several of these arrangements away from licensing contracts to
Hoover's Online enterprise subscriptions in order to be consistent with our
goal of providing the highest level of service to the end user.

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

<PAGE>

management, office network and human resource personnel, as well as fees for
professional services, travel, depreciation and general office expenses.
Non-cash compensation of $479,000 was amortized during each of the three
months ended June 30 and September 30, 1999, while $464,000 was amortized for
the three months ended December 31, 1999.

RESULTS OF OPERATIONS

The following table sets forth, for the periods illustrated, certain
statement of operations data expressed as a percentage of total revenues:

<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, 1999 DECEMBER 31, 1999
------------------ -----------------
1999 1998 1999 1998
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Revenues:

Advertising and e-commerce .......................... 45% 11% 32% 10%
Subscriptions ....................................... 42% 56% 49% 53%
Licensing ........................................... 6% 19% 12% 20%
CD-ROM and print .................................... 7% 14% 7% 17%
-------- -------- -------- -------
Total revenues ........................................... 100% 100% 100% 100%
Provision for returns of
print products ....................................... -- 2% -- 2%
Net revenues ............................................. 100% 98% 100% 98%
Cost of revenues ..................................... 35% 50% 41% 59%
Gross profit ............................................. 65% 48% 59% 39%
Expenses:
Product development .................................. 5% 6% 14% 5%
Sales and marketing .................................. 79% 24% 71% 27%
General and administrative ........................... 34% 31% 36% 39%
Non-cash compensation ................................ 8% -- 11% --
-------- -------- -------- -------
Total expenses ........................................... 126% 61% 132% 71%
Operating loss ........................................... (61%) (13%) (73%) (33%)
Interest income .......................................... 15% 2% 12% 2%
Interest expense ......................................... -- (1%) -- (1%)
-------- -------- -------- -------
Net loss ................................................. (46%) (12%) (61%) (32%)
======== ======== ======== =======
</TABLE>

REVENUES. Total revenues for the three months ended December 31,
1999, increased 137% to $5.5 million from $2.3 million for the three months
ended December 31, 1998. Total revenues for the nine months ended December
31, 1999, increased 100% to $12.5 million from $6.2 million for the
comparable nine-month period in the prior year.

Our subscription revenues increased 83% to $2.3 million for the
three months ended December 31, 1999, from $1.3 million for the comparable
quarter one year ago. Consistent increases were seen in the nine-month period
with subscription revenues increasing 87% to $6.1 million from $3.3 million
for the comparable nine-month period in the prior year. This increase in
revenues is due to the increase in the number of individual subscribers and
enterprise accounts. Total subscribers grew 107% to 165,500 as of December
31, 1999, from approximately 80,000 as of December 31, 1998. The growth in
the number of individual subscribers, to 39,400 as of December 31, 1999, from
24,600 as of December 31, 1998, was primarily due to increased traffic

<PAGE>

to our Web site. For the three months ended December 31, 1999, Hoover's
Online attracted approximately 2.4 million unique visitors, who accounted for
approximately 67 million page views, compared to 1.5 million unique visitors
and 22.5 million page views during the three months ended December 31, 1998.

Sales leads provided by the additional traffic to our Web site and
our increased number of salespeople contributed to the increase in new
enterprise subscription accounts. As of December 31, 1999, we had 2,163
enterprise accounts, representing an estimated 126,100 seats, compared to
approximately 1,000 enterprise accounts, representing an estimated 56,000
seats, as of December 31, 1998, increases of 116% and 125% respectively.

Licensing revenues decreased 22% to $347,000 for the three months
ended December 31, 1999, from $443,000 for the three months ended December,
1998. For the nine-month period ended December 31, 1999, licensing revenues
increased 12% to $1.4 million from $1.3 million in the same period one year
ago. Royalty payments are based on use of Hoover's content or other
revenue-sharing arrangements. We expect that over time our customers will
access our products primarily through Hoover's Online and therefore our
licensing arrangements with third-party proprietary and Web services may
decline as a percentage of our total revenues and in absolute dollars.

Revenues from advertising and e-commerce increased 829% to $2.4
million for the three months ended December 31,1999, from $262,000 for the
three months ended December 31, 1998. For the nine months ended December 31,
1999, revenues in this category increased 526% to $4.0 million from $646,000
for the nine months ended December 31, 1998. The increased number of page
views, the redesign of Hoover's Online, and new advertising sales personnel
contributed to the increase.

Revenues from CD-ROM and print products increased 11% to $370,000
for the three months ended December 31, 1999, from $332,000 for the
comparable quarter one-year ago. Revenues in this area for the nine months
ended December 31, 1999, decreased 13% to $916,000 from $1,054,000 for the
nine months ended December 31, 1998. Decreases were due to a reduced emphasis
in this area and a migration to our Web-based services.

COST OF REVENUES. Cost of revenues for the three months ended
December 31, 1999 increased 67% to $1.9 million from $1.2 million in the
three months ended December 31, 1998. Cost of revenues for the nine months
ended December 31, 1999, increased 35% to $5.0 million from $3.7 million for
the same period in the prior year. The increase in cost of revenues was
primarily due to an increase in compensation for existing and new editorial
personnel, as well as increases in expenses associated with third-party
content. As a percentage of revenues, cost of revenues for the three months
ended December 31, 1999 was lower, at 35% of revenues, compared to 50% in the
comparable quarter one year ago. This decrease occurred primarily because the
editorial costs associated with creation and maintenance of the company
database are relatively fixed without regard to the level of revenues.

PRODUCT DEVELOPMENT. Product development expenses for the three
months ended December 31, 1999 increased more than 82% to $257,000 from
$141,000 in the three months ended December 31, 1998. Product development
expenses for the nine months ended December 31, 1999, increased 388% to $1.7
million from $355,000 for the same period in the prior year. This increase
was due to the hiring of additional programmers and analysts, and to
increased amounts paid to outside consultants and designers. We increased our
personnel and consulting costs in order to plan for, implement and maintain
our technology upgrades and the expansion of Hoover's Online, The Business
Network. We expect that we will increase product development costs for the
remainder of our fiscal year.

SALES AND MARKETING. Sales and marketing expenses for the three
months ended December 31, 1999 increased 679% to $4.3 million from $554,000
for the three months ended

<PAGE>

December 31, 1998. Sales and marketing expenses for the nine months ended
December 31, 1999 increased 452% to $8.9 million from $1.6 million for the
same period in the prior year. 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. We expect that sales and marketing expenses will continue to
grow for the remainder of our fiscal year.

GENERAL AND ADMINISTRATIVE. General and administrative expenses for
the three months ended December 31, 1999 increased 156% to $1.9 million from
$727,000 for the three months ended December, 1998. General and
administrative expenses for the nine months ended December 31, 1999,
increased 88% to $4.5 million from $2.4 million for the same period in the
prior year. The increase was primarily due to an increase in fees for
professional services and travel, and an increase in salaries of existing
executive and administrative staff, as well as to the addition of
administrative and finance personnel. General office expenses increased due
to facility expansion, both in Austin and New York, and credit card
processing fees increased due to a higher number of individual subscription
payments. Depreciation increased due to an increase in capital expenditures.

INTEREST INCOME AND EXPENSE. Interest income for the three months
ended December 31, 1999, increased 1903% to $801,000 from $40,000 for the
three months ended December 31, 1998. Interest income for the nine months
ended December 31, 1999 increased 1,087% to $1.5 million from $126,000 for
the same period in the prior year. The increase was due to our increased cash
and short-term investments. We received net cash proceeds of $48 million from
the Company's initial public offering in July 1999, as well as $9 million in
proceeds received upon our sale of common stock to NBC, Knowledge Net
Holdings and Nextera in June 1999. Interest expense decreased to $3,700 and
$18,000 in the three and nine months ended December 31, 1999, from $17,000
and $42,000 in the three and nine months ended December 31, 1998, due to our
decreased bank debt.

TAXES. We have incurred significant operating losses for all periods
from inception (February 1990) through December 31, 1999. 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.

LIQUIDITY AND CAPITAL RESOURCES

We used $5.5 million net cash in operating activities during the
nine months ended December 31, 1999, compared to $779,000 in the comparable
period one year ago. Net cash used in operating activities resulted from net
operating losses partially offset by increases in deferred revenues and
accrued expenses.

During the nine months ended December 31, 1999, we invested $1.6
million net cash related to purchases of computer equipment and payments for
software licenses as well as investing $14.0 million in short-term
securities. This compared to $267,000 invested in computer equipment in the
nine months ended December 31, 1998.

As of December 31, 1999, we had $57.3 million of cash, cash
equivalents and short-term investments. Our principal commitments at December
31, 1999, consisted of obligations under capital leases. Our accounts payable
balance as of December 31, 1999, was $327,000 that consisted of short-term
accounts, due within 30 days, and commissions due to employees.

We may in the future pursue additional acquisitions of businesses,
products and technologies or enter into joint-venture arrangements that could
complement or expand our

<PAGE>

business. Any material acquisition or joint venture could result in a
decrease to our working capital, depending on the amount, timing and nature
of the consideration to be paid.

We believe that our existing cash and cash equivalents will be
sufficient to meet our anticipated cash requirements for working capital and
capital expenditures for at least the next 12 months. Beyond the next 12
months, our significant commitments consist of repayment of lease commitments
for facilities and telephone equipment. We also intend to invest in sales and
marketing promotions and continue to build an infrastructure to meet the
needs of a public company. Although we currently expect to meet the cash
requirements of such commitments, expenditures and ongoing operating expenses
from working capital, in order to meet our long-term liquidity needs, we may
need to raise additional funds, seek an additional credit facility or seek
other financing arrangements.

YEAR 2000 READINESS DISCLOSURE

Many existing computer programs use only two digits to identify a
year. These programs were designed and developed without addressing the
impact of the upcoming change in the century. If not corrected, many computer
software applications could fail or create erroneous results by, at or beyond
the year 2000. We use software, computer technology and other services
internally developed and provided by third-party vendors that may fail due to
the year 2000. We are dependent on telecommunications vendors to maintain our
network. In addition, we are dependent on financial and other information
provided electronically by our vendors and partners, as well as on general
research information obtained electronically. We are also dependent on
financial institutions involved in the processing of our customers' credit
card payments for subscriptions and other products and on a third party that
hosts our servers.

Over the last year we planned and implemented a year 2000 compliance
project to assess the readiness of internally-developed and third-party
software, content, and business systems.

We have completed a year 2000 compliance review of our internally
developed proprietary software. This review has included testing to determine
how our systems will function at and beyond the year 2000. Since inception,
we have internally developed substantially all of the systems for the
operation of our Web site. These systems include the software used to provide
our Web site's search, customer interaction, and transaction-processing and
distribution functions, as well as monitoring and back-up capabilities. Based
on our assessment to date, we believe that our internally developed
proprietary software is year 2000 compliant. We have experienced no
significant problems subsequent to December 31, 1999 which further supports
our belief that our internally developed software is year 2000 compliant.

We have completed a year 2000 compliance review of our content
publishing system and our significant content partners. Based on our
assessment of their data and our publishing processes, we believe that our
internally-developed database and the data provided to us from third parties
is year 2000 compliant. We have experienced no significant problems
subsequent to December 31, 1999 which further supports our belief that our
content publishing system and data supplied by significant partner software
are year 2000 compliant.

We have assessed the year 2000 readiness of our third-party supplied
software, hosting service, computer technology and other services, which
include software for use in our accounting, database and security systems.
The failure of such software or systems to be year 2000 compliant could have
a material impact on our corporate accounting functions and the operation of
our Web site. We are dependent on these third-party suppliers to correct any
year 2000 compliance problems, which exposes us to certain risks. As part of
the assessment of the year 2000 compliance of these systems, we have sought
assurances from these vendors that their software, computer technology and
other services are year 2000 compliant. Based on our

<PAGE>

assessment and testing of these products and services, as well as the
assurances obtained, we believe that our third-party supplied software,
computer technology and other services are year 2000 compliant. We have
experienced no significant problems subsequent to December 31, 1999 which
further supports our belief that third-party supplied software is year 2000
compliant.

Based on the results of this assessment and actual results to date,
we have developed and implemented a remediation plan with respect to
third-party software, third-party vendors and computer technology and
services that failed to be year 2000 compliant. The expenses associated with
this assessment and remediation were not material and therefore, we did not
develop a budget for these expenses. The failure of our software and computer
systems and of our third-party suppliers to be year 2000 compliant would have
a material adverse effect on us.

We have completed an assessment of our Web site's hardware and
software to determine year 2000 compliance. All software and systems were
categorized as either compliant or non-compliant. We assessed each
non-compliant issue to determine how to correct for year 2000 readiness.
Non-compliant software and systems have been or are expected to be corrected
by the installation of a patch or the purchase and implementation of new
software or equipment during the remainder of the calendar year.

The year 2000 readiness of the general infrastructure necessary to
support our operations is difficult to assess. For instance, we depend on the
integrity and stability of the Internet to provide our services. We also
depend on the year 2000 compliance of the computer systems and financial
services used by consumers and businesses. Thus, the infrastructure necessary
to support our operations consists of a network of computers and
telecommunications systems located throughout the world and operated by
numerous unrelated entities and individuals, none of which has the ability to
control or manage the year 2000 issues that may impact the entire
infrastructure. Our ability to assess the reliability of this infrastructure
is limited and relies solely on generally available news reports, surveys and
comparable industry data. A significant disruption in the ability of
consumers to reliably access the Internet or portions of it or to use their
credit cards would have an adverse effect on demand for our services and
would have a material adverse effect on us.

We have funded our year 2000 assessment activities from available
working capital and have not separately accounted for these costs in the
past. These costs have not been material to date.

At this time, we have not yet developed a contingency plan to
address situations that may result if we or our vendors are unable to achieve
year 2000 compliance because we currently do not believe that such a plan is
necessary. The cost of developing and implementing such a plan, if necessary,
could be material. Any failure of our material systems, our vendors' material
systems or the Internet to be year 2000 compliant could have a material
adverse consequence for us. Such consequences could include difficulties in
operating our Web site effectively or conducting other fundamental parts of
our business.

RISKS RELATED TO OUR BUSINESS

WE HAVE A HISTORY OF LOSSES AND EXPECT FUTURE LOSSES.

We incurred net losses for each of the previous fiscal years and
$7.7 million for the nine months ended December 31 1999. At December 31,
1999, we had an accumulated deficit of $16.2 million. We expect operating
losses and negative cash flow to continue into next fiscal year 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. We may never generate sufficient revenues
to achieve profitability. Even if we do

<PAGE>

achieve profitability, we may not sustain or increase profitability on a
quarterly or annual basis in the future.

OUR BUSINESS IS SUBJECT TO QUARTERLY FLUCTUATIONS IN OPERATING RESULTS WHICH
MAY NEGATIVELY IMPACT THE PRICE OF OUR STOCK.

Our quarterly operating results may fluctuate significantly in the
future due to a variety of factors. These include the following factors,
which are generally outside of our control:

- seasonal trends relating to subscriber usage of our services;

- the demand for Internet advertising and seasonal trends relating
to Internet advertising spending;

- the extent to which we experience increased competition in the
markets for Internet services and advertising; and

- economic conditions specific to the Internet, as well as general
economic and market conditions.

Other factors which cause our quarterly operating results to fluctuate
significantly, which are at least partially under our control, include:

- the rate of subscriber acquisitions;

- the timing and effectiveness of our marketing efforts to acquire
visitors and subscribers and to promote our brand;

- the timing and effectiveness of any co-branding arrangements or
other strategic alliances into which we enter;

- expenses related to upgrading our computer systems and related
infrastructure; and

- changes in our operating expenses.

In addition, our operating expenses are based on our expectations of
our future revenues, some of which are relatively fixed in the short term. We
may be unable to reduce our expenses quickly enough to offset any unexpected
revenue shortfall, which could have a material adverse effect on our
business, operating results and financial condition.

Due to all of the foregoing factors and the other risks discussed in
this section, quarter-to-quarter comparisons of our operating results as an
indication of future performance may not be appropriate. It is possible that
in some future periods our quarterly operating results may fall below the
expectations of public market analysts and investors. In this event, the
price of our common stock is likely to fall.

SEASONAL TRENDS IN OUR ADVERTISING REVENUES MAY CAUSE VOLATILITY IN OUR STOCK
PRICE.

We have experienced seasonal trends in our traffic and advertising
revenues. We believe that advertising sales in traditional media, such as
television and radio, are generally lower in the 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.

<PAGE>

OUR FAILURE TO SIGNIFICANTLY INCREASE THE NUMBER OF OUR SUBSCRIBERS OR RETAIN
OUR CURRENT SUBSCRIBERS WOULD ADVERSELY AFFECT OUR BUSINESS.

Our future success is highly dependent on attracting Internet users
who are willing to subscribe to online business information services. We
believe that marketing relationships, direct marketing, advertising, public
relations campaigns and offering new and enhanced content and services help
attract visitors and subscribers. We have launched a national advertising and
marketing campaign and have an estimated total campaign cost for the current
fiscal year of approximately $10 million. We have currently spent
approximately 50% of this estimated amount. On a percentage basis, we do not
believe that our increased marketing expense has or will lead to an
equivalent percentage increase in visitors and subscribers due to the large
component of brand awareness. In addition, the number of Internet users
willing to pay for online business information may not continue to increase.
If the market for subscription-based online business information develops
more slowly than we expect, or if our efforts to attract new subscribers are
not successful or cost-effective, our operating results and financial
condition may be materially and adversely affected.

We also believe that our long-term success depends largely on our
ability to retain our existing subscribers. We continue to invest significant
resources in our network infrastructure and customer and technical support
capabilities to provide high levels of customer service. We cannot be certain
that these investments will maintain or improve subscriber retention. In
addition, as Internet subscribers are offered competing information products
and services they may discontinue or limit their use of our Web site. Any
loss of significant numbers of subscribers would have a material adverse
effect on our business, operating results and financial condition.

WE ARE DEVELOPING AND ENHANCING OUR SERVICES AND FEATURES THAT MAY NOT BE
ATTRACTIVE TO OUR EXISTING AUDIENCE AND MAY NOT INCREASE OUR AUDIENCE.

We continue to expand content, services and features offered on
Hoover's Online by developing online resource centers in areas such as
professional development, business travel, in-depth business news, and
personal finance, and directories of business links. Management will continue
to spend a significant amount of time developing these and other potentially
new online 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 these services are not accepted by new or existing
visitors.

OUR BUSINESS INFORMATION AND SERVICES MAY NOT ATTRACT AN AUDIENCE WITH
DEMOGRAPHIC CHARACTERISTICS DESIRABLE TO OUR ADVERTISERS.

Our future success depends on our ability to deliver compelling
business information and services that will attract an audience with
demographic characteristics valuable to our advertisers. If we are unable to
continue to develop business information and services that attract an
audience desirable to advertisers, it could have a material adverse effect on
our business, operating results and financial condition.

OUR FAILURE TO SUCCESSFULLY DEVELOP OUR ADVERTISING SALES FORCE COULD REDUCE
OUR ADVERTISING REVENUES OR LIMIT THE GROWTH OF OUR ADVERTISING REVENUES.

Currently, we are developing and expanding our internal advertising
sales force. Our business would be adversely affected if we do not develop and
maintain an effective advertising

<PAGE>

sales force. We depend on our sales force to sell advertising, sponsorships,
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;

- new advertising sales personnel generally require a significant
amount of time to become productive; and

- our advertising sales force has only recently begun selling
significant sponsorships.

FAILURE TO PROVIDE A SUCCESSFUL ONLINE ADVERTISING ENVIRONMENT WOULD
ADVERSELY AFFECT OUR BUSINESS.

Advertising and e-commerce has grown as 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, 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. 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, our revenues generated
from advertisements sold under this model will decrease.

It is difficult to predict which advertising pricing models, if any,
will emerge as industry standards. This uncertainty makes it difficult to
project our future advertising rates and revenues. We cannot assure you that
we will be successful under alternative pricing models that may emerge.
Moreover, software programs that limit or prevent advertising from being
delivered to an Internet user's computer are available. Widespread adoption
of this software could materially adversely affect the commercial viability
of Internet advertising, which could materially adversely affect our
advertising revenues.

IF WE ARE NOT SUCCESSFUL IN INCREASING BRAND AWARENESS OF, AND TRAFFIC TO,
HOOVER'S ONLINE, OUR BUSINESS WOULD BE MATERIALLY AND ADVERSELY AFFECTED.

The future success of Hoover's Online will depend, in part, on our
ability to increase our brand awareness. In order to build brand awareness
and increase traffic to Hoover's Online, we must succeed in our marketing
efforts and provide high-quality services. As part of our brand-building
efforts, we have substantially increased our marketing budget, and have
developed and launched a national advertising campaign which, over a full
year, will cost approximately $10 million. Our ability to increase
advertising and subscription revenues from Hoover's Online will

<PAGE>

depend in part on the success of this marketing campaign and our ability to
increase the number of visitors and subscribers to our Web site. If our
marketing efforts are unsuccessful or if we cannot increase our brand
awareness and traffic to our Web site, our business, operating results and
financial condition would be materially and adversely affected.

INCREASED COMPETITION COULD MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS.

Many Web sites compete for the attention and spending of business
people 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 Reuters Business Interactive, LLC;

- business information aggregators, such as Dialog, LEXIS-NEXIS and
OneSource;

- consumer-oriented Web sites, such as Excite and Lycos; and

- other Web sites with a business orientation or a business channel,
such as Office.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. Hoover's information is valued by these
organizations and is licensed to them. If these entities view us as a
substantial competitive threat, they may not renew any strategic relationship
agreements currently in place and our audience may decrease.

Some of our existing competitors, as well as a number of potential
new competitors, have longer operating histories, greater name recognition,
larger customer bases and significantly greater financial, technical and
marketing resources than we do. This may allow them to devote greater
resources than we can to the development and promotion of their services.
These competitors may also undertake more far-reaching marketing campaigns,
adopt more aggressive pricing policies, including offering their business
information for free, and make more attractive offers to existing and
potential new employees, businesses with whom we have strategic relationships
and advertisers. Our competitors may develop content that is equal or
superior to ours or that achieves greater market acceptance than ours. It is
also possible that new competitors may emerge and rapidly acquire significant
market share.

We 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.

<PAGE>

As a result of these factors, we may not be able to compete
successfully for advertisers, visitors or staff, which could materially
adversely affect our business, operating results and financial condition.
Increased competition could result in price reductions, reduced margins or
loss of market share, any of which could materially adversely affect our
business, operating results and financial condition.

OUR FUTURE SUCCESS DEPENDS ON OUR EDITORIAL STAFF.

We depend upon the efforts of our writers, researchers and other
editorial staff to produce original, timely, comprehensive and trustworthy
content. Competition for these personnel is intense, and we may not be able
to retain existing or attract additional highly qualified staff in the
future. If we lose the services of a significant number of our editorial
staff or are unable to continue to attract additional qualified staff, our
business, operating results and financial condition could be materially
adversely affected.

RAPID GROWTH IN OUR FUTURE OPERATIONS COULD CONTINUE TO STRAIN OUR
MANAGERIAL, OPERATIONAL AND FINANCIAL RESOURCES.

We have experienced rapid growth in our operations. We expect that
the number of our employees will continue to increase for the foreseeable
future. This rapid growth has placed, and any additional growth will continue
to place, a significant strain on our managerial, operational and financial
resources. As a result, we will need to continue to improve our operational
and financial systems and managerial controls and procedures. Our future
success will also depend on our ability to expand, train and manage our
workforce, in particular our sales and marketing organization. We will also
have to maintain close coordination among our technical, accounting, finance,
marketing, sales and editorial personnel. If we are unable to accomplish any
of these objectives, our business, operating results and financial condition
could be materially adversely affected.

WE ARE DEPENDENT ON OUR STRATEGIC RELATIONSHIPS AND OUR BUSINESS WOULD BE
MATERIALLY ADVERSELY AFFECTED IF WE WERE TO LOSE OUR EXISTING RELATIONSHIPS
OR FAIL TO GAIN ADDITIONAL STRATEGIC RELATIONSHIPS.

We depend on the following strategic relationships:

- CONTENT PROVIDERS. A number of organizations provide us with content
that we integrate into our products. If our relationships with these
content providers were terminated, we would have to eliminate their
information from our products and services. We may also need to
locate alternate content providers and integrate their information
into our products and services. Extracting previously integrated
information, locating a new provider and integrating their
information may take time and may interrupt the provision of
affected services. We cannot assure that we would be able to replace
the content we currently receive from our content providers in a
timely manner.

- MARKETING RELATIONSHIPS. We have various marketing relationships
with other Web sites pursuant to which they display our content and
logo and provide a link back to Hoover's Online. The success of some
marketing relationships depends on the amount of increased viewer
traffic we receive from that organization's Web site. These
relationships may not generate the number of new viewers that we
expect. Termination of our marketing relationships may decrease the
number of visitors to our Web site and may adversely affect our
revenues.

<PAGE>

- SPONSORS. To facilitate the expansion of our services and features,
we have obtained sponsors for resource centers on Hoover's Online.
Sponsors may provide content and/or advertising for the resource
center. In return, sponsors would receive the opportunity to
interact with visitors to the resource center. The success of our
sponsorship relationships depends on the quality of the content and
products that the sponsors and we provide. If we fail to attract and
retain sponsors for our online resource centers or if our sponsors
fail to provide content and products attractive to our audience, we
may lose subscribers and our audience may be reduced.

ACQUISITIONS MAY DISRUPT OR OTHERWISE HAVE A NEGATIVE IMPACT ON OUR BUSINESS.

We plan to acquire or make investments in complementary businesses,
products and technologies. Future acquisitions and investments are subject to
the following risks:

- acquisitions may cause a disruption in our ongoing business,
distract our management and make it difficult to maintain our
standards, controls and procedures;

- we may not be able to integrate successfully the services, content,
products and personnel of any acquisition into our operations;

- we may be required to incur debt or issue debt or equity securities,
which may be dilutive to existing stockholders, to pay for
acquisitions. We also may be required to assume debt or contingent
liabilities, amortize goodwill and other intangibles or write-off
in-process research and development and other acquisition-related
expenses; and

- we may not derive the intended benefits of any acquisition and we
may lose our entire investment.

EXPANSION INTO NON-U.S. MARKETS MAY BE DIFFICULT.

The growth of the Internet outside of the United States has not
progressed and may not progress and may not be adopted by business people
outside of the United States. Impact of language and other cultural
differences could result in a product offering that is not accepted and may
not be financially successful. Strategic relationships may be depended upon
to facilitate this expansion and our business may be adversely affected if we
fail to gain new 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 raids (including denial of service attacks)
by third parties,

20
<PAGE>

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 and upgrades and disk-drive failures. These minor interruptions
temporarily limited the capacity of our current technology infrastructure and
resulted in increased calls to our customer service personnel. Our systems
and operations also are vulnerable to damage or interruption from human
error, natural disasters, telecommunication failures, break-ins, sabotage,
computer viruses, intentional acts of vandalism and similar events. We
currently do not have complete redundancy and we do not have alternative
providers of hosting services that are available on short-term notice. We are
still developing a formal disaster recovery plan. We cannot assure that any
plan we adopt will be sufficient. We 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, copyright or
trademark infringement based on other theories relating to the information we
publish on our Web site, on the Web sites of others with whom we license or
co-brand our products or in our books. These types of claims have been
brought, sometimes successfully, against online services, as well as other
print publications in the past. We could also be subject to claims based upon
the content that is accessible from Hoover's Online through links to other
Web sites. We may also be subject to claims for software license infringement
based on the software and other technologies that we utilize on our Web site.
Our insurance may not adequately protect us against these types of claims.

CONCERNS REGARDING SECURITY OF TRANSACTIONS AND TRANSMITTING CONFIDENTIAL
INFORMATION OVER THE INTERNET MAY NEGATIVELY AFFECT OUR REVENUES.

We believe that concern regarding the security of confidential
information transmitted over the Internet, such as credit card numbers,
prevents many potential customers, especially those outside of the United
States, from engaging in online transactions. If we do not add sufficient
security features to Hoover's Online, our revenues generated from
subscriptions and e-commerce may decline or there may be additional legal
exposure to us.

Our infrastructure is potentially vulnerable to physical or
electronic break-ins, viruses or similar problems. If a person circumvents
our security measures, he or she could misappropriate proprietary information
or cause interruptions in our operations. Security breaches that result in
access to confidential information could damage our reputation and expose us
to a risk of loss or liability. We may be required to make significant
investments and efforts to protect against or remedy security breaches. As
e-commerce becomes more prevalent, our audience will become more concerned
about security. If we do not adequately address these concerns, our business,
operating results and financial condition could be materially adversely
affected.

THE LOSS OF ANY OF OUR KEY PERSONNEL OR OUR FAILURE TO ATTRACT ADDITIONAL
PERSONNEL COULD HAVE A MATERIAL AND ADVERSE EFFECT ON OUR BUSINESS.

Our future success will depend, in substantial part, on the
continued service of our senior management, particularly Patrick J. Spain,
our Chairman of the Board, President and Chief Executive Officer. None of our
senior management has entered into an employment agreement with us. We do not
maintain key-person life insurance on any of our employees. The loss of the
services of one or more of our key personnel could have a material adverse
effect on our business, operating results and financial condition. Our future
success will also depend on our continuing

<PAGE>

ability to attract, retain and motivate highly qualified technical, customer
support, financial and accounting and managerial personnel. Competition for
these personnel is intense, and we cannot assure that we will be able to
retain our key personnel or that we will be able to attract, assimilate or
retain other highly qualified personnel in the future. We have from time to
time in the past experienced, and we expect to continue to experience in the
future, difficulty in hiring and retaining employees with appropriate
qualifications.

IF WE FAIL TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS OR FACE A
CLAIM OF INTELLECTUAL PROPERTY INFRINGEMENT BY A THIRD PARTY, WE COULD LOSE
OUR INTELLECTUAL PROPERTY RIGHTS OR BE LIABLE FOR SIGNIFICANT DAMAGES.

We rely primarily on a combination of copyrights, trademarks, trade
secret laws, our user policy, licensing agreements and restrictions on
disclosure to protect our intellectual property. Despite these precautions,
it may be possible for a third party to copy or otherwise obtain and use the
content on our Web site or our other intellectual property without
authorization. We cannot assure that our precautions will prevent
misappropriation or infringement of our intellectual property. Failure to
protect our intellectual property in a meaningful manner could have a
material adverse effect on our business, operating results and financial
condition. In addition, we may need to engage in litigation in order to
enforce our intellectual property rights in the future or to determine the
validity and scope of the proprietary rights of others. Any litigation could
result in substantial costs and diversion of management and other resources,
either of which could have a material adverse effect on our business,
operating results and financial condition.

Because we license some data and content from third parties our
exposure to copyright infringement actions may increase. We rely upon these
third parties for the origin and ownership of licensed content. We generally
obtain representations of the origins and ownership of licensed content and
generally obtain indemnification to cover any breach of any representations.
However, we cannot assure you that these representations will be accurate or
that indemnification will be sufficient to provide adequate compensation for
any breach of these representations.

We cannot assure you that infringement or other claims will not be
asserted or prosecuted against us in the future, whether resulting from our
internally developed intellectual property or licenses or content from third
parties. 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.

PROBLEMS RELATING TO THE YEAR 2000 ISSUE COULD ADVERSELY AFFECT US.

<PAGE>

The year 2000 issue may affect several areas, including:

INTERNALLY DEVELOPED SOFTWARE. We have substantially completed a
year 2000 compliance review of our internally developed proprietary software.
This review has included testing to determine how our systems will function
at and beyond the year 2000. Based on our assessment to date, we believe that
our internally developed proprietary software is year 2000 compliant.

CONTENT PUBLISHING SYSTEM AND CONTENT PROVIDERS. We have completed a
year 2000 compliance review of our content publishing system and our
significant content providers. Based on our assessment of their data and our
publishing processes, we believe that our content publishing system and the
data provided to us from third parties is year 2000 compliant.

THIRD-PARTY SUPPLIERS. We have assessed the year 2000 readiness of
our third-party supplied software, computer technology and other services,
which include software for use in our accounting, database and security
systems. The failure of such software or systems to be year 2000 compliant
could have a material impact on our corporate accounting functions and the
operation of our Web site. As part of the assessment of the year 2000
compliance of these systems, we have sought assurances from these vendors
that their software, computer technology and other services are year 2000
compliant. Expenses associated with this assessment and remediation
activities have not been material, therefore, we did not develop a budget for
these expenses. The failure of our software and computer systems and of our
third-party suppliers to be year 2000 compliant would have a material adverse
effect on us. Based on our assessment and testing of these products and
services, as well as the assurances obtained, we believe that our third party
supplied software, computer technology and other services are year 2000
compliant.

WEB SITE UPGRADES. Our recent Web server upgrades were performed to
accommodate growth in our business and to provide greater scalability, not in
response to year 2000 compliance requirements. We believe our upgraded
servers are year 2000 compliant. At this time, we have not yet developed a
contingency plan to address situations that may result if our vendors or we
are unable to achieve year 2000 compliance because we currently do not
believe that such a plan is necessary. The cost of developing and
implementing such a plan, if necessary, could be material. Any failure of our
material systems, our vendors' material systems or the Internet to be year
2000 compliant could have a material adverse consequence for us. Consequences
may include difficulties in operating our Web site effectively or conducting
other fundamental parts of our business. For instance, we rely on
computer-based systems for our day-to-day operations. In a worst case
scenario, we could lose the ability to serve the Web site and account billing
would not be processed correctly.

RISKS RELATED TO THE INTERNET INDUSTRY

WE DEPEND ON THE CONTINUED GROWTH IN USE AND EFFICIENT OPERATION OF THE
INTERNET.

The Internet-based information market is rapidly evolving. Our business
would be materially adversely affected if Internet usage does not continue to
grow or grows more slowly than anticipated. Internet usage may be inhibited for
a number of reasons, including:

- inadequate network infrastructure;

- security concerns;

- inconsistent quality of service, and

- unavailability of cost-effective, high-speed access to the Internet.

<PAGE>

Our audience depends on Internet service providers, online service
providers and other Web-site operators for access to Hoover's Online. Many of
these services have experienced significant service outages in the past and
could experience service outages, delays and other difficulties due to system
failure unrelated to our systems. These occurrences could cause our visitors
to perceive the Internet in general or our Web site in particular as
unreliable and, therefore, cause them to use other media to obtain their
company and business information. We also depend on third-party information
providers to deliver information and data feeds to us on a timely basis. Our
Web site could experience disruptions or interruptions in service due to the
failure or delay in the transmission or receipt of this information, which
could have a material adverse effect on our business, operating results and
financial condition.

WE CANNOT PREDICT THE SIZE OR VIABILITY OF THE ONLINE INFORMATION SERVICES
MARKET.

The market for our online business information services is rapidly
evolving and is characterized by an increasing number of market entrants. As
is typical of a rapidly evolving industry, demand and market acceptance for
recently introduced services is subject to a high level of uncertainty and
risk. Because 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 that we will be successful in our efforts.

IF WE CANNOT KEEP PACE WITH RAPIDLY CHANGING TECHNOLOGY AND DEMANDS OF OUR
CUSTOMERS, WE MAY BE UNABLE TO ENHANCE OUR EXISTING SERVICES OR INTRODUCE NEW
SERVICES.

The market in which we operate is characterized by rapidly changing
technology, evolving industry standards, frequent new service announcements,
introductions and enhancements and evolving customer demands. The emerging
nature of the Internet and the electronic distribution of business
information including distribution through wireless channels and products
exacerbate these market characteristics. Accordingly, our future success will
depend on our ability to adapt to rapidly changing technologies and industry
standards, and our ability to continually improve the performance, features
and reliability of our services in response to both evolving customer demands
and competitive service offerings. Our inability to adapt successfully to
these changes in a timely manner could have a material and adverse effect on
our business, operating results and financial condition. Furthermore, we may
experience difficulties that could delay or prevent the successful design,
development, testing, introduction or marketing of new services. Any
enhancements to existing services may not adequately meet the requirements of
our current and prospective customers or achieve any degree of significant
market acceptance. If we are unable, for technological or other reasons, to
develop and introduce new services or enhancements to existing services in a
timely manner or in response to changing market conditions or customer
requirements, or if our services or enhancements contain defects or do not
achieve a significant degree of market acceptance, our business, results of
operations and financial condition would be materially adversely affected.

PRIVACY CONCERNS MAY PREVENT OUR USE OF COOKIES.

Web sites typically place information known as cookies on a user's
hard drive without the user's knowledge or consent. Web sites use cookies for
a variety of reasons. This technology enables our subscribers to access our
premium services without entering their password upon each visit.
Additionally, it allows us to limit the frequency with which a viewer is
shown a particular ad. Any reduction or limitation in the use of cookies
could adversely affect our ability to target advertising effectively.
Commonly used Internet browsers allow users to modify their

<PAGE>

browser settings to remove cookies at any time or to prevent cookies from
being stored on their hard drives. In addition, some Internet commentators,
privacy advocates and governmental bodies have suggested limiting or
eliminating the use of cookies. The use of cookies may become more
restrictive in certain non-US markets, which could impact the rate or success
of expansion into those markets.

WE MAY BECOME SUBJECT TO BURDENSOME GOVERNMENT REGULATION AND LEGAL
UNCERTAINTIES.

The laws governing the Internet remain largely unsettled, even in
areas where there has been some legislative action. It may take years to
determine whether and how existing laws, including those governing
intellectual property, privacy, libel and taxation, apply to the Internet
generally and the electronic distribution of business information in
particular. Legislation could reduce the growth in the use of the Internet
generally and decrease the acceptance of the Internet as a communications and
commercial medium, which could have a material adverse effect on our
business, operating results and financial condition. In addition, the growing
popularity and use of the Internet has burdened the existing
telecommunications infrastructure and many areas with high Internet usage
have begun to experience interruptions in phone service. As a result, some
local telephone carriers have petitioned governmental agencies to regulate
Internet service providers and online service providers in a manner similar
to long-distance telephone carriers and to impose access fees on Internet
service providers and online service providers. If any of these petitions or
the relief that they seek is granted, the costs of communicating on the
Internet could increase substantially, potentially adversely affecting the
growth on the Internet. Further, due to the global nature of the Internet, it
is possible that, although transmissions relating to our services originate
in the State of Texas, governments of other states, the United States or
foreign countries might attempt to regulate our service or levy sales or
other taxes on our activities. In Texas, sales of goods over the Internet are
taxed the same as sales of personal property through traditional channels. As
a result, Internet companies like us, based in Texas, may be at a competitive
disadvantage to Internet companies based outside of Texas with respect to
sales to Texas-based customers. We cannot assure you that violations of local
or other laws will not be alleged or charged by governmental authorities,
that we might not unintentionally violate these laws or that in the future
these laws will not be modified or new laws enacted. Any of these
developments could have a material adverse effect on our business, operating
results and financial condition.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Hoover's has capital lease obligations, which result in the
risk that interest expense or the fair value of capital lease obligations
might be impacted by changes in market interest rates. However, because these
are not significant, market risks related to financial instruments are not
material.

On July 26, 1999, upon the closing of our initial public offering of
common stock, we received approximately $48 million in proceeds from the
underwriters of the offering. To date, these proceeds have been invested in
money market funds backed by short-term government securities and other
short-term, investment-grade, interest-bearing instruments. Market risks
related to these financial instruments are not material.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

<PAGE>

We are not currently subject to any material legal proceedings.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

The effective date of our first registration statement, filed on
Form S-1 under the Securities Act of 1933 (No. 333-78109) relating to our
initial public offering of our common stock, became effective July 20, 1999.
Offering proceeds, net of aggregate expenses of approximately $1 million,
were $48 million. The Company has used approximately $4.1 million of the net
offering proceeds for working capital purposes, $1.2 million for the purchase
and installation of computer and related equipment and software and $42.7
million has been invested in money market funds backed by government
securities and other short-term, investment-grade, interest-bearing
instruments pending further application of such proceeds.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITIES HOLDERS

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) The following exhibit is filed as part of this
report:

27.01 Financial Data Schedule (EDGAR version only)

(b) We filed no reports on Form 8-K filed during the
three months ended December 31, 1999.

<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

HOOVER'S, INC

February 14, 2000 /s/ Patrick J. Spain
- -------------------- -------------------------------------
Date Patrick J. Spain
CHAIRMAN OF THE BOARD,
CHIEF EXECUTIVE OFFICER
AND PRESIDENT
(PRINCIPAL EXECUTIVE OFFICER)

February 14, 2000 /s/ Lynn Atchison
- -------------------- -------------------------------------
Date Lynn Atchison
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER)

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONDENSED FINANCIAL STATEMENTS FOR HOOVER'S, INC. FOR THE THREE AND
NINE MONTHS ENDED DECEMBER 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 57,303
<SECURITIES> 227
<RECEIVABLES> 2,378
<ALLOWANCES> 80
<INVENTORY> 105
<CURRENT-ASSETS> 60,211
<PP&E> 3,597
<DEPRECIATION> 1,690
<TOTAL-ASSETS> 63,192
<CURRENT-LIABILITIES> 1,836
<BONDS> 0
0
0
<COMMON> 124
<OTHER-SE> 76,716
<TOTAL-LIABILITY-AND-EQUITY> 63,192
<SALES> 5,474
<TOTAL-REVENUES> 5,474
<CGS> 1,936
<TOTAL-COSTS> 6,894
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3
<INCOME-PRETAX> (2,572)
<INCOME-TAX> 0
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