Back to GetFilings.com
1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
COMMISSION FILE NUMBER 0-24531
COSTAR GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 52-2091509
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
7475 WISCONSIN AVENUE
BETHESDA, MARYLAND 20814
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (301) 215-8300
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK ($.01 PAR VALUE)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 of 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 of the past 90 days. Yes [X] 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
statement to this Form 10-K. [ ]
Based on the closing price of the common stock on March 13, 2000 on
the NASDAQ Stock Market, the aggregate market value of registrant's common
stock held by non-affiliates of the registrant was approximately $630 million.
As of March 13, 2000, there were 15,298,257 shares of registrant's
common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement, which is expected to
be filed with the Securities and Exchange Commission within 120 days after the
end of the registrant's fiscal year, are incorporated by reference into Part
III of this Report.
2
TABLE OF CONTENTS
PART I
Item 1 Business...............................................................................3
Item 2 Properties............................................................................11
Item 3 Legal Proceedings.....................................................................11
Item 4 Submission of Matters to a Vote of Security Holders...................................12
PART II
Item 5 Market for the Registrant's Common Stock and Related Stockholder Matters..............13
Item 6 Selected Consolidated Financial and Operating Data....................................14
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................................15
Item 7A Quantitative and Qualitative Disclosures about Market Risk............................25
Item 8 Financial Statements and Supplementary Data...........................................25
Item 9 Changes in and Disagreements with Accountants, on Accounting
and Financial Disclosure..............................................................26
PART III
Item 10 Directors and Executive Officers of the Registrant....................................26
Item 11 Executive Compensation................................................................26
Item 12 Security Ownership of Certain Beneficial Owners and Management........................26
Item 13 Certain Relationships and Related Transactions........................................26
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K.......................26
Index To Consolidated Financial Statements......................................................F-1
2
3
ITEM 1 BUSINESS
(In this report, the words "we", "our", "us", "CoStar" or "the
Company" refer to CoStar Group, Inc. and its subsidiaries. This report also
refers to our Web site, but information contained on that site is not part of
this report.)
CoStar Group, Inc., a Delaware corporation incorporated in 1998 to
succeed its predecessor companies, is the nation's largest provider of
information services to the commercial real estate industry. Through internal
development, extensive research and strategic acquisitions over 13 years,
CoStar has compiled a comprehensive proprietary database that, as of March 22,
2000, covered 54 markets and tracked leasing and sales transactions for over 15
billion square feet of commercial real estate and approximately 900,000
tenants. CoStar delivers its content to customers through eight distinct
products and services. Our wide array of digital service offerings includes a
leasing marketplace, a selling marketplace, sales comparable information,
decision support, contact management, tenant information, property marketing,
and industry news. In 1999, the Company made significant progress in moving its
business model to the Internet. Substantially all our current services are
digitally delivered and most of our clients receive information over the
Internet. The advent of the Internet allows CoStar to integrate data from
distinct product areas, deliver it more quickly to customers and allows our
clients to increase their efficiencies, decrease costs of conducting business
and ultimately, increase transaction values. Today, we are creating a digital
marketplace where the commercial real estate industry and related businesses
can continuously interact and easily facilitate transactions over the Internet
due to efficient exchange of accurate and standardized information supplied by
CoStar.
We have three assets that provide a unique foundation for this
marketplace: the most comprehensive, proprietary, national database in the
industry; the largest research department in the industry; and what we believe
is the largest number of participating organizations. Our database has been
constructed over more than a decade by a research department that makes updates
daily to our database throughout the year. In addition to our internal efforts,
we have obtained and assimilated over 50 proprietary databases. The database
now contains information on over $500 billion in lease transactions and covers
more over $40 billion in properties for sale.
INDUSTRY OVERVIEW
We believe that the market for commercial real estate information is
vast based on the variety, volume, and value of transactions related to
commercial real estate. To facilitate transactions, industry participants must
have extensive, accurate, and current information. Members of the commercial
real estate and related business community require daily access to current data
such as rental rates, vacancy rates, tenant movements, supply, new
construction, absorption rates, and other important market developments to
carry out their businesses effectively. Such data collection is time-consuming,
as shown by a 1996 study we commissioned, which found that commercial real
estate professionals spent 40% of their workday collecting and analyzing
information on the real estate market. Therefore, there is a strong need for an
efficient marketplace, where members of the commercial real estate and related
business community can exchange information, evaluate opportunities using
national standardized data, and interact with each other on a continuous basis.
A large number of parties involved in the commercial real estate and
related business community require extensive information, including:
- Sales and leasing brokers - Government agencies
- Property owners - Mortgage-backed security issuers
- Property management firms - Appraisers
3
4
- Design and construction firms - Media
- Real estate developers - Tenant vendors
- Real estate investment trusts - Building services vendors
- Investment banks - Communications providers
- Commercial banks - Insurance companies
- Investors and asset managers - Institutional advisors
The commercial real estate and related business community generally
operates in an inefficient marketplace because of the fragmented approach to
gathering and exchanging information within the marketplace. Various
organizations, including hundreds of brokerage firms, directory publishers, and
local research companies, have attempted to collect data on specific markets
and to develop software to analyze the information they had independently
gathered. This fragmented approach has resulted in duplication of effort in the
collection and analysis of information, excessive internal cost,
non-standardized data with varying degrees of accuracy and comprehensiveness,
and a large information gap.
The creation of an efficient digital marketplace for commercial real
estate will require an infrastructure of a national, standardized database,
accurate and comprehensive research capabilities, and intensive, real-time
participant interaction. The Internet can help maximize interaction among
participants in a marketplace. The Internet has emerged as a mass
communications and commerce medium enabling millions of people worldwide to
share information, create community among individuals with similar interests,
and conduct business electronically. In addition to its emergence as a mass
communications medium, the Internet has features and functions that are
unavailable in traditional media, which enable users to:
- retrieve enormous amounts of information at low cost and without
geographic limitation;
- access dynamic and interactive content on a real-time basis; and
- communicate and interact instantaneously with a single individual or
with large groups of users.
COSTAR'S COMPREHENSIVE, NATIONAL DATABASE
CoStar has spent 13 years building and acquiring a proprietary
database of commercial real estate information, including leasing, sales,
tenants, demand statistics and digital images The completed acquisition of
COMPS.COM, Inc. ("Comps") in February 2000 significantly increased the
resources in our database. Comps has spent 18 years building a proprietary
database of commercial real estate sales transactions.
Combined, as of March 22, 2000, our proprietary database contains:
- more than 15 billion square feet of U.S. commercial real estate;
- approximately 350,000 CoStar and approximately 330,000 Comps
commercial real estate properties;
- information for 54 U.S. markets;
- over two billion square feet of space available;
- over 38,000 properties for sale;
- approximately 900,000 tenants occupying commercial real estate
space;
- more than 530,000 sales transactions valued at over $660 billion;
and
- over 660,000 high-resolution digital images, including building
photographs, aerial photographs, plat maps and floor plans.
This highly complex database is comprised of hundreds of data fields, tracking
such categories as:
4
5
- Location - Mortgage and deed information
- Site and zoning information - For-sale information
- Building characteristics - Income and expense histories
- Space availability - Tenant names
- Tax assessments - Lease expirations
- Ownership - Contact information
- Sales comparables - Historical trends
COSTAR RESEARCH
We have developed a sophisticated data collection organization, made
up of a combination of researchers, license agreement, management systems,
computer and communications hardware, and software systems.
Research Department. As of March 13, 2000, over 700 commercial real
estate research professionals worked for us. CoStar's researchers collect and
analyze office and industrial real estate information through hundreds of
thousands of phone calls, e-mails, internet updates and faxes a year, in
addition to field inspections, news monitoring, and direct mail. Every new
research employee undergoes an extensive training program to maintain a
consistent research process. Because of the importance commercial real estate
professionals place on our data and our prominent position in the industry,
these professionals frequently take the initiative to report transactions to
our researchers.
In connection with obtaining sales comparable data, Comps researchers
review multiple sources of information to comprehensively identify recent
commercial property transactions in 47 markets throughout the United States.
Once a potential transaction is identified, Comps researchers inspect county
courthouse records and extract pertinent information directly from the recorded
deed into the database in order to increase the accuracy of each sales comp
report. Comps researchers match the legal description of the deed with a tax or
plat map and then proceed to perform a site inspection on the commercial
properties. The site inspection consists of photographing the building,
measuring the building (if necessary), counting parking spaces, assessing
property condition and construction, and gathering tenant information. Comps
researchers then interview buyers, sellers and brokers via telephone to seek to
confirm the information and to gather additional information.
As of March 13, 2000, over 200 field researchers compiled digital
images, location information and site-specific data for us, by both verifying
data in CoStar's database and entering new data into the database. Some of
these researchers use CoStar trucks equipped with Global Positioning Systems,
which use satellites to keep track of the trucks' location and pinpoint
building locations. As of March 13, 2000, CoStar had 29 trucks in a total of 19
markets that were used by field researchers. In addition, over 100 of our field
researchers are photographers who take photographs of commercial real estate
properties for CoStar to add to the collection of CoStar's digital images in
our database.
License Agreements. We license a small portion of our data from public
record providers such as Axciom DataQuick, TransAmerica/Intellitech and First
American RES. The licensing agreements with these entities provide for the use
of certain of their national property ownership information in the enhancement
and development of various CoStar services.
Management and Quality Control Systems. We use both automated and
non-automated controls to ensure the integrity of the data collection process.
A large number of automated data quality tests check for potential errors
including occupancy date conflicts, available square footage greater than
building area, typical floor greater than land area, and expired leases. Our
non-automated quality control procedures include:
5
6
- calling our information sources on recently-updated properties to
re-verify information;
- reviewing commercial real estate periodicals for transactions to
cross-check our research; and
- performing field checks to determine if we correctly canvassed all
buildings.
Finally, one of the most important and effective quality control measures is
feedback, garnered through regular client surveys taken from the commercial
real estate professionals using our data every day.
Computer and Communications Hardware. We maintain Windows NT servers
in support of the database and a national internal frame relay network to allow
remote researchers real-time access to the database. We store full data
back-ups off site.
Software Systems. We use client-server software to manage our
internal data collection. In addition, over the past decade we have developed
and refined our own software systems. This software has four primary functions:
- collection of building-specific data;
- tracking of commercial real estate companies and individuals;
- facilitation of our operations; and
- distribution of data.
PRODUCTS AND SERVICES
Our various current and planned products and services are described in
detail in the following paragraphs.
CoStar Exchange. We have developed a database of over 38,000
commercial properties for sale with a combined asset value in excess of $40
billion. We expect to distribute that information in a broker-centric model
through a secure Web-based browser, to be known as CoStar Exchange. We expect
that sellers and brokers of properties will be able to list extensive
information about their properties for sale on the site at no cost. The site
will afford an efficient means for these sellers to reach a large universe of
potential buyers. We expect that potential buyers will pay a subscription fee
to access the system. Sellers of investment-grade properties will have the
additional option of selecting limited, secure distribution of their properties
in order to address confidentiality requirements. We expect that the CoStar
Exchange service will integrate the content developed through years of research
under the CoStar Property, CoStar Tenant, CoStar COMPS and other CoStar
services. We expect to release CoStar Exchange in the second quarter of 2000.
CoStar Property. CoStar Property has fostered the development of the
digital leasing marketplace. Subscribers use CoStar Property to research
leasing options, analyze market conditions and competitive property positions,
and produce multimedia client presentations. Members of the broader commercial
real estate community, including non-CoStar subscribers, utilize CoStar
Property extensively to market their properties. Subscribers can query CoStar
Property with any combination of pertinent criteria, combining any of
approximately one hundred data fields from categories such as building size,
location, building characteristics, space availability, ownership, or sales
comparables. CoStar Property's search engine scans through hundreds of millions
of square feet of space in a specified market in seconds to find all the
properties meeting the search criteria. Our subscribers can select from over 50
customizable reports, presenting space availability, comparable sales, tenant
activity, market statistics, photographs, and floor plans. Users can export and
edit reports, photos, and floor plans to help determine feasibility of a
specific space. Our subscribers also use CoStar Property to analyze market
conditions by calculating current vacancy rates, absorption rates, or average
rental rates.
6
7
CoStar Tenant. CoStar Tenant delivers detailed information profiling
the tenants occupying commercial buildings by tracking tenants in 28 U.S.
markets. A key service feature is lease expiration information. Subscribers use
CoStar Tenant to gather information about particular tenants, identify and
target the most likely tenants to lease space, ascertain all tenants in a
particular building, understand trends and the underlying demand for commercial
real estate, locate and target the tenants most likely to need representation
for their real estate requirements, and pinpoint the tenants most likely to buy
a particular vendor's goods and services.
CoStar COMPS. Through the acquisition of Comps in February 2000, we
now provide comprehensive, national information on comparable sales information
in the commercial real estate industry. This service is provided for 47 markets
nationally representing 145 counties, through a Web-based system and includes
information on sale prices, income and expenses, capitalization rates, loan
data and other key details. Customers may search the proprietary database of
comparable sale information by multiple search parameters, including location,
property type, square footage, price range and number of units. Customers
receive a report of all relevant properties in the database matching their
search criteria, including photographs.
CoStar ARES. Through the acquisition of ARES Development Group, LLC in
September 1999, we are now the provider of CoStar ARES 2000, a leading contact
management and business tool for commercial real estate professionals. CoStar
ARES 2000 works in conjunction with ACT! 2000 and turns ACT! into a real estate
productivity system by providing commercial real estate elements that are not
provided by ACT!. Users of CoStar ARES 2000 can import data from CoStar
Property and CoStar Tenant into CoStar ARES 2000.
CoStar Marketplace. CoStar Marketplace provides an on-line means for
the commercial real estate and related business community to direct advertising
to the appropriate decision-makers. We currently deliver this service through
our CoStar services and via our Website. This service benefits our clients by
providing them increased distribution, higher visibility, and a more
cost-effective way to reach their targeted audience for their advertising
materials.
CoStar News. Our Website, our CoStar services, and our e-mail news
dispatches have become an accepted source of reliable industry news. In 1999,
we authored over 5,000 news stories. These articles have been cited by numerous
major news organizations. Our newswire feature keeps clients informed of
late-breaking commercial real estate news such as deals signed, acquisitions,
ground breakings and other features.
CoStar Analytic. We currently provide a full line of detailed
analytical tools and reports through CoStar Property and CoStar Tenant. These
tools provide strategic insight into the changing trends in vacancy rates,
tenant movements, supply, new construction, absorption rates, and other
important market metrics. We are enhancing these services through CoStar
Analytic. Once released, we expect that CoStar Analytic will provide a
Web-based analytic tool that will allow users to perform more sophisticated
analyses of underlying market conditions and trends when making investment,
leasing, purchase, sale, construction, and marketing decisions involving
commercial real estate. We may also provide fee-based customized reports and
advisory services.
Backlog. We do not have a significant backlog and do not believe that
backlog is a meaningful indicator of our future results.
7
8
CLIENTS
We draw clients from across the commercial real estate and related
business community. Commercial real estate brokers have traditionally been the
largest portion of CoStar clients. Recently, however, the fastest growing
segments for CoStar services have been owners, lenders, and vendors. The
following chart provides representative clients in various categories.
BROKERAGE LENDERS, INVESTMENT BANKERS APPRAISERS,
- --------- --------------------------- -----------
ACCOUNTANTS
-----------
CB Richard Ellis Deutschebank Arthur Anderson
Grubb & Ellis Donaldson, Lufkin & Jenrette E & Y Kenneth Leventhal
Jones Lang LaSalle GMAC Commercial Mortgage Real Estate Group
Insignia/ESG Merrill Lynch Koeppel Tener Real Estate
Julien J. Studley NationsBank KPMG
The Staubach Company Bank of America PriceWaterhouse Coopers
Carter & Associates Wells Fargo Deloitte and Touche
Colliers Washington Mutual
Binswanger World Savings
Marcus & Millichap First Nationwide
REITs OWNERS AND DEVELOPERS VENDORS
- ----- --------------------- -------
Boston Properties Hines IntelliSpace
CarrAmerica Trammel Crow Company Kastle Systems
Cornerstone Properties TrizecHahn Corporation RCN Corporation
Equity Office Properties Gale & Wentworth Teligent
Prentiss Properties Manulife Financial WinStar Communications
INSTITUTIONAL
ADVISORS,
GOVERNMENT AGENCIES PROPERTY MANAGERS ASSET MANAGERS
- ------------------- ----------------- --------------
County of Los Angeles Kennedy-Wilson Properties AEW Capital Management
Fairfax County Dev. Authority Leggat McCall Properties Jones Lang LaSalle
Fannie Mae Lincoln Property Company Legg Mason
Montgomery County Office PM Realty Group LendLease Real
of Economic Development U.S. Equities Realty Estate Investments
NYC Economic Development. USAA Real Estate
U.S. General Services Administration Company
As of March 13, 2000, CoStar had an estimated 25,000 end users at over
3,600 clients using one or more of CoStar's products, and Comps had an
estimated 25,000 end users at over 6,000 clients using one or more of Comps'
products. This includes the majority of the national commercial real estate
brokerage firms. As of December 31, 1999, no single client accounted for more
than 5% of our revenues. During the past five years, our contract renewal rate
has exceeded 90%.
SALES AND MARKETING
As of March 13, 2000, we had over 130 sales and marketing employees,
with the majority of our direct sales force located in the field. Our sales
teams are geographically focused and located in 23 field
8
9
sales offices in our largest U.S. markets. Our offices typically serve as the
platform for our in-market sales, client service, and field research operations
for their respective regions. The field sales offices also work with our
headquarters operation to coordinate sales to our multi-market and national
clients. In addition, we have a client service staff with responsibility for
installing and training our client base, ensuring high client satisfaction,
renewing existing client contracts, and identifying cross-selling
opportunities. We use a proprietary enterprise-wide client management system
integrated with our database and telecommunications system. This integrated
system allows the sales force, research staff, client service, and accounting
department to develop a coordinated sales and account management effort.
Our field sales people focus in one of three areas, Information
Solutions, Marketing Solutions or CoStar ARES 2000. The Information Solutions
sales personnel focus on existing information services such as CoStar Property,
CoStar Tenant and CoStar COMPS, and will in the future focus on new information
services, such as CoStar Exchange and CoStar Analytic. Many of our salespeople
have significant commercial real estate experience, allowing them to take a
consultative sales approach. The Marketing Solutions sales personnel sell
on-line advertising on our website, www.costargroup.com, and advertising spaces
in the CoStar Property and CoStar Tenant regional newswires. Many of these
sales people have an advertising sales background or experience in commercial
real estate. A team of inside and field sales people, together with a team of
telemarketing sales people, work to sell CoStar ARES 2000. Our sales strategy
is to aggressively attract new clients, while providing ongoing incentives for
existing clients to subscribe to our newer services.
We seek to make our services essential to our clients' businesses. To
encourage clients to use our services regularly, we generally charge fixed
monthly amounts rather than fees based on actual system usage. Our clients'
monthly charges are based on the number of sites, organization size, the
company's business focus, and the number of services to which a client
subscribes.
Our primary marketing methods include: service demonstrations, direct
marketing, trade show and industry events, print advertising, and client
referrals. Direct marketing is the most cost effective means for us to find
prospective clients. Once we have identified a prospective client, we have
found the most effective sales method is a service demonstration. Our direct
marketing efforts include direct mail, e-mail, and telemarketing, and make
extensive use of our unique, proprietary database. Our advertising includes
Internet banners, private network banners, and traditional print advertising.
This form of advertising is used for brand identity, message reinforcement, and
potential client identification. We also attend industry tradeshows and
seminars to reinforce our relationships with our core user groups.
COMPETITION
The market for information systems and services generally is
competitive and rapidly changing. The market for Internet services and
providers is relatively new, intensely competitive and rapidly changing. In the
commercial real estate industry, the principal competitive factors for
commercial real estate information are:
- quality and depth of the underlying databases;
- ease of use, flexibility, and functionality of the software;
- timeliness of the data;
- breadth of geographic coverage and services offered;
- perception that the service offered is the industry standard;
- proprietary nature of methodologies, databases and technical
resources;
- effectiveness of marketing and sales efforts;
- client service and support;
- vendor reputation;
9
10
- brand loyalty among customers;
- capital resources; and
- price.
We compete directly and indirectly for customers with the following
categories of companies:
- online services or Web sites targeted to commercial real estate
brokers, buyers and sellers of commercial real estate properties,
insurance companies, mortgage brokers and lenders, such as
Propertyfirst.com, LoopNet, Inc. and Realtyiq.com;
- publishers and distributors of information services, such as
regional providers such as Realty Information Tracking Services, and
smaller local providers, and national print publications such as
Black's Guide;
- in-house research departments operated by some commercial real
estate brokers; and
- public record providers such as First American Res, Acxiom DataQuick
and TransAmerica, though many of their customers view these public
record providers as complementary to our services and often
subscribe to one of these services as well as Comps' service.
As the digital real estate marketplace develops, additional
competitors (including companies which could have greater financial, product
development, technical, and marketing resources than we do) may enter the
market and competition may intensify. While we believe that we have
successfully differentiated ourselves from existing or potential competitors,
competition could materially harm our business.
PROPRIETARY RIGHTS
To protect our proprietary rights in our methodologies, database,
software, trademarks and other intellectual property, we depend upon a
combination of:
- trade secret, copyright and trademark laws;
- nondisclosure, noncompetetion and other contractual provisions with
employees;
- license agreements with customers;
- patent protection; and
- technical measures.
We seek to protect our software's source code and our database as
trade secrets and under copyright law. Although copyright registration is not a
prerequisite for copyright protection, we have filed for copyright registration
for our databases, software and other materials. Under current law, the
arrangement and selection of data may be protected, but the actual data itself
may not be. Moreover, other people are free to try to independently create
databases that perform the same function as ours. We believe, however, that
they would find it very time-consuming and costly to create a competing
database. We license our database, software and services under license
agreements that grant our clients non-exclusive, non-transferable licenses.
These agreements restrict the disclosure and use of our data, images and
software. In addition, the license agreements prohibit the unauthorized
reproduction or transfer of the information and software we license.
We also attempt to protect the secrecy of our proprietary database,
our trade secrets and our proprietary information through confidentiality and
noncompetition agreements with our employees and consultants. Our services also
include technical measures to discourage unauthorized copying.
We have filed trademark applications to register the "CoStar" mark in
the United States and Canada, and we have a registered trademark for "CoStar"
in the United Kingdom. In addition, we have
10
11
filed trademark applications to register trademarks for a variety of names for
the CoStar products and other marks. In addition, "COMPS" is a registered
trademark of Comps. We recently filed a patent application covering certain of
our methodologies and software.
On September 30, 1999, CoStar filed suit against LoopNet, Inc and its
president Dennis DeAndre in the U.S. District Court for the District of
Maryland. The complaint asserts, among other things, that LoopNet infringed
CoStar's copyrights by unlawfully displaying and distributing CoStar's
copyrighted photographs on LoopNet's web site. On March 14, 2000, the judge
issued a preliminary injunction ordering LoopNet, Inc. to remove CoStar
photographs from the LoopNet website once CoStar notifies it of any possible
infringement. The injunction also requires that LoopNet notify users whenever
it removes CoStar photographs submitted for posting on LoopNet's Web site. It
also mandates that LoopNet require certain repeat offenders to produce evidence
of copyright ownership before posting any photograph to the LoopNet Web site.
In its suit, CoStar is seeking monetary damages for past infringements,
attorney's fees and a permanent injunction against LoopNet.
EMPLOYEES
As of March 13, 2000, we employed 960 employees. None of our employees
is represented by a labor union. We have experienced no work stoppages. We
believe that our employee relations are excellent.
ITEM 2 PROPERTIES
Our corporate headquarters occupy approximately 48,000 square feet in
Bethesda, Maryland, under leases and subleases expiring between April 30, 2000
and July 31, 2000. In April 2000, we expect to move to a new corporate
headquarters in Bethesda, Maryland, occupying approximately 60,000 square feet
under a lease that expires on March 14, 2010. Comps is headquartered in San
Diego and leases approximately 40,000 square feet under a lease that expires on
August 31, 2002 and leases approximately 43,000 square feet under a lease that
expires on January 31, 2004. We believe that our Bethesda, Maryland and San
Diego facilities will be adequate to meet our requirements for our headquarters
for the foreseeable future.
We also lease office space in a variety of other locations, including,
without limitation, the following: New York; Los Angeles; Chicago; San
Francisco; Boston; Newport Beach; Philadelphia; Houston; Mason, Ohio; Atlanta;
Phoenix; Southfield, Michigan; Iselin, New Jersey; Charlotte, North Carolina;
Ft. Lauderdale, Florida; Seattle; Denver; Austin; Dallas; Sacramento,
California; and Tampa, Florida.
ITEM 3 LEGAL PROCEEDINGS
On November 5, 1999, a suit was filed in the Court of Chancery of the
State of Delaware in and for New Castle County under the caption Morris v.
Avis, et al (C.A. 197554). The suit alleged breaches of fiduciary duties by the
former members of the board of directors of Comps and Summit Partners. On
November 8, 1999, a suit was filed in the Superior Court of the State of
California of and for the County of San Diego captioned Berghoff v. Comps.com
et al (case no. GIC 738362). The allegations in the California lawsuit are
similar to the allegations in the Delaware suit. The plaintiffs in both of
these lawsuits had requested monetary damages and injunctive relief to prevent
the consummation of the merger between Comps and CoStar. On January 6, 2000,
the Delaware suit was voluntarily dismissed by the plaintiff. On February 4,
2000, the parties to the California lawsuit entered into a Memorandum of
Understanding that sets forth their agreement to settle the lawsuit. The
parties are in the process of fully documenting the settlement of the class
action in order to obtain the necessary court approval. A hearing
11
12
has been scheduled in the California action on March 29, 2000 to address the
status of this matter. The parties intend to seek the preliminary approval by
the court of the settlement either at this hearing or at a subsequent hearing
to be scheduled shortly thereafter.
The Company currently and from time to time is involved in other
litigation incidental to the conduct of its business. The Company is not a
party to any lawsuit or proceeding that, in the opinion of management of the
Company, is likely to have a material adverse effect on the Company's financial
position or results of operations.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The registrant did not submit any matters to a vote of its security
holders during the quarter ended December 31, 1999.
12
13
ITEM 5 MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
Price Range of Common Stock. Our common stock is traded on the Nasdaq
Stock Market under the symbol "CSGP." Public trading of our common stock began
on July 1, 1998. Prior to that, there was no public market for the common stock.
The following table sets forth, for the periods indicated, the high and low sale
price per share of our common stock on the Nasdaq Stock Market.
YEAR ENDED DECEMBER 31, 1998 HIGH LOW
- ---------------------------- ----- ---
Third Quarter (from July 1, 1998)............................................$10 7/8 $5 1/2
Fourth Quarter...............................................................$14 $6
YEAR ENDED DECEMBER 31, 1999
- ----------------------------
First Quarter................................................................$29 1/4 $12 5/8
Second Quarter...............................................................$48 5/8 $28 1/2
Third Quarter................................................................$48 $22 3/16
Fourth Quarter...............................................................$35 7/8 $14 5/16
As of March 13, 2000, there were approximately 142 holders of record
of our common stock. On March 13, 2000, the last sale price reported on the
Nasdaq Stock Market for our common stock was $52 1/8 per share.
Dividend Policy. We have never declared or paid any dividends on our
common stock. We do not plan to do so in the foreseeable future.
Recent Issues of Unregistered Securities. During 1999, we made certain
issues of shares of our common stock without registration under the Securities
Act of 1933 (the "Securities Act"). On January 8, 1999, we acquired LeaseTrend,
Inc. ("LeaseTrend") through a transaction in which the shareholders of
LeaseTrend received 566,671 shares of Common Stock and approximately $4,500,000
in cash. These shares were purchased for investment purposes. The issuance of
these shares was effected in reliance on an exemption from registration under
Section 4(2) of the Securities Act. On January 22, 1999, we acquired Jamison
Research, Inc. ("Jamison") through a transaction which the shareholders of
Jamison received 446,637 shares of Common Stock and approximately $5,284,000 in
cash. These shares were purchased for investment purposes. The issuance of
these shares was effected in reliance on an exemption from registration under
Section 4(2) of the Securities. On September 15, 1999, we acquired ARES
Development Group, LLC ("ARES") through a transaction in which the members of
ARES received 33,208 shares of Common Stock and approximately $250,000 in cash.
These shares were purchased for investment purposes. The issuance of these
shares was effected in reliance on the exemption from registration under
Section 4(2) of the Securities Act.
13
14
ITEM 6 SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA AND OTHER OPERATING DATA)
The following table provides selected financial data for the five
years ended December 31, 1999. The Statement of Operations Data we show below
for 1997 through 1999 and the Balance Sheet Data for 1998 and 1999 is derived
from audited financial statements that we include later in this report. The
Statement of Operations Data for 1995 and 1996 and the Balance Sheet Data we
show below for 1995 through 1997 is derived from audited financial statements
for those years, which do not appear in this report. As explained in the Notes
to the Consolidated Financial Statements that appear later in this report, the
financial data for 1995 through 1999 is derived from the audited financial
statements of us and of our predecessor companies for those years.
YEARS ENDED DECEMBER 31,
---------------------------------------------
1995 1996 1997 1998 1999
------ ------ ------- ------- -------
STATEMENT OF OPERATIONS DATA:
Revenues........................... $2,062 $ 4,336 $ 7,900 $13,900 $ 30,234
Cost of revenues................... 931 2,188 3,413 4,562 13,244
------ ------- ------- ------- --------
Gross margin....................... 1,131 2,148 4,487 9,338 16,990
Operating expenses................. 1,994 4,829 7,786 12,864 32,373
------ ------- ------- ------- --------
Loss from operations............... (863) (2,681) (3,299) (3,526) (15,383)
Other income (expense), net........ 79 49 33 341 3,106
------ ------- ------- ------- --------
Net loss........................... $ (784) $(2,632) $(3,266) $(3,185) $(12,277)
====== ======= ======= ======= ========
Net loss per share - basic and
diluted......................... $(0.22) $ (0.60) $ (0.57) $ (0.44) $ (1.05)
====== ======= ======= ======= ========
Weighted average shares
outstanding..................... 3,635 4,388 5,722 7,213 11,727
====== ======= ======= ======= ========
AS OF DECEMBER 31,
--------------------------------------------
1995 1996 1997 1998 1999
----- ------ ------- ------- -------
BALANCE SHEET DATA:
Cash and cash equivalents.......... $1,328 $3,326 $ 1,069 $19,667 $ 94,074
Working capital.................... 1,017 2,248 (1,547) 16,900 89,153
Total assets....................... 3,015 7,670 6,581 27,541 136,905
Total liabilities.................. 688 2,000 3,664 4,338 17,208
Stockholders' equity................ 2,327 5,670 2,917 23,203 119,697
AS OF DECEMBER 31,
--------------------------------------------
1995 1996 1997 1998 1999
------ ------ ------- -------- --------
OTHER OPERATING DATA:
Markets Covered by Database.......... 4 9 14 19 41
Counties Covered by Database......... 42 56 120 136 259
Number of Clients.................... 204 542 1,123 1,731 3,612
Billions of Square Feet in
Database.......................... 2.2 3.3 6.5 9.1 15.6
Buildings in Database................ 24,822 43,520 112,335 175,471 334,917
Images in Database................... 24,926 47,308 90,545 178,827 349,526
14
15
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
CoStar is the leading provider of information services to the U.S.
commercial real estate industry. We are creating a digital marketplace where
the members of the commercial real estate and related business community can
continuously interact and facilitate transactions by efficiently exchanging
accurate and standardized information. Our wide array of digital service
offerings includes a leasing marketplace, a selling marketplace, comparable
sales information, decision support, tenant information, property marketing,
and industry news. Substantially all of our current services are digitally
delivered over the Internet.
We completed our initial public offering in July 1998 and received net
proceeds of approximately $22.7 million. We primarily used those net proceeds
to fund the geographic and service expansion of our business, including three
strategic acquisitions, and to expand our sales and marketing organization. In
May 1999, we completed a follow-on public offering and received net proceeds of
approximately $97.4 million. We used a portion of those net proceeds to fund
the acquisition of Comps, and we expect to use the remainder of the proceeds
primarily for development and distribution of new services, expansion of all
existing services across our current markets, geographic expansion in the U.S.
and international markets, strategic acquisitions and working capital and
general corporate purposes.
From 1994 through 1999, we expanded the geographical coverage of our
existing services and developed new services. In addition to internal growth,
this expansion included the acquisitions of Chicago ReSource, Inc. in Chicago
in 1996 and New Market Systems, Inc. in San Francisco in 1997. In August 1998,
we expanded into the Houston region through the acquisition of Houston-based
real estate information provider C Data Services, Inc. In January 1999, we
expanded further into the Midwest and Florida by acquiring LeaseTrend, and into
Atlanta and Dallas/Fort Worth by acquiring Jamison. In September 1999, we
acquired ARES, a Los Angeles based developer and distributor of ARES for ACT!.
In February 2000, we acquired Comps discussed in detail later in this section.
We consider regions that have had ongoing operations for at least 18
months to be established, and we currently generate positive cash flow from our
operations in established regions. As of December 31, 1999, the following
regions are those that have been in operation for more than 18 months and that
we consider to be established: Washington, New York, Los Angeles, Chicago, San
Francisco, Philadelphia and Boston. These regions provide us with substantial
cash flow, which we reinvest into the business. Since our inception, the
development of our business has required substantial investments for the
expansion of services and the establishment of operating regions, which has
resulted in substantial net losses on an overall basis.
The incremental cost of introducing new services in an established
region in the future may reduce the profitability of a region or cause it to
incur losses. We expect continued development and distribution of new services,
expansion of all existing services across current markets and geographic
expansion in the U.S. and international markets. Therefore, while we expect
operations in existing established regions to remain profitable and provide
substantial funding, we expect our overall expansion plans to generate
significant losses and negative cash flow from operations during the next two
years.
Although our services are expanding rapidly, our CoStar Property and
CoStar Tenant services currently generate the largest portion of our revenue.
The CoStar Property and CoStar Tenant contracts range from terms of one to
three years and generally renew automatically. Upon renewal, many of the
contract rates increase automatically in accordance with contract provisions or
as a result of renegotiations. To encourage clients to use our services
regularly, we charge fixed amounts rather than fees based on actual system
usage. We charge our clients based on the number of sites, organization size,
the company's business focus, and the number of services to which a client
subscribes. Our contract renewal rate currently exceeds 90% on an annual basis.
Our clients pay contract fees on an annual, quarterly, or monthly basis. We
recognize this revenue over the life of the contract on a straight-line basis
beginning with the installation or renewal date. Annual and quarterly advance
15
16
payments result in deferred revenue, substantially reducing the working capital
requirements generated by the growth in our accounts receivable.
As explained in the Notes to the Consolidated Financial Statements
that appear later in this report, the financial data for 1997 through 1999 is
derived from the audited financial statements of us and of our predecessor
companies for those years.
CONSOLIDATED RESULTS OF OPERATIONS
The following table provides our selected consolidated results of
operations (in thousands of dollars and as a percentage of total revenue) for
the indicated periods:
YEARS ENDED DECEMBER 31,
-------------------------------------------------
1997 1998 1999
-------------- -------------- --------------
Revenues................................. $ 7,900 100% $13,900 100% $ 30,234 100%
Cost of revenues......................... 3,413 43 4,562 33 13,244 44
------- --- ------- --- -------- ---
Gross margin............................. 4,487 57 9,338 67 16,990 56
Operating expenses
Selling and marketing............... 4,374 55 7,240 52 19,869 66
Software development................ 395 5 704 5 1,108 4
General and administrative.......... 3,017 38 4,920 35 11,396 37
------- --- ------- --- -------- ---
Total operating expenses....... 7,786 98 12,864 92 32,373 107
------- --- ------- --- -------- ---
Loss from operations..................... (3,299) (41) (3,526) (25) (15,383)(51)
Other income (expense), net.............. 33 0 341 2 3,106 10
------- --- ------- --- -------- ---
Net loss................................. $(3,266) (41)% $(3,185) (23)% $(12,277)(41)%
======= === ======= === ======== ===
16
17
COMPARISON OF YEAR ENDED DECEMBER 31, 1999 AND YEAR ENDED DECEMBER 31, 1998
Revenues. Revenues grew 118% from $13.9 million in 1998 to $30.2
million in 1999. This increase resulted principally from growth in our client
base in all regions we served, expansion into new regions, and expansion of our
services in existing regions. Revenues from regions we considered established
as of December 31, 1999 grew from $13.1 million in 1998 to $19.8 million in
1999, an increase of 51%. During 1999, we expanded into Seattle and acquired
and converted over twenty regions, including Atlanta, Dallas, Denver, Florida
and the Midwest. Our advertising revenues, which we generated primarily in our
established regions, increased 66% from $969,000 in 1998 to $1.6 million in
1999.
Gross Margin. Gross margin increased from $9.3 million in 1998 to
$17.0 million in 1999. While gross margin increased in total, as a percentage
of revenues it decreased from 67% to 56%. The increase in gross margin amounts
resulted principally from significant revenue growth from established regions.
The decline in gross margin percentages resulted from expansion of services in
established regions, an increase in the number of emerging regions and lower
gross margins in the newly acquired regions. Furthermore, our cost of revenues
for the year ended December 31, 1999 includes purchase price amortization from
the LeaseTrend, Jamison and ARES acquisitions of approximately $682,000.
Selling and Marketing Expenses. Selling and marketing expenses
increased 174% from $7.2 million in 1998 to $19.9 million in 1999 and increased
as a percentage of revenues from 52% in 1998 to 66% in 1999. Selling and
marketing expenses increased as a result of the cost of the acquired sales
organizations and purchase price amortization of an aggregate amount of
approximately $1.6 million for the Jamison, LeaseTrend and ARES acquisitions
for the year ended December 31, 1999. In addition, continued expansion of the
sales organization and marketing efforts required for growth, particularly in
emerging and acquired regions, including Phoenix, Houston, Denver, Florida and
the Midwest, contributed to the increased expenses.
Software Development Expenses. Software development expenses increased
57% from $704,000 in 1998 to $1.1 million in 1999, but decreased as a
percentage of revenues from 5% in 1998 to 4% in 1999. The increase in expenses
reflects development costs for the expansion of services for emerging and
established regions and new service initiatives.
General and Administrative Expenses. General and administrative
expenses increased 132% from $4.9 million in 1998 to $11.4 million in 1999 and
increased as a percentage of revenues from 35% in 1998 to 38% in 1999. General
and administrative expenses increased due to the hiring of new employees to
support the expanding scope of our operations and client base, as well as the
increased administrative costs of a public company. Additionally, our general
and administrative expenses include an aggregate amount of approximately $1.3
million of purchase price amortization from the LeaseTrend, Jamison and ARES
acquisitions.
Other Income. Other income increased from $341,000 in 1998 to $3.1
million in 1999. This increase resulted from an increase in interest income due
to our higher average cash balances in 1999, reflecting the net proceeds from
our follow-on public offering in May 1999.
17
18
COMPARISON OF YEAR ENDED DECEMBER 31, 1998 AND YEAR ENDED DECEMBER 31, 1997
Revenues. Revenues grew 76% from $7.9 million in 1997 to $13.9 million
in 1998. This increase resulted principally from growth in our client base in
all regions we served, expansion into new regions, and expansion of our
services in existing regions. Revenues from regions we considered established
as of December 31, 1998 grew from $7.9 million in 1997 to $13.1 million in
1998, an increase of 66%. During 1998, we also expanded into Houston,
Sacramento, Phoenix, and San Diego. Our advertising revenues, which we
generated primarily in our established regions, increased 139% from $405,000 in
1997 to $969,000 in 1998.
Gross Margin. Gross margin increased from $4.5 million in 1997 to $9.3
million in 1998. This increase represented an improvement from 57% to 67% of
revenues. The increase resulted principally in established regions, where
revenue growth exceeded the growth of cost of revenues, which remained
relatively constant.
Selling and Marketing Expenses. Selling and marketing expenses
increased 66% from $4.4 million in 1997 to $7.2 million in 1998, but decreased
as a percentage of revenues from 55% in 1997 to 52% in 1998. Selling and
marketing expenses increased as we expanded our sales organization into new
regions and began to enhance our selling and marketing capabilities on a
national basis. Selling expenses declined as a percent of revenues due to sales
growth during the year and the growing renewable contract base.
General and Administrative Expenses. General and administrative
expenses increased 63% from $3.0 million in 1997 to $4.9 million in 1998, but
decreased as a percentage of revenues from 38% in 1997 to 35% in 1998. General
and administrative expenses increased because we hired new employees to support
our expanding organization and client base, and also in response to increases
in our occupancy and communication costs. General and administrative expenses
decreased as a percentage of revenues due to the continued leveraging of
corporate overhead costs over a larger organization with an expanding client
base.
Other Income. Other income increased from $33,000 in 1997 to $341,000
in 1998. This increase resulted from an increase in interest income due to our
higher average cash balances in 1998, reflecting the net proceeds from our
initial public offering in July 1998.
CONSOLIDATED QUARTERLY RESULTS OF OPERATIONS
The following tables summarize our consolidated results of operations
on a quarterly basis for the indicated periods:
18
19
1998 1999
-------------------------------------- ---------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31
------- ------- -------- ------- -------- ------- -------- -------
(IN THOUSANDS)
Revenues................................. $2,839 $ 3,254 $3,659 $ 4,148 $ 6,127 $ 7,178 $ 8,021 $ 8,908
Cost of revenues......................... 904 968 1,248 1,442 2 594 3,068 3,616 3,965
------ ------- ------- ------- ------- ------- ------- -------
Gross margin............................. 1,935 2,286 2,411 2,706 3,533 4,110 4,405 4,943
Operating expenses....................... 2,281 2,492 3,650 4,442 5,759 7,352 8,898 10,364
------ ------- ------- ------- ------- ------- ------- -------
Loss from operations..................... (346) (206) (1,239) (1,736) (2,226) (3,242) (4,493) (5,421)
Other income (expense), net.............. (38) (40) 202 218 62 616 1,234 1,193
------ ------- ------- ------- ------- ------- ------- -------
Net loss................................. $ (384) $ (246) $(1,037) $(1,518) $(2,164) $(2,626) $(3,259) $(4,228)
====== ======= ======= ======= ======= ======= ======= =======
1998 1999
-------------------------------------- --------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31
------- ------- -------- ------- ------- ------- -------- -------
(AS A PERCENTAGE OF TOTAL REVENUE)
Revenues................................. 100% 100% 100% 100% 100% 100% 100% 100%
Cost of revenues......................... 32 30 34 35 42 43 45 45
--- --- --- --- --- --- --- ---
Gross margin............................. 68 70 66 65 58 57 55 55
Operating expenses....................... 81 77 100 107 94 102 111 116
--- --- --- --- --- --- --- ---
Loss from operations..................... (13) ( 7) (34) (42) (36) (45) (56) (61)
Other income (expense), net.............. 1 0 6 5 1 9 15 13
--- --- --- --- --- --- --- ---
Net loss................................. (14)% ( 7)% (28)% (37)% (35)% (36)% (41)% (48)%
=== === === === === === === ===
19
20
LEASETREND, INC. ACQUISITION
On January 8, 1999, the Company acquired all of the common stock of
LeaseTrend, Inc., a Cincinnati based provider of commercial real estate
information, for approximately $4.5 million in cash and 566,671 shares of the
Company's common stock. The transaction was accounted for as a purchase and the
consideration was valued for accounting purposes at approximately $9.2 million
including acquisition expenses.
JAMISON RESEARCH, INC. ACQUISITION
On January 22, 1999, the Company acquired all of the common stock of
Jamison Research, Inc., an Atlanta based provider of commercial real estate
information, for approximately $5.3 million in cash and 446,637 shares of the
Company's common stock. The transaction was accounted for as a purchase and the
consideration was valued for accounting purposes at approximately $10.3 million
including acquisition expenses.
ARES DEVELOPMENT GROUP, LLC ACQUISITION
On September 15, 1999, the Company acquired all of the membership
interests of ARES Development Group, LLC, Los Angeles based developers and
distributors of ARES for ACT!, for $250,000 in cash and 33,208 shares of the
Company's common stock. The transaction was accounted for as a purchase and the
consideration was valued for accounting purposes at approximately $1,265,000
including acquisition expenses. In addition, the acquisition agreement provides
for $1,000,000 of additional consideration (in a combination of cash and stock)
that may be paid by the Company upon the achievement of certain operating goals
by the members of ARES. In February 2000, we issued 2,140 shares of our common
stock and paid $437,500 in cash to the members of ARES for the achievement of
the first of the operating goals by the members of ARES.
COMPS.COM, INC. ACQUISITION
On February 10, 2000, CoStar completed the acquisition of Comps under
a merger agreement, dated as of November 3, 1999, among Costar, Comps and Acq
Sub, Inc. ("Acq Sub"), a wholly-owned subsidiary of CoStar. Comps' primary
asset is a database of commercial real estate sales information. In connection
with the transaction, Comps was merged with and into Acq Sub, which was the
surviving corporation in the merger. Immediately after the merger, Acq Sub
changed its name to Comps, Inc. The merger agreement provided for each share of
Comps common stock to receive either $7.50 in cash or 0.31496 shares of CoStar
common stock, subject to adjustment to ensure that 50.1% of the Comps shares
received Costar common stock and 49.9% of the Comps shares received cash. The
aggregate consideration included:
- $49,015,905 in cash paid to former holders of Comps common stock
(excluding cash paid for fractional shares); and
- 2,258,738 shares of CoStar common stock (including shares issued to
former warrantholders of Comps).
Comps reported a cash and short term investment balance of
approximately $49.5 million at September 30, 1999, which resulted from its
initial public offering in May 1999. Comps also reported long term debt of
approximately $3.8 million at September 30, 1999. Although Comps was
experiencing operating losses and negative cash flow from operations, the
remaining cash and short term investments at the closing date significantly
offset the overall cash consideration for the purchase of Comps by the Company.
The cash portion of the purchase price was obtained by CoStar from the proceeds
from the sale of its common stock in a public offering in May 1999. We will
make significant investments to integrate Comps into our organization,
including costs to:
- upgrade computer systems;
- establish network connections;
- convert database structures;
- train personnel; and
- migrate Comps clients to our services.
We are taking steps to reduce the operating losses and negative cash
flow of our Comps subsidiary, but we expect these losses and negative cash flow
to continue throughout the year 2000. Additionally, CoStar will experience
significant charges to operations for the amortization of intangible assets
resulting from the acquisition. These assets will be amortized over lives of
two to ten years.
20
21
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents balance was $94,074,127 at December 31,
1999, an increase of $74,407,240 from $19,666,887 at December 31, 1998. This
increase was due principally to the $97.4 million in proceeds from the
follow-on public offering, which was offset by cash used for the acquisitions
of LeaseTrend and Jamison in January 1999 and ARES in September 1999, cash used
in operating activities, $4,520,375 in purchases of property and equipment and
$1,589,060 in purchased building photography. During the year ended December
31, 1999, we financed our operations and growth through cash flow from the
established regions and the proceeds of the public offerings. Net cash used in
operations for the year ended December 31, 1999 was $7,476,662 compared to net
cash used in operating activities of $293,426 for the year ended December 31,
1998. This was a direct result of expenditures required for the expansion in
the emerging and acquired regions. We continue to experience overall operating
losses as a result of our recent expansion into emerging and acquired regions,
while established regions continue to generate substantial cash flow from
operations.
Net cash used in investing activities amounted to $16,456,157 for the
year ended December 31, 1999, including $9,736,950 (net of acquired cash) for
the acquisition of LeaseTrend, Jamison and ARES. Additional investing
activities included capitalized product development costs, purchased building
photography, and purchase of property and equipment, consisting principally of
computer and office equipment. As a result of our expansion, we have entered
into numerous operating leases for office space throughout the country,
including CoStar's and Comps' headquarters, and have commitments for rent
payments ranging from $2,435,563 to $4,133,782 annually over the next ten
years. Other than such leases and related commitments for leasehold
improvements, we currently have no material commitments for capital
expenditures.
To date, we have grown in part by acquiring other companies, and we
may continue to make acquisitions. Our acquisitions may vary in size and could
be material to our current operations. We expect to use cash, stock, or other
means of funding to make these acquisitions.
We expect to incur significantly higher costs, particularly as we
introduce new and upgraded services, expand geographically, and develop the
infrastructure to support the expanding organization and client base. Based on
current plans, we believe that our available cash combined with positive cash
flow from our established regions should be sufficient to fund our operations
for at least the next two years.
Through September 30, 1998, we operated as either a Subchapter S
corporation or a limited partnership, and we were not subject to corporate
income taxes. After September 30, 1998, we became a taxable entity. Although we
have experienced losses to date, future profits, to the extent not offset by
the benefits of loss carryforwards, would result in income tax liabilities. We
do not expect to benefit substantially from tax loss carryforwards generated
prior to July 1998. Further, the reversal of deferred taxes of approximately
$7.0 million at December 31, 1999, recorded in connection with the purchase of
acquired intangibles, will result in a non-cash income tax benefit in future
periods.
We do not believe the impact of inflation has significantly affected
our operations.
YEAR 2000
We are not aware of any Year 2000 issues that have affected our
business. The amounts that we expended in connection with Year 2000 compliance
were not significant, as we undertook most of our activities in the normal
course of business. We estimate, however, that we spent approximately $1
million in 1999 in connection with Year 2000 compliance.
It is possible that the Company's computerized systems could be
affected in the future by the Year 2000 issue. The Company has numerous
computerized interfaces with third parties that are possibly vulnerable to
failure if those third parties have not adequately addressed their Year 2000
issues. System failures resulting from these issues could cause disruption to
the Company's operations.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
We have made forward-looking statements in this Report that are
subject to risks and uncertainties. Forward-looking statements include
information that is not purely historic fact, including statements concerning
the financial outlook for 2000 and estimates for the future, our possible or
assumed future results of operations generally, new products and services that
we expect
21
22
to release, and other statements and information more specifically regarding
assumptions about our earnings per share, capital and other expenditures,
financing plans, cash flow, capital structure, pending legal proceedings and
claims, future economic performance, operating income, management's plans,
goals and objectives for future operations and growth and markets for stock.
The sections of this Report, which contain forward-looking statements, include
"Business", "Properties", "Legal Proceedings" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Our forward-looking statements are also identified by words such as
"believes," "expects," "anticipates," "intends," "estimates" or similar
expressions. You should understand that these forward-looking statements are
necessarily estimates reflecting our judgment, not guarantees of future
performance. They are subject to a number of assumptions, risks and
uncertainties that could cause actual results to differ materially from those
expressed or implied in the forward-looking statements. You should understand
that the following important factors, in addition to those discussed in "Risk
Factors", could affect the our future results and could cause those results or
other outcomes to differ materially from those expressed or implied in our
forward-looking statements: competition and technological innovation by
competitors; sensitivity to general economic conditions and events that affect
commercial real estate in particular; business combinations and strategic
alliances by other industry participants; growth in commerce conducted over the
Internet; changes in relationships with real estate brokers and other strategic
partners; and legal and regulatory issues.
Accordingly, you should not place undue reliance on forward-looking
statements, which speak only as of the date of this Report. All subsequent
written and oral forward-looking statements attributable to us or any person
acting on our behalf are expressly qualified in their entirety by the
cautionary statements contained or referred to in this section. We do not
undertake any obligation to release publicly any revisions to these
forward-looking statements to reflect events or circumstances after the date of
this Report or to reflect the occurrence of unanticipated events.
RISK FACTORS
Our future profitability is uncertain due to our continuing operating
losses. We have never recorded an overall operating profit because the
investment required for geographic expansion and new services has exceeded the
profits generated in our established markets. We intend to continue to invest
in expansion and new services and will therefore sustain substantial losses for
at least the next two years. Our ability to earn a profit will largely depend
on our ability to generate profits from services that exceed our investment in
geographic expansion and new services. We may not be able to generate revenues
sufficient to earn a profit, to maintain profits on a quarterly or annual
basis, or to sustain or increase our future revenue growth.
Our operating results may fluctuate significantly. Our revenues and
operating results may fluctuate with general economic conditions and also for
many other reasons, such as: our investments in geographic expansion; the
timing of new service introductions and enhancements; the success of new
products; the timing of investing the net proceeds from our offerings;
acquisitions of other companies or assets; sales and marketing promotional
activities; loss of clients or revenues due to consolidation in the real estate
industry; changes in client budgets; or our investments in other corporate
resources.
We may not achieve the cost savings and sales enhancements that we
expect to result from the integration of CoStar and Comps. The merger between
CoStar and Comps may not be successful unless we realize significant cost
savings and increased sales. Our success in realizing these cost savings and
increased sales, and the timing of this realization, depend on the quality and
speed of the integration of CoStar and Comps. We have established an
integration team that has identified specific areas for cost savings and is
continuing to plan the coordination of the two companies. However, we may not
realize the cost savings and sales enhancements that we anticipate from
integrating operations following completion of the merger as fully or as
quickly as we expect for a number of reasons, including: errors in planning or
integration; delays in implementing the integration plan; and unexpected events
such as major changes in the markets in which we operate.
We may not be able to successfully introduce new products, including
our CoStar Exchange product. Our future business and financial success will
depend on our ability to continue to introduce new products into the
marketplace. Developing new products, such as CoStar Exchange, imposes heavy
burdens on our systems development department, product managers, management and
researchers. In addition, successfully launching and selling a new product,
such as CoStar Exchange, puts pressure on our sales and marketing resources. If
we are unable to develop new products, such as CoStar Exchange, then our
customers may choose a competitive service over ours and our business may be
adversely affected. In addition, if we incur significant costs in developing
new products, such as CoStar Exchange, or are not successful in marketing and
selling these new products, it could have a material adverse effect on our
results of operations.
We may not be able to complete successfully our planned expansion. Our
future business and financial success will
22
23
depend on our ability to continue to expand our services and the areas where we
do business. These expansion efforts must occur while information technology is
rapidly changing. These efforts impose additional burdens on our research,
systems development, sales, and general managerial resources. We may not be
able to manage this growth successfully. The continued expansion effort on
which our future growth depends has inherent risks, such as the following: any
new or enhanced services we develop might not meet the increasingly
sophisticated needs of our current or potential clients; we might not succeed
in developing new or enhanced services; and we might not succeed in entering
new geographical markets.
If we are unable to maintain the integrity and reliability of our
data, our business could be harmed. Our success depends on our clients'
confidence in the comprehensiveness, accuracy, and reliability of the data we
provide. We believe that we take adequate precautions to safeguard the
completeness and accuracy of our data and that the information is generally
current, comprehensive, and accurate. But the task of establishing and
maintaining this quality while we grow is challenging. We cannot guarantee that
we can sustain those efforts. If we cannot maintain the quality of our data, we
could experience reduced demand for our services and could be exposed to
lawsuits claiming damages resulting from inaccurate data.
We may not be able to adapt to the rapid technological changes to the
Internet and Internet products. To be successful, we must adapt to the rapid
technological changes to the Internet and Internet products by continually
enhancing our Web site and introducing and integrating new services and
products to capitalize on the technological advances in the Internet. Although
in the next year we expect to migrate all of our information products to a
web-based platform, this process is costly and we cannot assure you that we
will be able to successfully integrate our services and products with the
Internet's technological advances. The collection, storage, management and
dissemination of commercial real estate information from a centralized database
on the Internet is a recent and evolving development. Our market is
characterized by rapidly changing technologies, evolving industry standards,
increasingly sophisticated customer needs and frequent new product
introductions. These factors are exacerbated by the rapid technological change
experienced in the computer and software industries. We could incur substantial
costs if we need to modify our services or infrastructure in order to adapt to
these changes. If we incurred significant costs without adequate results or we
are unable to adapt to rapid technological changes, it could have a material
adverse effect on our business.
Our increasing use of the Internet and the World Wide Web exposes us
to regulatory and other uncertainties. Most of our clients currently receive
their CoStar data via the Internet. We are in the process of making
substantially all our services accessible through a standard Web-browser
format. This exposes us to various uncertainties arising from the future course
of development of the Internet and the World Wide Web. Governments in the
United States and abroad might adopt laws or regulations applicable to Internet
commerce that could harm our business by, for example, regulating our
transmissions over the Internet or exposing our business to new taxes in
various jurisdictions. User concerns about the privacy and security of
Internet-distributed communications might impede the growth of our business. We
may need to expend substantial resources to protect against security breaches
on our Web site or in our Internet communications.
We cannot assure you that our Internet products will achieve market
acceptance. We intend to continue to increase our reliance on the Internet for
delivery of our services and products. As a result, our future profitability
will increasingly rely upon the use of our information services and transaction
support products on the Internet. Our ability to obtain market acceptance for
our Internet products will depend on the following factors: our ability to
transition our customers from the use of our services and products on CD-ROM to
the use of these services and products on the Internet in a timely and
efficient manner; our customers acceptance of, and their ability to adapt to
the use of, our existing and future services and products on the Internet; and
our ability to anticipate and adapt to the changing Internet market. If our
Internet-based information services or transaction support products are not
received favorably by our current customers, their use of our other products
may be negatively affected or cause new customers to choose a competitive
service over ours.
Unsatisfactory Internet performance, interruption or failure could
have an adverse effect on our business. Our business increasingly depends upon
the satisfactory performance, reliability and availability of our Web site, the
Internet and the World Wide Web. Problems with the Internet or Web may impede
the development of our business for a number of reasons. If the number of
Internet users or their use of Internet resources continues to grow, we may
overwhelm the existing Internet infrastructure. Growth in Internet usage that
is not matched by comparable growth of the infrastructure supporting the
Internet could result in slower response time, cause outright failure of the
Internet, or otherwise adversely affect usage.
We may be subject to legal liability for displaying or distributing
information on the Internet. Because the content in our database is distributed
to others, we may be subject to claims for defamation, negligence or copyright
or trademark infringement or claims based on other theories. These types of
claims have been brought, sometimes successfully, against Internet services in
the past. We could also be subject to claims based upon the content that is
accessible from our Web site through links to other Web sites or information on
our Web site supplied by third parties. Our insurance may not adequately
protect us against these
23
24
types of claims. Even to the extent these claims do not result in liability to
us, we could incur significant costs in investigating and defending against any
claims. Our potential liability for information distributed by us to others
could require us to implement measures to reduce our exposure to liability,
which may require the expenditure of substantial resources and limit the
attractiveness of our service to users.
Temporary or permanent outages of our computers and software or
telecommunications equipment could have an adverse effect on our business. Our
operations depend on our ability to protect our database, computers and
software, telecommunications equipment and facilities against damage from
potential dangers such as fire, power loss, security breaches, and
telecommunications failures. Any temporary or permanent loss of one or more of
these systems or facilities from an accident, equipment malfunction or some
other cause could harm our business. Our core computer services and networking
equipment are located in a climate controlled, fire and security-protected
central location. We keep off-site backup copies of all data contained in our
database, maintain a back-up power supply and equipment, and stockpile spare
parts. These measures may not, however, adequately protect our business.
We may be unable to enforce or defend our ownership and use of
intellectual property. The success of our business depends in large part on the
intellectual property involved in our methodologies, database and software. We
rely on a combination of trade secret and copyright laws, nondisclosure and
noncompetition provisions, license agreements and other contractual provisions
and technical measures to protect our intellectual property rights. We cannot
guarantee that we will always succeed in this effort. Our business could be
significantly harmed if we do not succeed in protecting our intellectual
property. The same would be true if a court should find that our services
infringe other persons' intellectual property rights. Any intellectual property
lawsuits in which we might become involved, either as a plaintiff, such as in
the LoopNet lawsuit, or as a defendant, could cost us much time and money.
International expansion may result in new business risks. If we expand
internationally, this expansion could subject us to new business risks,
including: adapting to the differing business practices and laws in foreign
commercial real estate markets; difficulties in managing foreign operations;
limited protection for intellectual property rights in some countries;
difficulty in accounts receivable collection and longer collection periods;
cost of enforcement of contractual obligations; impact of recessions in
economies outside the United States; currency exchange rate fluctuations; and
potentially adverse tax consequences.
Our business depends on retaining and attracting highly capable
management and operating personnel. Our success depends in large part on our
ability to retain and attract management and operating personnel, including our
President and Chief Executive Officer, Andrew C. Florance. Our business
requires highly skilled technical, sales, management, Web-development,
marketing and research personnel, who are in high demand and are often subject
to competing offers. Because we are expanding rapidly, we continue to need an
increased number of management and support personnel. To retain and attract key
personnel, we use various measures, including multi-year employment agreements
containing confidentiality and non-competition agreements, a stock option plan,
and incentive bonuses for key executive officers. We are the beneficiary of a
key person life insurance policy on Mr. Florance. These measures may not be
enough to retain and attract the personnel we needs or to offset the impact on
our business of a loss of Mr. Florance or other key employees.
If we are unable to continue to develop our sales force, it could have
a material adverse effect on our business. In order to support our growth, we
need to substantially increase the size of our direct sales force. Our ability
to increase our direct sales force involves a number of risks, including: the
competition we face from other companies in hiring and retaining sales
personnel; our ability to integrate and motivate additional sales and sales
support personnel; our ability to manage a multi-location sales organization;
and the length of time it takes new sales personnel to become productive.
Competition could render our services uncompetitive. The market for
information systems and services in general is highly competitive and rapidly
changing. We believe our proprietary database and content compete favorably
with our competitors. However, many of our existing competitors, as well as a
number of potential new competitors, may have longer operating histories in the
Internet market, greater name recognition, larger customer bases, greater user
traffic and greater financial, technical and marketing resources than us. Our
competitors may be able to undertake more extensive marketing campaigns, adopt
more aggressive pricing policies, make more attractive offers to potential
employees, subscribers, distribution partners and content providers and may be
able to respond more quickly to new or emerging technologies and changes in
Internet user requirements.
Cyclical downturns and consolidation in the commercial real estate
industry could have an adverse effect on our business. Our business depends on
conditions in the commercial real estate industry, including businesses that
supply or invest in that industry. Changes in the commercial real estate market
may affect demand for our services. The traditional economic downturns
24
25
in the commercial real estate industry could harm our business. These changes
could decrease renewal rates, which could have a material adverse impact on our
operating results. Also, companies in this industry are consolidating, often in
order to reduce expenses. Consolidation could reduce the number of our existing
clients, reduce the size of our target market and increase our clients'
bargaining power. Any of these factors could adversely affect our business.
If we do not generate sufficient cash flows from operations, we may
need additional capital. To date, we have financed our operations through cash
from profitable operations in our established markets, the sale of our stock
and borrowing money. If we do not generate enough cash from operations to
finance our business in the future, we will need to raise additional funds
through public or private financing. Selling additional stock could dilute the
equity interests of our stockholders. If we borrow money, we will have to pay
interest and agree to restrictions that may limit our operating flexibility. We
may not be able to obtain funds needed to finance our operations at all or may
be able to obtain them only on unattractive terms.
Problems with our software could impair the use of our services. The
software underlying our services is complex and may contain undetected errors.
We have previously discovered errors in our proprietary software. Despite
testing, we cannot be certain that errors will not be found in current
versions, new versions or enhancements of that software. Any errors could
result in adverse publicity, impaired use of our services, loss of revenues,
cost increases and legal claims by customers. All these factors could seriously
damage our business, operating results and financial condition.
Market volatility may have an adverse effect on our stock price. The
trading price of our common stock has fluctuated widely in the past and, like
most stocks, it will continue to fluctuate in the future. The price could
fluctuate widely based on numerous factors, including: quarter-to-quarter
variations in our operating results; changes in analysts' estimates of our
earnings; announcements by us or our competitors of technological innovations
or new services; general conditions in the commercial real estate industry;
developments or disputes concerning copyrights or proprietary rights;
regulatory developments; and economic or other factors. In addition, in recent
years, the stock market in general, and the shares of Internet-related and
other technology companies in particular, have experienced extreme price
fluctuations. This volatility has had a substantial effect on the market prices
of securities issued by many companies for reasons unrelated to the operating
performance of the specific companies.
Stock ownership by executive officers and directors provides
substantial influence over matters requiring a vote of stockholders. Our
executive officers and directors, and entities affiliated with them,
beneficially own a sufficient number of our outstanding common stock to
exercise substantial influence over the election of directors and other matters
requiring a vote of stockholders. This concentrated ownership might delay or
prevent a change in control and may impede or prevent transactions in which
stockholders might otherwise receive a premium for their shares.
Our charter documents contain provisions that could impede third party
acquisitions. Our governing corporate documents contain provisions that could
discourage potential takeover attempts and make attempts by our stockholders to
change management more difficult. These provisions include: a requirement that
stockholders give us advance notice of certain nominations for our board of
directors and of new business for any stockholder meeting; a prohibition on
stockholders' calling special meetings; and a prohibition on stockholder action
by written consent. Our certificate of incorporation also allows our board of
directors to issue up to two million shares of preferred stock and to fix the
rights of those shares without a vote by the stockholders. The rights of
holders of common stock may be harmed by the rights of the holders of this
"blank check" preferred stock. If we issue any preferred stock, an outside
party may find it more difficult to acquire a majority of our outstanding
voting stock. In addition, we are subject to the anti-takeover provisions of
Section 203 of the Delaware General Corporation Law. Applying these provisions
could delay or prevent a change in control, which could adversely affect the
market price of our common stock.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not have significant exposure to market risks
associated with changes in interest rates related to its cash equivalent
securities held as of December 31, 1999.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements meeting the requirements of Regulation S-X are
set forth beginning at page F-1. The Company is not subject to the provisions
of Item 302 of Regulation S-K concerning supplementary financial data.
25
26
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS, ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference to
the Company's Proxy Statement.
ITEM 11 EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to
the Company's Proxy Statement.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this Item is incorporated by reference to
the Company's Proxy Statement.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to
the Company's Proxy Statement.
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K
(a)(1) The following financial statements are filed as a part of
this report:
CoStar Group, Inc. Consolidated Financial Statements
(a)(2) No financial statement schedules are required to be filed.
(a)(3) The documents required to be filed as exhibits to this Report
under Item 601 of Regulation S-K are listed in the Exhibit
Index included elsewhere in this report, which list is
incorporated herein by reference.
(b) A current report on Form 8-K was filed by the Company on
November 17, 1999 with respect to the entering into by the
Company of a definitive agreement to acquire COMPS.COM, Inc.
A current report on Form 8-K was filed by the Company on
February 25, 2000 with respect to the closing of the
acquisition of COMPS.COM, Inc. by the Company.
26
27
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Bethesda, State of Maryland, on the 27 day of March, 2000.
COSTAR GROUP, INC.
By: /s/
----------------------------------
Andrew C. Florance
Chief Executive Officer and President
KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose
signature appears below constitutes and appoints Andrew C. Florance and Frank
A. Carchedi power of substitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments to this report, and to
file the same, with all exhibits thereto and to all documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to confirming all that said attorneys-in-fact
and agents or any of them, or his or their 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,
as amended, this report has been signed by the following persons in the
capacities indicated on the dates indicate.
SIGNATURE CAPACITY DATE
--------- -------- ----
/s/ Chairman of the Board March 27, 2000
- ------------------------------------
Michael R. Klein
/s/ Chief Executive Officer and March 27, 2000
- ------------------------------------ President, and a Director
Andrew C. Florance (Principal Executive Officer)
/s/ Chief Financial Officer March 27, 2000
- ------------------------------------ (Chief Financial and Accounting Officer)
Frank A. Carchedi
/s/ Director March 22, 2000
- ------------------------------------
David Bonderman
/s/ Director March 27, 2000
- ------------------------------------
Warren H. Haber
/s/ Director March 24, 2000
- ------------------------------------
Josiah O. Low, III
/s/ Director March 22, 2000
- ------------------------------------
John Simon
27
28
COSTAR GROUP, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
COSTAR GROUP, INC.
Report of Independent Auditors.............................. F-2
Consolidated Statements of Operations....................... F-3
Consolidated Balance Sheets................................. F-4
Consolidated Statements of Stockholders' Equity............. F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
F-1
29
REPORT OF INDEPENDENT AUDITORS
Board of Directors
CoStar Group, Inc.
We have audited the accompanying consolidated balance sheets of CoStar Group,
Inc. as of December 31, 1998 and 1999, and the related consolidated statements
of operations, stockholders' equity and cash flows for each of the three years
in the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with 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 consolidated financial position of CoStar Group,
Inc. at December 31, 1998 and 1999, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
/s/ ERNST & YOUNG LLP
McLean, Virginia
March 1, 2000
F-2
30
COSTAR GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1998 1999
----------- ----------- ------------
Revenues........................................... $ 7,899,940 $13,900,165 $ 30,234,213
Cost of revenues................................... 3,412,593 4,561,619 13,243,813
----------- ----------- -------------
Gross margin....................................... 4,487,347 9,338,546 16,990,400
Operating expenses:
Selling and marketing.............................. 4,373,914 7,240,442 19,869,331
Software development............................... 395,077 704,194 1,108,197
General and administrative......................... 3,017,439 4,919,976 11,395,735
----------- ----------- -------------
7,786,430 12,864,612 32,373,263
----------- ----------- -------------
Loss from operations............................... (3,299,083) (3,526,066) (15,382,863)
Other income (expense):
Interest expense................................... (26,421) (119,716) --
Interest income.................................... 48,743 460,369 3,106,190
Other income....................................... 11,215 -- --
----------- ----------- -------------
Net loss........................................... $(3,265,546) $(3,185,413) $(12,276,673)
=========== =========== =============
Net loss per share - basic and diluted............. $ (0.57) $ (0.44) $ (1.05)
=========== =========== =============
Weighted average common shares..................... 5,722,432 7,213,037 11,726,589
=========== =========== =============
See accompanying notes.
F-3
31
COSTAR GROUP, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
---------------------------
1998 1999
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 19,666,887 $ 94,074,127
Accounts receivable, less allowance for doubtful accounts
of approximately $326,000 and $756,000 as of
December 31, 19998 and 1999............................ 1,245,579 2,840,912
Prepaid expenses and other current assets................. 325,629 2,458,092
------------ ------------
Total current assets........................................ 21,238,095 99,373,131
Property and equipment:
Leasehold improvements.................................... 125,895 326,147
Furniture, office equipment and research vehicles......... 1,031,332 3,386,947
Computer hardware and software............................ 2,228,166 4,545,714
------------ ------------
3,385,393 8,258,808
Accumulated depreciation.................................... (1,228,465) (2,376,996)
------------ ------------
2,156,928 5,881,812
Intangible and other assets................................. 3,954,529 31,222,190
Deposits.................................................... 192,060 427,649
------------ ------------
Total assets................................................ $ 27,541,612 $136,904,782
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 800,941 $ 1,842,442
Accrued wages and commissions............................. 1,077,952 2,555,639
Accrued expenses.......................................... 812,250 3,186,141
Deferred revenue.......................................... 1,647,165 2,635,311
------------ ------------
Total current liabilities................................... 4,338,308 10,219,533
Deferred taxes.............................................. -- 6,988,446
Stockholders' equity:
Preferred stock, $.01 par value, 2,000,000 shares
authorized, none outstanding........................... -- --
Common stock, $.01 par value; 30,000,000 shares
authorized; 8,771,027 and 12,967,275 issued and
outstanding as of December 31, 1998 and 1999........... 87,710 129,673
Additional paid-in capital................................ 37,727,345 146,455,554
Retained deficit.......................................... (14,611,751) (26,888,424)
------------ ------------
Total stockholders' equity.................................. 23,203,304 119,696,803
------------ ------------
Total liabilities and stockholders' equity.................. $ 27,541,612 $136,904,782
============ ============
See accompanying notes.
F-4
32
COSTAR GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK ADDITIONAL TOTAL
-------------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
---------- -------- ------------ ------------ -------------
Balance at December 31, 1996.... 5,644,519 $ 56,445 $ 13,773,994 $ (8,160,792) $ 5,669,647
Stock issued for
acquisition................ 44,571 446 205,494 205,940
Stock issued for
compensation............... 64,927 649 299,351 -- 300,000
Reduction of note receivable
from stockholder........... -- -- 7,458 -- 7,458
Net loss...................... -- -- -- (3,265,546) (3,265,546)
---------- -------- ------------ ------------ ------------
Balance at December 31, 1997.... 5,754,017 57,540 14,286,297 (11,426,338) 2,917,499
Exercise of stock options..... 48,480 485 79,515 -- 80,000
Stock issued for initial
public offering............ 2,875,000 28,750 22,708,689 -- 22,737,439
Stock issued for
acquisition................ 93,530 935 584,398 -- 585,333
Warrants...................... -- -- 50,000 -- 50,000
Reduction of note receivable
from stockholder........... -- -- 18,446 -- 18,446
Net loss...................... -- -- -- (3,185,413) (3,185,413)
---------- -------- ------------ ------------ ------------
Balance at December 31, 1998.... 8,771,027 87,710 37,727,345 (14,611,751) 23,203,304
Exercise of stock options..... 121,907 1,219 927,447 -- 928,666
Stock issued for follow-on
public offering............ 3,019,495 30,195 97,381,198 -- 97,411,393
Stock issued for
acquisitions............... 1,046,516 10,466 10,325,271 -- 10,335,737
Stock issued for compensation. 8,330 83 74,887 -- 74,970
Reduction of note receivable
from stockholder........... -- -- 19,406 -- 19,406
Net loss...................... -- -- -- (12,276,673) (12,276,673)
--------- -------- ------------ ------------ ------------
Balance at December 31, 1999.... 12,967,275 $129,673 $146,455,554 $(26,888,424) $119,696,803
========== ======== ============ ============ ============
See accompanying notes.
F-5
33
COSTAR GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
----------- ----------- -----------
Operating activities:
Net loss........................................... $(3,265,546) $(3,185,413) $(12,276,673)
Adjustments to reconcile net loss to net cash
provided by (used in) in operating activities:
Depreciation..................................... 353,333 428,702 1,148,531
Amortization..................................... 487,144 705,806 3,705,238
Provision for losses on accounts receivable...... 61,343 174,720 430,140
Non-cash compensation charges.................... 157,459 68,446 19,406
Changes in operating assets and liabilities:
Accounts receivable.............................. (217,153) (398,955) (1,949,794)
Prepaid expenses and other current assets........ 29,838 (323,405) (2,057,418)
Deposits......................................... (6,691) (87,550) (230,493)
Accounts payable and accrued expenses............ 230,530 1,579,633 3,773,811
Deferred revenue................................. (66,668) 744,590 (39,410)
----------- ----------- -----------
Net cash used in operating activities............ (2,236,411) (293,426) (7,476,662)
Investing activities:
Purchases of property and equipment, net........... (522,592) (1,283,666) (4,520,375)
Other assets....................................... (600,670) (985,262) (2,198,832)
Acquisitions, net of acquired cash................. (547,859) (7,033) (9,736,950)
----------- ----------- -----------
Net cash used in investing activities............ (1,671,121) (2,275,961) (16,456,157)
Financing activities:
Proceeds from (payment of) line of credit.......... 1,000,000 (1,000,000) --
Proceeds from (payment of) subordinated debt to
stockholder...................................... 650,000 (650,000) --
Net proceeds from public offerings................. -- 22,737,439 97,411,393
Net proceeds from exercise of stock options........ -- 80,000 928,666
----------- ----------- -----------
Net cash provided by financing activities........ 1,650,000 21,167,439 98,340,059
Net (decrease) increase in cash and cash
equivalents...................................... (2,257,532) 18,598,052 74,407,240
Cash and cash equivalents at beginning of year..... 3,326,367 1,068,835 19,666,887
----------- ----------- -----------
Cash and cash equivalents at end of year........... $ 1,068,835 $19,666,887 $94,074,127
=========== =========== ===========
See accompanying notes.
F-6
34
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
CoStar Group, Inc. (the "Company") has created a comprehensive,
proprietary, national database of commercial real estate information for
metropolitan areas throughout the United States. Based on its unique database,
the Company provides information to the commercial real estate and related
business community and operates within one reportable business segment. The
information is distributed to its clients under license agreements, which are
typically one to three years in duration.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
CoStar Group, Inc. is a Delaware corporation and was incorporated in
February 1998 to succeed its predecessors, Realty Information Group L.P.
("RIGLP") and OLD RIG, Inc. ("RIGINC"). RIGLP was an operating entity, while
RIGINC was a shell holding entity. In connection with the Company's Initial
Public Offering on July 1, 1998 ("the Offering"), RIGLP and RIGINC merged with
the Company pursuant to the RIG Contribution Agreement dated March 5, 1998. The
limited partners of RIGLP (other than RIGINC) and all of the stockholders of
RIGINC received 3.03 shares of Common Stock of the Company per each limited
partnership unit or share of common stock exchanged, for a total of 5,754,017
shares. As a result of the reorganization of these entities, the Company owned
(directly or indirectly) all of the capital stock of RIGINC and all the equity
of RIGLP.
The merger has been accounted for as a reorganization of entities
under common control similar to a pooling of interests. Following the merger,
each shareholder of the Company maintained their exact same ownership of the
operating entity, RIGLP, as before the merger. The transfer of assets and
liabilities of RIGLP and RIGINC have been recorded at the historical carrying
values. The financial statements are presented as if the Company was in
existence throughout all periods presented, as one operating entity. All share
amounts have been restated to reflect the conversion of partnership units to
common stock of the Company. On January 1, 1999, RIGLP and RIGINC were merged
into a newly formed corporation, CoStar Realty Information, Inc. ("CoStar
Realty"), a wholly owned subsidiary of the Company.
Additionally, the consolidated financial statements of the Company
include the accounts of New Market Systems ("NMS") acquired on March 1, 1997, C
Data Services, Inc. ("CDS") acquired on August 14, 1998, LeaseTrend, Inc.
("LeaseTrend") acquired on January 8, 1999, Jamison Research, Inc. ("Jamison")
acquired on January 22, 1999, and ARES Development Group, LLC ("ARES") acquired
on September 15, 1999. CDS was merged into CoStar Realty on January 1, 1999,
and LeaseTrend and Jamison were merged into CoStar Realty on December 31, 1999.
CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its subsidiaries after elimination of all significant intercompany
transactions.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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.
RECLASSIFICATIONS
Certain previously reported amounts have been reclassified to
conform to the Company's current presentation.
F-7
35
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REVENUE RECOGNITION
Revenue from the sale of licenses is recognized on a straight-line
basis over the term of the license, which is typically from one to three years.
During 1998 and 1999, the Company recognized revenue in accordance
with Statement of Position No. 97-2, "Software Revenue Recognition," ("SOP
97-2"). Prior to 1998, the Company recognized revenues in accordance with
Statement of Position No. 91-1, "Software Revenue Recognition."
SIGNIFICANT CUSTOMERS
No single customer accounted for more than 5% of our revenues as of
December 31, 1999. The Company operates solely within one business segment.
COMPREHENSIVE INCOME (LOSS)
For the years ended December 31, 1997, 1998 and 1999, the Company's
net income (loss) reflects comprehensive income (loss) and accordingly, no
additional disclosure is presented.
ADVERTISING COSTS
The Company expenses advertising as incurred. Advertising expense was
$398,700, $904,600, and $1,332,000 for the years ended December 31, 1997, 1998,
and 1999, respectively.
INCOME TAXES
Through June 30, 1998, the Company operated as a partnership for
federal income tax purposes under which income, losses, deductions and credits
were allocated to and reported by the partners on their individual income tax
returns. Accordingly, no provision for income tax was recorded in the financial
statements. In connection with the Company's initial public offering, the
partnership became part of the Company and its taxable income (loss) flowed
through to the Company. Had the Company operated as a C-Corporation for the
years ended December 31, 1996, 1997 and 1998, there would be no income taxes
recorded as a result of the losses for the periods. Commencing in 1998, the
Company provides for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109 ("FAS 109"). Deferred income taxes
result from temporary differences between the tax basis of assets and
liabilities and the basis reported in the consolidated financial statements.
STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation in accordance
with APB No. 25, "Accounting for Stock Issued to Employees" ("APB 25") using
the intrinsic value method. Stock-based compensation related to options granted
to non-employees is accounted for using the fair value method in accordance
with the Statement of Financial Accounting Standard No. 123 "Accounting for
Stock-Based Compensation" ("FAS 123"). The Company has made pro forma
disclosures required by FAS 123 for all options granted.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Cash
equivalents consist of money market fund investments and United States
Government Securities, substantially all of which are held with one
institution. At December 31, 1998, cash of $100,000 and $500,000 was held in
escrow accounts under the conditions of a data licensing agreement and the
LeaseTrend acquisition agreement, respectively. Both amounts were paid out of
escrow in 1999.
F-8
36
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONCENTRATION OF CREDIT RISK AND FINANCIAL INSTRUMENTS
The Company performs ongoing credit evaluations of its customers'
financial condition and generally does not require collateral. The Company
maintains reserves for credit losses, and such losses have been within
management's expectations. The credit risk in accounts receivable is mitigated
by the large and widespread customer base and lack of dependence on individual
customers. The carrying amount of the accounts receivable approximates their
net realizable value. The carrying value of the Company's financial instruments
including cash and cash equivalents, accounts receivable, accounts payable,
accrued expenses and notes payable approximates fair value.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and
amortization are calculated on the straight-line method over the following
estimated useful lives of the assets:
Leasehold improvements Shorter of lease term or useful life
Furniture and office equipment Seven years
Research vehicles Three years
Computer hardware and software Three to five years
CAPITALIZED PRODUCT DEVELOPMENT COSTS
Initial costs to develop and produce the Company's database and
software products, including direct labor, contractors and applicable overhead
are capitalized from the time technological feasibility is determined until
initial product release. Prior to technological feasibility, such costs are
classified as software development and expensed as incurred. Ongoing
significant enhancements of the product are capitalized subsequent to initial
product release. Amortization of capitalized costs is based on the greater of
the amount computed using (a) the ratio of current gross revenues to the sum of
current and anticipated gross revenues, or (b) the straight-line method over
the remaining estimated economic life of the product, typically five years
after initial product release. Included in amortization is approximately
$122,000, $160,000 and $219,000 of expense related to the capitalized product
development costs for the years ended December 31, 1997, 1998 and 1999,
respectively.
INTANGIBLE AND OTHER ASSETS
Goodwill and other intangibles represent the unamortized excess of the
cost of acquiring subsidiary companies over the fair value of such companies'
net tangible assets at the dates of acquisition. Goodwill, acquired technology,
and customer base, which are related to the Company's acquisitions as described
in Note 3, are being amortized on a straight-line basis over periods ranging
from two to ten years. The cost of photography is amortized on a straight line
basis over five years.
LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be disposed of", management periodically reviews, if
impairment indicators exist, the carrying value and lives of long-lived assets.
For long-lived assets to be held and used, the Company bases its evaluation on
such impairment indicators as the nature of the assets, the future economic
benefit of the assets, as well as other external market conditions or factors
that may be present. If such impairment indicators are present or other factors
exist that indicate that the carrying amount of the asset may not be
recoverable, the Company determines whether an impairment has occurred through
the use of an undiscounted cash flows analysis of assets a the lowest level for
which identifiable cash flows exist. If impairment has occurred, the Company
recognizes a loss for the difference between the carrying amount and the
estimated value of the asset. The fair value of the asset is measured using
discounted cash flow analysis or other valuation techniques. In addition, the
Company evaluates the recoverability of enterprise goodwill by assessing
whether the book value can be recovered through expected and undiscounted cash
flows.
F-9
37
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NET LOSS PER SHARE
Basic loss per share is based on the weighted average shares
outstanding during the period. The calculation of diluted loss per share
increases the shares used in the calculation by the dilutive effects of
options, unvested common stock, warrants, and convertible securities. The
Company's common stock equivalent shares outstanding from stock options,
unvested common stock, warrants and convertible securities are excluded from
the diluted loss per share computation, as their effect is antidilutive.
3. ACQUISITIONS
On March 1, 1997, the Company acquired 99.3% of the outstanding shares
of New Market Systems, Inc., a California corporation, through the exchange of
44,571 shares of common stock and payment of $550,000 in cash. The Company
valued the shares of common stock at $206,000 which the company estimates as
the fair market value of its common stock on the acquisition date.
On August 14, 1998, the Company acquired Houston-based commercial real
estate information provider, C Data Services, Inc. CDS was acquired in a
transaction in which the former stockholders of CDS received 93,530 shares of
common stock of the Company and approximately $9,000 in cash. The transaction
was accounted for as a purchase and the consideration was valued for accounting
purposes at approximately $617,000 including acquisition expenses.
On January 8, 1999, the Company acquired all of the common stock of
LeaseTrend, Inc., a Cincinnati based provider of commercial real estate
information, for $4,500,000 in cash and 566,671 shares of the Company's common
stock. The transaction was accounted for as a purchase and the consideration was
valued for accounting purposes at approximately $9,200,000 including acquisition
expenses.
On January 22, 1999, the Company acquired all of the common stock of
Jamison Research, Inc., an Atlanta based provider of commercial real estate
information, for $5,284,000 in cash and 446,637 shares of the Company's common
stock. The transaction was accounted for as a purchase and the consideration was
valued for accounting purposes at approximately $10,300,000 including
acquisition expenses.
On September 15, 1999, the Company acquired all of the membership
interests of ARES Development Group, LLC, Los Angeles based developers and
distributors of ARES for ACT!, for $250,000 in cash and 33,208 shares of the
Company's common stock. The transaction was accounted for as a purchase and the
consideration
F-10
38
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. ACQUISITIONS (CONTINUED)
was valued for accounting purposes at approximately $1,265,000 including
acquisition expenses. In addition, the acquisition agreement provides for
$1,000,000 of additional consideration (in a combination of cash and stock)
that may be paid by the Company upon the achievement of certain operating goals
by the members of ARES. In February 2000, the Company issued 2,140 shares of
its common stock and paid $437,500 in cash to the members of ARES for the
achievement of the first operating goal by the members of ARES.
The operations of all acquired businesses were included in the
Company's statement of operations after the respective date of acquisitions.
Except for the portion of the purchase price of acquisitions acquired with
cash, these transactions have been excluded from the statements of cash flows.
The Company's unaudited pro forma condensed consolidated statements of
operations for the year ended December 31, 1998 and 1999, assuming the
acquisition of CDS, LeaseTrend, Jamison and ARES had been consummated as of
January 1 of each period, is summarized as follows:
For the Year
Ended December 31,
1998 1999
--------------------------------
Revenues $ 22,635,000 $ 30,989,000
------------ ------------
Net loss $ (7,148,000) $(12,694,000)
============ ============
Weighted average shares 8,260,000 11,787,000
============ ============
Net loss per share - basic and diluted $ (0.87) $ (1.08)
============ ============
4. INTANGIBLES AND OTHER ASSETS
Intangibles and other assets consists of the following:
December 31, December 31,
1998 1999
------------- ------------
Capitalized product development costs $ 947,243 $ 1,435,116
Accumulated amortization (397,302) (616,641)
------------ ------------
549,941 818,475
------------ ------------
Building photography 1,528,678 3,117,738
Acquired technology - 3,552,000
Customer base 1,791,920 19,347,326
Goodwill 1,203,438 9,893,421
Accumulated amortization (1,119,448) (5,506,770)
------------ ------------
3,404,588 30,403,715
------------ ------------
Intangible and other assets $ 3,954,529 $ 31,222,190
============ ============
F-11
39
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. LINE OF CREDIT
In October 1997, the Company entered into a line of credit agreement
with Silicon Valley East (a Division of Silicon Valley Bank), and renewed the
line in October 1998. The line provided for a total of $5,000,000 in borrowing
bearing an interest rate at the bank's prime rate plus 1%. At December 31,
1998, no borrowings were outstanding under the line, and the line expired in
October 1999. Interest paid in 1997, 1998, and 1999 totaled $17,760, $63,263,
and $0 respectively.
6. RELATED PARTY TRANSACTIONS
During 1997, the general partner of RIGLP obtained a commitment from a
partner for an additional $1,000,000 of subordinated, unsecured credit, bearing
interest at a rate equal to that of the line of credit. In connection with the
commitment, the individual contributing partner received warrants for the
purchase of 45,450 shares of Common Stock. The warrants had a two-year term
beyond the Company's initial public offering and provided for the purchase of
an equivalent number of shares at a price of 10% less than the price of the
stock sold in the initial public offering ($9.00 per share). These warrants
were exercised in total in February 2000. At December 31, 1998 and 1999, no
borrowings were outstanding under the commitment. Interest paid in 1998 and
1999 totaled $28,235 and $0 respectively.
Commencing in May 1995 the Company agreed to pay an investor $10,000
per month and the Chairman of the Company $6,667 per month for consulting
services. During 1997 and 1998, the Company incurred fees of approximately
$200,000 and $82,912, respectively, related to such consulting services. These
agreements were terminated in connection with the Company's initial public
offering.
7. INCOME TAXES
The Company accounts for taxes under Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes (SFAS 109). Under SFAS 109,
deferred tax liabilities and assets are determined based on the difference
between financial statement and tax basis of assets and liabilities using
enacted rates expected to be in effect during the year in which the differences
reverse. Deferred taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and tax purposes. Through June 30, 1998 the Company operated as a
partnership for federal income tax purposes. The Company paid no income taxes
in 1998 or 1999.
DECEMBER 31, DECEMBER 31,
1998 1999
------------ ------------
Deferred tax assets:
Reserve for bad debts.................................. $ 125,000 $ 292,000
Accrued compensation................................... 414,000 486,600
Net operating losses................................... 927,000 5,658,500
Other liabilities...................................... 51,000 561,000
---------- -----------
Total deferred tax assets......................... 1,517,000 6,998,100
---------- -----------
Deferred tax liabilities:
Depreciation........................................... (299,000) (291,000)
Product development costs.............................. (260,000) (337,000)
Identified intangibles associated with purchase
accounting......................................... -- (6,988,000)
---------- -----------
Total deferred tax liabilities.................... (559,000) (7,616,000)
---------- -----------
Net deferred tax liability............................. 958,000 (617,900)
Valuation allowance.................................... (958,000) (6,370,100)
---------- -----------
Net deferred taxes.......................................... $ -- $(6,988,000)
========== ===========
F-12
40
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES (CONTINUED)
A valuation allowance has been established against the related net
deferred tax assets (exclusive of deferred tax liabilities associated with
purchase accounting) due to the uncertainty of realization. The Company's change
in valuation allowance amounted to $958,000 and $5,277,000 during the years
ended December 31, 1998 and 1999, respectively, primarily due to an increase in
net operating losses.
The Company's provision for income taxes resulted in effective tax
rates that varied from the statutory federal income tax rate as follows:
DECEMBER 31, DECEMBER 31,
1998 1999
------------ -----------
Expected federal income tax provision (benefit) at 34%...... $ (1,083,000) (4,174,000)
State income taxes, net of federal benefit.................. (147,000) (567,200)
Change in valuation allowance............................... 958,000 5,277,100
Expenses not deductible for tax purposes.................... 277,000 (535,900)
Other....................................................... (5,000) --
------------ -----------
$ -- $ --
============ ===========
At December 31, 1999, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $14,555,000 which expire, if
unused, from the year 2010 through the year 2019. The tax benefit of
approximately $2.0 million of net operating losses related to stock options will
be credited to equity when the benefit is realized through utilization of the
net operating loss carryforwards.
During 1999, the Company made acquisitions reported using the purchase
method of accounting. These acquisitions included identified intangible assets,
which in accordance with FAS 109, required deferred taxes and related
goodwill to be recorded. At December 31, 1999, the amount of the deferred taxes
and related unamortized goodwill was approximately $6,988,000. The deferred
taxes will reverse over the life of the identified intangible assets and
related goodwill. During the year ended December 31, 1999, the reversal of the
deferred tax benefit of approximately $901,000 has been reported with the
related goodwill amortization in the same amount under general and
administrative expenses.
8. COMMITMENTS
The Company leases office facilities and office equipment under various
noncancelable operating leases. The leases contain various renewal options. Rent
expense for the years ended December 31, 1997, 1998, and 1999 was approximately
$766,000, $1,031,000, and $2,440,000, respectively.
Future minimum lease payments as of December 31, 1999 are as follows:
2000 $3,492,000
2001 3,126,000
2002 2,901,000
2003 2,644,000
2004 and thereafter 15,696,000
--------------------
$27,859,000
====================
F-13
41
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. SALES OF COMMON STOCK
In May 1997, the Company issued 65,000 shares of common stock valued
at $300,000 to provide compensation to an officer, $150,000 of which had been
accrued at December 31, 1996.
On July 1, 1998, the Company completed an Initial Public Offering of
2,500,000 shares of common stock for $9.00 per share, and on August 9, 1998,
the Company's underwriter exercised its over-allotment option to purchase an
additional 375,000 shares of common stock (together, the "IPO"). Total proceeds
of the IPO including shares issued pursuant to the over-allotment option were
$22,737,000, after deducting underwriting discounts and commissions of
$1,811,000 and offering expenses of $1,326,000. The Company repaid the amount
owed on its line of credit and subordinated debt to stockholder, for a total
$1,650,000, out of the proceeds of the IPO.
On May 10, 1999, the Company completed a Follow-On Public Offering of
3,019,495 shares of common stock (including the over-allotment option)(the
"Follow-On Offering") for $34.50 per share. Total proceeds of the Follow-On
Offering were $97,411,393, after deducting underwriting discounts and
commissions and offering expenses of $1,024,144.
10. NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted
net loss per share:
YEARS ENDED DECEMBER 31,
-----------------------------------------
1997 1998 1999
----------- ----------- ------------
Numerator:
Net loss.............................. $(3,265,546) $(3,185,413) $(12,276,673)
=========== =========== ============
Denominator:
Denominator for basic earnings per
share -- weighted-average shares.... 5,722,432 7,213,037 11,726,589
Effect of dilutive securities:
Dilutive potential common shares...... -- -- --
----------- ----------- ------------
Denominator for diluted earnings per
share -- adjusted weighted-average
shares.............................. 5,722,432 7,213,037 11,726,589
=========== =========== ============
Basic and diluted net loss per
share............................... $ (0.57) $ (0.44) $ (1.05)
=========== =========== ===========
The weighted average number of shares does not include stock options
and warrants outstanding of 398,384, 922,944 and 1,352,142 as of December 1997,
1998 and 1999, respectively, as their effect would be anti-dilutive for the
periods presented.
F-14
42
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. EMPLOYEE BENEFIT PLANS
Option Plan
In March 1996 RIGLP adopted the 1996 Option and Purchase Plan (the
"1996 Plan"), under which 606,000 shares of Common Stock were reserved for
issuance upon the exercise of options granted to officers, executive personnel,
directors and key employees. Certain options previously granted were included
in the 1996 Plan. In connection with the IPO, all of the options granted under
the 1996 Plan were replaced with options under the 1998 Plan (as defined
below).
In June 1998 the Company's Board of Directors adopted the Stock
Incentive Plan (the "1998 Plan") prior to consummation of the IPO. The 1998
Plan provides for the grant of stock options to officers, directors and
employees of the Company and its subsidiaries. Options granted under the 1998
Plan may be incentive or non-qualified stock options. The exercise price for a
stock option may not be less than the fair market value of the Company's Common
Stock on the date of grant. Stock options granted under the 1998 Plan may not
be transferred other than by will or by the laws of descent and distribution.
Upon the occurrence of a Change of Control, as defined in the 1998 Plan, all
outstanding unexercisable options under the 1998 Plan immediately become
exercisable. The Company has reserved 2,050,000 shares of Common Stock for
issuance under the 1998 Plan. Unless terminated sooner by the Board of
Directors, the 1998 Plan will terminate in 2008.
Option activity was as follows:
WEIGHTED-
NUMBER OF PRICE PER AVERAGE
SHARES SHARE EXERCISE PRICE
---------------- --------------- ----------------
Outstanding at December 31, 1996............... 343,844 $3.19
Granted...................................... 69,690 $4.07-$ 4.62 $4.38
Exercised.................................... --
Canceled or expired.......................... (15,150) $3.45 $3.45
-------
Outstanding at December 31, 1997............... 398,384 $3.39
Granted...................................... 540,900 $5.63-$13.75 $8.70
Exercised.................................... (48,480) $1.65 $1.65
Canceled or expired.......................... (13,310) $9.00 $9.00
-------
Outstanding at December 31, 1998............... 877,494 $ 6.77
Granted...................................... 635,945 $9.00-$48.00 $27.17
Exercised.................................... (121,907) $5.63-$34.95 $ 7.62
Canceled or expired.......................... (39,390) $4.07-$48.00 $18.25
-------
Outstanding at December 31, 1999.............. 1,352,142 $15.95
=======
Exercisable at December 31, 1999.............. 531,530 $ 8.89
=======
Exercisable at December 31, 1998............... 425,944 $ 6.77
=======
Exercisable at December 31, 1997............... 249,299 $10.28
=======
During 1996 the Company adopted the disclosure provisions of SFAS No.
123. Accordingly, no compensation cost has been recognized for the Plan. Had
compensation expense related to the Plan been determined based on the fair
value at the grant date for options granted consistent with the provisions of
SFAS No. 123, Company's pro forma net loss and net loss per share would have
been approximately $3,337,000, $3,912,000 and $16,824,000, and $0.58, $0.54 and
$1.43 for the years ended December 31, 1997, 1998 and 1999, respectively. Such
pro forma results are not representative of the effects on operations for
future years.
F-15
43
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. EMPLOYEE BENEFIT PLANS (CONTINUED)
The weighted average fair value of options granted during 1997 was
$3.36 using the minimum value option-pricing model with the following
assumptions: dividend yield 0%, risk-free interest rate of 6.00%, and expected
life of five years. The weighted average fair value of options granted during
1998 was $6.63 using the Black-Scholes option-pricing model with the following
assumptions: dividend yield 0%, expected volatility of 94%, risk-free interest
rate of 5.7%, and expected life of five years. The weighted average fair value
of options granted during 1999 was $19.60 using the Black-Scholes
option-pricing model with the following assumptions: dividend yield 0%,
expected volatility of 90%, risk-free interest rate of 5.0%, and expected life
of five years.
The following table summarizes information regarding options
outstanding at December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------- --------------------------
WEIGHTED-
AVERAGE
REMAINING WEIGHTED- WEIGHTED-
NUMBER OF CONTRACTUAL LIFE AVERAGE NUMBER OF AVERAGE
EXERCISE PRICE SHARES (IN YEARS) EXERCISE PRICE SHARES EXERCISE PRICE
-------------- --------- ---------------- -------------- --------- --------------
$ 3.45 - $ 4.62............ 313,724 1.4 $ 3.61 292,513 $ 3.57
$ 5.63 - $ 7.44............ 10,003 8.7 6.63 3,334 6.63
$ 8.13 - $ 9.00............ 421,774 8.6 8.94 140,661 8.94
$10.06 - $14.50............ 61,895 9.0 14.19 9,105 14.28
$17.50 - $22.84............ 79,600 9.4 20.48 -- --
$23.00 - $25.00............ 89,196 9.5 23.57 -- --
$27.13 - $30.38............ 260,700 9.3 29.91 79,997 30.00
$31.50 - $37.63............ 88,750 9.6 34.37 6,250 37.00
$38.25 - $48.00............ 26,500 9.5 43.19 -- --
--------- --------
1,352,142 7.3 15.95 531,860 8.89
========= ========
Employee 401(k) Plan
The Company maintains a defined contribution retirement plan for all
eligible employees. Effective January 1, 1997, the Company established a 401(k)
Plan (the "401(k)") to provide retirement benefits for eligible employees. The
401(k) provides for tax deferred contributions of between l% and 15% of
employees' salaries, limited to a maximum annual amount as established by the
Internal Revenue Service. The Company matched 25% in 1997 and 1998, and 100% in
1999 of employee contributions up to a maximum of 6% of total compensation.
Amounts contributed to the 401(k) by the Company to match employee
contributions for the years ended December 31, 1997, 1998, and 1999 were
approximately 28,000, $39,000 and $364,000, respectively.
F-16
44
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. SUBSEQUENT EVENTS
On February 10, 2000, the Company acquired all of the common stock of
COMPS.COM, Inc., a San Diego based provider of commercial real estate
information, for $49,015,905 in cash and 2,258,738 shares of the Company's
Common Stock. The acquisition has been accounted for using purchase accounting
and has been valued at approximately $102,000,000 for accounting purposes. The
purchase price was allocated primarily to cash, acquired technology and other
intangibles, which will be amortized over a period of 2 to 10 years.
The pro forma unaudited results of operations for the year ended
December 31, 1999 assuming the purchase of COMPS.COM, Inc., had been
consummated as of January 1, 1999 and as adjusted for the amortization of
intangibles and the elimination of interest charges, would be as follows:
1999
Revenues................................... $ 48,479,000
============
Net loss................................... $(35,777,000)
============
Net loss per share......................... $ (2.55)
============
F-17
45
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
2.1 Acquisition and Reorganization Agreement by and among CoStar Group,
Inc. and LeaseTrend, Inc. and the Shareholders of LeaseTrend, Inc.
dated January 8, 1999 (Incorporated by reference to Exhibit 2.1 to
the report of the Registrant on Form 8-K (File No. 0-24531) filed
with the Commission on January 22, 1999).
2.2 Agreement and Plan of Merger between LeaseTrend, Inc. and LTI
Acquisition Corp., dated January 8, 1999 (Incorporated by reference
to Exhibit 2.2 to the report of the Registration on Form 8-K (File
No. 0-24531) filed with the Commission on January 22, 1999).
2.3 Agreement and Plan of Merger by and among CoStar Group, Inc.,
Jamison Research, Inc., Henry D. Jamison IV and Leslie Lees Jamison
dated January 6, 1999 (Incorporated by reference to Exhibit 2.3 to
the report of the Registrant on Form 8-K (File No. 0-24531) filed
with the Commission on February 2, 1999).
2.4 Amendment to Agreement and Plan of Merger by and among CoStar Group,
Inc., Jamison Research, Inc., Jamison Acquisition Corp., Henry D.
Jamison IV and Leslie Lees Jamison dated January 14, 1999
(Incorporated by reference to Exhibit 2.4 to the report of the
Registrant on Form 8-K (File No. 0-24531) filed with the Commission
on February 2, 1999).
2.5 Agreement and Plan of Merger by and among CoStar Group, Inc.,
COMPS.COM, Inc., and Acq Sub, Inc., dated as of November 3, 1999
(Incorporated by reference to Exhibit 2.1 to the report of the
Registrant on Form 8-K (File No. 0-24531) filed with the Commission
on November 17, 1999).
3.1 Restated Certificate of Incorporation (Incorporated by reference to
Exhibit 3.1 to Amendment No. 4 to the Registration Statement on Form
S-1 of the Registrant (Reg. No. 333-47953) filed with the Commission
on June 30, 1998 (the "1998 Form S-1").
3.2 Certificate of Amendment of Restated Certificate of Incorporation
(Incorporated by reference to Exhibit 3.1 to the Company's 10-Q
dated June 30, 1999).
3.3 Amended and Restated By-Laws (Incorporated by reference to Exhibit
3.2 to the 1998 Form S-1).
4.1 Specimen Common Stock Certificate (filed herewith).
*10.1 CoStar Group, Inc. 1998 Stock Incentive Plan, as amended
(Incorporated by reference to Exhibit 10.1 to the Company's 10-Q
dated September 30, 1999).
*10.2 Employment Agreement for Andrew C. Florance (Incorporated by
reference to Exhibit 10.2 to the 1998 Form S-1).
*10.3 Employment Agreement for Frank A. Carchedi (Incorporated by
reference to Exhibit 10.3 to the 1998 Form S-1).
*10.4 Employment Agreement for David M. Schaffel (Incorporated by
reference to Exhibit 10.4 to the 1998 Form S-1).
*10.5 Employment Agreement for Curtis M. Ricketts (Incorporated by
reference to Exhibit 10.5 to the 1998 Form S-1).
*10.6 Employment Agreement for Fred A. Heitzman III (Incorporated by
reference to Exhibit 10.6 to the Registration Statement of the
Registrant on Form S-1 (Reg. No. 333-74953) filed with the
Commission on March 24, 1999).
10.7 Registration Rights Agreement (Incorporated by reference to Exhibit
10.7 to the 1998 Form S-1).
10.8 Office Lease dated August 12, 1999 between CoStar Realty
Information, Inc. and Newlands Building Ventures, LLC (Incorporated
by reference to Exhibit 10.2 to the Company's 10-Q dated September
30, 1999).
46
10.9 Office Building Lease, dated January 31, 1999, between Comps, Inc.
and Comps Plaza Associates, L.P. (Incorporated by reference to
Exhibit 10.14 to the Registration Statement of Comps on Form S-1
(Reg. No. 333-72901) filed with the Commission on April 5, 1999 (the
"Comps Form S-1")).
10.10 First Amendment to Lease, dated March 22, 1999, between Comps, Inc.
and Comps Plaza Associates, L.P. (Incorporated by reference to
Exhibit 10.14.1 to the Comps Form S-1).
10.11 Sublease Agreement, dated June 28, 1999, between Comps, Inc. and
Pulse Engineering, Inc. (filed herewith).
21.1. Subsidiaries of the Company (filed herewith).
23.1 Consent of Independent Auditors (filed herewith).
24.1 Powers of Attorney (Included in the Signature Pages to the Report).
27 Financial Data Schedule (filed herewith).
* Management Contract or Compensatory Plan or Arrangement