COSTAR GROUP, INC.
10-Ks and 10-Qs
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UNITED
STATES
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, 2009
Commission
file number 0-24531
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CoStar
Group, Inc.
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(Exact
name of registrant as specified in its
charter)
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Delaware
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52-2091509
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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2
Bethesda Metro Center, 10th Floor,
Bethesda,
Maryland 20814
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(Address
of principal executive offices) (zip code)
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(301)
215-8300
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Registrant’s
telephone number, including area
code
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Securities
registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of Each Exchange on Which
Registered
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Common
Stock, $.01 par value
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NASDAQ
Global Select Market
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Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes
o
No
x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act. Yes
o
No
x
Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements of
the past 90 days. Yes
x
No
o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that
registrant was required to submit and post such files.) Yes
o
No
o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Securities Exchange Act of 1934.
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Large
accelerated filer
o
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Accelerated
filer
x
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Non-accelerated
filer
o
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Smaller
reporting company
o
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
o
No
x
Based on
the closing price of the common stock on June 30, 2009 on the Nasdaq Stock
Market, Nasdaq Global Select Market, the aggregate market value of registrant’s
common stock held by non-affiliates of the registrant was approximately $641
million.
As of
February 19, 2010, there were 20,581,462 shares of the 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 ended December 31, 2009, are incorporated by reference
into Part III of this Report.
TABLE
OF CONTENTS
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PART
I
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Item
1.
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3
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Item
1A.
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15
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Item
1B.
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21
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Item
2.
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21
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Item
3.
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22
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Item
4.
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22
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PART
II
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Item
5.
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23
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Item
6.
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26
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Item
7.
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27
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Item
7A.
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41
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Item
8.
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42
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Item
9.
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42
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Item
9A.
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42
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Item
9B.
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43
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PART
III
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Item
10.
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44
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Item
11.
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44
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Item
12.
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44
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Item
13.
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44
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Item
14.
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44
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PART
IV
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Item
15.
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44
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46
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47
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F-1
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2
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Item
1.
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(In this
report, the words “we,” “our,” “us,” “CoStar” or the “Company” refer to CoStar
Group, Inc. and its direct and indirect subsidiaries. This report also refers to
our websites, but information contained on those sites is not part of this
report).
CoStar
Group, Inc., a Delaware corporation, is the number one provider of information,
marketing and analytic services to the commercial real estate
industry in the United States (“U.S.”) and United Kingdom (“U.K.”) based on the
fact that we offer the most comprehensive commercial real estate database
available, have the largest research department in the industry, provide more
information, marketing and analytic services than any of our competitors and
believe we generate more revenues than any of our competitors. CoStar’s
integrated suite of services offers customers online access to the most
comprehensive database of commercial real estate information, which has been
researched and verified by our team of researchers, currently covering the U.S.,
as well as London and other parts of the U.K. and parts of France. Prior to
2007, CoStar operated within one segment. Due to the increased size, complexity
and funding requirements associated with our international expansion, in 2007 we
began to manage our business geographically in two operating segments, with our
primary areas of measurement and decision-making being the U.S. and
International, which includes the U.K. and France.
Since our
founding in 1987, CoStar’s strategy has been to provide commercial real estate
professionals with critical knowledge to explore and complete transactions, by
offering the most comprehensive, timely and standardized information on U.S.
commercial real estate. As a result of our January 2003 acquisition of Focus
Information Limited (now, CoStar U.K. Limited), June 2004 acquisition of
Scottish Property Network, December 2006 acquisition of Grecam S.A.S., February
2007 acquisition of Property Investment Exchange Limited, and July 2009
acquisition of Property and Portfolio Research, Inc. (“PPR”) and its wholly
owned U.K. subsidiary, Property and Portfolio Research Ltd. (“PPR UK”) we have
extended our offering of comprehensive commercial real estate information to
include London and other parts of the U.K. and parts of
France. Information about CoStar’s revenues from, and long-lived
assets located in, foreign countries is included in Notes 2 and 12 to our
consolidated financial statements. CoStar’s revenues, net income, assets and
liabilities, broken out by segment are set forth in Note 12 to our consolidated
financial statements. Information about risks attendant to our
foreign operations is included in “Item 7A. Quantitative and Qualitative
Disclosures about Market Risk.”
We
deliver our content to our U.S. customers primarily via an integrated suite of
online service offerings that includes information about space available for
lease, comparable sales information, tenant information, information about
properties for sale, internet marketing services, property information for
clients’ websites, information about industry professionals and their business
relationships, analytic information, data integration, and industry
news. We also provide market research and analysis for commercial
real estate investors and lenders via our PPR service offerings. We have created
and are continually improving a standardized information platform where the
commercial real estate industry and related businesses can continuously interact
and easily facilitate transactions due to the efficient exchange of accurate
information we have supplied.
We have a
number of assets that provide a unique foundation for our standardized platform,
including the most comprehensive proprietary database in the industry; the
largest research department in the industry; proprietary data collection,
information management and quality control systems; a large in-house product
development team; a broad suite of web-based information, marketing and analytic
services; a large team of analysts and economists and a large base of clients.
Our database has been developed and enhanced for more than 22 years by a
research department that makes thousands of daily database updates. In addition
to our internal efforts to grow the database, we have obtained and assimilated
over 51 proprietary databases.
We intend
to continue to grow our standardized platform of commercial real estate
information, marketing and analytic services. In 2004, we began
research for a 21-market U.S. expansion effort. By the end of the
first quarter of 2006, we had successfully launched service in each of those 21
markets. In addition, following our acquisition of National Research
Bureau in January 2005, we launched various research initiatives as part of our
expansion into real estate information for retail properties. We
launched the new retail component of our flagship product, CoStar Property
Professional, in May 2006. In July 2006, we announced our intention to commence
actively researching
3
commercial
properties in approximately 81 new Core Based Statistical Areas (“CBSAs”) across
the U.S. in an effort to expand the geographical coverage of our service
offerings, including our new retail service. In the fourth quarter of 2007, we
released our CoStar Property Professional service in the 81 new CBSAs across the
U.S. In 2008, we released CoStar Showcase, an internet marketing service that
provides commercial real estate professionals the opportunity to make their
listings accessible to all visitors to our public website,
www.CoStar.com.
During
the second half of 2009, as part of our strategy for providing subscribers with
tools for conducting primary research and analysis on commercial real estate, we
expanded subscribers’ capabilities to use our database of research-verified
commercial property information to conduct in-depth analysis and generate online
reports of trends in sales and leasing activity. Furthermore, in July
2009, we added analytic and market forecasting services to our platform of
research and marketing services with our acquisition of PPR and in October 2009
we acquired Resolve Technology, Inc., (“Resolve Technology”) adding business
intelligence and portfolio management software used by institutional real estate
investment companies.
We also
intend to continue to grow and expand the coverage of our service offerings
within our International segment. In December 2006, our U.K.
subsidiary, CoStar Limited, acquired Grecam S.A.S., a provider of commercial
property information and market-level surveys, studies and consulting services,
located in Paris, France. In February 2007, CoStar Limited also
acquired Property Investment Exchange Limited, a provider of commercial property
information and operator of an online investment property exchange located in
London, England. Our July 2009 acquisition of PPR and PPR UK also
expanded the market research capabilities of our U.K.
operations. CoStar intends to integrate its U.K. and French
operations more fully with its U.S. operations and eventually to introduce a
consistent international platform of service offerings. Further
information about CoStar’s acquisitions is included in Note 3 to our
consolidated financial statements.
We intend
to introduce a consistent worldwide platform of service
offerings. Following our acquisitions of PPR and Resolve Technology
in 2009, we began integrating their respective product and service offerings
with our own, including the services we have successfully integrated following
our prior acquisitions. In 2007, we introduced the “CoStar Group” as
the brand encompassing our worldwide operations. We believe that our
recent U.S. and International expansion and integration efforts have created a
platform for long-term growth.
Our
subscription-based information services, consisting primarily of CoStar Property
Professional, CoStar Tenant, CoStar COMPS Professional and FOCUS services,
currently generate more than 95% of our total revenues. Our contracts for our
subscription-based information services typically have a minimum term of one
year and renew automatically. Upon renewal, subscription contract rates may
increase in accordance with contract provisions or as a result of contract
renegotiations. To encourage clients to use our services regularly, we generally
charge a fixed monthly amount for our subscription-based services rather than
fees based on actual system usage. Contract rates are based on the number of
sites, number of users, organization size, the client’s business focus,
geography and the number of services to which a client subscribes. Our
subscription clients generally pay contract fees on a monthly basis, but in some
cases may pay us on a quarterly or annual basis.
Industry
Overview
The
market for commercial real estate information and analysis is vast
based on the variety, volume and value of transactions related to commercial
real estate. Each transaction has multiple participants and multiple information
requirements, and in order to facilitate transactions, industry participants
must have extensive, accurate and current information and analysis. Members of
the commercial real estate and related business community require daily access
to current data such as space availability, properties for sale, rental rates,
vacancy rates, tenant movements, sales comparables, supply, new construction,
absorption rates and other important market developments to carry out their
businesses effectively. Market research (including historical and forecast
conditions) and applied analytics have also become instrumental to the success
of commercial real estate industry participants operating in the current
economic environment. There is a strong need for an efficient marketplace, where
commercial real estate professionals can exchange information, evaluate
opportunities using standardized data and interpretive analyses, and interact
with each other on a continuous basis.
4
A large
number of parties involved in the commercial real estate and related business
community make use of the services we provide in order to obtain information
they need to conduct their businesses, including:
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Sales
and leasing brokers
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Government
agencies
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Property
owners
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Mortgage-backed
security issuers
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Property
managers
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Appraisers
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Design
and construction professionals
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Pension
fund managers
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Real
estate developers
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Reporters
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Real
estate investment trust managers
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Tenant
vendors
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Investment
bankers
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Building
services vendors
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Commercial
bankers
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Communications
providers
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Mortgage
bankers
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Insurance
companies’ managers
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Mortgage
brokers
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Institutional
advisors
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Retailers
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Investors
and asset managers
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The
commercial real estate and related business community generally has operated 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,
collect data on specific markets and develop software to analyze the information
they have independently gathered. This highly fragmented methodology has
resulted in duplication of effort in the collection and analysis of information,
excessive internal cost and the creation of non-standardized data containing
varying degrees of accuracy and comprehensiveness, resulting in a formidable
information gap.
The
creation of a standardized information platform for commercial real estate
requires an infrastructure including a standardized database, accurate and
comprehensive research capabilities, experienced analysts, easy to use
technology and intensive participant interaction. By combining its extensive
database, over 975 researchers and outside contractors, experienced team of
analysts and economists, technological expertise and broad customer base, we
believe that we have created such a platform.
The U.S.
and global economies have changed adversely over the past year or more, and the
commercial real estate industry has been negatively impacted. The
commercial real estate market has seen a reduction in property sales and leasing
activity, lower absorption rates, climbing vacancy rates and decreases in rental
rates and sales prices. The full extent of the impact of our current
financial crisis is not yet clear. As our customers continue to look
for ways to reduce spending, we may continue to see reduced demand for our
information, marketing and analytic services. However, we believe
that even in a weakened economy there is a continuing need for accurate,
standardized commercial real estate information, marketing and analytic
services. We believe that access to continuously researched and
verified commercial real estate information becomes even more valuable in a down
market, as industry players assess where market conditions are heading, how
their businesses should adapt, determine what properties are worth, and try to
market their properties, among other things. Moreover, outsourcing
the labor-intensive task of conducting basic real estate research may result in
cost savings for our clients.
CoStar’s Comprehensive
Database
CoStar
has spent more than 22 years building and acquiring a database of commercial
real estate information, which includes information on leasing, sales,
comparable sales, tenants, and demand statistics, as well as digital
images.
As of
January 29, 2010, our database of real estate information covered the U.S., as
well as London, England and other parts of the U.K. and parts of France, and
contained:
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More
than 1.4 million sale and lease
listings;
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Approximately
3.7 million total properties;
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Approximately
10.5 billion square feet of sale and lease
listings;
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Approximately
7.2 million tenants;
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Approximately
1.6 million sales transactions valued in the aggregate at approximately
$3.4 trillion; and
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More
than 9.5 million digital attachments, including building photographs,
aerial photographs, plat maps and floor
plans.
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5
This
highly complex database is comprised of hundreds of data fields, tracking such
categories as:
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Location
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Mortgage
and deed information
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Site
and zoning information
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For-sale
information
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Building
characteristics
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Income
and expense histories
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Space
availability
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Tenant
names
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Tax
assessments
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Lease
expirations
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Ownership
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Contact
information
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Sales
and lease comparables
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Historical
trends
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Space
requirements
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Demographic
information
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Number
of retail stores
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Retail
sales per square foot
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CoStar
Research
We have
developed a sophisticated data collection organization utilizing a multi-faceted
research process. In 2009, our full time researchers and contractors drove
millions of miles, conducted hundreds of thousands of on-site building
inspections, and conducted millions of interviews of brokers, owners and
tenants.
Research Department.
As of
January 29, 2010, we have approximately 975 commercial real estate research
professionals and outside contractors performing research. Our
research professionals undergo an extensive training program so that we can
maintain consistent research methods and processes throughout our research
department. Our researchers collect and analyze commercial real estate
information through millions of phone calls, e-mails, internet updates and faxes
each year, in addition to field inspections, public records review, news
monitoring and direct mail. Each researcher is responsible for maintaining the
accuracy and reliability of database information. As part of their update
process, researchers develop cooperative relationships with industry
professionals that allow them to gather useful information. Because of the
importance commercial real estate professionals place on our data and our
prominent position in the industry, many of these professionals routinely take
the initiative and proactively report available space and transactions to our
researchers.
CoStar
has an extensive field research effort that includes physical inspection of
properties in order to research new markets, find additional inventory,
photograph properties and verify existing information.
CoStar
utilizes 146 high-tech field research vehicles in 39 states and the U.K. Of
these vehicles, 99 are custom-designed energy efficient hybrid cars that are
equipped with computers, proprietary Global Positioning System tracking
software, high resolution digital cameras and handheld laser instruments to help
precisely measure buildings, geo-code them and position them on digital
maps. Some of our researchers also use custom-designed trucks with
the same equipment as well as pneumatic masts that extend up to an elevation of
twenty-five feet to allow for unobstructed building photographs from “birds-eye”
views. Each CoStar vehicle uses wireless technology to track and
transmit field data. A typical site inspection consists of photographing the
building, measuring the building, geo-coding the building, capturing “For Sale”
or “For Lease” sign information, counting parking spaces, assessing property
condition and construction, and gathering tenant information. Certain
researchers canvass properties, interviewing tenants suite by suite. In
addition, many of our field researchers are photographers who take photographs
of commercial real estate properties to add to CoStar’s database of digital
images.
Data and Image Providers.
We
license a small portion of our data and images from public record providers and
third party data sources. Licensing agreements with these entities provide for
our use of a variety of commercial real estate information, including property
ownership, tenant information, demographic information, maps and aerial
photographs, all of which enhance various CoStar services. These license
agreements generally grant us a non-exclusive license to use the data and images
in the creation and supplementation of our information, marketing and analytic
services and include what we believe are standard terms, such as a contract term
ranging from one to five years, automatic renewal of the contract and fixed
periodic license fees or a combination of fixed periodic license fees plus
additional fees based upon our usage.
6
Management and Quality Control
Systems.
Our research processes include 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 space greater than land area and expired leases. We also monitor changes
to critical fields of information to ensure all information is kept in
compliance with our standard definitions and methodology. Our non-automated
quality control procedures include:
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calling
our information sources on recently updated properties to re-verify
information;
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performing
periodic research audits and field checks to determine if we correctly
canvassed buildings;
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providing
training and retraining to our research professionals to ensure accurate
data compilation; and
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compiling
measurable performance metrics for research teams and managers for
feedback on data quality.
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Finally,
one of the most important and effective quality control measures we rely on is
feedback provided by the commercial real estate professionals using our data
every day.
Proprietary
Technology
As of
January 29, 2010, CoStar had a staff of 122 product development, database and
network professionals. CoStar’s information technology professionals
focus on developing new services for our customers and delivering research
automation tools that improve the quality of our data and increase the
efficiency of our research analysts.
Our
information technology team is responsible for developing and maintaining CoStar
products, including CoStar Property Professional, CoStar COMPS, CoStar Tenant,
CoStar Showcase, CoStar Commercial MLS, CoStar Connect, FOCUS, SPN,
Shopproperty, PPR products and services, Resolve Portfolio Maximizer and
Request. In 2007, to better support our retail customers, we added
significant features to CoStar Property Professional including tenant proximity
and demographic search capability, mapping layers, detailed retail tenant
information and demographics. In 2008, CoStar released CoStar
Showcase, an internet marketing service that provides commercial real estate
professionals the opportunity to make their listings accessible to all visitors
to our public website, www.CoStar.com.
Our
information technology team is responsible for developing the infrastructure
necessary to support CoStar’s business processes, our comprehensive database of
commercial real estate information, marketing and analytic services and our
extensive image library. The team implements technologies and systems that
introduce efficient workflows and controls that increase the production capacity
of our research teams and improve the quality of our data. Over the
years, the team has developed data collection and quality control mechanisms
that we believe are unique to the commercial real estate industry. The team
continues to develop and modify our enterprise information management system
that integrates CoStar sales, research, field research, customer support and
accounting information. We use this system to maintain our commercial
real estate research information, manage contacts with the commercial real
estate community, provide research workflow automation and conduct daily
automated quality assurance checks. In addition, our information technology team
has also developed fraud-detection technology to detect and prevent unauthorized
access to our services.
Our
information technology professionals also maintain the servers and network
components necessary to support CoStar services and research
systems. Our encrypted virtual private network provides remote
researchers and salespeople secure access to CoStar applications and network
resources. CoStar maintains a comprehensive data protection policy that provides
for use of encrypted data fields and off-site storage of all system backups,
among other protective measures. CoStar’s services are continually
monitored in an effort to ensure our customers fast and reliable
access.
Services
Our suite
of information, marketing and analytic services is branded and marketed to our
customers. Our services are derived from a database of building-specific
information and offer customers specialized tools for accessing, analyzing and
using our information. Over time, we expect to enhance our existing information,
marketing and analytic services and develop additional services that make use of
our comprehensive database to meet the needs of our existing customers as well
as potential new categories of customers.
7
Our
various information, marketing and analytic services are described in detail in
the following paragraphs as of January 29, 2010:
CoStar Property
Professional
®
CoStar
Property Professional, or “CoStar Property,” is the Company’s flagship service.
It provides subscribers a comprehensive inventory of office, industrial, retail
and multifamily properties and land in markets throughout the U.S., including
for-lease and for-sale listings, historical data, building photographs, maps and
floor plans. Commercial real estate professionals use CoStar Property to
identify available space for lease, evaluate leasing and sale opportunities,
value assets and position properties in the marketplace. Our clients also use
CoStar Property to analyze market conditions by calculating current vacancy
rates, absorption rates or average rental rates, and forecasting future trends
based on user selected variables. CoStar Property provides subscribers with
powerful map-based search capabilities as well as a user controlled, password
protected extranet (or electronic “file cabinet”) where brokers may share space
surveys and transaction-related documents online, in real time, with team
members. When used together with CoStar Connect, CoStar Property enables
subscribers to share space surveys and transaction-related documents with their
clients, accessed through their corporate website. CoStar Property, along with
all of CoStar’s other core information, marketing and analytic services, is
delivered solely via the internet.
CoStar COMPS
Professional
®
CoStar
COMPS Professional, or “COMPS Professional,”
provides comprehensive
coverage of comparable sales information in the U.S. commercial real estate
industry. It is the industry’s most comprehensive database of comparable sales
transactions and is designed for professionals who need to research property
comparables, identify market trends, expedite the appraisal process and support
property valuations. COMPS Professional offers subscribers numerous fields of
property information, access to support documents (e.g., deeds of trust) for new
comparables, demographics and the ability to view for-sale properties alongside
sold properties in three formats – plotted on a map, aerial image or in a
table.
CoStar Tenant
®
CoStar Tenant is a
detailed online business-to-business prospecting and analytical tool providing
commercial real estate professionals with the most comprehensive commercial real
estate-related U.S. tenant information available. CoStar Tenant
profiles tenants
occupying space in commercial buildings across the U.S. and provides updates on
lease expirations - one of the service’s key features - as well as occupancy
levels, growth rates and numerous other facts. Delivering this information via
the internet allows users to target prospective clients quickly through a
searchable database that identifies only those tenants meeting certain
criteria.
CoStar Showcase
®
CoStar
Showcase offers commercial real estate professionals a simple way to get their
for-sale and for-lease listings in front of a broad internet audience who search
on Google, Yahoo, Bing, Showcase.com and Costar.com to find commercial
properties. When customers sign up for CoStar Showcase, their listings
become accessible to visitors to Showcase.com and Costar.com, who can search
those listings for free. To drive traffic to CoStar Showcase subscriber
listings, CoStar invests in Google, Yahoo and Bing keyword based pay-per-click
advertising to capture the high volume traffic of users actively searching for
commercial properties on those search engines. As part of their CoStar
Showcase subscription, subscribers also receive customized websites for each of
their brokers that displays their bio, photo, contact information and updated
listings that they can use to promote their services. CoStar Showcase can be
purchased as a firm-wide annual subscription by firms who want all of their
brokers to be able to access the service, or it can be purchased by individual
brokers on a month-to-month basis. When individual brokers sign up
for CoStar Showcase, they also receive access to CoStar Commercial
MLS.
CoStar Property Express
®
CoStar Property Express
provides access, via an annual subscription, to a “light” or scaled down version
of CoStar Property. Commercial real estate professionals use CoStar Property
Express to look up and search for-lease and for-sale listings in CoStar’s
comprehensive national database. CoStar Property Express
provides base building
information, photos, floor plans, maps and a limited number of
reports.
CoStar Listings Express
®
CoStar
Listings Express provides access via an annual subscription to a listings only
version of CoStar Property Express. Commercial real estate
professionals use CoStar Listings Express to look up and search for lease and
for sale listings in CoStar’s comprehensive national database. CoStar
Listings Express provides base building information, photos, floor plans, maps
and a limited number of reports on only properties that are either for lease or
for sale. CoStar Listings Express does not provide information on
fully leased properties, as found in CoStar Property Professional and CoStar
Property Express.
8
CoStar COMPS Express
®
CoStar
COMPS Express provides users with immediate, subscription free access with
payment by credit card to the CoStar COMPS Professional system on a
report-by-report basis. Subscribers also use this on-demand service to research
comparable sales information outside of their subscription markets.
CoStar Connect
®
CoStar Connect allows
commercial real estate firms to license CoStar’s technology and information to
market their U.S. property listings on their corporate websites. Customers
enhance the quality and depth of their listing information through access to
CoStar’s database of content and digital images. The service automatically
updates via the CoStar Property database and manages customers’ online property
information, providing comprehensive listings coverage and significantly
reducing the expense of building and maintaining their websites’ content and
functionality.
CoStar Commercial MLS
®
CoStar Commercial MLS
is the industry’s most comprehensive collection of researched for sale
listings. CoStar Commercial MLS draws upon CoStar’s large database of
digital images and includes office, industrial, multifamily and retail
properties, as well as shopping centers and raw land. CoStar
Commercial MLS represents an efficient means for sellers to market their
properties to a large audience and for buyers to easily identify target
properties.
CoStar Advertising
®
CoStar Advertising
offers property owners a highly targeted and cost effective way to market a
space for lease or a property for sale directly to the individuals looking for
that type of space through interactive advertising. Our advertising model is
based on varying levels of exposure, enabling the advertiser to target as
narrowly or broadly as its budget permits. With the CoStar Advertising program,
when the advertiser’s listings appear in a results set, they receive priority
positioning and are enhanced to stand out. The advertiser can also purchase
exposure in additional submarkets, or the entire market area so that this ad
will appear even when this listing would not be returned in a results
set.
CoStar Professional
Directory
®
CoStar
Professional Directory, a service available exclusively to CoStar Property
Professional subscribers, provides detailed contact information for
approximately 1.3 million commercial real estate professionals, including
specific information about an individual’s current and prior activities such as
completed transactions, current landlord representation assignments, sublet
listings, major tenants and owners represented and local and national
affiliations. Commercial real estate brokers can input their
biographical information and credentials and upload their photo to create
personal profiles. Subscribers use CoStar Professional Directory to
network with their peers, identify and evaluate potential business partners, and
maintain accurate mailing lists of other industry professionals for their direct
mail marketing efforts
.
CoStar Market
Report™
The CoStar Market Report provides in-depth
current and historical analytical information covering office, industrial and
retail properties across the U.S. Published quarterly, each market
report includes details such as absorption rates, vacancy rates, rental rates,
average sales prices, capitalization rates, existing inventory and current
construction activity. This data is presented using standard definitions and
calculations developed by CoStar, and offers real estate professionals critical
and unbiased information necessary to make intelligent commercial real estate
decisions. CoStar Market Reports are available to CoStar Property Professional
subscribers at no additional charge.
Metropolis™
The
Metropolis service is a single interface that combines commercial real estate
data from multiple information providers into a comprehensive resource. The
Metropolis service allows a user to input a property address and then view
detailed information on that property from multiple information providers,
including CoStar services. This technology offers commercial real estate
professionals a simple and convenient solution for integrating a wealth of third
party information and proprietary data, and is currently available for the
Southern California markets.
PPR
®
Our
subsidiary PPR, and its U.K. subsidiary, PPR UK, offer products and services
designed to meet the research needs of commercial real estate investors and
lenders. PPR covers metropolitan areas throughout the United States, the U.K.,
Europe, and Asia, with offerings including historical and forecast market data
and analysis by market and property type, and services including access to PPR’s
analysts, economists, and strategists to develop and deliver custom research
solutions.
9
Resolve Portfolio
Maximizer
®
Resolve Portfolio
Maximizer is an industry leading real estate portfolio management software
solution. Resolve Portfolio Maximizer allows users to model partnership
structures, calculate waterfall distributions and fees, model and analyze debt
obligations, and create multiple “what if” scenarios for alternative investment
decisions.
Request™
Request
is the first business intelligence software solution built specifically for
managing commercial real estate investments. Request helps users eliminate some
of the difficulties of consolidating real estate investment data from disparate
sources and facilitates standardization of information presentation and
reporting across an organization. Request also provides a platform for users to
develop business intelligence and reporting capabilities.
FOCUS™
CoStar’s
U.K. subsidiary, CoStar U.K. Limited, offers several services; its primary
service is FOCUS. FOCUS is a digital online service offering information on the
U.K. commercial real estate market. This service seamlessly links data on
individual properties and companies across the U.K., including comparable sales,
available space, requirements, tenants, lease deals, planning information,
socio-economics and demographics, credit ratings, photos and maps.
SPN™
SPN
provides users online access to a comprehensive database of information for
properties located in Scotland, including available space, comparable sales and
lease deals.
Propex™
Propex
gives users access to the commercial property investment market. It is used by
U.K. investment agencies and professional investors and is a secure online
exchange through which investment deals may be introduced. It is a primary
channel for the distribution of live transaction data and property research data
in the U.K. investment market. Propex also provides private investors
with a gateway into the commercial property investment market. It is a
free-access listing website, which provides details of commercial property
investments. It is used by U.K. agencies to sell investments suitable for the
private investor.
Shopproperty.co.uk™
Shopproperty
is a listing database of available retail units across the U.K. on a free-access
website. Shopproperty.co.uk is the only specialist listing website
with fully licensed Goad street-trader plans.
Grecam™
Our
French subsidiary, Grecam S.A.S., provides commercial real estate information
throughout the Paris region through its Observatoire Immobilier D’ Entreprise
(“OIE”) service offering. The OIE service provides commercial
property availability and transaction information to its subscribers through
both an online service and market reports.
Clients
We draw
clients from across the commercial real estate and related business community.
Commercial real estate brokers have traditionally formed the largest portion of
CoStar clients, however, we also provide services to owners, landlords,
financial institutions, retailers, vendors, appraisers, investment banks,
governmental agencies, and other parties involved in commercial real estate. The
following chart lists U.S. and U.K. clients that are well known or have the
highest annual subscription fees in each of the various categories, each as of
January 29, 2010.
10
|
Brokers
|
Lenders,
Investment Bankers
|
Institutional Advisors, Asset
Managers
|
||
|
CB
Richard Ellis
|
Deutsche
Bank
|
BlackRock
|
||
|
CB
Richard Ellis — U.K.
|
Wells
Fargo
|
Prudential
|
||
|
Colliers
|
JP
Morgan Chase Bank
|
Prudential
— U.K.
|
||
|
Colliers
Conrad Ritblat Erdman — U.K.
|
Key
Bank
|
Metropolitan
Life
|
||
|
Cushman
& Wakefield
|
TD
Bank
|
ING
Clarion Partners
|
||
|
Cushman
& Wakefield — U.K.
|
Citibank
|
Duke
Realty Corporation
|
||
|
Weichert
Commercial Brokerage
|
AEGON
USA Realty Advisors, Inc.
|
USAA
Real Estate Company
|
||
|
Jones
Lang LaSalle
|
Capmark
Financial Group, Inc.
|
NorthMarq
Capital
|
||
|
Jones
Lang LaSalle — U.K.
|
East
West Bank
|
AEW
Capital Management LP
|
||
|
Grubb
& Ellis
|
Q10
Bonneville Mortgage Company
|
Progressive
Casualty Insurance Co.
|
||
|
Gerald
Eve — U.K.
|
||||
|
Drivers
Jonas — U.K.
|
||||
|
Lambert
Smith Hampton — U.K.
|
||||
|
Charles
Dunn Company, Inc.
|
Owners,
Developers
|
Appraisers,
Accountants
|
||
|
Marcus
& Millichap
|
Hines
|
Integra
|
||
|
Mohr
Partners
|
LNR
Property Corp
|
Deloitte
|
||
|
Newmark
& Company Real Estate
|
Shorenstein
Company, LLC
|
Marvin
F. Poer
|
||
|
CRESA
Partners
|
Tishman
Speyer
|
KPMG
|
||
|
Studley
|
Manulife
Financial
|
GE
Capital
|
||
|
Coldwell
Banker Commercial NRT
|
Industrial
Developments International (IDI)
|
PGP
Valuation
|
||
|
UGL
Equis
|
Land
Securities — U.K.
|
Thomson
Reuters
|
||
|
FirstService
Williams
|
||||
|
Cassidy
Turley BRE Commercial
|
||||
|
Binswanger
|
||||
|
Re/Max
|
||||
|
Carter
|
Retailers
|
Government
Agencies
|
||
|
USI
Real Estate Brokerage Services
|
Nationwide
Insurance
|
U.S.
General Services Administration
|
||
|
DAUM
Commercial Real Estate Services
|
In-N-Out
Burger
|
County
of Los Angeles
|
||
|
HFF
|
Merle
Norman Cosmetics, Inc.
|
Internal
Revenue Service
|
||
|
U.S.
Equities Realty
|
Massage
Envy
|
City
of Chicago
|
||
|
Sperry
Van Ness
|
7-Eleven
|
Cook
County Assessor’s Office
|
||
|
DTZ
— U.K.
|
Dollar
General Corporation
|
U.S.
Department of Housing and
|
||
|
Savillis
Commercial — U.K.
|
Walgreens
|
Urban
Development
|
||
|
NB
Real Estate — U.K.
|
Town
Fair Tire
|
Corporation
of London — U.K.
|
||
|
GVA
Grimley — U.K.
|
Rent-A-Center
|
Federal
Reserve Bank of New York
|
||
|
Vail
Williams — U.K.
|
Spencer
Gifts LLC
|
Federal
Deposit Insurance Corporation
|
||
|
REITs
|
Property Managers
|
Vendors
|
||
|
Simon
Property Group, Inc.
|
Transwestern
Commercial Services
|
Turner
Construction Company
|
||
|
Brandywine
Realty Trust
|
Lincoln
Property Company
|
Kastle
Systems
|
||
|
Brookfield
Properties
|
PM
Realty Group
|
Comcast
Corporation
|
||
|
Boston
Properties
|
Navisys
Group
|
ADT
Security
|
||
|
Liberty
Property Trust
|
Osprey
Management Company
|
Cox
Communications, Inc.
|
||
|
Kimco
Realty Corporation
|
Leggat
McCall Properties
|
DirectTV
|
||
|
Vornado
Realty Trust
|
Asset
Plus Corporation
|
Verizon
Communications, Inc.
|
||
11
For the
years ended December 31, 2007, 2008 and 2009, no single client accounted for
more than 5% of our revenues.
Sales
and Marketing
As of
January 29, 2010, we had 276 sales, marketing and customer support employees,
with the majority of our direct sales force located in field sales offices. Our
sales teams are primarily located in 25 field sales offices throughout the U.S.
and in London, England; Manchester, England; Glasgow, Scotland and Paris,
France. Our inside sales team is located in our Bethesda, Maryland
office. This team prospects for new clients and performs service demonstrations
exclusively by telephone and over the internet to support the direct sales
force.
Our local
offices typically serve as the platform for our in-market sales, customer
support and field research operations for their respective regions. The sales
force is responsible for selling to new prospects, training new and existing
clients, providing ongoing customer support, renewing existing client contracts
and identifying cross-selling opportunities. In addition, the sales force has
primary front line responsibility for customer care.
Our sales
strategy is to aggressively attract new clients, while providing ongoing
incentives for existing clients to subscribe to additional services. We actively
manage client accounts in order to retain clients by providing frequent service
demonstrations as well as company-client contact and
communication. We place a premium on training new and existing client
personnel on the use of our services so as to promote maximum client utilization
and satisfaction with our services. Our strategy also involves entering into
multi-year, multi-market license agreements with our larger
clients.
We seek
to make our services essential to our clients’ businesses. To encourage clients
to use our services regularly, we generally charge a fixed monthly amount for
our subscription-based services rather than fees based on actual system usage.
Contract rates are generally based on the number of sites, number of users,
organization size, the client’s business focus, geography and the number of
services to which a client subscribes. Our subscription clients generally pay
contract fees on a monthly basis, but in some cases may pay us on a quarterly or
annual basis. In addition, through CoStar COMPS Express, clients can
access our database of commercial real estate information without a subscription
on a pay per use basis.
Our
customer service and support staff is charged with ensuring high client
satisfaction by providing ongoing customer support.
Our
primary marketing methods include: service demonstrations; face to face
networking; web-based marketing; direct marketing; communication via our
corporate website and news services; participation in trade show and industry
events; print advertising in trade magazines and other business publications;
client referrals; and CoStar Advisor™, the Company’s newsletter, which is
distributed to our clients and prospects. Web-based marketing and direct
marketing are the most cost-effective means for us to find prospective clients.
Our web-based marketing efforts include paid advertising with major search
engines and commercial real estate news sites and our direct marketing efforts
include direct mail, email and telemarketing, and make extensive use of our
unique, proprietary database. Once we have identified a prospective client, our
most effective sales method is a service demonstration. We use various forms of
advertising to build brand identity and reinforce the value and benefits of our
services. We also sponsor and attend local association activities and events,
and attend and/or exhibit at industry trade shows and conferences to reinforce
our relationships with our core user groups, including industry-leading events
for commercial brokers and retail and financial services
institutions.
In May
2008, we released CoStar Showcase
®
, an
internet marketing service that provides commercial real estate professionals
the opportunity to make their listings available to all visitors to our public
websites, www.CoStar.com and Showcase.com, and allows each visitor to search
those property listings for free. CoStar Showcase draws additional traffic to
our website through searches on Google, Yahoo, and Bing. Commercial real estate
listings are derived from our database and are researched
and verified by CoStar researchers. CoStar Showcase subscribers need
only designate their listings for inclusion in the free property search tool. In
addition, CoStar Showcase customers who have not subscribed for our other
services, serve as leads for additional cross-selling
opportunities.
12
Competition
The
market for information, marketing and analytic services generally is competitive
and rapidly changing. In the commercial real estate industry, the principal
competitive factors for commercial real estate information, marketing and
analytic services and providers 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;
|
|
|
•
|
client
service and support;
|
|
|
•
|
perception
that the service offered is the industry
standard;
|
|
|
•
|
price;
|
|
|
•
|
effectiveness
of marketing and sales efforts;
|
|
|
•
|
proprietary
nature of methodologies, databases and technical
resources;
|
|
|
•
|
vendor
reputation;
|
|
|
•
|
brand
loyalty among customers; and
|
|
|
•
|
capital
resources.
|
We
compete directly and indirectly for customers with the following categories of
companies:
|
|
•
|
online
services or websites targeted to commercial real estate brokers, buyers
and sellers of commercial real estate properties, insurance companies,
mortgage brokers and lenders, such as LoopNet, Inc., Cityfeet.com, Inc.,
Reed Business Information Limited, officespace.com, MrOfficeSpace.com,
TenantWise, Inc., WorkplaceIQ and RealPoint
LLC;
|
|
|
•
|
publishers
and distributors of information, marketing and analytic services,
including regional providers and national print publications, such as
Black’s Guide, CBRE Economic Advisors, Marshall & Swift, Yale Robbins,
Inc., Reis, Inc., Real Capital Analytics, Inc. and The Smith Guide,
Inc.;
|
|
|
•
|
locally
controlled real estate boards, exchanges or associations sponsoring
property listing services and the companies with whom they partner, such
as Xceligent, Catalyst, the National Association of Realtors, CCIM
Institute, Society of Industrial and Office Realtors (SIOR) the Commercial
Association of Realtors Data Services and the Association of Industrial
Realtors (AIR);
|
|
|
•
|
in-house
research departments operated by commercial real estate brokers;
and
|
|
|
|
|
•
|
public
record providers.
|
As the
commercial real estate information, marketing and analytic services marketplace
develops, additional competitors (including companies which could have greater
access to data, financial, product development, technical, analytic or marketing
resources than we do) may enter the market and competition may intensify. For
example, the National Association of Realtors and Bloomberg L.P. have moved into
the commercial real estate information business and intend to compete with us in
the commercial real estate information space. Similarly, a company
like Google, which has a far-reaching web presence and substantial data
aggregation capabilities, could easily enter the commercial real estate
marketing arena, something Google has already done with residential real estate.
While we believe that we have successfully differentiated ourselves from
existing competitors, competition could materially harm our
business.
13
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, trademark, database protection and other
laws;
|
|
|
•
|
nondisclosure,
noncompetition and other contractual provisions with employees and
consultants;
|
|
|
•
|
license
agreements with customers;
|
|
|
•
|
patent
protection; and
|
|
|
•
|
technical
measures.
|
We seek
to protect our software’s source code, our database and our photography as trade
secrets and under copyright law. Although copyright registration is not a
prerequisite for copyright protection, we have filed for copyright registration
for many of our databases, photographs, software and other materials. Under
current U.S. copyright law, the arrangement and selection of data may be
protected, but the actual data itself may not be. In addition, with respect to
our U.K. databases, certain database protection laws provide additional
protections of these databases. We license our services under license agreements
that grant our clients non-exclusive, non-transferable licenses. These
agreements restrict the disclosure and use of our information and prohibit the
unauthorized reproduction or transfer of the information, marketing and analytic
services 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 designed to discourage and detect unauthorized copying of our
intellectual property. We have established an internal antipiracy team that uses
fraud-detection technology to continually monitor our services to detect and
prevent unauthorized access, and we actively prosecute individuals and firms
that engage in this unlawful activity.
We have
filed trademark applications to register trademarks for a variety of names for
CoStar services and other marks, and have obtained registered trademarks for a
variety of our marks, including “CoStar,” “COMPS,” “CoStar Property,” “CoStar
Tenant,” “CoStar Showcase” and “CoStar Group.” Depending upon the jurisdiction,
trademarks are generally valid as long as they are in use and/or their
registrations are properly maintained and they have not been found to become
generic. We consider our trademarks in the aggregate to constitute a
valuable asset. In addition, we have filed several patent
applications covering certain of our methodologies and software and currently
have one patent in the U.K. which expires in 2021 covering, among other things,
certain of our field research methodologies, and six patents in the U.S. which
expire in 2020, 2021, 2022, 2023 (2 patents) and 2025, covering, among other
things, critical elements of CoStar’s proprietary field research technology and
mapping tools. We regard the rights under our patents as valuable to
our business but do not believe that our business is materially dependent on any
single patent.
Employees
As of
January 29, 2010, we employed 1,438 employees. None of our employees are
represented by a labor union. We have experienced no work stoppages. We believe
that our employee relations are excellent.
Available
Information
Our
investor relations internet website is http://www.costar.com/investors.aspx. The
reports we file with or furnish to the Securities and Exchange Commission,
including our annual report, quarterly reports and current reports, are
available free of charge on our internet website as soon as reasonably
practicable after we electronically file such material with, or furnish it to,
the Securities and Exchange Commission. You may review and copy any of the
information we file with the Securities and Exchange Commission at the
Commission's Public Reference Room at 100 F Street, NE, Washington, DC 20549.
You may obtain information regarding the operation of the Public Reference Room
by calling the SEC at 1-800-SEC-0330. The Securities and Exchange
Commission maintains an internet site that contains reports, proxy and
information statements, and other information regarding issuers that file
electronically with the Commission at http://www.sec.gov.
14
|
Item
1A.
|
Cautionary
Statement Concerning Forward-Looking Statements
We have
made forward-looking statements in this Report and make forward-looking
statements in our press releases and conference calls that are subject to risks
and uncertainties. Forward-looking statements include information that is not
purely historic fact and include, without limitation, statements concerning our
financial outlook for 2010 and beyond, our possible or assumed future results of
operations generally, and other statements and information regarding assumptions
about our revenues, EBITDA, fully diluted net income, taxable income, cash flow
from operating activities, available cash, operating costs, amortization
expense, intangible asset recovery, net income per share, diluted net income per
share, weighted-average outstanding shares, capital and other expenditures,
effective tax rate, equity compensation charges, future taxable income, purchase
amortization, financing plans, geographic expansion, acquisitions, contract
renewal rate, capital structure, contractual obligations, legal proceedings and
claims, our database, database growth, services and facilities, employee
relations, future economic performance, our ability to liquidate or realize our
long-term investments, management’s plans, goals and objectives for future
operations, and growth and markets for our stock. Sections of this Report which
contain forward-looking statements include “Business,” “Risk Factors,”
“Properties,” “Legal Proceedings,” “Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” “Quantitative and Qualitative
Disclosures About Market Risk,” “Controls and Procedures” and the Financial
Statements and related Notes.
Our
forward-looking statements are also identified by words such as “believes,”
“expects,” “thinks,” “anticipates,” “intends,” “estimates” or similar
expressions. You should understand that these forward-looking statements are
estimates reflecting our judgment, beliefs and expectations, 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. The following important
factors, in addition to those discussed or referred to under the heading “Risk
Factors,” and other unforeseen events or circumstances, could affect our future
results and could cause those results or other outcomes to differ materially
from those expressed or implied in our forward-looking statements: general
economic conditions; commercial real estate market conditions; changes or
consolidations within the commercial real estate industry; customer retention;
our ability to attract new clients; our ability to sell additional services to
existing clients; competition; foreign currency fluctuations; our ability to
identify, acquire and integrate acquisition candidates; our ability to obtain
any required financing on favorable terms; global credit market conditions
affecting investments; our ability to integrate our U.S. and international
product offerings; our ability to continue to expand successfully; our ability
to effectively penetrate the market for retail real estate information and gain
acceptance in that market; our ability to control costs; litigation; changes in
accounting policies or practices; release of new and upgraded services by us or
our competitors; data quality; development of our sales force; employee
retention; technical problems with our services; managerial execution; changes
in relationships with real estate brokers and other strategic partners; legal
and regulatory issues; and successful adoption of and training on our
services.
Accordingly,
you should not place undue reliance on forward-looking statements, which speak
only as of, and are based on information available to us on, 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 update any such statements or 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
A continuing decline or
consolidation in the commercial real estate industry may decrease customer
demand for our services
. A continuing decline in the commercial real
estate industry’s leasing activity, rental rates and absorption rates or a
sustained downturn in the commercial real estate market’s for sale activity may
continue to hamper our ability to generate revenues and may lead to more
cancellations by our current or future customers, either of which could cause
our revenues to decline and reduce our profitability. A depressed commercial
real estate market has a negative impact on our core customer base, which could
decrease demand for our information, marketing and analytic services. Also,
companies in this industry are consolidating, often in order to reduce expenses.
Consolidation, or other cost-cutting measures by our customers, may lead to more
cancellations of our information, marketing and analytic services by our
customers, reduce the number of our existing clients, reduce the size of our
target market or increase our clients’ bargaining power, all of which could
cause our revenues to decline and reduce our profitability.
15
Negative general economic conditions
could increase our expenses and reduce our revenues
. Our business and the
commercial real estate industry are particularly affected by negative trends in
the general economy. The success of our business depends on a number of factors
relating to general global, national, regional and local economic conditions,
including perceived and actual economic conditions, recessions, inflation,
deflation, exchange rates, interest rates, taxation policies, availability of
credit, employment levels, and wage and salary levels. Negative general economic
conditions could continue to adversely affect our business by reducing our
revenues and profitability. Further, continuing bank failures and
freezing of the credit markets generally, other adverse national and global
economic events, as well as any significant terrorist attack, are likely to have
a further dampening effect on the economy in general, which could negatively
affect our financial performance and our stock price. Market disruptions may
also contribute to extreme price and volume fluctuations in the stock market
that may affect our stock price for reasons unrelated to our operating
performance. In addition, a significant increase in inflation could
increase our expenses more rapidly than expected, the effect of which may not be
offset by corresponding increases in revenue. Conversely, deflation resulting in
a decline of prices could reduce our revenues. In the current economic
environment, it is difficult to predict whether we will experience significant
inflation or deflation in the near future. A significant increase in either
could have an adverse effect on our results of operations. As a result of the
negative economic conditions that have persisted for more than a year, we have
seen increased customer cancellations, reductions of services and failures to
timely pay amounts due to us. If we continue to experience greater
cancellations and more reductions of services and failures to timely pay and we
do not acquire new clients or sell new services to our existing clients, our
revenues may decline and our financial position would be adversely
affected.
Our revenues and financial position
will be adversely affected if we are not able to attract and retain
clients
. Our success and revenues depend on attracting and retaining
subscribers to our information, marketing and analytic services. Our
subscription-based information, marketing and analytic services generate the
largest portion of our revenues. However, we may be unable to attract new
clients, and our existing clients may decide not to add, not to renew or to
cancel subscription services. In addition, in order to increase our revenue, we
must continue to attract new customers, continue to keep our cancellation rate
low and continue to sell new services to our existing customers. We may not be
able to continue to grow our customer base, keep the cancellation rate for
customers and services low or sell new services to existing customers as a
result of several factors, including without limitation: economic pressures, a
decision that customers have no need for our services; a decision to use
alternative services; customers’ and potential customers’ pricing and budgetary
constraints; consolidation in the real estate and/or financial services
industries; data quality; technical problems; or competitive pressures. If
clients decide to cancel services or not to renew their subscription agreements,
and we do not sell new services to our existing clients or attract new clients,
then our renewal rate, and revenues may decline.
If we are unable to hire qualified
persons for, or retain and continue to develop, our sales force, or if our sales
force is unproductive, our revenues could be adversely affected
. In order
to support revenues and future revenue growth, we need to continue to develop,
train and retain our sales force. Our ability to build and develop a strong
sales force may be affected by a number of factors, including: our ability to
attract, integrate and motivate sales personnel; our ability to effectively
train our sales force; the ability of our sales force to sell an increased
number of services; our ability to manage effectively an outbound telesales
group; the length of time it takes new sales personnel to become productive; the
competition we face from other companies in hiring and retaining sales
personnel; and our ability to effectively manage a multi-location sales
organization. If we are unable to hire qualified sales personnel and develop and
retain the members of our sales force, including sales force management, or if
our sales force is unproductive, our revenues or growth rate could decline and
our expenses could increase.
If we are unable to increase our
revenues or our operating costs are higher than expected, our profitability may
continue to decline and our operating results may fluctuate
significantly
. We may not be able to accurately forecast our revenues or
future revenue growth rate. Many of our expenses, particularly
personnel costs and occupancy costs, are relatively fixed. As a result, we may
not be able to adjust spending quickly enough to offset any unexpected increase
in expenses or revenue shortfall. We may experience higher than expected
operating costs, including increased personnel costs, occupancy costs, selling
and marketing costs, investments in geographic
16
expansion,
acquisition costs, communications costs, travel costs, software development
costs, professional fees and other costs. If operating costs exceed our
expectations and cannot be adjusted accordingly, our profitability may be
reduced and our results of operations and financial position will be adversely
affected. In 2009, we were unable to sustain our historic revenue
growth rates, and in fact, our annual revenues declined in 2009 compared to
2008. We may not be able to return to our historic revenue growth rates and our
revenues may continue to decline. Our ability to increase our
revenues and operating profit will depend on increased demand for our
services. Our sales are affected by, among other things, general
economic and commercial real estate conditions. Reduced demand,
whether due to changes in customer preference, a further weakening of the U.S.
or global economy, competition or other reasons, may result in decreased revenue
and growth, adversely affecting our operating results.
Competition could render our
services uncompetitive
. The market for information systems and services
in general is highly competitive and rapidly changing. Competition in
this market may increase further as a result of current recessionary economic
conditions, as customer bases and customer spending decrease and service
providers are competing for fewer customer resources. Our existing
competitors, or future competitors, may have greater name recognition, larger
customer bases, better technology or data, lower prices, easier access to data,
greater user traffic or greater financial, technical or marketing resources than
we have. Our competitors may be able to undertake more effective marketing
campaigns, obtain more data, adopt more aggressive pricing policies, make more
attractive offers to potential employees, subscribers, distribution partners and
content providers or may be able to respond more quickly to new or emerging
technologies or changes in user requirements. If we are unable to retain
customers or obtain new customers, our revenues could
decline. Increased competition could result in lower revenues and
higher expenses, which would reduce our profitability.
Litigation or government
investigations in which we become involved may significantly increase our
expenses and adversely affect our stock price
. Currently and from time to
time, we are a party to various lawsuits. Any lawsuits, threatened lawsuits or
government investigations in which we are involved could cost us a significant
amount of time and money to defend, could distract management’s attention away
from operating our business, could result in negative publicity, and could
adversely affect our stock price. In addition, if any claims are determined
against us or if a settlement requires us to pay a large monetary amount or take
other action that materially restricts or impedes our operations, our
profitability could be significantly reduced and our financial position could be
adversely affected. We cannot make assurances that we will have any or
sufficient insurance to cover any litigation claims.
Fluctuating foreign currencies may
negatively impact our business, results of operations and financial
position
. Due to our acquisitions of CoStar U.K. Limited (formerly FOCUS
Information Limited), SPN, Grecam S.A.S., Propex, and Property and Portfolio
Research Ltd. a portion of our business is denominated in the British Pound and
Euro and as a result, fluctuations in foreign currencies may have an impact on
our business, results of operations and financial position. Foreign
currency exchange rates have fluctuated and may continue to
fluctuate. Significant foreign currency exchange rate fluctuations
may negatively impact our international revenue, which in turn affects our
consolidated revenue. Currencies may be affected by internal factors,
general economic conditions and external developments in other countries, all of
which can have an adverse impact on a country’s currency. Currently, we are not
party to any hedging transactions intended to reduce our exposure to exchange
rate fluctuations. We may seek to enter into hedging transactions in the future,
but we may be unable to enter into these transactions successfully, on
acceptable terms or at all. We cannot predict whether we will incur foreign
exchange losses in the future. Further, significant foreign exchange
fluctuations resulting in a decline in the British Pound or Euro may decrease
the value of our foreign assets, as well as decrease our revenues and earnings
from our foreign subsidiaries, which would reduce our profitability and
adversely affect our financial position.
We may be subject to legal liability
for collecting, displaying or distributing information
. Because the
content in our database is collected from various sources and distributed to
others, we may be subject to claims for breach of contract, defamation,
negligence, unfair competition or copyright or trademark infringement or claims
based on other theories. We could also be subject to claims based upon the
content that is accessible from our website through links to other websites or
information on our website supplied by third parties. Even if 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 such liability, which may require us to expend substantial resources
and limit the attractiveness of our information, marketing and analytic services
to users.
17
An impairment in carrying value of
goodwill could negatively impact our consolidated results of operations and net
worth.
Goodwill and identifiable intangible assets not subject to
amortization are tested annually by each reporting unit on October 1
st
of
each year for impairment and are tested for impairment more frequently based
upon the existence of one or more indicators. We consider our
operating segments, U.S. and International, as our reporting units under
Financial Accounting Standards Board (“FASB”) authoritative guidance for
consideration of potential impairment of goodwill. We assess the impairment of
long-lived assets, identifiable intangibles and goodwill whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable. The existence of one or more of the following indicators could
cause us to test for impairment prior to the annual assessment.
|
|
•
|
Significant
underperformance relative to historical or projected future operating
results;
|
|
|
•
|
Significant
changes in the manner of our use of acquired assets or the strategy for
our overall business;
|
|
|
•
|
Significant
negative industry or economic trends;
or
|
|
|
•
|
Significant
decline in our market capitalization relative to net book value for a
sustained period.
|
These
types of events or indicators and the resulting impairment analysis could result
in goodwill impairment charges in the future, which would reduce our
profitability. Impairment charges could negatively affect our financial results
in the periods of such charges, which may reduce our profitability. As of
December 31, 2009, we had $80.3 million of goodwill, $55.2 million in our U.S.
segment and $25.1 million in our International segment.
Our stock price may be negatively
affected by fluctuations in our financial results
. Our operating results,
revenues and expenses may fluctuate as a result of changes in general economic
conditions and also for many other reasons, many of which are outside of our
control, such as: cancellations or non-renewals of our services; competition;
our ability to control expenses; loss of clients or revenues; technical problems
with our services; changes or consolidation in the real estate industry; our
investments in geographic expansion and to increase coverage in existing
markets; interest rate fluctuations; the timing and success of new service
introductions and enhancements; successful execution of our expansion plans;
data quality; the development of our sales force; managerial execution; employee
retention; foreign currency and exchange rate fluctuations; inflation;
successful adoption of and training on our services; litigation; acquisitions of
other companies or assets; sales, brand enhancement and marketing promotional
activities; client support activities; changes in client budgets; or our
investments in other corporate resources. In addition, changes in accounting
policies or practices may affect our level of net income. Fluctuations in our
financial results, revenues and expenses may cause the market price of our
common stock to decline.
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 we expect that it will continue to
fluctuate in the future. The price could fluctuate widely based on numerous
factors, including: economic factors; 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 or other legal proceedings; and
regulatory developments. 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 and
may have the same effect on the market price of our common stock.
Negative conditions in the global
credit markets may affect the liquidity of a portion of our long-term
investments.
Currently, our long-term investments include
mostly AAA rated auction rate securities (“ARS”), which are primarily student
loan securities supported by guarantees from the Federal Family Education Loan
Program (“FFELP”) of the U.S. Department of Education. Continuing negative
conditions in the global credit markets have prevented some investors from
liquidating their holdings of auction rate securities because the amount of
securities submitted for sale has exceeded the amount of purchase orders for
such securities. As of December 31, 2009, we held $32.8 million par value of
ARS, all of which failed to settle at auctions. When an auction fails for ARS in
which we have invested, we may be unable to liquidate some or all of these
securities at par. In the event we need or desire to immediately access these
funds, we will not be able to do so until a future auction on these investments
is successful, a buyer is found outside the auction process or an alternative
action is determined. If a buyer is found but is unwilling to purchase the
investments at par, we may incur a loss, which would reduce our profitability
and adversely affect our financial position.
18
Our ARS
investments are not currently trading and therefore do not currently have a
readily determinable market value. Accordingly, the estimated fair
value of the ARS no longer approximates par value. We have used a
discounted cash flow model to determine the estimated fair value of our
investment in ARS as of December 31, 2009. The assumptions used in
preparing the discounted cash flow model include estimates for interest rates,
credit spreads, timing and amount of cash flows, liquidity risk premiums,
expected holding periods and default risk of the ARS. Based on this
assessment of fair value, as of December 31, 2009, we determined there was a
decline in the fair value of our ARS investments of approximately $3.0
million. The decline was deemed to be a temporary impairment and
recorded as an unrealized loss in accumulated other comprehensive loss in
stockholders’ equity. If the issuers of these ARS are unable to
successfully close future auctions and their credit ratings deteriorate, we may
be required to record additional unrealized losses in accumulated other
comprehensive loss or an other-than-temporary impairment charge to earnings on
these investments, which would reduce our profitability and adversely affect our
financial position.
International operations expose us
to additional business risks, which may reduce our profitability
. Our
international operations and expansion subject us to additional business risks,
including: currency exchange rate fluctuations; adapting to the differing
business practices and laws in foreign countries; difficulties in managing
foreign operations; limited protection for intellectual property rights in some
countries; difficulty in collecting accounts receivable and longer collection
periods; costs of enforcing contractual obligations; impact of recessions in
economies outside the U.S.; and potentially adverse tax consequences. In
addition, international expansion imposes additional burdens on our executive
and administrative personnel, systems development, research and sales
departments, and general managerial resources. If we are not able to manage our
international operations successfully, we may incur higher expenses and our
profitability may be reduced. Finally, the investment required for additional
international expansion could exceed the profit generated from such expansion,
which would reduce our profitability and adversely affect our financial
position.
Our expansion into the commercial
real estate analytics sector may not be successful or may not result in
increased revenues, which may negatively impact our business, results of
operations and financial position
. Expanding into the
commercial real estate market research and forecasting arena imposes additional
burdens on our research, systems development, sales, marketing and general
management resources. During 2010, we expect to continue to expand
our presence in the commercial real estate analytics sector. If we
are unable to manage this expansion effectively or if our costs for this effort
exceed our expectations, our financial position could be adversely
affected. In addition, if we incur additional costs to expand our
analytics services and we are not successful in marketing or selling these
expanded services, our expansion may have a material adverse effect on our
financial position by increasing our expenses without increasing our revenues,
adversely affecting our profitability.
If we are unable to enforce or
defend our ownership and use of intellectual property, our business, competitive
position and operating results could be harmed
. The success of our
business depends in large part on the intellectual property involved in our
methodologies, database, services and software. We rely on a combination of
trade secret, patent, copyright and other laws, nondisclosure and noncompetition
provisions, license agreements and other contractual provisions and technical
measures to protect our intellectual property rights. However, current law may
not provide for adequate protection of our databases and the actual data. In
addition, legal standards relating to the validity, enforceability and scope of
protection of proprietary rights in internet related businesses are uncertain
and evolving, and we cannot assure you of the future viability or value of any
of our proprietary rights. Our business could be significantly harmed if we are
not able to protect our content and our other intellectual property. The same
would be true if a court found that our services infringe other persons’
intellectual property rights. Any intellectual property lawsuits or threatened
lawsuits in which we are involved, either as a plaintiff or as a defendant,
could cost us a significant amount of time and money and distract management’s
attention from operating our business. In addition, if we do not prevail on any
intellectual property claims, this could result in a change to our methodology
or information, marketing and analytic services and could reduce our
profitability.
19
Our current or future geographic
expansion plans may not result in increased revenues, which may negatively
impact our business, results of operations and financial position
.
Expanding into new markets and investing resources towards increasing the depth
of our coverage within existing markets imposes additional burdens on our
research, systems development, sales, marketing and general managerial
resources. During 2010, we plan to continue to increase the depth of
our coverage in the U.S. and U.K. If we are unable to manage our
expansion efforts effectively, if our expansion efforts take longer than planned
or if our costs for these efforts exceed our expectations, our financial
position could be adversely affected. In addition, if we incur significant costs
to improve data quality within existing markets, or are not successful in
marketing and selling our services in these markets or in new markets, our
expansion may have a material adverse effect on our financial position by
increasing our expenses without increasing our revenues, adversely affecting our
profitability.
We may not be able to successfully
introduce new or upgraded information, marketing and analytic services, which
could decrease our revenues and our profitability
. Our future business
and financial success will depend on our ability to continue to introduce new
and upgraded services into the marketplace. To be successful, we must adapt to
rapid technological changes by continually enhancing our information, marketing
and analytic services. Developing new services and upgrades to services imposes
heavy burdens on our systems department, management and researchers. This
process is costly, and we cannot assure you that we will be able to successfully
develop and enhance our services. In addition, successfully launching and
selling a new service puts pressure on our sales and marketing resources. If we
are unable to develop new or upgraded services, then our customers may choose a
competitive service over ours and our revenues may decline and our profitability
may be reduced. In addition, if we incur significant costs in developing new or
upgraded services, are not successful in marketing and selling these new
services or upgrades, or our customers fail to accept these new services, it
could have a material adverse effect on our results of operations by decreasing
our revenues and reducing our profitability.
Our continuing expansion into the
retail real estate sector may not be completed successfully or may not result in
increased revenues, which may negatively impact our business, results of
operations and financial position
. Expanding into the retail real estate
sector imposed and continues to impose additional burdens on our research,
systems development, sales, marketing and general managerial resources. During
the next year, we expect to continue to expand the number of retail properties
contained within our database. If we are unable to manage this expansion
effectively, if this expansion effort takes longer than planned or if our costs
for this effort exceed our expectations, our financial position could be
adversely affected. In addition, if we incur significant costs to expand our
retail sector services and we are not successful in marketing and selling these
expanded services, or customers fail to accept these new services, our expansion
may have a material adverse effect on our financial position by increasing our
expenses without increasing our revenues, adversely affecting our
profitability.
Technical problems that affect
either our customers’ ability to access our services, or the software, internal
applications and systems underlying our services, could lead to reduced demand
for our information, marketing and analytic services, lower revenues and
increased costs
. Our business increasingly depends upon the satisfactory
performance, reliability and availability of our website, the internet and our
service providers. Problems with our website, the internet or the services
provided by our local exchange carriers or internet service providers could
result in slower connections for our customers or interfere with our customers’
access to our information, marketing and analytic services. If we experience
technical problems in distributing our services, we could experience reduced
demand for our information, marketing and analytic services. In addition, the
software, internal applications and systems underlying our services are complex
and may not be efficient or error-free. Our careful development and testing may
not be sufficient to ensure that we will not encounter technical problems when
we attempt to enhance our software, internal applications and systems. Any
inefficiencies, errors or technical problems with our software, internal
applications and systems could reduce the quality of our services or interfere
with our customers’ access to our information, marketing and analytic services,
which could reduce the demand for our services, lower our revenues and increase
our costs.
If we are not able to obtain and
maintain accurate, comprehensive or reliable data, we could experience reduced
demand for our information, marketing and analytic services
. Our success
depends on our clients’ confidence in the comprehensiveness, accuracy and
reliability of the data and analysis we provide. The task of establishing and
maintaining accurate and reliable data and analysis is challenging.
If our data, including the data we obtain from third parties, or analysis is not
current, accurate, comprehensive or reliable, we could experience reduced demand
for our services or legal claims by our customers, which could result in lower
revenues and higher expenses. Our U.S. researchers use integrated internal
research processes to update our database. Any inefficiencies,
errors, or technical problems with this application could reduce the quality of
our data, which could result in reduced demand for our services, lower revenues
and higher costs.
20
If we are not able to successfully
identify, finance and/or integrate acquisitions, our business operations and
financial position could be adversely affected
. We have expanded our
markets and services in part through acquisitions of complementary businesses,
services, databases and technologies, and expect to continue to do so in the
future. Our strategy to acquire complementary companies or assets depends on our
ability to identify, and the availability of, suitable acquisition candidates.
In addition, acquisitions involve numerous risks, including managing the
integration of personnel and products; including those of PPR and Resolve
Technology; managing geographically remote operations, such as SPN in Scotland,
Grecam S.A.S. in France, CoStar U.K. Limited, Propex and Property and Portfolio
Research Ltd. in the U.K.; the diversion of management’s attention from other
business concerns; the inherent risks in entering markets and sectors in which
we have either limited or no direct experience; and the potential loss of key
employees or clients of the acquired companies. We may not successfully
integrate any acquired businesses or assets and may not achieve anticipated
benefits of any acquisition. Acquisitions could result in dilutive issuances of
equity securities, the incurrence of debt, one-time write-offs of goodwill and
substantial amortization expenses of other intangible
assets. Obtaining credit in the current economic environment may be
difficult and cost prohibitive. We may be unable to obtain financing
on favorable terms, or at all, if necessary to finance future acquisitions
making it impossible or more costly to acquire complementary
businesses. If we are able to obtain financing, the terms may be
onerous and restrict our operations.
Temporary or permanent outages of
our computers, software or telecommunications equipment could lead to reduced
demand for our information, marketing and analytic services, lower revenues and
increased costs
. 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, computer viruses 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. If we
experience a failure that prevents us from delivering our information, marketing
and analytic services to clients, we could experience reduced demand for our
information, marketing and analytic services, lower revenues and increased
costs.
Changes in accounting and reporting
policies or practices may affect our financial results or presentation of
results, which may affect our stock price
. Changes in accounting and
reporting policies or practices could reduce our net income, which reductions
may be independent of changes in our operations. These reductions in reported
net income could cause our stock price to decline. For example, in
2006, we adopted authoritative guidance for stock compensation, which required
us to expense the value of granted stock options.
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 Florance, and our other officers and key employees. 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. To retain and attract key personnel, we use various measures, including
employment agreements, awards under a stock incentive plan and incentive bonuses
for key executive officers. These measures may not be enough to retain and
attract the personnel we need or to offset the impact on our business of the
loss of the services of Mr. Florance or other key officers or
employees.
|
Item
1B.
|
None.
|
Item
2.
|
Our
corporate headquarters currently is located in Bethesda, Maryland, where we
occupy approximately 60,000 square feet of office space. This facility is used
primarily by our U.S. segment. Our main lease for our Bethesda, Maryland
headquarters expires on October 15, 2010.
In
February 2010, we purchased a 169,429 square-foot LEED Gold certified office
building located at 1331 L Street, NW in downtown Washington, D.C. together with
the tenancy in the underlying ground lease for the property. This facility will
be used primarily by our U.S. segment. We intend to begin relocating our
Bethesda-based employees and infrastructure to our new building starting in the
second quarter of 2010. We currently expect to complete our relocation by
October 2010 and allow the lease for our Bethesda property to
expire.
21
Our
principal facility in the U.K. is located in London, England, where we occupy
approximately 11,000 square feet of office space. Our lease for this
facility has a maximum term ending October 20, 2018, with early termination at
our option on October 18, 2013, with advance notice. This facility is used
primarily by our International segment.
In
addition to our Bethesda, Maryland, Washington, D.C. and London, England
facilities, our research operations are principally run out of leased spaces in
San Diego, California; Columbia, Maryland; White Marsh, Maryland; Glasgow,
Scotland; and Paris, France. Additionally, we lease office space in a variety of
other metropolitan areas, which generally house our field sales offices. These
locations include, without limitation, the following: New York; Los Angeles;
Chicago; San Francisco; Boston; Manchester, England; Orange County, California;
Philadelphia; Houston; Atlanta; Phoenix; Detroit; Pittsburgh; Iselin, New
Jersey; Fort Lauderdale; Denver; Dallas; Kansas City; Cleveland; Cincinnati;
Indianapolis; Austin; Salt Lake City; Seattle; and St. Louis.
We
believe these facilities are suitable and appropriately support our business
needs.
|
Item
3.
|
Currently,
and from time to time, we are involved in litigation incidental to the conduct
of our business. We are not a party to any lawsuit or proceeding that, in the
opinion of our management based on consultations with legal counsel, is likely
to have a material adverse effect on our financial position or results of
operations.
We did
not submit any matters to a vote of our security holders during the quarter
ended December 31, 2009.
22
Price Range of Common Stock.
Our common stock is traded on the Nasdaq
Global Select Market under the symbol “CSGP.” The following table sets forth,
for the periods indicated, the high and low daily closing prices per share of
our common stock, as reported by the Nasdaq Global Select
Market.
|
High
|
Low
|
|||||||
|
Year
Ended December 31, 2008
|
||||||||
|
First
Quarter
|
$ | 45.31 | $ | 36.55 | ||||
|
Second
Quarter
|
$ | 51.36 | $ | 44.39 | ||||
|
Third
Quarter
|
$ | 56.70 | $ | 43.57 | ||||
|
Fourth
Quarter
|
$ | 45.20 | $ | 27.00 | ||||
|
Year
Ended December 31, 2009
|
||||||||
|
First
Quarter
|
$ | 35.93 | $ | 24.23 | ||||
|
Second
Quarter
|
$ | 40.09 | $ | 31.10 | ||||
|
Third
Quarter
|
$ | 41.57 | $ | 33.97 | ||||
|
Fourth
Quarter
|
$ | 44.43 | $ | 38.35 | ||||
As of
February 1, 2010, there were 359 holders of record of our common
stock.
Dividend Policy.
We have
never declared or paid any dividends on our common stock. Any future
determination to pay dividends will be at the discretion of our Board of
Directors, subject to applicable limitations under Delaware law, and will be
dependent upon our results of operations, financial position and other factors
deemed relevant by our Board of Directors. We do not anticipate paying any
dividends on our common stock during the foreseeable future, but intend to
retain any earnings for future growth of our business.
Recent Issues of Unregistered
Securities.
On July 17, 2009, we acquired all of the issued and
outstanding capital stock of PPR from DMG Information, Inc., a Delaware
corporation (“DMGI”), the sole stockholder of PPR, in exchange for an aggregate
of 572,999 shares of CoStar common stock, which had a value of approximately
$20.9 million as of that date. On July 17, 2009, we issued 433,667
shares of common stock as initial consideration, and on September 28, 2009, we
issued the remaining 139,332 shares of common stock as deferred purchase price
after taking into account post-closing adjustments. We issued the
shares of common stock in reliance upon the exemption from registration under
Section 4(2) of the Securities Act of 1933 as issuances not involving a public
offering based upon the fact that, among other things, PPR had only one
stockholder and there was no general solicitation.
On
October 19, 2009, we issued 25,886 shares of common stock to an individual as
the stock portion of the consideration in exchange for all of the issued and
outstanding capital stock of Resolve Technology. The stock portion of
the purchase price was approximately $1.1 million, and the shares are subject to
a three-year lockup period. We issued the shares of common stock in
reliance upon the exemption from registration under Section 4(2) of the
Securities Act of 1933 as issuances not involving a public offering based upon
the fact that, among other things, Resolve Technology had only one stockholder
and there was no general solicitation.
23
Issuer Purchases of Equity
Securities.
The following table is a summary of
our repurchases of common stock during each of the three months in the quarter
ended December 31, 2009:
ISSUER
PURCHASES OF EQUITY SECURITIES
|
Month,
2009
|
Total
Number of Shares Purchased
|
Average
Price Paid per Share
|
Total
Number of Shares Purchased as Part of Publicly Announced Plans or
Programs
|
Maximum
Number of Shares that May Yet Be Purchased Under the Plans or
Programs
|
||||||||||||
|
October
1 through 31
|
¾ | ¾ | ¾ | ¾ | ||||||||||||
|
November
1 through 30
|
¾ | ¾ | ¾ | ¾ | ||||||||||||
|
December
1 through 31
|
4,070 | (1) | $ | 41.96 | ¾ | ¾ | ||||||||||
|
Total
|
4,070 | $ | 41.96 | ¾ | ¾ | |||||||||||
(1)
The
number of shares purchased consists of shares of common stock tendered by
employees to the Company to satisfy the employees’ tax withholding obligations
arising as a result of vesting of restricted stock grants under the Company’s
1998 Stock Incentive Plan, as amended, and the Company’s 2007 Stock Incentive
Plan, as amended, which shares were purchased by the Company based on their fair
market value on the vesting date. None of these share purchases were
part of a publicly announced program to purchase common stock of the
Company.
Stock
Price Performance Graph
The stock
performance graph below shows how an initial investment of $100 in our common
stock would have compared to:
|
·
|
An
equal investment in the Standards & Poor's Stock 500 (“S&P
500”) Index.
|
|
·
|
An
equal investment in the S&P 500 Application Software
Index.
|
The
comparison covers the period beginning December 31, 2004, and ending on December
31, 2009, and assumes the reinvestment of any dividends. You should note that
this performance is historical and is not necessarily indicative of future price
performance.
24
|
Company
/ Index
|
12/31/04
|
12/31/05
|
12/31/06
|
12/31/07
|
12/31/08
|
12/31/09
|
||||||||||||||||||
|
CoStar
Group, Inc.
|
100 | 93.48 | 115.98 | 102.32 | 71.33 | 90.45 | ||||||||||||||||||
|
S&P
500 Index
|
100 | 104.91 | 121.48 | 128.16 | 80.74 | 102.11 | ||||||||||||||||||
|
S&P
500 Application Software Index
|
100 | 110.69 | 116.59 | 129.51 | 70.79 | 113.14 | ||||||||||||||||||
25
Selected
Consolidated Financial and Operating Data
(in
thousands, except per share data and other operating data)
The
following table provides selected consolidated financial and other operating
data for the five years ended December 31, 2009. The consolidated statement of
operations data shown below for each of the three years ended December 31, 2007,
2008, and 2009 and the consolidated balance sheet data as of December 31, 2008
and 2009 are derived from audited consolidated financial statements that are
included in this report. The consolidated statement of operations data for each
of the years ended December 31, 2005 and 2006 and the consolidated balance sheet
data as of December 31, 2005, 2006, and 2007 shown below are derived from
audited consolidated financial statements for those years that are not included
in this report.
|
Year
Ended December 31,
|
||||||||||||||||||||
|
Consolidated
Statement of Operations Data:
|
2005
|
2006
|
2007
|
2008
|
2009
|
|||||||||||||||
|
Revenues
|
$ | 134,338 | $ | 158,889 | $ | 192,805 | $ | 212,428 | $ | 209,659 | ||||||||||
|
Cost
of revenues
|
44,286 | 56,136 | 76,704 | 73,408 | 73,714 | |||||||||||||||
|
Gross
margin
|
90,052 | 102,753 | 116,101 | 139,020 | 135,945 | |||||||||||||||
|
Operating
expenses
|
82,710 | 88,672 | 98,249 | 99,232 | 104,110 | |||||||||||||||
|
Income
from operations
|
7,342 | 14,081 | 17,852 | 39,788 | 31,835 | |||||||||||||||
|
Interest
and other income, net
|
3,455 | 6,845 | 8,045 | 4,914 | 1,253 | |||||||||||||||
|
Income
before income taxes
|
10,797 | 20,926 | 25,897 | 44,702 | 33,088 | |||||||||||||||
|
Income
tax expense , net
|
4,340 | 8,516 | 9,946 | 20,079 | 14,395 | |||||||||||||||
|
Net
income
|
$ | 6,457 | $ | 12,410 | $ | 15,951 | $ | 24,623 | $ | 18,693 | ||||||||||
|
Net
income per share
-
basic
|
$ | 0.35 | $ | 0.66 | $ | 0.84 | $ | 1.27 | $ | 0.95 | ||||||||||
|
Net
income per share
-
diluted
|
$ | 0.34 | $ | 0.65 | $ | 0.82 | $ | 1.26 | $ | 0.94 | ||||||||||
|
Weighted
average shares outstanding
-
basic
|
18,453 | 18,751 | 19,044 | 19,372 | 19,780 | |||||||||||||||
|
Weighted
average shares outstanding
-
diluted
|
19,007 | 19,165 | 19,404 | 19,550 | 19,925 | |||||||||||||||
|
As
of December 31,
|
||||||||||||||||||||
|
Consolidated
Balance Sheet Data:
|
2005
|
2006
|
2007
|
2008
|
2009
|
|||||||||||||||
|
Cash,
cash equivalents, short-term and long-term investments
|
$ | 134,185 | $ | 158,148 | $ | 187,426 | $ | 224,590 | $ | 255,698 | ||||||||||
|
Working
capital
|
124,501 | 154,606 | 167,441 | 183,347 | 203,660 | |||||||||||||||
|
Total
assets
|
248,059 | 275,437 | 321,843 | 334,384 | 404,579 | |||||||||||||||
|
Total
liabilities
|
23,263 | 25,327 | 40,038 | 30,963 | 45,573 | |||||||||||||||
|
Stockholders’
equity
|
224,796 | 250,110 | 281,805 | 303,421 | 359,006 | |||||||||||||||
|
As
of December 31,
|
||||||||||||||||||||
|
Other
Operating Data
|
2005
|
2006
|
2007
|
2008
|
2009
|
|||||||||||||||
|
Number
of subscription client sites
|
11,464 | 13,257 | 14,467 | 15,920 | 16,020 | |||||||||||||||
|
Millions
of properties in database
|
1.8 | 2.1 | 2.7 | 3.2 | 3.6 | |||||||||||||||
26
The
following Management’s Discussion and Analysis of Financial Condition and
Results of Operations contains “forward-looking statements,” including
statements about our beliefs and expectations. There are many risks and
uncertainties that could cause actual results to differ materially from those
discussed in the forward-looking statements. Potential factors that could cause
actual results to differ materially from those discussed in any forward-looking
statements include, but are not limited to, those stated above in Item 1A. under
the headings “Risk Factors
¾
Cautionary
Statement Concerning Forward-Looking Statements” and “
¾
Risk Factors,” as
well as those described from time to time in our filings with the Securities and
Exchange Commission.
All
forward-looking statements are based on information available to us on the date
of this filing and we assume no obligation to update such statements. The
following discussion should be read in conjunction with our Annual Reports on
Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other
filings with the Securities and Exchange Commission and the consolidated
financial statements and related notes in this Annual Report on Form
10-K.
Overview
CoStar
Group, Inc. (“CoStar”) is the number one provider of information, marketing and
analytic services to the commercial real estate industry in the U.S. and the
U.K. based on the fact that we offer the most comprehensive commercial real
estate database available, have the largest research department in the industry,
provide more information, marketing and analytic services than any of our
competitors and believe we generate more revenues than any of our competitors.
We have created a standardized information, marketing and analytic platform
where members of the commercial real estate and related business community can
continuously interact and facilitate transactions by efficiently exchanging
accurate and standardized commercial real estate information. Our integrated
suite of online service offerings includes information about space available for
lease, comparable sales information, tenant information, information about
properties for sale, internet marketing services, information for clients'
websites, information about industry professionals and their business
relationships, data integration, and industry news. We also provide market
research and analysis for commercial real estate investors and lenders via our
PPR service offerings. Our service offerings span all commercial property types,
including office, industrial, retail, land, mixed-use, hospitality and
multifamily.
Since
1994, we have expanded the geographical coverage of our existing information and
marketing services and developed new information, marketing and analytic
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, Inc. and into Atlanta and
Dallas/Fort Worth by acquiring Jamison Research, Inc. In February 2000, we
acquired COMPS.COM, Inc., a San Diego-based provider of commercial real
estate information. In November 2000, we acquired First Image Technologies,
Inc., a California-based provider of commercial real estate
software. In September 2002, we expanded further into Portland,
Oregon through the acquisition of certain assets of Napier Realty Advisors
(doing business as REAL-NET). In January 2003, we established a base in the U.K.
with our acquisition of London-based FOCUS Information Limited. In May 2004, we
expanded into Tennessee through the acquisition of Peer Market Research, Inc.,
and in September 2004, we extended our coverage of the U.K. through the
acquisition of Scottish Property Network. In September 2004, we strengthened our
position in Denver, Colorado through the acquisition of substantially all of the
assets of RealComp, Inc., a local comparable sales information
provider.
In
January 2005, we acquired National Research Bureau, a Connecticut-based provider
of U.S. shopping center information. In December 2006, our U.K. subsidiary,
CoStar Limited, acquired Grecam S.A.S. (“Grecam”), a provider of commercial
property information and market-level surveys, studies and consulting services
located in Paris, France. In February 2007, CoStar Limited also acquired
Property Investment Exchange Limited (“Propex”), a provider of commercial
property information and operator of an electronic platform that facilitates the
exchange of investment property located in London, England. In April 2008, we
acquired the assets of First CLS, Inc. (doing business as the Dorey Companies
and DoreyPRO), an Atlanta-based provider of local commercial real estate
information. Most recently, in July 2009, we acquired Massachusetts-based
Property and Portfolio Research, Inc. (“PPR”), a provider of real
27
estate
analysis, market forecasts and credit risk analytics to the commercial real
estate industry, and its wholly owned U.K. subsidiary Property and Portfolio
Research Ltd., and in October 2009, we acquired Massachusetts-based Resolve
Technology, Inc. (“Resolve Technology”), a provider of business intelligence and
portfolio management software serving the institutional real estate investment
industry. The First CLS, Inc., PPR and Resolve Technology acquisitions are
discussed later in this section under the heading “Recent
Acquisitions.”
In 2004,
we began our expansion into 21 new metropolitan markets throughout the U.S. and
began expanding the geographical coverage of many of our existing U.S. and U.K.
markets. We completed our expansion into the 21 new markets in the first quarter
of 2006. In early 2005, in conjunction with the acquisition of National Research
Bureau, we launched a major effort to expand our coverage of retail real estate
information. The retail component of our flagship product, CoStar Property
Professional, was unveiled in May 2006 at the International Council of Shopping
Centers’ convention in Las Vegas.
During
the second half of 2006, in order to expand the geographical coverage of our
service offerings, we began actively researching commercial properties in 81 new
Core Based Statistical Areas (“CBSAs”) in the U.S., we increased our U.S. field
research fleet by adding 89 vehicles and we hired researchers to staff these
vehicles. We released our CoStar Property Professional service in the 81 new
CBSAs across the U.S. in the fourth quarter of 2007. Throughout our recent
expansion efforts, we have remained focused on ensuring that CoStar continues to
provide the quality of information our customers expect. As such, in 2009 we
expanded our research operations, and we plan to continue to grow our research
operations slightly in 2010, in order to continue to meet customer
expectations.
During
the second half of 2009, as a part of our strategy to provide subscribers with
tools for conducting primary research and analysis on commercial real estate, we
expanded subscribers’ capabilities to use CoStar’s database of research-verified
commercial property information to conduct in-depth analysis and generate
reports on trends in sales and leasing activity online. Further, in July 2009,
we acquired PPR and its wholly owned subsidiary, providers of real estate
investment analysis and market forecasting services.
In
connection with our acquisitions of Propex, Grecam and PPR’s wholly owned
subsidiary Property and Portfolio Research Ltd., we intend to expand the
coverage of our service offerings within the U.K. and to integrate our
international operations more fully with those in the U.S. We have gained
operational efficiencies as a result of consolidating a majority of our U.K.
research operations in one location in Glasgow and combining the majority of our
remaining U.K. operations in one central location in London.
We intend
to eventually introduce a consistent international platform of service
offerings. In 2007, we introduced the “CoStar Group” as the brand encompassing
our international operations. We believe that our recent U.S. and international
expansion and integration efforts have created a platform for long-term
growth.
We expect
to continue to develop and distribute new services, expand existing services
within our current platform, consider strategic acquisitions and expand and
develop our sales and marketing organization. For instance, in May 2008, we
released CoStar Showcase
®
, an
internet marketing service that provides commercial real estate professionals
the opportunity to make their listings accessible to all visitors to our public
website, www.CoStar.com. More recently, in July 2009, we expanded subscribers’
analytic capabilities to use our online database to conduct in-depth analysis
and generate reports on sales and leasing activity through our acquisition of
PPR and in October 2009, we acquired Resolve Technology, which enabled us to
provide our customers with additional tools for analyzing commercial real estate
markets. Any future expansion could reduce our profitability and increase our
capital expenditures. Therefore, while we expect current service offerings to
remain profitable, driving overall earnings throughout 2010 and providing
substantial cash flow for our business, it is possible that any new investments
could cause us to generate losses and negative cash flow from operations in the
future.
Current
general economic conditions in the U.S. and the world are negatively affecting
business operations for our clients and are resulting in more business
consolidations and, in certain circumstances, failures. As a result of these
economic conditions, we continue to see customer cancellations, reductions of
services and failures to pay amounts due to us, although at a slower pace than
in previous quarters. If cancellations, reductions of services and
failures to pay continue at the current rate or increase, and we are unable to
offset the resulting decrease in revenue by increasing sales to new or existing
customers, our revenues may decline or grow at reduced
rates. Additionally,
28
current
economic conditions may cause customers to reduce expenses, and customers may be
forced to purchase fewer services from us or cancel all services. We
compete against many other commercial real estate information, marketing and
analytic service providers for business. If customers choose to
cancel our services for cost-cutting or other reasons, our revenue could
decline. The extent and duration of any future continued weakening of
the economy is unknown. The extent and duration of any benefits
resulting from any of the governmental or private sector initiatives designed to
strengthen the economy are currently unknown and there can be no assurance that
those initiatives will be successful in the future. Because of these
uncertainties, we may not be able to accurately forecast our revenue or
earnings. However, we continue to believe that the Company is
positioned to generate continued, sustained earnings in 2010.
Our
financial reporting currency is the U.S. dollar. Changes in exchange rates
can significantly affect our reported results and consolidated
trends. We believe that our increasing diversification beyond the
U.S. economy through our international businesses benefits our stockholders over
the long term. We also believe it is important to evaluate our operating results
before and after the effect of currency changes, as it may provide a more
accurate comparison of our results of operations over historical periods.
Currency volatility may continue, which may impact (either positively or
negatively) our reported financial results and consolidated trends and
comparisons.
We
currently issue stock options and/or restricted stock to our officers, directors
and employees, and as a result we record additional compensation expense in our
consolidated statements of operations. We plan to continue the use of
stock-based compensation for our officers, directors and employees, which may
include, among other things, restricted stock or stock option grants that
typically will require us to record additional compensation expense in our
consolidated statements of operations and reduce our net income.
Our
subscription-based information services, consisting primarily of CoStar Property
Professional, CoStar Tenant, CoStar COMPS Professional, and FOCUS services
currently generate more than 95% of our total revenues. CoStar Property
Professional, CoStar Tenant, and CoStar COMPS Professional are generally sold as
a suite of similar services and comprise our primary service offering in our
U.S. operating segment. FOCUS is our primary service offering in our
International operating segment. The majority of our contracts for our
subscription-based information services typically have a minimum term of one
year and renew automatically. Upon renewal, many of the subscription contract
rates may change in accordance with contract provisions or as a result of
contract renegotiations. To encourage clients to use our services regularly, we
generally charge a fixed monthly amount for our subscription-based information
services rather than fees based on actual system usage. Contract rates are
generally based on the number of sites, number of users, organization size, the
client’s business focus, geography and the number of services to which a client
subscribes. Our subscription clients generally pay contract fees on a monthly
basis, but in some cases may pay us on a quarterly or annual basis. We recognize
this revenue on a straight-line basis over the life of the contract. Annual and
quarterly advance payments result in deferred revenue, substantially reducing
the working capital requirements generated by accounts receivable.
For the
twelve months ended December 31, 2009 and 2008, our contract renewal rate was
approximately 85% and 89%, respectively. As discussed above, our trailing
twelve-month contract renewal rate may continue to decline if continuing
negative economic conditions lead to greater business failures and/or
consolidations, further reductions in customer spending or decreases in the
customer base.
Application
of Critical Accounting Policies and Estimates
The
preparation of financial statements and related disclosures in conformity with
generally accepted accounting principles (“GAAP”) in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of contingent assets
and liabilities at the date of the financial statements and revenues and
expenses during the period reported. The following accounting policies involve a
“critical accounting estimate” because they are particularly dependent on
estimates and assumptions made by management about matters that are highly
uncertain at the time the accounting estimates are made. In addition, while we
have used our best estimates based on facts and circumstances available to us at
the time, different estimates reasonably could have been used in the current
period. Changes in the accounting estimates we use are reasonably likely to
occur from period to period, which may have a material impact on the
presentation of our financial condition and results of operations. We review
these estimates and assumptions periodically and reflect the effects of
revisions in the period that they are determined to be necessary.
29
Valuation of Long-Lived and Intangible Assets and Goodwill
We assess
the impairment of long-lived assets, identifiable intangibles and goodwill
whenever events or changes in circumstances indicate that the carrying value may
not be recoverable. Judgments made by management relate to the expected useful
lives of long-lived assets and our ability to realize any undiscounted cash
flows of the carrying amounts of such assets. The accuracy of these
judgments may be adversely affected by several factors, including the factors
listed below:
|
|
•
|
Significant
underperformance relative to historical or projected future operating
results;
|
|
|
•
|
Significant
changes in the manner of our use of the acquired assets or the strategy
for our overall business;
|
|
|
•
|
Significant
negative industry or economic trends;
or
|
|
|
•
|
Significant
decline in our market capitalization relative to net book value for a
sustained period.
|
When we
determine that the carrying value of long-lived and identifiable intangible
assets may not be recovered based upon the existence of one or more of the above
indicators, we test for impairment.
Goodwill
and identifiable intangible assets not subject to amortization are tested
annually by each reporting unit on October 1 of each year for impairment and are
tested for impairment more frequently based upon the existence of one or more of
the above indicators. We consider our operating segments, U.S. and
International, as our reporting units under FASB authoritative guidance for
consideration of potential impairment of goodwill.
The
goodwill impairment test is a two-step process. The first step is to
determine the fair value of each reporting unit. We estimate the fair value of
each reporting unit based on a projected discounted cash flow model that
includes significant assumptions and estimates including our future financial
performance and a weighted average cost of capital. The fair value of each
reporting unit is compared to the carrying amount of the reporting unit. If the
carrying value of the reporting unit exceeds the fair value, then the second
step of the process is performed to measure the impairment loss. We
measure impairment loss based on a projected discounted cash flow method using a
discount rate determined by our management to be commensurate with the risk in
our current business model. A 50% decrease in the fair value of our
International reporting unit as of December 31, 2009 would have no impact on the
carrying value of our goodwill.
Accounting
for Income Taxes
As part
of the process of preparing our consolidated financial statements, we are
required to estimate our income taxes in each of the jurisdictions in which we
operate. This process requires us to estimate our actual current tax exposure
and assess the temporary differences resulting from differing treatment of
items, such as deferred revenue or deductibility of certain intangible assets,
for tax and accounting purposes. These differences result in deferred tax assets
and liabilities, which are included within our consolidated balance sheets. We
must then also assess the likelihood that our deferred tax assets will be
recovered from future taxable income, and, to the extent we believe that it is
more-likely-than not that some portion or all of our deferred tax assets will
not be realized, we must establish a valuation allowance. To the
extent we establish a valuation allowance or change the allowance in a period,
we must reflect the corresponding increase or decrease within the tax provision
in the statements of operations.
Non-GAAP
Financial Measures
We
prepare and publicly release quarterly unaudited financial statements prepared
in accordance with GAAP. We also disclose and discuss certain non-GAAP financial
measures in our public releases. Currently, the non-GAAP financial measure that
we disclose is EBITDA, which is our net income (loss) before interest, income
taxes, depreciation and amortization. We disclose EBITDA on a consolidated and
an operating segment basis in our earnings releases, investor conference calls
and filings with the Securities and Exchange Commission. The non-GAAP financial
measures that we use may not be comparable to similarly titled measures reported
by other companies. Also, in the future, we may disclose different non-GAAP
financial measures in order to help our investors more meaningfully evaluate and
compare our future results of operations to our previously reported results of
operations.
30
We view
EBITDA as an operating performance measure and as such we believe that the GAAP
financial measure most directly comparable to it is net income (loss). In
calculating EBITDA, we exclude from net income (loss) the financial items that
we believe should be separately identified to provide additional analysis of the
financial components of the day-to-day operation of our business. We have
outlined below the type and scope of these exclusions and the material
limitations on the use of this non-GAAP financial measure as a result of these
exclusions. EBITDA is not a measurement of financial performance under GAAP and
should not be considered as a measure of liquidity, as an alternative to net
income (loss) or as an indicator of any other measure of performance derived in
accordance with GAAP. Investors and potential investors in our securities should
not rely on EBITDA as a substitute for any GAAP financial measure, including net
income (loss). In addition, we urge investors and potential investors in our
securities to carefully review the reconciliation of EBITDA to net income (loss)
set forth below, in our earnings releases and in other filings with the
Securities and Exchange Commission and to carefully review the GAAP financial
information included as part of our Quarterly Reports on Form 10-Q and our
Annual Reports on Form 10-K that are filed with the Securities and Exchange
Commission, as well as our quarterly earnings releases, and compare the GAAP
financial information with our EBITDA.
EBITDA is
used by management to internally measure our operating and management
performance and by investors as a supplemental financial measure to evaluate the
performance of our business that, when viewed with our GAAP results and the
accompanying reconciliation, we believe provides additional information that is
useful to gain an understanding of the factors and trends affecting our
business. We have spent more than 22 years building our database of
commercial real estate information and expanding our markets and services
partially through acquisitions of complementary businesses. Due to the expansion
of our information, marketing and analytic services, which included
acquisitions, our net income (loss) has included significant charges for
purchase amortization, depreciation and other amortization. EBITDA excludes
these charges and provides meaningful information about the operating
performance of our business, apart from charges for purchase amortization,
depreciation and other amortization. We believe the disclosure of EBITDA helps
investors meaningfully evaluate and compare our performance from quarter to
quarter and from year to year. We also believe EBITDA is a measure of our
ongoing operating performance because the isolation of non-cash charges, such as
amortization and depreciation, and non-operating items, such as interest and
income taxes, provides additional information about our cost structure, and,
over time, helps track our operating progress. In addition, investors,
securities analysts and others have regularly relied on EBITDA to provide a
financial measure by which to compare our operating performance against that of
other companies in our industry.
Set forth
below are descriptions of the financial items that have been excluded from our
net income (loss) to calculate EBITDA and the material limitations associated
with using this non-GAAP financial measure as compared to net income
(loss):
|
|
·
|
Purchase
amortization in cost of revenues may be useful for investors to consider
because it represents the use of our acquired database technology, which
is one of the sources of information for our database of commercial real
estate information. We do not believe these charges necessarily reflect
the current and ongoing cash charges related to our operating cost
structure.
|
|
|
·
|
Purchase
amortization in operating expenses may be useful for investors to consider
because it represents the estimated attrition of our acquired customer
base and the diminishing value of any acquired trade names. We do not
believe these charges necessarily reflect the current and ongoing cash
charges related to our operating cost
structure.
|
|
|
·
|
Depreciation
and other amortization may be useful for investors to consider because
they generally represent the wear and tear on our property and equipment
used in our operations. We do not believe these charges necessarily
reflect the current and ongoing cash charges related to our operating cost
structure.
|
|
|
·
|
The
amount of net interest income we generate may be useful for investors to
consider and may result in current cash inflows or outflows. However, we
do not consider the amount of net interest income to be a representative
component of the day-to-day operating performance of our
business.
|
31
|
|
·
|
Income
tax expense (benefit) may be useful for investors to consider because
it generally represents the taxes which may be payable for the period and
the change in deferred income taxes during the period and may reduce the
amount of funds otherwise available for use in our
business. However, we do not consider the amount of income tax
expense (benefit) to be a representative component of the day-to-day
operating performance of our
business.
|
Management
compensates for the above-described limitations of using non-GAAP measures by
using a non-GAAP measure only to supplement our GAAP results and to provide
additional information that is useful to gain an understanding of the factors
and trends affecting our business.
The
following table shows our EBITDA reconciled to our net income and our cash flows
from operating, investing and financing activities for the indicated periods (in
thousands):
|
Year
Ended December 31,
|
||||||||||||
|
2007
|
2008
|
2009
|
||||||||||
|
Net
income
|
$ | 15,951 | $ | 24,623 | $ | 18,693 | ||||||
|
Purchase
amortization in cost of revenues
|
2,170 | 2,284 | 2,389 | |||||||||
|
Purchase
amortization in operating expenses
|
5,063 | 4,880 | 3,412 | |||||||||
|
Depreciation
and other amortization
|
8,914 | 9,637 | 8,875 | |||||||||
|
Interest
income, net
|
(8,045 | ) | (4,914 | ) | (1,253 | ) | ||||||
|
Income
tax expense, net
|
9,946 | 20,079 | 14,395 | |||||||||
|
EBITDA
|
$ | 33,999 | $ | 56,589 | $ | 46,511 | ||||||
|
Cash
flows provided by (used in)
|
||||||||||||
|
Operating
activities
|
$ | 51,732 | $ | 40,908 | $ | 39,569 | ||||||
|
Investing
activities
|
$ | (40,331 | ) | $ | 52,430 | $ | 3,408 | |||||
|
Financing
activities
|
$ | 8,161 | $ | 11,475 | $ | 2,172 | ||||||
Consolidated
Results of Operations
The
following table provides our selected consolidated results of operations for the
indicated periods (in thousands of dollars and as a percentage of total
revenue):
|
Year
Ended December 31,
|
||||||||||||||||||||||||
|
2007
|
2008
|
2009
|
||||||||||||||||||||||
|
Revenues
|
$ | 192,805 | 100.0 | % | $ | 212,428 | 100.0 | % | $ | 209,659 | 100.0 | % | ||||||||||||
|
Cost
of
revenues
|
76,704 | 39.8 | 73,408 | 34.6 | 73,714 | 35.2 | ||||||||||||||||||
|
Gross
margin
|
116,101 | 60.2 | 139,020 | 65.4 | 135,945 | 64.8 | ||||||||||||||||||
|
Operating
expenses:
|
||||||||||||||||||||||||
|
Selling
and
marketing
|
51,777 | 26.9 | 41,705 | 19.6 | 42,508 | 20.3 | ||||||||||||||||||
|
Software
development
|
12,453 | 6.5 | 12,759 | 6.0 | 13,942 | 6.6 | ||||||||||||||||||
|
General
and
administrative
|
36,569 | 19.0 | 39,888 | 18.8 | 44,248 | 21.1 | ||||||||||||||||||
|
Gain
on lease settlement,
net
|
(7,613 | ) | (3.9 | ) | ¾ | 0.0 | ¾ | 0.0 | ||||||||||||||||
|
Purchase
amortization
|
5,063 | 2.6 | 4,880 | 2.3 | 3,412 | 1.6 | ||||||||||||||||||
|
Total
operating
expenses
|
98,249 | 51.0 | 99,232 | 46.7 | 104,110 | 49.7 | ||||||||||||||||||
|
Income
from
operations
|
17,852 | 9.3 | 39,788 | 18.7 | 31,835 | 15.2 | ||||||||||||||||||
|
Interest
and other income,
net
|
8,045 | 4.2 | 4,914 | 2.3 | 1,253 | 0.6 | ||||||||||||||||||
|
Income
before income
taxes
|
25,897 | 13.4 | 44,702 | 21.0 | 33,088 | 15.8 | ||||||||||||||||||
|
Income
tax expense,
net
|
9,946 | 5.2 | 20,079 | 9.5 | 14,395 | 6.9 | ||||||||||||||||||
|
Net
income
|
$ | 15,951 | 8.3 | % | $ | 24,623 | 11.6 | % | $ | 18,693 | 8.9 | % | ||||||||||||
32
Comparison
of Year Ended December 31, 2009 and Year Ended December 31, 2008
Revenues
. Revenues decreased
to $209.7 million in 2009, from $212.4 million in 2008. Revenues from customers
in our International operations decreased $4.3 million primarily due to foreign
currency fluctuations. The decrease in International revenues was partially
offset by an increase in U.S. revenues of approximately $1.5
million. The increase in U.S. revenues is primarily due to additional
revenue of approximately $8.5 million from our July 2009 acquisition of PPR
partially offset by decreased sales resulting from a difficult commercial real
estate and economic environment. Our subscription-based information services
consist primarily of CoStar Property Professional, CoStar Tenant, CoStar COMPS
Professional, FOCUS services and Propex services. As of December 31, 2009, our
subscription-based information services represented more than 95% of our total
revenues.
Gross Margin
. Gross margin
decreased to $135.9 million in 2009, from $139.0 million in 2008. The gross
margin percentage decreased to 64.8% in 2009, from 65.4% in 2008. The decrease
in the amount and percentage of gross margin was principally due to a $2.8
million decrease in revenue in 2009.
Selling and Marketing
Expenses
. Selling and marketing expenses increased to $42.5 million in
2009, from $41.7 million in 2008, and increased as a percentage of revenues to
20.3% in 2009, from 19.6% in 2008. The increase in the amount and percentage of
selling and marketing expenses was primarily due to additional selling and
marketing expenses of approximately $1.7 million incurred by PPR and included as
a result of our July 2009 acquisition of PPR. The increase was offset
by an approximately $900,000 decrease due to foreign currency
fluctuations.
Software Development
Expenses
. Software development expenses increased to $13.9 million in
2009, from $12.8 million in 2008, and increased as a percentage of revenues to
6.6% in 2009, from 6.0% in 2008. The increase in the
amount and percentage of software development expenses was due to additional
software development expenses of approximately $600,000 incurred by PPR and
included as a result of our July 2009 acquisition of PPR as well as additional
development expenses of approximately $400,000 incurred by Resolve Technology,
and included as a result of our October 2009 acquisition of Resolve
Technology.
General and Administrative
Expenses
. General and administrative expenses increased to $44.2 million
in 2009, from $39.9 million in 2008, and increased as a percentage of revenues
to 21.1% in 2009, from 18.8% in 2008. The increase in the amount and percentage
of general and administrative expenses was principally a result of an increase
of acquisition and deal related costs of approximately $700,000, an increase in
legal fees of $2.0 million and additional general and administrative expenses of
approximately $1.1 million incurred by PPR and included as a result of our July
2009 acquisition of PPR.
Purchase Amortization.
Purchase amortization decreased to $3.4 million in 2009, from $4.9 million in
2008, and decreased as a percentage of revenues to 1.6% in 2009, from 2.3% in
2008. The decrease in purchase amortization expense is due to the
completion of amortization for certain identifiable intangible assets in
2009.
Interest and Other Income, Net.
Interest and other income, net decreased to $1.3 million in 2009, from
$4.9 million in 2008. Interest and other income, net decreased due to lower
average interest rates in 2009 compared to 2008.
Income Tax Expense, Net.
Income tax expense, net decreased to $14.4 million in 2009, from $20.1
million in 2008. This decrease was due to lower income before income taxes as a
result of our decreased profitability.
Comparison
of Business Segment Results for Year Ended December 31, 2009 and Year Ended
December 31, 2008
We manage
our business geographically in two operating segments, with our primary areas of
measurement and decision-making being the U.S. and International, which includes
the U.K. and France. Management relies on an internal management reporting
process that provides segment revenue and EBITDA, which is our net income before
interest, income taxes, depreciation and amortization. Management believes that
segment EBITDA is an appropriate measure for evaluating the operational
performance of our segments. EBITDA is used by management to internally measure
our operating and management performance and to evaluate the performance of our
business. However, this measure should be considered in addition to, not as a
substitute for or superior to, income from operations or other measures of
financial performance prepared in accordance with GAAP.
33
Segment
Revenues
. CoStar Property
Professional, CoStar Tenant, and CoStar COMPS Professional are generally sold as
a suite of similar services and comprise our primary service offering in our
U.S. operating segment. U.S. revenues increased to $191.6 million from $190.1
million for the years ended December 31, 2009 and 2008, respectively. This
increase in U.S. revenue is due to additional revenues of approximately $8.5
million included as a result of our July 2009 acquisition of PPR, partially
offset by a decrease of approximately $7.0 million in U.S. revenues due to
decreased sales resulting from a difficult commercial real estate and economic
environment. FOCUS is our primary service offering in our International
operating segment. International revenues decreased approximately
$4.3 million primarily due to foreign currency fluctuations, partially offset by
intersegment revenues of approximately $900,000 attributable to services
performed by Property and Portfolio Research Ltd. for
PPR. Intersegment revenues are eliminated from total
revenues.
Segment EBITDA.
U.S. EBITDA
decreased to $47.7 million from $58.8 million for the years ended December 31,
2009 and 2008, respectively. The decrease in U.S. EBITDA was due primarily to
additional costs incurred by PPR, which we acquired in July of 2009 and
increased legal fees. International EBITDA decreased to a loss of $1.2 million
for the year ended December 31, 2009 from a $2.2 million loss for the year ended
December 31, 2008. This decreased loss is primarily due to a lower corporate
allocation in 2009 as compared to 2008. International EBITDA includes a
corporate allocation of approximately $500,000 and $1.1 million for the years
ended December 31, 2009 and 2008, respectively. The corporate allocation
represents costs incurred for U.S. employees involved in international
management and expansion activities.
Comparison
of Year Ended December 31, 2008 and Year Ended December 31, 2007
Revenues
. Revenues grew to
$212.4 million in 2008, from $192.8 million in 2007. This increase in revenue
was due to further penetration of our subscription-based information and
marketing services, and successful cross-selling of our services to our
customers in existing markets, combined with continued high renewal rates. Our
subscription-based information services consist primarily of CoStar Property
Professional, CoStar Tenant, CoStar COMPS Professional, FOCUS services and
Propex services. As of December 31, 2008, our subscription-based information and
marketing services represented more than 90% of our total revenues.
Gross Margin
. Gross margin
increased to $139.0 million in 2008, from $116.1 million in 2007. The gross
margin percentage increased to 65.4% in 2008, from 60.2% in 2007. The increase
in the gross margin resulted principally from revenue growth from our
subscription-based information and marketing services and a decrease in cost of
revenues. Cost of revenues decreased to $73.4 million for the year ended
December 31, 2008, from $76.7 million for the year ended December 31, 2007
principally due to expansion costs that were incurred in 2007 that were not
incurred in 2008.
Selling and Marketing
Expenses
. Selling and marketing expenses decreased to $41.7 million in
2008, from $51.8 million in 2007, and decreased as a percentage of revenues to
19.6% in 2008, from 26.9% in 2007. The decrease was principally due to a
reduction in personnel costs of approximately $5.4 million primarily due to the
fact that the sales force sold services with a smaller average price point in
2008, which resulted in lower average contract values compared to 2007.
Additionally, there was a decrease in marketing initiatives of approximately
$2.3 million in 2008.
Software Development
Expenses
. Software development expenses slightly increased to $12.8
million in 2008, from $12.5 million in 2007, and slightly decreased as a
percentage of revenues to 6.0% in 2008, from 6.5% in 2007. The
decrease in the percentage was primarily due to increased revenues in
2008.
General and Administrative
Expenses
. General and administrative expenses increased to $39.9 million
in 2008, from $36.6 million in 2007, and decreased slightly as a percentage of
revenues to 18.8% in 2008, from 19.0% in 2007. The increase in the amount of
general and administrative expenses was principally a result of an increase of
approximately $2.5 million in legal fees and an increase of $1.6 million in bad
debt expense.
34
Gain on Lease Settlement, Net.
On September 14, 2007, CoStar U.K Limited, a wholly owned U.K. subsidiary
of CoStar, entered into an agreement with Trafigura Limited to assign to
Trafigura our leasehold interest in our office space located in London. The
lease assignment was effective on December 19, 2007. As a result, CoStar U.K.
Limited was paid $7.6 million, net of expenses, for the assignment of the lease.
There were no gains on lease settlements in 2008.
Purchase Amortization.
Purchase amortization slightly decreased to $4.9 million in 2008, from $5.1
million in 2007, and slightly decreased as a percentage of revenues to 2.3% in
2008, from 2.6% in 2007.
Interest and Other Income, Net.
Interest and other income, net decreased to $4.9 million in 2008, from
$8.0 million in 2007. Although, cash and cash equivalents, short-term and
long-term investments were higher in 2008 than in 2007, our interest and other
income decreased due to lower average interest rates in 2008 compared to
2007.
Income Tax Expense, Net.
Income tax expense, net increased to $20.1 million in 2008, from $9.9
million in 2007. This increase was primarily due to higher income before income
taxes for 2008 due to our growth and profitability, in addition to a higher
effective tax rate in 2008. The effective tax rate was lower in 2007
due to the gain on lease settlement in the U.K. that was completed in December
2007. The lease settlement resulted in income in the U.K., which
reduced the overall effective tax rate.
Comparison
of Business Segment Results for Year Ended December 31, 2008 and Year Ended
December 31, 2007
Due to
the increased size, complexity and funding requirements associated with our
international expansion, in 2007 we began to manage our business geographically
in two operating segments, with our primary areas of measurement and
decision-making being the U.S. and International, which includes the U.K. and
France. Management relies on an internal management reporting process that
provides segment revenue and EBITDA, which is our net income before interest,
income taxes, depreciation and amortization. Management believes that segment
EBITDA is an appropriate measure for evaluating the operational performance of
our segments. EBITDA is used by management to internally measure our operating
and management performance and to evaluate the performance of our business.
However, this measure should be considered in addition to, not as a substitute
for or superior to, income from operations or other measures of financial
performance prepared in accordance with GAAP.
Segment
Revenues
. CoStar Property
Professional, CoStar Tenant, and CoStar COMPS Professional are generally sold as
a suite of similar services and comprise our primary service offering in our
U.S. operating segment. U.S. revenues increased to $190.1 million from $170.3
million for the years ended December 31, 2008 and 2007, respectively. This
increase in U.S. revenue is due to further penetration of our U.S.
subscription-based information and marketing services and the successful
cross-selling of our service to our customers, combined with a continued high
renewal rate. FOCUS is our primary service offering in our International
operating segment. International revenues slightly decreased to $22.4
million from $22.5 million for the years ended December 31, 2008 and 2007,
respectively. This decrease is due to foreign currency
fluctuations. In their functional currency, International revenues
increased 7.2% for the year ended December 31, 2008 compared to the year ended
December 31, 2007.
Segment EBITDA.
U.S. EBITDA
increased to $58.8 million from $32.9 million for the years ended December 31,
2008 and 2007, respectively. The increase in U.S. EBITDA was due to increased
revenues, and lower sales and marketing personnel costs, partially offset by an
increase in legal fees and bad debt expense. International EBITDA decreased to a
loss of $2.2 million from $1.1 million earnings for the years ended December 31,
2008 and 2007, respectively. This decrease is primarily due to gain on lease
settlement of $7.6 million in 2007 that did not occur in 2008. International
EBITDA also includes a corporate allocation of approximately $1.1 million and
$2.6 million for the years ended December 31, 2008 and 2007, respectively. The
corporate allocation represents costs incurred for U.S. employees involved in
international management and expansion activities.
35
Consolidated
Quarterly Results of Operations
The
following tables summarize our consolidated results of operations on a quarterly
basis for the indicated periods (in thousands, except per share amounts, and as
a percentage of total revenues):
| 2008 | 2009 | |||||||||||||||||||||||||||||||
| Mar. 31 | Jun. 30 | Sep. 30 | Dec. 31 | Mar. 31 | Jun. 30 | Sep. 30 | Dec. 31 | |||||||||||||||||||||||||
|
Revenues
|
$ | 52,264 | $ | 53,478 | $ | 53,757 | $ | 52,929 | $ | 51,370 | $ | 50,064 | $ | 53,590 | $ | 54,635 | ||||||||||||||||
|
Cost
of revenues
|
19,721 | 18,341 | 17,613 | 17,733 | 16,894 | 16,744 | 19,149 | 20,927 | ||||||||||||||||||||||||
|
Gross
margin
|
32,543 | 35,137 | 36,144 | 35,196 | 34,476 | 33,320 | 34,441 | 33,708 | ||||||||||||||||||||||||
|
Operating
expenses
|
25,313 | 26,627 | 24,864 | 22,428 | 23,735 | 25,129 | 27,490 | 27,756 | ||||||||||||||||||||||||
|
Income
from operations
|
7,230 | 8,510 | 11,280 | 12,768 | 10,741 | 8,191 | 6,951 | 5,952 | ||||||||||||||||||||||||
|
Interest
and other income, net
|
1,938 | 1,243 | 951 | 782 | 442 | 322 | 263 | 226 | ||||||||||||||||||||||||
|
Income
before income taxes
|
9,168 | 9,753 | 12,231 | 13,550 | 11,183 | 8,513 | 7,214 | 6,178 | ||||||||||||||||||||||||
|
Income
tax expense, net
|
4,126 | 4,318 | 5,586 | 6,049 | 5,077 | 3,897 | 2,889 | 2,532 | ||||||||||||||||||||||||
|
Net
income
|
$ | 5,042 | $ | 5,435 | $ | 6,645 | $ | 7,501 | $ | 6,106 | $ | 4,616 | $ | 4,325 | $ | 3,646 | ||||||||||||||||
|
Net
income per share
-
basic
|
$ | 0.26 | $ | 0.28 | $ | 0.34 | $ | 0.39 | $ | 0.31 | $ | 0.24 | $ | 0.22 | $ | 0.18 | ||||||||||||||||
|
Net
income per share
-
diluted
|
$ | 0.26 | $ | 0.28 | $ | 0.34 | $ | 0.38 | $ | 0.31 | $ | 0.24 | $ | 0.22 | $ | 0.18 | ||||||||||||||||
|
2008
|
2009
|
|||||||||||||||||||||||||||||||
|
Mar.
31
|
Jun.
30
|
Sep.
30
|
Dec.
31
|
Mar.
31
|
Jun.
30
|
Sep.
30
|
Dec.
31
|
|||||||||||||||||||||||||
|
Revenues
|
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||||||
|
Cost
of revenues
|
37.7 | 34.3 | 32.8 | 33.5 | 32.9 | 33.4 | 35.7 | 38.3 | ||||||||||||||||||||||||
|
Gross
margin
|
62.3 | 65.7 | 67.2 | 66.5 | 67.1 | 66.6 | 64.3 | 61.7 | ||||||||||||||||||||||||
|
Operating
expenses
|
48.5 | 49.8 | 46.2 | 42.4 | 46.2 | 50.2 | 51.3 | 50.8 | ||||||||||||||||||||||||
|
Income
from operations
|
13.8 | 15.9 | 21.0 | 24.1 | 20.9 | 16.4 | 13.0 | 10.9 | ||||||||||||||||||||||||
|
Interest
and other income, net
|
3.7 | 2.3 | 1.8 | 1.5 | 0.9 | 0.6 | 0.5 | 0.4 | ||||||||||||||||||||||||
|
Income
before income taxes
|
17.5 | 18.2 | 22.8 | 25.6 | 21.8 | 17.0 | 13.5 | 11.3 | ||||||||||||||||||||||||
|
Income
tax expense, net
|
7.9 | 8.0 | 10.4 | 11.4 | 9.9 | 7.8 | 5.4 | 4.6 | ||||||||||||||||||||||||
|
Net
income
|
9.6 | % | 10.2 | % | 12.4 | % | 14.2 | % | 11.9 | % | 9.2 | % | 8.1 | % | 6.7 | % | ||||||||||||||||
Recent
Acquisitions
First CLS, Inc.
On April 1,
2008, we acquired certain assets of First CLS, Inc. (doing business as the Dorey
Companies and DoreyPRO), an Atlanta-based provider of local commercial real
estate information for $3.0 million in initial cash consideration and deferred
consideration of $1.7 million paid during the third quarter of
2009.
PPR
. On July 17, 2009, we
acquired all of the issued and outstanding equity securities of PPR, and its
wholly owned subsidiary Property and Portfolio Research Ltd., providers of real
estate analysis, market forecasts and credit risk analytics to the commercial
real estate industry. We acquired PPR from DMG Information, Inc. (“DMGI”) in
exchange for 572,999 shares of CoStar common stock, which had an aggregate value
of approximately $20.9 million as of the closing date. On July 17, 2009, 433,667
shares of our common stock were issued to DMGI, and the remaining 139,332 shares
were issued to DMGI on September 28, 2009 after taking into account post-closing
purchase price adjustments.
Resolve Technology
. On
October 19, 2009, we acquired all of the outstanding capital stock of Resolve
Technology, a Delaware corporation, for approximately $4.5 million, consisting
of approximately $3.4 million in cash and 25,886 shares, or approximately $1.1
million, of CoStar restricted common stock, which shares are subject to a
three-year lockup. The purchase price is subject to certain
post-closing adjustments. Additionally, the seller may be entitled to
receive (i) a potential deferred cash payout two years after closing based on
the incremental growth of Resolve Technology’s revenue, and (ii) other potential
deferred cash payouts for successful completion of operational and sales
milestones during the period from closing through June 30, 2013, which period
may be subject to extension to a date no later than December 31,
2014.
36
Accounting Treatment
. These
acquisitions were accounted for using purchase accounting. The purchase price
for the First CLS, Inc. acquisition was primarily allocated to acquired customer
base and goodwill. For each of the PPR and Resolve Technology acquisitions, the
purchase price was allocated to various working capital accounts, developed
technology, customer base, trademarks, non-competition agreements and
goodwill. The acquired customer base for the acquisitions, which
consists of one distinct intangible asset for each acquisition and is composed
of acquired customer contracts and the related customer relationships, is being
amortized on a 125% declining balance method over ten years. The identified
intangibles will be amortized over their estimated useful
lives. Goodwill for these acquisitions will not be amortized, but is
subject to annual impairment tests. The results of operations of
First CLS, Inc., PPR, and Resolve Technology have been consolidated with those
of the Company since the respective dates of the acquisitions and are not
considered material to our consolidated financial statements. Accordingly, pro
forma financial information has not been presented for any of the
acquisitions.
Liquidity
and Capital Resources
Our
principal sources of liquidity are cash, cash equivalents and short-term
investments. Total cash, cash equivalents and short-term investments were $226.0
million at December 31, 2009 compared to $195.3 million at December 31, 2008.
The increase in cash, cash equivalents and short-term investments for the year
ended December 31, 2009 was primarily due to net cash from operating activities
of approximately $39.6 million, net cash provided from financing activities of
approximately $2.2 million, partially offset by purchases of property and
equipment and other assets of approximately $10.5 million, and net cash paid for
acquisitions of approximately $3.2 million.
Net cash
provided by operating activities for the year ended December 31, 2009 was $39.6
million compared to $40.9 million for the year ended December 31, 2008. The $1.3
million decrease in net cash provided by operating activities is primarily due
to a decrease of approximately $5.5 million from net income plus non-cash items,
a decrease of approximately $4.7 million due to changes in prepaid expenses and
deposits, and decreased cash receipts for deferred revenue of $1.1 million,
partially offset by decreased payments for accounts payable and other
liabilities of approximately $5.7 million and $4.3 million in increased cash
receipts on receivables.
Net cash
provided by investing activities was $3.4 million for the year ended December
31, 2009, compared to net cash provided by investing activities of $52.4 million
for the year ended December 31, 2008. This $49.0 million decrease in net cash
provided by investing activities was primarily due to the decision in 2008 to
invest in money market funds and U.S. treasuries instead of short-term
investment instruments, which resulted in a net sale of investments of
approximately $59.1 million for the year ended December 31, 2008 compared to
sales of investments of approximately $17.2 million for the year ended December
31, 2009.
Net cash
provided by financing activities was $2.2 million for the year ended December
31, 2009 compared to $11.5
million for the year ended
December 31, 2008. The change is due to decreased proceeds from
exercise of stock options.
Contractual Obligations
. The
following table summarizes our principal contractual obligations at December 31,
2009 and the effect such obligations are expected to have on our liquidity and
cash flows in future periods (in thousands):
|
Total
|
2010
|
2011-2012 | 2013-2014 |
2015
and
thereafter
|
||||||||||||||||
|
Operating
leases
|
$ | 26,225 | $ | 10,530 | $ | 11,751 | $ | 3,061 | $ | 883 | ||||||||||
|
Purchase
obligations
(1)
|
7,036 | 2,927 | 2,746 | 763 | 600 | |||||||||||||||
|
Total
contractual principal cash obligations
|
$ | 33,261 | $ | 13,457 | $ | 14,497 | $ | 3,824 | $ | 1,483 | ||||||||||
|
|
(1)
Amounts
do not include (i) contracts with initial terms of twelve months or less,
or (ii) multi-year contracts that may be terminated by a third party or
us. Amounts do not include unrecognized tax benefits of
$
1.9
million due to uncertainty regarding the timing of future cash
payments.
|
37
In
February 2010, we purchased a 169,429 square-foot LEED Gold certified office
building located at 1331 L Street, NW in downtown Washington, D.C. for a
purchase price of $41.25 million in cash.
During
2009, we incurred capital expenditures of approximately $10.5 million. We expect
to make capital expenditures in 2010 of approximately $20.0 million to $25.0
million.
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 may use cash, stock, debt or other means of
funding to make these acquisitions. We paid $3.0 million in initial
cash consideration in April 2008 and $1.7 million in deferred consideration in
August 2009 for the online commercial real estate information assets of First
CLS, Inc., an Atlanta-based provider of local commercial real estate
information. In the third quarter of 2009, we issued 572,999 shares of common
stock to DMGI, Inc. for all of the issued and outstanding capital stock of PPR
and its wholly owned subsidiary. In October 2009, we acquired Resolve
Technology for approximately $3.4 million ($2.9 million was paid upon
acquisition and $450,000 was deferred until February 2010) in cash and 25,886
shares of CoStar common stock. Additionally, the seller may be
entitled to receive (i) a potential deferred cash payout two years after closing
based on the incremental growth of Resolve Technology’s revenue, and (ii) other
potential deferred cash payouts for successful completion of additional
operational and sales milestones during the period from closing through June 30,
2013, which period may be subject to extension to a date no later than December
31, 2014.
Based on
current plans, we believe that our available cash combined with positive cash
flow provided by operating activities should be sufficient to fund our
operations for at least the next 12 months.
As of
December 31, 2009, we had $32.8 million par value of long-term investments in
student loan auction rate securities (“ARS”), which failed to settle at
auctions. The majority of these investments are of high credit quality
with AAA credit ratings and are primarily securities supported by
guarantees from the Federal Family Education Loan Program (“FFELP”) of the
U.S. Department of Education. While we continue to earn interest on
these investments, the investments are not liquid in the short
term. In the event we need to immediately access these funds, we may
have to sell these securities at an amount below par value. Based on
our ability to access our cash, cash equivalents and other short-term
investments and our expected operating cash flows, we do not
anticipate having to sell these investments below par value in order to operate
our business in the foreseeable future.
On
December 23, 2008, the Company initiated a Financial Industry Regulatory
Authority (“FINRA”) arbitration against Credit Suisse First Boston (“CSFB”)
related to CSFB’s purchase of ARS for the Company’s account. Our
complaint asserts breach of contract, fraud, breach of fiduciary duty and other
causes of action. An arbitration hearing was originally scheduled to begin
during the week beginning December 7, 2009, but was rescheduled at the request
of CSFB and is now set to begin on March 8, 2010. We expect to receive a
ruling on its claim during the second quarter of 2010. Since the outcome
of this legal proceeding is uncertain at this time, we cannot estimate the
amount of gain or loss, if any, that could result from the resolution of this
matter.
Recent
Accounting Pronouncements
In
February 2007, the FASB issued authoritative guidance on the fair value option
for financial assets and financial liabilities, which permits entities to choose
to measure many financial instruments and certain other items at fair value that
are not currently required to be measured at fair value. This guidance is
effective for fiscal years beginning on or after December 31, 2007. We adopted
this guidance on January 1, 2008 and have not elected to apply the fair value
option to any of our financial instruments. The adoption of this
guidance did not have a material impact on our results of operations or
financial position.
In
December 2007, the FASB issued authoritative guidance on business
combinations, which changes the accounting for any business combination we enter
into with an acquisition date after December 31, 2008. Under this guidance, an
acquiring entity is required to recognize all the assets acquired and
liabilities assumed in a transaction at the acquisition date fair value with
limited exceptions. This guidance changes the accounting treatment and
disclosure for certain specific items in a business combination. We
adopted this guidance on January 1, 2009 and have recorded assets acquired and
liabilities assumed at fair value.
38
In
December 2007, the FASB issued authoritative guidance on non-controlling
interest, which establishes new accounting and reporting standards for the
non-controlling interest in a subsidiary and for the deconsolidation of a
subsidiary. This guidance is effective for fiscal years beginning on or after
December 15, 2008. We adopted this guidance on January 1, 2009. The
adoption of this guidance did not have a material impact on our results of
operations or financial position.
In April
2008, the FASB issued authoritative guidance on existing intangibles or expected
future cash flows from those intangibles, which is effective for all fiscal
years and interim periods beginning after December 15, 2008. Early adoption of
this guidance is not permitted. This guidance requires additional footnote
disclosures about the impact of our ability or intent to renew or extend
agreements related to existing intangibles or expected future cash flows from
those intangibles, how we account for costs incurred to renew or extend such
agreements, the time until the next renewal or extension period by asset class,
and the amount of renewal or extension costs capitalized, if any. For any
intangibles acquired after December 31, 2008, this guidance requires that we
consider our experience regarding renewal and extensions of similar arrangements
in determining the useful life of such intangibles. If we do not have experience
with similar arrangements, this guidance requires that we use the assumptions of
a market participant putting the intangible to its highest and best use in
determining the useful life. We adopted this guidance on January 1, 2009. The
adoption of this guidance did not have a material impact on our results of
operations or financial position.
In June
2008, the FASB issued authoritative guidance related to determining whether
instruments granted in share-based payment transactions are participating
securities. This guidance clarifies that unvested share-based payment
awards with a right to receive non-forfeitable dividends are participating
securities. This guidance is effective for all annual and interim periods
beginning after December 15, 2008. Adoption of this standard will require the
two-class method of calculating basic earnings per share to the extent that
unvested share-based payments have the right to receive non-forfeitable
dividends. We adopted this guidance on January 1, 2009. The adoption
of this guidance did not have a material impact on our results of operations or
financial position.
In April
2009, the FASB issued authoritative guidance related to the initial recognition,
measurement and subsequent accounting for assets and liabilities arising from
pre-acquisition contingencies in a business combination. It requires that such
assets acquired or liabilities assumed be initially recognized at fair value at
the acquisition date if fair value can be determined during the measurement
period. When fair value cannot be determined, companies should typically account
for the acquired contingencies using existing guidance. This guidance requires
that companies expense acquisition and deal-related costs that were previously
allowed to be capitalized. This guidance also requires that a
systematic and rational basis for subsequently measuring and accounting for the
assets or liabilities be developed depending on their nature. This guidance was
effective for contingent assets or liabilities arising from business
combinations with an acquisition date on or after January 1,
2009. The adoption of this guidance changes the accounting
treatment and disclosure for certain specific items in a business combination
with an acquisition date subsequent to December 31, 2008. We adopted
this guidance on January 1, 2009, and expensed acquisition and deal-related
costs associated primarily with the acquisitions of PPR and Resolve
Technology.
In April
2009, the FASB issued authoritative guidance for determining whether a market is
active or inactive, and whether a transaction is distressed. This guidance is
applicable to all assets and liabilities (financial and non-financial) and will
require enhanced disclosures. We adopted this guidance for our interim period
ending June 30, 2009. The adoption of this guidance did not have a material
impact on our results of operations or financial position, but did require
additional disclosures in our financial statements.
In April
2009, the FASB issued authoritative guidance requiring disclosures in interim
reporting periods concerning the fair value of financial instruments that were
previously only required in the annual financial statements. We adopted the
provisions of this guidance for our interim period ending June 30, 2009. The
adoption of this guidance did not have a material impact on our results of
operations or financial position, but did require additional disclosures in our
financial statements.
In April
2009, the FASB issued authoritative guidance that redefines what constitutes an
other-than-temporary impairment, defines credit and non-credit components of an
other-than-temporary impairment, prescribes their financial statement treatment,
and requires enhanced disclosures relating to such impairments. We adopted this
guidance for our interim period ending June 30, 2009. The adoption of this
guidance did not have a material impact on our results of operations or
financial position, but did require additional disclosures in our financial
statements.
39
In May
2009, the FASB issued authoritative guidance which establishes general standards
of accounting for and disclosure of events that occur after the balance sheet
date but before financial statements are issued. This guidance was effective for
all interim and annual reporting periods ending after June 15, 2009. This
guidance has not and is not expected to result in significant changes in the
subsequent events that we report, either through recognition or disclosure, in
our financial statements.
In June
2009, the FASB issued authoritative guidance to amend the manner in which
entities evaluate whether consolidation is required for variable interest
entities (VIE). Previously, variable interest holders were required
to determine whether they had a controlling financial interest in a VIE based on
a quantitative analysis of the expected gains and/or losses of the
entity. The new guidance requires an enterprise with a variable
interest in a VIE to qualitatively assess whether it has a controlling financial
interest in the entity, and if so, whether it is the primary
beneficiary. This guidance also requires that companies continually
evaluate VIEs for consolidation, rather than assessing whether consolidation is
required based upon the occurrence of triggering events. This
guidance enhances disclosures to provide financial statement users with greater
transparency about transfers of financial assets and a transferor’s continuing
involvement with transferred financial assets. This guidance will be effective
for the first annual reporting period beginning after November 15, 2009. This
guidance is not expected to materially impact our results of operations,
financial position or related disclosures.
In June
2009, the FASB issued authoritative guidance which replaced the previous
hierarchy of U.S. GAAP and establishes the FASB Codification as the single
source of authoritative U.S. GAAP recognized by the FASB to be applied by
nongovernmental entities. This guidance is effective for financial statements
issued for interim and annual periods ending after September 15, 2009. This
guidance did not materially impact our results of operations or financial
position, but did require changes to our disclosures in our financial
statements.
In July
2009, the FASB issued authoritative guidance to improve the consistency with
which companies apply fair value measurements guidance to
liabilities. This guidance is effective for interim and annual
periods beginning after September 30, 2009. This guidance is not
expected to materially impact our results of operations, financial position or
related disclosures.
In
October 2009, the FASB issued authoritative guidance that amends existing
guidance for identifying separate deliverables in a revenue-generating
transaction where multiple deliverables exist, and provides guidance for
measuring and allocating revenue to one or more units of
accounting. In addition, the FASB issued authoritative guidance on
arrangements that include software elements. Under this guidance,
tangible products containing software components and non-software components
that are essential to the functionality of the tangible product will no longer
be within the scope of the software revenue recognition guidance. This guidance
is effective using the prospective application or the retrospective application
for revenue arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010 with earlier application permitted. We are
currently assessing the impacts adoption of this guidance may have on our
financial statements.
In
January 2010, the FASB issued authoritative guidance that amends the disclosure
requirements related to recurring and nonrecurring fair value measurements. This
guidance requires new disclosures on the transfers of assets and liabilities
between Level 1 (assets and liabilities measured using observable inputs such as
quoted prices in active markets) and Level 2 (assets and liabilities measured
using inputs other than quoted prices in active markets that are either directly
or indirectly observable) of the fair value measurement hierarchy, including the
amount and reason of the transfers. Additionally, this guidance requires a roll
forward of activities on purchases, sales, issuance, and settlements of the
assets and liabilities measured using significant unobservable inputs (Level 3
fair value measurements). This guidance is effective for interim and annual
reporting periods beginning after December 15, 2009, with the exception of the
additional disclosure for Level 3 assets and liabilities, which is effective for
fiscal years beginning after December 15, 2010, and for interim periods within
those fiscal years. This guidance is not expected to materially impact our
results of operations or financial position, but will require changes to our
disclosures in our interim and annual financial statements.
40
We
provide information, marketing and analytic services to the commercial real
estate and related business community in the U.S., U.K. and France. Our
functional currency for our operations in the U.K. and France is the local
currency. As such, fluctuations in the British Pound and Euro may have an impact
on our business, results of operations and financial position. For the year
ended December 31, 2009, revenue denominated in foreign currencies was
approximately 9.1% of total revenue. For the year ended December 31,
2009, our revenue would have decreased by approximately $1.9 million if the U.S.
dollar exchange rate used strengthened by 10%. In addition, we have
assets and liabilities denominated in foreign currencies. A 10%
strengthening of the U.S. dollar exchange rate against all currencies with which
we have exposure at December 31, 2009 would have resulted in an increase of
approximately $210,000 in the carrying amount of net assets. For the year ended
December 31, 2009, our revenue would have increased by approximately $1.9
million if the U.S. dollar exchange rate used weakened by 10%. In addition, we
have assets and liabilities denominated in foreign currencies. A 10%
weakening of the U.S. dollar exchange rate against all currencies with which we
have exposure at December 31, 2009 would have resulted in a decrease of
approximately $210,000 in the carrying amount of net assets. We currently do not
use financial instruments to hedge our exposure to exchange rate fluctuations
with respect to our foreign subsidiaries. We may seek to enter hedging
transactions in the future to reduce our exposure to exchange rate fluctuations,
but we may be unable to enter into hedging transactions successfully, on
acceptable terms or at all. As of December 31, 2009, accumulated
other comprehensive loss included a loss from foreign currency translation
adjustments of approximately $4.9 million.
We do not
have material exposure to market risks associated with changes in interest rates
related to cash equivalent securities held as of December 31,
2009. As of December 31, 2009, we had $226.0 million of cash, cash
equivalents and short-term investments. If there is an increase
or decrease in interest rates, there will be a corresponding increase or
decrease in the amount of interest earned on our cash, cash equivalents
and short-term investments. Based on our ability to access our
cash, cash equivalents and short-term investments, and our expected
operating cash flows, we do not believe that increases or decreases in interest
rates will impact our ability to operate our business in the foreseeable
future.
Included
within our long-term investments are investments in mostly AAA rated student
loan ARS. These securities are primarily securities supported by
guarantees from the FFELP of the U.S. Department of Education. As of
December 31, 2009, auctions for $32.8 million of our investments in auction rate
securities failed. As a result, we may not be able to sell these
investments at par value until a future auction on these investments is
successful. In the event we need to immediately liquidate these investments, we
may have to locate a buyer outside the auction process, who may be unwilling to
purchase the investments at par, resulting in a loss. Based on an
assessment of fair value of these investments in ARS as of December 31, 2009, we
determined that there was a decline in the fair value of our ARS investments of
approximately $3.0 million, which was deemed to be a temporary impairment and
recorded as an unrealized loss in accumulated other comprehensive loss in
stockholders’ equity. If the issuers are unable to successfully close
future auctions and their credit ratings deteriorate, we may be required to
adjust the carrying value of these investments as a temporary impairment and
recognize a greater unrealized loss in accumulated other comprehensive loss or
as an other-than-temporary impairment charge to earnings. Based on our ability
to access our cash, cash equivalents and short-term investments, and our
expected operating cash flows, we do not anticipate having to sell these
securities below par value in order to operate our business in the foreseeable
future. See Note 2 to the consolidated financial statements for
further discussion.
We have
approximately $103.7 million in intangible assets as of December 31, 2009. As of
December 31, 2009, we believe our intangible assets will be recoverable,
however, changes in the economy, the business in which we operate and our own
relative performance could change the assumptions used to evaluate intangible
asset recoverability. In the event that we determine that an asset has been
impaired, we would recognize an impairment charge equal to the amount by which
the carrying amount of the assets exceeds the fair value of the asset. We
continue to monitor these assumptions and their effect on the estimated
recoverability of our intangible assets.
41
Financial
Statements meeting the requirements of Regulation S-X are set forth beginning at
page F-1. Supplementary data is set forth in “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” under the caption
“Consolidated Results of Operations.”
None.
|
Item
9A.
|
We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our reports filed or submitted under the
Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the Securities and Exchange Commission’s rules and forms,
and that such information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow for timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management is required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
As of
December 31, 2009, we carried out an evaluation, under the supervision and with
the participation of our management, including our Chief Executive Officer and
our Chief Financial Officer, of the effectiveness of the design and operation of
our disclosure controls and procedures. Based on the foregoing, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were effective and were operating at the reasonable
assurance level.
Management’s
Report on Internal Control over Financial Reporting
Management
of CoStar is responsible for establishing and maintaining adequate internal
control over financial reporting and for the assessment of the effectiveness of
internal control over financial reporting. As defined by the Securities and
Exchange Commission, internal control over financial reporting is a process
designed by, or supervised by, the Company’s principal executive and principal
financial officers, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements in accordance
with generally accepted accounting principles.
The
Company’s internal control over financial reporting is supported by written
policies and procedures, that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the Company’s assets; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the Company are being made only in accordance with
authorizations of the Company’s management and directors; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Company’s assets that could have a
material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In
connection with the preparation of the Company's annual financial statements,
management of the Company has undertaken an assessment of the effectiveness of
the Company’s internal control over financial reporting as of December 31, 2009
based on criteria established in Internal Control – Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (“the
COSO Framework”). Management's assessment included an evaluation of
the design of the Company's internal control over financial reporting and
testing of the operational effectiveness of the Company's internal control over
financial reporting.
42
Based on
this assessment, management did not identify any material weakness in the
Company's internal control, and management has concluded that the Company's
internal control over financial reporting was effective as of December 31,
2009.
Ernst
& Young, LLP, the independent registered public accounting firm that audited
the Company's financial statements included in this report, has issued an
attestation report on the effectiveness of internal control over financial
reporting, a copy of which is included in this Annual Report on Form
10-K.
There
have been no changes in our internal control over financial reporting during our
most recent fiscal quarter that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.
|
Item
9B.
|
None.
43
The
information required by this Item is incorporated by reference to our Proxy
Statement for our 2010 annual meeting of stockholders.
|
Item
11.
|
The information required by this Item
is incorporated by reference to our Proxy Statement for our 2010 annual meeting
of stockholders.
|
Item
12.
|
The
information required by this Item is incorporated by reference to our Proxy
Statement for our 2010 annual meeting of stockholders.
The
information required by this Item is incorporated by reference to our Proxy
Statement for our 2010 annual meeting of stockholders.
The
information required by this Item is incorporated by reference to our Proxy
Statement for our 2010 annual meeting of stockholders.
(a)(1)
The following financial statements are filed as a part of this report: CoStar
Group, Inc. Consolidated Financial Statements.
(a)(2)
Financial statement schedules:
Schedule
II – Valuation and Qualifying Accounts
Years
Ended December 31, 2009, 2008, and 2007 (in thousands):
|
Allowance
for doubtful accounts and billing adjustments
(1)
|
Balance
at Beginning
of
Year
|
Charged
to Expense
|
Write-offs,
Net of Recoveries
|
Balance
at End
of
Year
|
||||||||||||
|
Year
ended December 31, 2009
|
$ | 3,213 | $ | 4,172 | $ | 4,522 | $ | 2,863 | ||||||||
|
Year
ended December 31, 2008
|
$ | 2,959 | $ | 4,042 | $ | 3,788 | $ | 3,213 | ||||||||
|
Year
ended December 31, 2007
|
$ | 1,966 | $ | 2,464 | $ | 1,471 | $ | 2,959 | ||||||||
|
(1)
|
Additions
to the allowance for doubtful accounts are charged to bad debt expense.
Additions to the allowance for billing adjustments are charged against
revenues.
|
44
Additional
financial statement schedules are omitted because they are not applicable or not
required or because the required information is incorporated herein by reference
or included in the financial statements or related notes included elsewhere in
this report.
(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.
45
Pursuant
to the requirements of Section 13 of the Securities 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 25
th
day
of February 2010.
|
COSTAR
GROUP, INC.
|
||
|
By:
|
/s/
Andrew C. Florance
|
|
|
Andrew
C. Florance
|
||
|
President
and Chief Executive Officer
|
||
KNOW ALL
PERSONS BY THESE PRESENTS, that each individual whose signature appears below
constitutes and appoints Andrew C. Florance and Brian J. Radecki, and each of
them individually, as their true and lawful attorneys-in-fact and agents, with
full 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
connection therewith, as fully to all intents and purposes as he might or could
do in person, herein by ratifying and 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 Act of 1934, as amended, this report has
been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
Signature
|
Capacity
|
Date
|
||
|
/s/
Michael R. Klein
|
Chairman
of the Board
|
February
25, 2010
|
||
|
Michael
R. Klein
|
||||
|
/s/
Andrew C. Florance
|
Chief
Executive Officer and
|
February
25, 2010
|
||
|
Andrew
C. Florance
|
President
and a Director
|
|||
|
(Principal
Executive Officer)
|
||||
|
/s/
Brian J. Radecki
|
Chief
Financial Officer
|
February
25, 2010
|
||
|
Brian
J. Radecki
|
(Principal
Financial and Accounting Officer)
|
|||
|
/s/
David Bonderman
|
Director
|
February
25, 2010
|
||
|
David
Bonderman
|
||||
|
/s/
Warren H. Haber
|
Director
|
February
25, 2010
|
||
|
Warren
H. Haber
|
||||
|
/s/
Josiah O. Low, III
|
Director
|
February
25, 2010
|
||
|
Josiah
O. Low, III
|
||||
|
/s/
Christopher Nassetta
|
Director
|
February
25, 2010
|
||
|
Christopher
Nassetta
|
||||
|
/s/
Michael Glosserman
|
Director
|
February
25, 2010
|
||
|
Michael
Glosserman
|
46
|
Exhibit
No.
|
Description
|
|
|
2.1
|
Offer
Document by CoStar Limited for the share capital of Focus Information
Limited (Incorporated by reference to Exhibit 2.1 to Amendment No. 2 to
the Registration Statement on Form S-3 of the Registrant (Reg. No.
333-106769) filed with the Commission on August 14,
2003).
|
|
|
3.1
|
Restated
Certificate of Incorporation (Incorporated by reference to Exhibit 3.1 the
Registration Statement on Form S-1 of the Registrant (Reg. No. 333-47953)
filed with the Commission on March 13, 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 Registrant’s Report on Form 10-Q for the
quarter ended June 30, 1999).
|
|
|
3.3
|
Amended
and Restated By-Laws (Incorporated by reference to Exhibit 3.3 to the
Registrant’s Report on Form 10-K for the year ended December 31,
2008).
|
|
|
4.1
|
Specimen
Common Stock Certificate (Incorporated by reference to Exhibit 4.1 to the
Registrant’s Report on Form 10-K for the year ended December 31,
1999).
|
|
|
*10.1
|
CoStar
Group, Inc. 1998 Stock Incentive Plan, as amended (Incorporated by
reference to Exhibit 10.1 to the Registrant’s Report on Form 10-Q for the
quarter ended September 30, 2005).
|
|
|
*10.2
|
CoStar
Group, Inc. 2007 Stock Incentive Plan, as amended (Incorporated by
reference to Exhibit 10.2 to the Registrant’s Report on Form 10-K for
the year ended December 31, 2008).
|
|
|
*10.3
|
CoStar
Group, Inc. 2007 Stock Incentive Plan French Sub-Plan (Incorporated by
reference to Exhibit 10.3 to the Registrant’s Report on Form 10-K for the
year ended December 31, 2007).
|
|
|
*10.4
|
Form
of Stock Option Agreement between the Registrant and certain of its
officers, directors and employees (Incorporated by reference to Exhibit
10.8 to the Registrant’s Report on Form 10-K for the year ended December
31, 2004).
|
|
|
*10.5
|
Form
of Stock Option Agreement between the Registrant and Andrew C. Florance
(Incorporated by reference to Exhibit 10.8.1 to the Registrant’s Report on
Form 10-K for the year ended December 31, 2004).
|
|
|
*10.6
|
Form
of Restricted Stock Agreement between the Registrant and certain of its
officers, directors and employees (Incorporated by reference to Exhibit
10.9 to the Registrant’s Report on Form 10-K for the year ended December
31, 2004).
|
|
|
*10.7
|
Form
of 2007 Plan Restricted Stock Grant Agreement between the Registrant and
certain of its officers, directors and employees (Incorporated by
reference to Exhibit 99.1 to the Registrant’s Report on Form 8-K filed
June 22, 2007).
|
|
|
*10.8
|
Form
of 2007 Plan Incentive Stock Option Grant Agreement between the Registrant
and certain of its officers and employees (Incorporated by reference to
Exhibit 10.8 to the Registrant’s Report on Form 10-K for the year
ended December 31, 2008).
|
|
|
*10.9
|
Form
of 2007 Plan Incentive Stock Option Grant Agreement between the Registrant
and Andrew C. Florance (Incorporated by reference to Exhibit 10.9 to
the Registrant’s Report on Form 10-K for the year ended December 31,
2008).
|
|
|
*10.10
|
Form
of 2007 Plan Nonqualified Stock Option Grant Agreement between the
Registrant and certain of its officers and employees (Incorporated by
reference to Exhibit 10.10 to the Registrant’s Report on Form 10-K
for the year ended December 31, 2008).
|
|
|
*10.11
|
Form
of 2007 Plan Nonqualified Stock Option Grant Agreement between the
Registrant and certain of its directors (Incorporated by reference to
Exhibit 10.11 to the Registrant’s Report on Form 10-K for the year
ended December 31, 2008).
|
|
|
*10.12
|
Form
of 2007 Plan Nonqualified Stock Option Grant Agreement between the
Registrant and Andrew C. Florance (Incorporated by reference to
Exhibit 10.12 to the Registrant’s Report on Form 10-K for the year
ended December 31, 2008).
|
|
|
*10.13
|
Form
of 2007 Plan French Sub-Plan Restricted Stock Agreement between the
Registrant and certain of its employees (Incorporated by reference to
Exhibit 10.10 to the Registrant’s Report on Form 10-K for the year ended
December 31, 2007).
|
|
|
*10.14
|
CoStar
Group, Inc. Employee Stock Purchase Plan (Incorporated by reference to
Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2006).
|
|
|
*10.15
|
Employment
Agreement for Andrew C. Florance (Incorporated by reference to Exhibit
10.2 to Amendment No. 1 to the Registration Statement on Form S-1 of the
Registrant (Reg. No. 333-47953) filed with the Commission on April 27,
1998).
|
47
INDEX
TO EXHIBITS
¾
(Continued)
|
Exhibit
No.
|
Description
|
|
|
*10.16
|
First
Amendment to Andrew C. Florance Employment Agreement, effective January 1,
2009 (Incorporated by reference to Exhibit 10.16 to the Registrant’s
Report on Form 10-K for the year ended December 31,
2008).
|
|
|
*10.17
|
Executive
Service Contract dated February 16, 2007, between Property Investment
Exchange Limited and Paul Marples (Incorporated by reference to Exhibit
10.14 to the Registrant’s Report on Form 10-K for the year ended December
31, 2007).
|
|
|
*10.18
|
Form
of Indemnification Agreement between the Registrant and each of its
officers and directors (Incorporated by reference to Exhibit 10.1 to the
Registrant’s Report on Form 10-Q for the quarter ended March 31,
2004).
|
|
|
10.19
|
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 Registrant’s Report on Form 10-Q for the quarter ended September
30, 1999).
|
|
|
10.20
|
Office
Sublease, dated June 14, 2002, between CoStar Realty Information, Inc.,
CoStar Group, Inc. and Gateway, Inc. (Incorporated by reference to Exhibit
10.2 to the Registrant’s Report on Form 10-Q for the quarter ended June
30, 2002).
|
|
|
10.21
|
Exercise
of option to extend lease term and sublease amendment, dated February 22,
2007 between Gateway, Inc. and CoStar Realty Information, Inc. and CoStar
Group, Inc. (Incorporated by reference to Exhibit 10.11 to the
Registrant’s Report on Form 10-K for the year ended December 31,
2006).
|
|
|
10.22
|
Addendum
No. 3 to Office Lease, dated as of May 12, 2004, between Newlands Building
Venture, LLC, and CoStar Realty Information, Inc. (Incorporated by
reference to Exhibit 10.1 to the Registrant’s Report on Form 10-Q for the
quarter ended June 30, 2004).
|
|
|
10.23
|
Office
Lease, dated as of February 23, 2005, between CoStar Realty Information,
Inc. and Crestpointe III, LLC. (Incorporated by reference to Exhibit 10.13
to the Registrant’s Report on Form 10-K for the year ended December 31,
2004).
|
|
|
10.24
|
Office
Lease Agreement, dated March 16, 2007, between Corporate Place I Business
Trust and CoStar Group, Inc. (Incorporated by reference to Exhibit 10.2 to
the Registrant’s Report on Form 10-Q for the quarter ended March 31,
2007).
|
|
|
10.25
|
Agreement
for Lease among Nokia U.K. Limited, Focus Information Limited and CoStar
Group, Inc., dated November 23, 2007 (Incorporated by reference to Exhibit
10.22 to the Registrant’s Report on Form 10-K for the year ended December
31, 2007).
|
|
|
10.26
|
Agreement
for Lease between CoStar UK Limited and Wells Fargo & Company, dated
August 25, 2009 (filed herewith).
|
|
|
10.27
|
Addendum
No. 5 to Office Lease, dated as of October 23, 2009, between Newlands
Building Venture, LLC, and CoStar Realty Information, Inc. (filed
herewith).
|
|
|
10.28
|
Sub-Underlease
between CoStar UK Limited and Wells Fargo & Company, dated November
18, 2009 (filed herewith).
|
|
|
10.29
|
Contract
for Sale and Purchase between Focus Information Limited and Trafigura
Limited, dated September 14, 2007 (Incorporated by reference to Exhibit
10.1 to the Registrant’s Report on Form 10-Q for the quarter ended
September 30, 2007).
|
|
|
21.1
|
Subsidiaries
of the Registrant (filed herewith).
|
|
|
23.1
|
Consent
of Ernst & Young LLP, Independent Registered Public Accounting Firm
(filed herewith).
|
|
|
31.1
|
Certification
of Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith).
|
|
|
31.2
|
Certification
of Principal Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith).
|
|
|
32.1
|
Certification
of Principal Executive Officer pursuant to 18 U.S.C. Sec. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed
herewith).
|
|
|
32.2
|
Certification
of Principal Financial Officer pursuant to 18 U.S.C. Sec. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed
herewith).
|
*
Management Contract or Compensatory Plan or Arrangement.
48
COSTAR
GROUP, INC.
|
Reports
of Independent Registered Public Accounting
Firm
|
F-2
|
|
Consolidated
Statements of Operations for the years ended December 31, 2007,
2008 and 2009
|
F-4
|
|
Consolidated
Balance Sheets as of December 31, 2008 and
2009
|
F-5
|
|
Consolidated
Statements of Stockholders’ Equity for the years ended December 31, 2007,
2008 and 2009
|
F-6
|
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2007, 2008 and
2009
|
F-7
|
|
Notes
to Consolidated Financial
Statements
|
F-8
|
F-1
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board
of Directors and Shareholders of CoStar Group, Inc.
We have
audited the accompanying consolidated balance sheets of CoStar Group, Inc. as of
December 31, 2009 and 2008, and the related consolidated statements of
operations, stockholders’ equity and cash flows for each of the three years in
the period ended December 31, 2009. Our audits also included the
financial statement schedule listed in the Index at Item
15(a). The financial statements and schedule are the responsibility
of the Company’s management. Our responsibility is to express an
opinion on the financial statements and schedule based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (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, 2009 and 2008, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31, 2009
in conformity U.S generally accepted accounting principles. Also, in
our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, present fairly in
all material respects the information set forth therein.
As also
discussed in Note 9 to the consolidated financial statements, under the heading
Income Taxes, the Company adopted FASB authoritative guidance regarding
Accounting for Uncertainty in Income Taxes effective January 1,
2007.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), CoStar’s internal control over financial
reporting as of December 31, 2009, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission and our report dated February 25, 2010
expressed.
/s/ Ernst
& Young LLP
McLean,
Virginia
February 25, 2010
F-2
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board
of Directors and Shareholders of CoStar Group, Inc.
We have
audited CoStar Group, Inc.’s (“CoStar”) internal control over financial
reporting as of December 31, 2009, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (the COSO criteria). CoStar’s management is
responsible for maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control over financial
reporting included in the accompanying Management’s Report on Internal Control
over Financial Reporting. Our responsibility is to express an opinion on the
company’s internal control over financial reporting based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, CoStar maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2009, based on
the COSO
criteria.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets as of December
31, 2009 and 2008 and the related consolidated statements of operations,
stockholders’ equity and cash flows for each of the three years in the period
ended December 31, 2009 of CoStar Group, Inc. and our report dated February 25,
2010 expressed an unqualified opinion thereon.
/s/ Ernst
& Young LLP
McLean,
Virginia
February 25, 2010
F-3
COSTAR
GROUP, INC.
(in
thousands, except per share data)
|
Year
Ended December 31,
|
||||||||||||
|
2007
|
2008
|
2009
|
||||||||||
|
Revenues
|
$ | 192,805 | $ | 212,428 | $ | 209,659 | ||||||
|
Cost
of revenues
|
76,704 | 73,408 | 73,714 | |||||||||
|
Gross
margin
|
116,101 | 139,020 | 135,945 | |||||||||
|
Operating
expenses:
|
||||||||||||
|
Selling
and marketing
|
51,777 | 41,705 | 42,508 | |||||||||
|
Software
development
|
12,453 | 12,759 | 13,942 | |||||||||
|
General
and administrative
|
36,569 | 39,888 | 44,248 | |||||||||
|
Gain on lease settlement, net
|
(7,613 | ) | ¾ | ¾ | ||||||||
|
Purchase
amortization
|
5,063 | 4,880 | 3,412 | |||||||||
| 98,249 | 99,232 | 104,110 | ||||||||||
|
Income
from operations
|
17,852 | 39,788 | 31,835 | |||||||||
|
Interest
income, net
|
8,045 | 4,914 | 1,253 | |||||||||
|
Income
before income taxes
|
25,897 | 44,702 | 33,088 | |||||||||
|
Income
tax expense, net
|
9,946 | 20,079 | 14,395 | |||||||||
|
Net
income
|
$ | 15,951 | $ | 24,623 | $ | 18,693 | ||||||
|
Net
income per share
¾
basic
|
$ | 0.84 | $ | 1.27 | $ | 0.95 | ||||||
|
Net
income per share
¾
diluted
|
$ | 0.82 | $ | 1.26 | $ | 0.94 | ||||||
|
Weighted
average outstanding shares
¾
basic
|
19,044 | 19,372 | 19,780 | |||||||||
|
Weighted
average outstanding shares
¾
diluted
|
19,404 | 19,550 | 19,925 | |||||||||
See
accompanying notes.
F-4
COSTAR
GROUP, INC.
(in
thousands except per share data)
|
December
31,
|
||||||||
|
2008
|
2009
|
|||||||
|
ASSETS
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 159,982 | $ | 205,786 | ||||
|
Short-term
investments
|
35,268 | 20,188 | ||||||
|
Accounts
receivable, less allowance for doubtful accounts of approximately $3,213
and $2,863 as of December 31, 2008 and 2009, respectively
|
12,294 | 12,855 | ||||||
|
Deferred
income taxes, net
|
2,036 | 3,450 | ||||||
|
Prepaid
expenses and other current assets
|
2,903 | 5,128 | ||||||
|
Total
current assets
|
212,483 | 247,407 | ||||||
|
Long-term
investments
|
29,340 | 29,724 | ||||||
|
Deferred
income taxes, net
|
3,392 | 1,978 | ||||||
|
Property
and equipment, net
|
16,876 | 19,162 | ||||||
|
Goodwill
|
54,328 | 80,321 | ||||||
|
Intangibles
and other assets, net
|
16,421 | 23,390 | ||||||
|
Deposits
and other assets
|
1,544 | 2,597 | ||||||
|
Total
assets
|
$ | 334,384 | $ | 404,579 | ||||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable
|
$ | 1,636 | $ | 3,667 | ||||
|
Accrued
wages and commissions
|
7,217 | 9,696 | ||||||
|
Accrued
expenses
|
7,754 | 14,167 | ||||||
|
Income
taxes payable
|
1,907 | ¾ | ||||||
|
Deferred
revenue
|
9,442 | 14,840 | ||||||
|
Deferred
rent
|
1,180 | 1,377 | ||||||
|
Total
current liabilities
|
29,136 | 43,747 | ||||||
|
Deferred
income taxes, net
|
132 | ¾ | ||||||
|
Income
taxes payable
|
1,695 | 1,826 | ||||||
|
Commitments
and contingencies
|
¾ | ¾ | ||||||
|
Stockholders’
equity:
|
||||||||
|
Preferred
stock, $0.01 par value; 2,000 shares authorized; none
outstanding
|
¾ | ¾ | ||||||
|
Common
stock, $0.01 par value; 30,000 shares authorized; 19,733 and 20,617 issued
and outstanding as of December 31, 2008 and 2009,
respectively
|
197 | 206 | ||||||
|
Additional
paid-in capital
|
333,983 | 364,635 | ||||||
|
Accumulated
other comprehensive loss
|
(13,796 | ) | (7,565 | ) | ||||
|
Retained
earnings (accumulated deficit)
|
(16,963 | ) | 1,730 | |||||
|
Total
stockholders’ equity
|
303,421 | 359,006 | ||||||
|
Total
liabilities and stockholders’ equity
|
$ | 334,384 | $ | 404,579 | ||||
See
accompanying notes.
F-5
COSTAR
GROUP, INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
(in
thousands)
|
Additional
|
Accumulated
Other
|
Retained
Earnings
|
Total
|
|||||||||||||||||||||||||
|
Comprehensive
Income
|
Common
Stock
|
Paid-In
Capital
|
Comprehensive
Income
(Loss)
|
(Accumulated
Deficit)
|
Stockholders’
Equity
|
|||||||||||||||||||||||
|
Shares
|
Amount
|
|||||||||||||||||||||||||||
|
Balance
at December 31, 2006
|
19,081 | $ | 191 | $ | 302,936 | $ | 4,520 | $ | (57,537 | ) | $ | 250,110 | ||||||||||||||||
|
Tax
benefit adjustment
|
¾ | ¾ | 26 | ¾ | ¾ | 26 | ||||||||||||||||||||||
|
Balance
at January 1, 2007
|
19,081 | 191 | 302,962 | 4,520 | (57,537 | ) | 250,136 | |||||||||||||||||||||
|
Net
income
|
15,951 | ¾ | ¾ | ¾ | ¾ | 15,951 | 15,951 | |||||||||||||||||||||
|
Foreign
currency translation adjustment
|
873 | ¾ | ¾ | ¾ | 873 | ¾ | 873 | |||||||||||||||||||||
|
Net
unrealized gain on investments
|
233 | ¾ | ¾ | ¾ | 233 | ¾ | 233 | |||||||||||||||||||||
|
Comprehensive
income
|
$ | 17,057 | ||||||||||||||||||||||||||
|
Exercise
of stock options
|
289 | 3 | 8,127 | ¾ | ¾ | 8,130 | ||||||||||||||||||||||
|
Restricted
stock grants
|
131 | 1 | (1 | ) | ¾ | ¾ | ¾ | |||||||||||||||||||||
|
Restricted
stock grants surrendered
|
(58 | ) | ¾ | (635 | ) | ¾ | ¾ | (635 | ) | |||||||||||||||||||
|
Consideration
for Propex
|
22 | ¾ | 1,010 | ¾ | ¾ | 1,010 | ||||||||||||||||||||||
|
Stock
compensation expense, net of forfeitures
|
¾ | ¾ | 5,399 | ¾ | ¾ | 5,399 | ||||||||||||||||||||||
|
ESPP
|
9 | ¾ | 448 | ¾ | ¾ | 448 | ||||||||||||||||||||||
|
Excess
tax benefit for exercised stock options
|
¾ | ¾ | 260 | ¾ | ¾ | 260 | ||||||||||||||||||||||
|
Balance
at December 31, 2007
|
19,474 | 195 | 317,570 | 5,626 | (41,586 | ) | 281,805 | |||||||||||||||||||||
|
Net
income
|
24,623 | ¾ | ¾ | ¾ | ¾ | 24,623 | 24,623 | |||||||||||||||||||||
|
Foreign
currency translation adjustment
|
(14,061 | ) | ¾ | ¾ | ¾ | (14,061 | ) | ¾ | (14,061 | ) | ||||||||||||||||||
|
Net
unrealized loss on investments
|
(5,361 | ) | ¾ | ¾ | ¾ | (5,361 | ) | ¾ | (5,361 | ) | ||||||||||||||||||
|
Comprehensive
income
|
$ | 5,201 | ||||||||||||||||||||||||||
|
Exercise
of stock options
|
198 | 2 | 6,555 | ¾ | ¾ | 6,557 | ||||||||||||||||||||||
|
Restricted
stock grants
|
102 | 1 | ¾ | ¾ | ¾ | 1 | ||||||||||||||||||||||
|
Restricted
stock grants surrendered
|
(49 | ) | (1 | ) | (695 | ) | ¾ | ¾ | (696 | ) | ||||||||||||||||||
|
Stock
compensation expense, net of forfeitures
|
¾ | ¾ | 4,907 | ¾ | ¾ | 4,907 | ||||||||||||||||||||||
|
ESPP
|
8 | ¾ | 329 | ¾ | ¾ | 329 | ||||||||||||||||||||||
|
Excess
tax benefit for exercised stock options
|
¾ | ¾ | 5,317 | ¾ | ¾ | 5,317 | ||||||||||||||||||||||
|
Balance
at December 31, 2008
|
19,733 | 197 | 333,983 | (13,796 | ) | (16,963 | ) | 303,421 | ||||||||||||||||||||
|
Net
income
|
18,693 | ¾ | ¾ | ¾ | ¾ | 18,693 | 18,693 | |||||||||||||||||||||
|
Foreign
currency translation adjustment
|
3,671 | ¾ | ¾ | ¾ | 3,671 | ¾ | 3,671 | |||||||||||||||||||||
|
Net
unrealized gain on investments
|
2,560 | ¾ | ¾ | ¾ | 2,560 | ¾ | 2,560 | |||||||||||||||||||||
|
Comprehensive
income
|
$ | 24,924 | ||||||||||||||||||||||||||
|
Exercise
of stock options
|
85 | ¾ | 2,232 | ¾ | ¾ | 2,232 | ||||||||||||||||||||||
|
Restricted
stock grants
|
237 | 2 | ¾ | ¾ | ¾ | 2 | ||||||||||||||||||||||
|
Restricted
stock grants surrendered
|
(44 | ) | ¾ | (672 | ) | ¾ | ¾ | (672 | ) | |||||||||||||||||||
|
Stock
compensation expense, net of forfeitures
|
¾ | ¾ | 6,438 | ¾ | ¾ | 6,438 | ||||||||||||||||||||||
|
ESPP
|
7 | ¾ | 230 | ¾ | ¾ | 230 | ||||||||||||||||||||||
|
Consideration
for PPR
|
573 | 6 | 20,897 | ¾ | ¾ | 20,903 | ||||||||||||||||||||||
|
Consideration
for Resolve Technology
|
26 | 1 | 1,124 | ¾ | ¾ | 1,125 | ||||||||||||||||||||||
|
Excess
tax benefit for exercised stock options
|
¾ | ¾ | 403 | ¾ | ¾ | 403 | ||||||||||||||||||||||
|
Balance
at December 31, 2009
|
20,617 | $ | 206 | $ | 364,635 | $ | (7,565 | ) | $ | 1,730 | 359,006 | |||||||||||||||||
See
accompanying notes.
F-6
COSTAR
GROUP, INC.
(in
thousands)
|
Year
Ended December 31,
|
||||||||||||
|
2007
|
2008
|
2009
|
||||||||||
|
Operating
activities:
|
||||||||||||
|
Net
income
|
$ | 15,951 | $ | 24,623 | $ | 18,693 | ||||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||||
|
Depreciation
|
7,778 | 8,360 | 7,583 | |||||||||
|
Amortization
|
8,369 | 8,441 | 7,093 | |||||||||
|
Deferred
income tax expense, net
|
9,946 | 2,148 | (2,428 | ) | ||||||||
|
Provision
for losses on accounts receivable
|
2,464 | 4,042 | 4,172 | |||||||||
|
Excess
tax benefit from stock options
|
(260 | ) | (5,317 | ) | (403 | ) | ||||||
|
Stock-based
compensation expense
|
5,440 | 4,940 | 6,460 | |||||||||
|
Leasehold
write-off
|
¾ | ¾ | 603 | |||||||||
|
Changes
in operating assets and liabilities, net of acquisitions:
|
||||||||||||
|
Accounts
receivable
|
(2,944 | ) | (6,196 | ) | (1,610 | ) | ||||||
|
Interest
receivable
|
(67 | ) | 533 | 97 | ||||||||
|
Prepaid
expenses and other current assets
|
(755 | ) | 1,464 | (1,521 | ) | |||||||
|
Deposits
and other assets
|
(670 | ) | 652 | (1,013 | ) | |||||||
|
Accounts
payable and other liabilities
|
6,981 | (3,044 | ) | 2,655 | ||||||||
|
Deferred
revenue
|
(501 | ) | 262 | (812 | ) | |||||||
|
Net
cash provided by operating activities
|
51,732 | 40,908 | 39,569 | |||||||||
|
Investing
activities:
|
||||||||||||
|
Purchases
of investments
|
(116,609 | ) | (4,839 | ) | ¾ | |||||||
|
Sales
of investments
|
107,286 | 63,949 | 17,159 | |||||||||
|
Purchases
of property and equipment and other assets
|
(14,271 | ) | (3,656 | ) | (10,544 | ) | ||||||
|
Acquisitions,
net of cash acquired
|
(16,737 | ) | (3,024 | ) | (3,207 | ) | ||||||
|
Net
cash (used in) provided by investing activities
|
(40,331 | ) | 52,430 | 3,408 | ||||||||
|
Financing
activities:
|
||||||||||||
|
Excess
tax benefit from stock options
|
260 | 5,317 | 403 | |||||||||
|
Repurchase
of restricted stock to satisfy tax withholding obligations
|
(635 | ) | (695 | ) | (672 | ) | ||||||
|
Proceeds from exercise of stock options
|
8,536 | 6,853 | 2,441 | |||||||||
|
Net
cash provided by financing activities
|
8,161 | 11,475 | 2,172 | |||||||||
|
Effect
of foreign currency exchange rates on cash and cash
equivalents
|
64 | (2,616 | ) | 655 | ||||||||
|
Net
increase in cash and cash equivalents
|
19,626 | 102,197 | 45,804 | |||||||||
|
Cash
and cash equivalents at beginning of year
|
38,159 | 57,785 | 159,982 | |||||||||
|
Cash
and cash equivalents at end of year
|
$ | 57,785 | $ | 159,982 | $ | 205,786 | ||||||
See
accompanying notes.
F-7
COSTAR
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2009
1.
ORGANIZATION
CoStar
Group, Inc. (the “Company”) has created a comprehensive, proprietary database of
commercial real estate information covering the United States, as well as parts
of the United Kingdom and France. Based on its unique database, the Company
provides information, marketing and analytic services to the commercial real
estate and related business community and operates within two segments, U.S. and
International. The Company’s information, marketing and analytic services are
typically distributed to its clients under subscription-based license
agreements, which typically have a minimum term of one year and renew
automatically.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation. Accounting policies are
consistent for each operating segment.
Use
of Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles (“GAAP”) in the United States of America 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 on the consolidated statements of cash flows have
been reclassified to conform to the Company’s current presentation.
Revenue
Recognition
The
Company primarily derives revenues from providing access to its proprietary
database of commercial real estate information. The Company generally charges a
fixed monthly amount for its subscription-based services. Subscription contract
rates are based on the number of sites, number of users, organization size, the
client’s business focus and the number of services to which a client subscribes.
Subscription-based license agreements typically have a minimum term of one year
and renew automatically.
Revenue
is recognized when (1) there is persuasive evidence of an arrangement, (2) the
fee is fixed and determinable, (3) services have been rendered and payment has
been contractually earned and (4) collectability is reasonably
assured.
Revenues
from subscription-based services are recognized on a straight-line basis over
the term of the agreement. Deferred revenue results from advance cash receipts
from customers or amounts billed in advance to customers from the sales of
subscription licenses and is recognized over the term of the license
agreement.
Cost
of Revenues
Cost of
revenues principally consists of salaries and related expenses for the Company’s
researchers who collect and analyze the commercial real estate data that is the
basis for the Company’s information, marketing and analytic services.
Additionally, cost of revenues includes the cost of data from third party data
sources, which is expensed as incurred, and the amortization of database
technology.
F-8
COSTAR
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
¾
(CONTINUED)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
¾
(CONTINUED)
Significant
Customers
No single
customer accounted for more than 5% of the Company’s revenues for each of the
years ended December 31, 2007, 2008 and 2009.
Foreign
Currency Translation
The
Company’s functional currency in its foreign locations is the local currency.
Assets and liabilities are translated into U.S. dollars as of the balance sheet
date. Revenues, expenses, gains and losses are translated at the average
exchange rates in effect during each period. Gains and losses resulting from
translation are included in accumulated other comprehensive income (loss). Net
gains or losses resulting from foreign currency exchange transactions are
included in the consolidated statements of operations. There were no material
gains or losses from foreign currency exchange transactions for the years ended
December 31, 2009 and 2008.
Accumulated
Other Comprehensive Loss
The
components of accumulated other comprehensive loss were as follows (in
thousands):
|
Year
Ended December 31,
|
||||||||
|
2008
|
2009
|
|||||||
|
Foreign
currency translation adjustment
|
$ | (8,521 | ) | $ | (4,850 | ) | ||
|
Accumulated
net unrealized loss on investments, net of tax
|
(5,275 | ) | (2,715 | ) | ||||
|
Total
accumulated other comprehensive loss
|
$ | (13,796 | ) | $ | (7,565 | ) | ||
Advertising
Costs
The
Company expenses advertising costs as incurred. Advertising expenses were
approximately $2.3 million, $2.8 million and $3.3 million for the years ended
December 31, 2007, 2008 and 2009, respectively.
Income
Taxes
Deferred
income taxes result from temporary differences between the tax basis of assets
and liabilities and the basis reported in the Company’s consolidated financial
statements. Deferred tax liabilities and assets are determined based on the
difference between the financial statement and the tax basis of assets and
liabilities using enacted rates expected to be in effect during the year in
which the differences reverse. Valuation allowances are provided against assets,
including net operating losses, if it is anticipated that some or all of an
asset may not be realized through future taxable earnings or implementation of
tax planning strategies.
Net
Income Per Share
Net
income per share is computed by dividing net income by the weighted average
number of common shares outstanding during the period on a basic and diluted
basis. The Company’s potentially dilutive securities include stock options and
restricted stock. Diluted net income per share considers the impact of
potentially dilutive securities except in periods in which there is a net loss,
as the inclusion of the potential common shares would have an anti-dilutive
effect.
Stock-Based
Compensation
Equity
instruments issued in exchange for employee services are accounted for using a
fair-value based method and the fair value of such equity instruments is
recognized as expense in the consolidated statements of operations.
F-9
COSTAR GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
¾
(CONTINUED)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
¾
(CONTINUED)
Stock-Based Compensation
¾
(Continued)
Stock-based
compensation cost is measured at the grant date of the share-based awards based
on their fair values, and is recognized on a straight line basis as expense over
the vesting periods of the awards, net of an estimated forfeiture
rate.
Cash
flows resulting from excess tax benefits are classified as part of cash flows
from operating and financing activities. Excess tax benefits represent tax
benefits related to stock based compensation in excess of the associated
deferred tax asset for such equity compensation. Net cash proceeds
from the exercise of stock options were approximately $8.5 million; $6.9 million
and $2.4 million for the years ended December 31, 2007, 2008 and 2009,
respectively. There were approximately $260,000, $5.3 million and
$403,000 of excess tax benefits realized from stock option exercises for the
years ended December 31, 2007, 2008 and 2009.
Stock-based
compensation expense for stock options, restricted stock and the employee stock
purchase plan included in the Company's results of operations for the years
ended December 31, was as follows (in thousands):
|
Year
Ended December 31,
|
||||||||||||
|
2007
|
2008
|
2009
|
||||||||||
|
Cost
of
revenues
|
$ | 926 | $ | 547 | $ | 888 | ||||||
|
Selling
and
marketing
|
1,118 | 400 | 1,125 | |||||||||
|
Software
development
|
340 | 423 | 588 | |||||||||
|
General
and
administrative
|
3,056 | 3,570 | 3,859 | |||||||||
|
Total
|
$ | 5,440 | $ | 4,940 | $ | 6,460 | ||||||
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 U.S. Government Securities. As of
December 31, 2008 and 2009, cash of approximately $518,000 and $519,000,
respectively, was held to support letters of credit for security
deposits.
Investments
The
Company determines the appropriate classification of debt and equity investments
at the time of purchase and reevaluates such designation as of each balance
sheet date. The Company considers all of its investments to be
available-for-sale. Short-term investments consist of commercial
paper, government/federal notes and bonds and corporate obligations with
maturities greater than 90 days at the time of purchase. Available-for-sale
short-term investments with contractual maturities beyond one year are
classified as current in the Company’s consolidated balance sheets because they
represent the investment of cash that is available for current operations.
Long-term investments consist of auction rate securities. Investments
are carried at fair market value.
Concentration
of Credit Risk and Financial Instruments
The
Company performs ongoing credit evaluations of its customers’ financial
condition and generally does not require that its customers’ obligations to the
Company be secured. The Company maintains reserves for credit losses, and such
losses have been within management’s expectations. The large size and widespread
nature of the Company’s customer base and lack of dependence on individual
customers mitigate the risk of nonpayment of the Company’s accounts receivable.
The carrying amount of the accounts receivable approximates the net realizable
value. The carrying value of the Company’s financial instruments including cash
and cash equivalents, short-term investments, long-term investments, accounts
receivable, accounts payable, and accrued expenses approximates fair
value.
F-10
COSTAR
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
¾
(CONTINUED)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
¾
(CONTINUED)
Allowance
for Doubtful Accounts
The
allowance for doubtful accounts is based on the Company’s assessment of the
collectability of customer accounts. The Company regularly reviews
the allowance by considering factors such as historical experience, the aging of
the balances, and current economic conditions that may affect a customer’s
ability to pay.
Property
and Equipment
Property
and equipment are stated at cost. All repairs and maintenance costs are expensed
as incurred. Depreciation and amortization are calculated on a straight-line
basis over the following estimated useful lives of the assets:
|
Leasehold
improvements
|
Shorter
of lease term or useful life
|
|
|
Furniture
and office equipment
|
Five
to seven years
|
|
|
Research
vehicles
|
Five
years
|
|
|
Computer
hardware and software
|
Two
to five years
|
Qualifying
internal-use software costs incurred during the application development stage,
which consist primarily of outside services and purchased software license
costs, are capitalized and amortized over the estimated useful life of the
asset. All other costs are expensed as incurred.
Goodwill,
Intangibles and Other Assets
Goodwill
represents the excess of costs over the fair value of assets of businesses
acquired. Goodwill and intangible assets acquired in a purchase business
combination and determined to have an indefinite useful life are not amortized,
but instead tested for impairment at least annually by reporting unit. The
Company’s operating segments, U.S. and International, are the reporting units
tested for potential impairment. The goodwill impairment test is a
two-step process. The first step is to determine the fair value of
each reporting unit. The estimate of the fair value of each reporting
unit is based on a projected discounted cash flow model that includes
significant assumptions and estimates including the Company’s future financial
performance and a weighted average cost of capital. The fair value of each
reporting unit is compared to the carrying amount of the reporting unit. If the
carrying value of the reporting unit exceeds the fair value, then the second
step of the process is performed to measure the impairment loss. The
impairment loss is measured based on a projected discounted cash flow method
using a discount rate determined by the Company’s management to be commensurate
with the risk in its current business model.
Intangible
assets with estimable useful lives that arose from acquisitions on or after July
1, 2001, are amortized over their respective estimated useful lives using a
method of amortization that reflects the pattern in which the economic benefits
of the intangible assets are consumed or otherwise used up, and reviewed for
impairment
.
Acquired
database technology, customer base and trade names and other are related to the
Company’s acquisitions (See Notes 3, 7 and 8). Acquired database technology and
trade names and other are amortized on a straight-line basis over periods
ranging from two to ten years. The acquired intangible asset characterized as
customer base consists of one distinct intangible asset composed of acquired
customer contracts and the related customer relationships. Acquired customer
bases that arose from acquisitions prior to July 1, 2001 are amortized on a
straight-line basis principally over a period of ten years. Acquired customer
bases that arose from acquisitions on or after July 1, 2001 are amortized on a
125% declining balance method over ten years. The cost of capitalized building
photography is amortized on a straight-line basis over five years.
F-11
COSTAR
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
¾
(CONTINUED)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
¾
(CONTINUED)
Long-Lived
Assets
Long-lived
assets, such as property, plant, and equipment, and purchased intangibles
subject to amortization, are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to estimate undiscounted future
cash flows expected to be generated by the asset or asset group. If the carrying
amount of an asset exceeds its estimated future cash flows, an impairment charge
is recognized by the amount for which the carrying amount of the asset exceeds
the fair value of the asset.
Assets to
be disposed of would be separately presented in the balance sheet and reported
at the lower of the carrying amount or fair value less costs to sell, and would
no longer be depreciated. The assets and liabilities of a disposed group
classified as held for sale would be presented separately in the appropriate
asset and liability sections of the balance sheet.
Recent
Accounting Pronouncements
In
February 2007, the FASB issued authoritative guidance on the fair value option
for financial assets and financial liabilities, which permits entities to choose
to measure many financial instruments and certain other items at fair value that
are not currently required to be measured at fair value. This guidance is
effective for fiscal years beginning on or after December 31, 2007. The Company
adopted this guidance on January 1, 2008 and has not elected to apply the fair
value option to any of its financial instruments. The adoption of
this guidance did not have a material impact on the Company’s results of
operations or financial position.
In
December 2007, the FASB issued authoritative guidance on business
combinations, which changes the accounting for any business combination the
Company enters into with an acquisition date after December 31, 2008. Under this
guidance, an acquiring entity is required to recognize all the assets acquired
and liabilities assumed in a transaction at the acquisition date fair value with
limited exceptions. This guidance changes the accounting treatment and
disclosure for certain specific items in a business combination. The
Company adopted this guidance on January 1, 2009 and has recorded assets
acquired and liabilities assumed at fair value.
In
December 2007, the FASB issued authoritative guidance on non-controlling
interest, which establishes new accounting and reporting standards for the
non-controlling interest in a subsidiary and for the deconsolidation of a
subsidiary. This guidance is effective for fiscal years beginning on or after
December 15, 2008. The Company adopted this guidance on January 1, 2009.
The adoption of this guidance did not have a material impact on the Company’s
results of operations or financial position.
In April
2008, the FASB issued authoritative guidance on existing intangibles or expected
future cash flows from those intangibles, which is effective for all fiscal
years and interim periods beginning after December 15, 2008. Early adoption of
this guidance is not permitted. This guidance requires additional footnote
disclosures about the impact of the Company’s ability or intent to renew or
extend agreements related to existing intangibles or expected future cash flows
from those intangibles, how the Company accounts for costs incurred to renew or
extend such agreements, the time until the next renewal or extension period by
asset class, and the amount of renewal or extension costs capitalized, if any.
For any intangibles acquired after December 31, 2008, this guidance requires
that the Company consider its experience regarding renewal and extensions of
similar arrangements in determining the useful life of such intangibles. If the
Company does not have experience with similar arrangements, this guidance
requires that the Company use the assumptions of a market participant putting
the intangible to its highest and best use in determining the useful life. The
Company adopted this guidance on January 1, 2009. The adoption of this guidance
did not have a material impact on the Company’s results of operations or
financial position.
F-12
COSTAR
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
¾
(CONTINUED)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
¾
(CONTINUED)
Recent
Accounting Pronouncements
¾
(Continued)
In June
2008, the FASB issued authoritative guidance related to determining whether
instruments granted in share-based payment transactions are participating
securities. This guidance clarifies that unvested share-based payment
awards with a right to receive non-forfeitable dividends are participating
securities. This guidance is effective for all annual and interim periods
beginning after December 15, 2008. Adoption of this standard will require the
two-class method of calculating basic earnings per share to the extent that
unvested share-based payments have the right to receive non-forfeitable
dividends. The Company adopted this guidance on January 1, 2009. The
adoption of this guidance did not have a material impact on the Company’s
results of operations or financial position.
In April
2009, the FASB issued authoritative guidance related to the initial recognition,
measurement and subsequent accounting for assets and liabilities arising from
pre-acquisition contingencies in a business combination. It requires that such
assets acquired or liabilities assumed be initially recognized at fair value at
the acquisition date if fair value can be determined during the measurement
period. When fair value cannot be determined, companies should typically account
for the acquired contingencies using existing guidance. This guidance requires
that companies expense acquisition and deal-related costs that were previously
allowed to be capitalized. This guidance also requires that a
systematic and rational basis for subsequently measuring and accounting for the
assets or liabilities be developed depending on their nature. This guidance was
effective for contingent assets or liabilities arising from business
combinations with an acquisition date on or after January 1,
2009. The adoption of this guidance changes the accounting
treatment and disclosure for certain specific items in a business combination
with an acquisition date subsequent to December 31, 2008. The Company
adopted this guidance on January 1, 2009, and expensed acquisition and
deal-related costs of approximately $700,000 associated primarily with the
acquisitions of Property and Portfolio Research, Inc. (“PPR”) and Resolve
Technology, Inc. (“Resolve Technology”).
In April
2009, the FASB issued authoritative guidance for determining whether a market is
active or inactive, and whether a transaction is distressed. This guidance is
applicable to all assets and liabilities (financial and non-financial) and will
require enhanced disclosures. The Company adopted this guidance for its interim
period ending June 30, 2009. The adoption of this guidance did not have a
material impact on the Company’s results of operations or financial position,
but did require additional disclosures in the Company’s financial
statements.
In April
2009, the FASB issued authoritative guidance requiring disclosures in interim
reporting periods concerning the fair value of financial instruments that were
previously only required in the annual financial statements. The Company adopted
the provisions of this guidance for the interim period ending June 30, 2009. The
adoption of this guidance did not have a material impact on the Company’s
results of operations or financial position, but did require additional
disclosures in the Company’s financial statements.
In April
2009, the FASB issued authoritative guidance that redefines what constitutes an
other-than-temporary impairment, defines credit and non-credit components of an
other-than-temporary impairment, prescribes their financial statement treatment,
and requires enhanced disclosures relating to such impairments. The Company
adopted this guidance for the interim period ending June 30, 2009. The adoption
of this guidance did not have a material impact on the Company’s results of
operations or financial position, but did require additional disclosures in the
Company’s financial statements.
In May
2009, the FASB issued authoritative guidance which establishes general standards
of accounting for and disclosure of events that occur after the balance sheet
date but before financial statements are issued. This guidance was effective for
all interim and annual reporting periods ending after June 15, 2009. This
guidance has not and is not expected to result in significant changes in the
subsequent events that the Company reports, either through recognition or
disclosure, in its financial statements.
F-13
COSTAR
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
¾
(CONTINUED)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
¾
(CONTINUED)
Recent
Accounting Pronouncements
¾
(Continued)
In June
2009, the FASB issued authoritative guidance to amend the manner in which
entities evaluate whether consolidation is required for variable interest
entities (VIE). Previously, variable interest holders were required
to determine whether they had a controlling financial interest in a VIE based on
a quantitative analysis of the expected gains and/or losses of the
entity. The new guidance requires an enterprise with a variable
interest in a VIE to qualitatively assess whether it has a controlling financial
interest in the entity, and if so, whether it is the primary
beneficiary. This guidance also requires that companies continually
evaluate VIEs for consolidation, rather than assessing whether consolidation is
required based upon the occurrence of triggering events. This
guidance enhances disclosures to provide financial statement users with greater
transparency about transfers of financial assets and a transferor’s continuing
involvement with transferred financial assets. This guidance will be effective
for the first annual reporting period beginning after November 15, 2009. This
guidance is not expected to materially impact the Company’s results of
operations, financial position or related disclosures.
In June
2009, the FASB issued authoritative guidance which replaced the previous
hierarchy of U.S. GAAP and establishes the FASB Codification as the single
source of authoritative U.S. GAAP recognized by the FASB to be applied by
nongovernmental entities. This guidance is effective for financial statements
issued for interim and annual periods ending after September 15, 2009. This
guidance did not materially impact the Company’s results of operations or
financial position, but did require changes to the disclosures in the Company’s
financial statements.
In July
2009, the FASB issued authoritative guidance to improve the consistency with
which companies apply fair value measurements guidance to
liabilities. This guidance is effective for interim and annual
periods beginning after September 30, 2009. This guidance is not
expected to materially impact the Company’s results of operations, financial
position or related disclosures.
In
October 2009, the FASB issued authoritative guidance that amends existing
guidance for identifying separate deliverables in a revenue-generating
transaction where multiple deliverables exist, and provides guidance for
measuring and allocating revenue to one or more units of
accounting. In addition, the FASB issued authoritative guidance on
arrangements that include software elements. Under this guidance,
tangible products containing software components and non-software components
that are essential to the functionality of the tangible product will no longer
be within the scope of the software revenue recognition guidance. This guidance
is effective using the prospective application or the retrospective application
for revenue arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010 with earlier application permitted. The
Company is currently assessing the impacts adoption of this guidance may have on
its financial statements.
In
January 2010, the FASB issued authoritative guidance that amends the disclosure
requirements related to recurring and nonrecurring fair value measurements. This
guidance requires new disclosures on the transfers of assets and liabilities
between Level 1 (assets and liabilities measured using observable inputs such as
quoted prices in active markets) and Level 2 (assets and liabilities measured
using inputs other than quoted prices in active markets that are either directly
or indirectly observable) of the fair value measurement hierarchy, including the
amount and reason of the transfers. Additionally, this guidance requires a roll
forward of activities on purchases, sales, issuance, and settlements of the
assets and liabilities measured using significant unobservable inputs (Level 3
fair value measurements). This guidance is effective for interim and annual
reporting periods beginning after December 15, 2009, with the exception of the
additional disclosure for Level 3 assets and liabilities, which is effective for
fiscal years beginning after December 15, 2010, and for interim periods within
those fiscal years. This guidance is not expected to materially impact the
Company’s results of operations or financial position, but will require changes
to the disclosures in its interim and annual financial statements.
F-14
COSTAR
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
¾
(CONTINUED)
3.
ACQUISITIONS
On April
1, 2008, the Company acquired certain assets of First CLS, Inc. (doing business
as the Dorey Companies and DoreyPRO), an Atlanta-based provider of local
commercial real estate information for $3.0 million in initial cash
consideration and deferred consideration of $1.7 million paid during the third
quarter of 2009.
On July
17, 2009, the Company acquired all of the issued and outstanding equity
securities of PPR, and its wholly owned subsidiary Property and Portfolio
Research Ltd., providers of real estate analysis, market forecasts and credit
risk analytics to the commercial real estate industry. The Company acquired PPR
from DMG Information, Inc. (“DMGI”) in exchange for 572,999 shares of CoStar
common stock, which had an aggregate value of approximately $20.9 million as of
the closing date. On July 17, 2009, 433,667 shares of the Company’s common stock
were issued to DMGI, and the remaining 139,332 shares were issued to DMGI on
September 28, 2009 after taking into account post-closing purchase price
adjustments. The purchase accounting is preliminary and is subject to
change upon completion of the purchase accounting.
The
purchase price for the PPR acquisition was allocated as follows (in
thousands):
|
Working
capital
|
$ | (5,479 | ) | |
|
Acquired
trade names and
other
|
810 | |||
|
Acquired
customer
base
|
5,300 | |||
|
Acquired
database
technology
|
3,700 | |||
|
Goodwill
|
16,572 | |||
|
Total
purchase
consideration
|
$ | 20,903 |
On
October 19, 2009, the Company acquired all of the outstanding capital stock of
Resolve Technology, a Delaware corporation, for approximately $4.5 million,
consisting of approximately $3.4 million in cash and 25,886 shares, or
approximately $1.1 million, of CoStar common stock, which shares are subject to
a three-year lockup. Additionally, the seller may be entitled
to receive (i) a potential deferred cash payout two years after closing based on
the incremental growth of Resolve Technology’s revenue, and (ii) other potential
deferred cash payouts for successful completion of operational and sales
milestones during the period from closing through June 30, 2013, which period
may be subject to extension to a date no later than December 31,
2014. The purchase accounting is preliminary and is subject to
change upon completion of the purchase accounting.
The
purchase price for the Resolve acquisition was allocated as follows (in
thousands):
|
Purchase
price in cash and
stock
|
$ | 4,499 | ||
|
Deferred
consideration
|
3,052 | |||
|
Total
purchase consideration
|
$ | 7,551 | ||
|
Working
capital
|
$ | (550 | ) | |
|
Acquired
trade names and
other
|
430 | |||
|
Acquired
customer
base
|
890 | |||
|
Acquired
database
technology
|
1,200 | |||
|
Goodwill
|
5,581 | |||
|
Total
purchase
consideration
|
$ | 7,551 |
F-15
COSTAR
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
¾
(CONTINUED)
3.
ACQUISITIONS
¾
(CONTINUED)
These
acquisitions were accounted for using purchase accounting. The purchase price
for the First CLS, Inc. acquisition was primarily allocated to acquired customer
base and goodwill. For each of the PPR and Resolve Technology acquisitions, the
purchase price was allocated to various working capital accounts, developed
technology, customer base, trademarks, non-competition agreements and
goodwill. The acquired customer base for the acquisitions, which
consists of one distinct intangible asset for each acquisition and is composed
of acquired customer contracts and the related customer relationships, is being
amortized on a 125% declining balance method over ten years. The identified
intangibles will be amortized over their estimated useful
lives. Goodwill for these acquisitions will not be amortized, but is
subject to annual impairment tests. Goodwill is comprised of acquired
workforce. The results of operations of First CLS, Inc., PPR, and Resolve
Technology have been consolidated with those of the Company since the respective
dates of the acquisitions and are not considered material to the Company’s
consolidated financial statements. Accordingly, pro forma financial information
has not been presented for any of the acquisitions.
4.
INVESTMENTS
The
Company determines the appropriate classification of debt and equity investments
at the time of purchase and reevaluates such designation as of each balance
sheet date. The Company considers all of its investments to be
available-for-sale. Short-term investments consist of commercial
paper, government/federal notes and bonds and corporate obligations with
maturities greater than 90 days at the time of purchase. Available-for-sale
short-term investments with contractual maturities beyond one year are
classified as current in the Company’s consolidated balance sheets because they
represent the investment of cash that is available for current operations.
Long-term investments consist of auction rate securities. Investments
are carried at fair market value.
Scheduled
maturities of investments classified as available-for-sale as of December 31,
2009 are as follows (in thousands):
|
Maturity
|
Fair
Value
|
|||
|
Due
in:
|
||||
|
2010
|
$ | 3,072 | ||
|
2011-2014
|
16,634 | |||
|
2015-2019
|
106 | |||
|
2020
and
thereafter
|
30,100 | |||
|
Available-for-sale
investments
|
$ | 49,912 | ||
The
realized gains on the Company’s investments for the years ended December 31,
2008 and 2009 were approximately $329,000 and $4,000,
respectively. The realized losses on the Company’s investments for
the years ended December 31, 2008 and 2009 were approximately $489,000 and
$5,000, respectively.
Unrealized
holding gains and losses, net of the related tax effect, on available-for-sale
securities are excluded from earnings and are reported as a separate component
of accumulated other comprehensive income (loss) in stockholders’ equity until
realized. Realized gains and losses from the sale of
available-for-sale securities are determined on a specific-identification basis.
A decline in market value of any available-for-sale security below cost that is
deemed to be other than temporary results in a reduction in carrying amount to
fair value. The impairment is charged to earnings and a new cost
basis for the security is established. Dividend and interest income
are recognized when earned.
F-16
COSTAR
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
¾
(CONTINUED)
4.
INVESTMENTS
¾
(CONTINUED)
As of
December 31, 2009, the amortized cost basis and fair value of investments
classified as available-for-sale are as follows (in thousands):
|
Amortized
Cost
|
Gross
Unrealized Gains
|
Gross
Unrealized Losses
|
Fair Value | |||||||||||||
|
Collateralized
debt obligations
|
$ | 12,987 | $ | 5 | $ | (14 | ) | $ | 12,978 | |||||||
|
Corporate
debt securities
|
6,396 | 331 | ¾ | 6,727 | ||||||||||||
|
Residential
mortgage-backed securities
|
394 | ¾ | (7 | ) | 387 | |||||||||||
|
Government-sponsored
enterprise obligations
|
97 | ¾ | (1 | ) | 96 | |||||||||||
|
Auction
rate securities
|
32,750 | ¾ | (3,026 | ) | 29,724 | |||||||||||
|
Available-for-sale
investments
|
$ | 52,624 | $ | 336 | $ | (3,048 | ) | $ | 49,912 | |||||||
The
unrealized losses on the Company’s investments as of December 31, 2008 and 2009
were generated primarily from changes in interest rates. The losses are
considered temporary, as the contractual terms of these investments do not
permit the issuer to settle the security at a price less than the amortized cost
of the investment. Because the Company does not intend to sell these instruments
and it is not more likely than not that the Company will be required to sell
these instruments prior to anticipated recovery, which may be maturity, it does
not consider these investments to be other-than-temporarily impaired as of
December 31, 2008 and 2009. See Note 5 to the consolidated financial
statements for further discussion on the fair value of the Company’s financial
assets.
The
components of the investments in an unrealized loss position for more than
twelve months consists of the following (in thousands):
|
December
31,
|
||||||||||||||||
|
2008
|
2009
|
|||||||||||||||
|
Aggregate
Fair
Value
|
Gross
Unrealized Losses
|
Aggregate
Fair
Value
|
Gross Unrealized
Losses
|
|||||||||||||
|
Collateralized
debt obligations
|
$ | 19,151 | $ | (1,323 | ) | $ | 7,578 | $ | (14 | ) | ||||||
|
Corporate
debt securities
|
2,558 | (156 | ) | ¾ | ¾ | |||||||||||
|
Residential
mortgage-backed securities
|
427 | (15 | ) | 387 | (7 | ) | ||||||||||
|
Government-sponsored
enterprise obligations
|
¾ | ¾ | 96 | (1 | ) | |||||||||||
|
Auction
rate securities
|
¾ | ¾ | 29,724 | (3,026 | ) | |||||||||||
| $ | 22,136 | $ | (1,494 | ) | $ | 37,785 | $ | (3,048 | ) | |||||||
The
components of the investments in an unrealized loss position for less than
twelve months consists of the following (in thousands):
|
December
31,
|
||||||||||||||||
|
2008
|
2009
|
|||||||||||||||
|
Aggregate
Fair
Value
|
Gross
Unrealized Losses
|
Aggregate
Fair
Value
|
Gross Unrealized Losses
|
|||||||||||||
|
Collateralized
debt obligations
|
$ | 3,022 | $ | (84 | ) | $ | ¾ | $ | ¾ | |||||||
|
Corporate
debt securities
|
3,807 | (268 | ) | ¾ | ¾ | |||||||||||
|
Residential
mortgage-backed securities
|
36 | (1 | ) | ¾ | ¾ | |||||||||||
|
Government-sponsored
enterprise obligations
|
130 | (14 | ) | ¾ | ¾ | |||||||||||
|
Auction
rate securities
|
29,340 | (3,710 | ) | ¾ | ¾ | |||||||||||
| $ | 36,335 | $ | (4,077 | ) | $ | ¾ | $ | ¾ | ||||||||
F-17
COSTAR
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
¾
(CONTINUED)
4.
INVESTMENTS
¾
(CONTINUED)
The
gross unrealized gains on the Company’s investments as of December 31, 2008 and
2009 were approximately $128,000 and $336,000, respectively.
5.
FAIR VALUE
In
September 2006, the FASB issued authoritative guidance which defines fair value,
establishes a framework for measuring fair value in accordance with GAAP and
expands disclosures about fair value measurements. The Company adopted this
guidance as of January 1, 2008 for financial instruments. Although
the adoption of the guidance did not materially impact its financial position,
results of operations, or cash flow, the Company is now required to provide
additional disclosures as part of its financial statements.
There
is a three-tier fair value hierarchy, which categorizes the inputs used in
measuring fair value. These tiers include: Level 1, defined as
observable inputs such as quoted prices in active markets; Level 2, defined as
inputs other than quoted prices in active markets that are either directly or
indirectly observable; and Level 3, defined as unobservable inputs in which
little or no market data exists, therefore requiring an entity to develop its
own assumptions.
The
following table represents the Company's fair value hierarchy for its financial
assets (cash, cash equivalents and investments) and liabilities measured at fair
value on a recurring basis as of December 31, 2009 (in thousands):
|
Level
1
|
Level
2
|
Level
3
|
Total
|
|||||||||||||
|
Assets:
|
||||||||||||||||
|
Cash
|
$ | 38,721 | $ | ¾ | $ | ¾ | $ | 38,721 | ||||||||
|
Money
market funds
|
167,065 | ¾ | ¾ | 167,065 | ||||||||||||
|
Collateralized
debt obligations
|
¾ | 12,978 | ¾ | 12,978 | ||||||||||||
|
Corporate
debt securities
|
¾ | 6,727 | ¾ | 6,727 | ||||||||||||
|
Residential
mortgage-backed securities
|
¾ | 387 | ¾ | 387 | ||||||||||||
|
Government-sponsored
enterprise obligations
|
¾ | 96 | ¾ | 96 | ||||||||||||
|
Auction
rate securities
|
¾ | ¾ | 29,724 | 29,724 | ||||||||||||
|
Total
assets
measured
at fair value
|
$ | 205,786 | $ | 20,188 | $ | 29,724 | $ | 255,698 | ||||||||
|
Liabilities:
|
||||||||||||||||
|
Deferred
consideration
|
$ | ¾ | $ | ¾ | $ | 3,082 | $ | 3,082 | ||||||||
|
Total liabilities
measured
at fair value
|
$ | ¾ | $ | ¾ | $ | 3,082 | $ | 3,082 | ||||||||
The
Company’s Level 2 assets consist of collateralized debt obligations, corporate
debt securities, residential mortgage-backed securities and government-sponsored
enterprise obligations, which do not have directly observable quoted prices in
active markets. The Company’s Level 2 assets are valued using matrix
pricing.
The
Company’s Level 3 assets consist of auction rate securities (“ARS”), whose
underlying assets are primarily student loan securities supported by guarantees
from the Federal Family Education Loan Program (“FFELP”) of the U.S. Department
of Education.
F-18
COSTAR
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
¾
(CONTINUED)
5.
FAIR VALUE
¾
(CONTINUED)
The following table summarizes changes in fair value of the Company’s Level 3 assets from December 31, 2007 to December 31, 2009 (in thousands):
|
Auction
Rate
Securities
|
||||
|
Balance
at December 31, 2007
|
$ | 53,975 | ||
|
Unrealized
loss included in other comprehensive loss
|
(3,710 | ) | ||
|
Net
settlements
|
(20,925 | ) | ||
|
Balance
at December 31, 2008
|
$ | 29,340 | ||
|
Unrealized
gain included in other comprehensive loss
|
684 | |||
|
Net
settlements
|
(300 | ) | ||
|
Balance
at December 31, 2009
|
$ | 29,724 | ||
ARS are
variable rate debt instruments whose interest rates are reset approximately
every 28 days. The underlying securities have contractual maturities
greater than twenty years. The ARS are recorded at fair
value.
As of
December 31, 2009, the Company held ARS with $32.8 million par value, all of
which failed to settle at auction. The majority of these investments
are of high credit quality with AAA credit ratings and are primarily
student loan securities supported by guarantees from the FFELP of the U.S.
Department of Education. The Company may not be able to liquidate and
fully recover the carrying value of the ARS in the near term. As a
result,
these
securities are classified as long-term investments in the Company’s consolidated
balance sheet as of December 31, 2009.
While the
Company continues to earn interest on its ARS investments at the contractual
rate, these investments are not currently trading and therefore do not currently
have a readily determinable market value. Accordingly, the estimated
fair value of the ARS no longer approximates par value. The Company
has used a discounted cash flow model to determine the estimated fair value of
its investment in ARS as of December 31, 2009. The assumptions used
in preparing the discounted cash flow model include estimates for interest
rates, credit spreads, timing and amount of cash flows, liquidity risk premiums,
expected holding periods, and default risk. Based on this assessment
of fair value, as of December 31, 2009, the Company determined there was a
decline in the fair value of its ARS investments of approximately $3.0
million. The decline was deemed to be a temporary impairment and
recorded as an unrealized loss in accumulated other comprehensive loss in
stockholders’ equity. In addition, while a majority of the ARS are
currently rated AAA, if the issuers are unable to successfully close future
auctions and their credit ratings deteriorate, the Company may be required to
record additional unrealized losses in accumulated other comprehensive loss or
an other-than-temporary impairment charge to earnings on these
investments.
The
Company’s Level 3 liabilities consist of a $3.1 million liability for deferred
consideration related to the October 19, 2009 acquisition of Resolve Technology.
The deferred consideration is for (i) a potential deferred cash payout two years
after closing based on the incremental growth of Resolve Technology’s revenue,
and (ii) other potential deferred cash payouts for successful completion of
operational and sales milestones during the period from closing through June 30,
2013, which period may be subject to extension to a date no later than December
31, 2014.
The
following table summarizes changes in fair value of the Company’s Level 3
liabilities from December 31, 2008 to December 31, 2009 (in
thousands):
|
Deferred
Consideration
|
||||
|
Balance
at December 31, 2008
|
$ | ¾ | ||
|
Deferred
consideration upon
acquisition
|
3,052 | |||
|
Accretion
for 2009
|
30 | |||
|
Balance
at December 31, 2009
|
$ | 3,082 | ||
F-19
COSTAR
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
¾
(CONTINUED)
5.
FAIR VALUE
¾
(CONTINUED)
The
Company has used a discounted cash flow model to determine the estimated fair
value of its Level 3 liabilities as of December 31, 2009. The
significant assumptions used in preparing the discounted cash flow model include
the discount rate, estimates for future incremental revenue growth and
probabilities for completion of operational and sales milestones.
6. PROPERTY AND EQUIPMENT
Property
and equipment consists of the following (in thousands):
|
December
31,
|
||||||||
|
2008
|
2009
|
|||||||
|
Leasehold
improvements
|
$ | 7,808 | $ | 10,333 | ||||
|
Furniture,
office equipment and research vehicles
|
19,305 | 20,279 | ||||||
|
Computer
hardware and software
|
27,938 | 28,259 | ||||||
| 55,051 | 58,871 | |||||||
|
Accumulated
depreciation and amortization
|
(38,175 | ) | (39,709 | ) | ||||
|
Property
and equipment, net
|
$ | 16,876 | $ | 19,162 | ||||
7.
GOODWILL
The
changes in the carrying amount of goodwill by operating segment consist of the
following (in thousands):
|
United
States
|
International
|
Total
|
||||||||||
|
Goodwill,
December 31, 2007
|
$ | 30,428 | $ | 31,426 | $ | 61,854 | ||||||
|
Acquisitions
|
1,119 | ¾ | 1,119 | |||||||||
|
Effect
of foreign currency translation
|
¾ | (8,645 | ) | (8,645 | ) | |||||||
|
Goodwill,
December 31, 2008
|
31,547 | 22,781 | 54,328 | |||||||||
|
Acquisitions
|
23,858 | ¾ | 23,858 | |||||||||
|
Effect of foreign currency translation
|
¾ | 2,280 | 2,280 | |||||||||
|
Purchase accounting adjustment
|
(145 | ) | ¾ | (145 | ) | |||||||
|
Goodwill, December 31, 2009
|
$ | 55,260 | $ | 25,061 | $ | 80,321 | ||||||
The
Company recorded goodwill of approximately $1.1 million in connection with the
First CLS, Inc. acquisition in April 2008, which was decreased by $145,000 in
2009, upon completion of purchase accounting. Approximately $1.7
million in additional goodwill was recorded in connection with the First CLS,
Inc. acquisition as a result of the payment of deferred consideration of $1.7
million in August 2009. The Company recorded goodwill of
approximately $16.6 million in connection with the July 2009 acquisition of
PPR. Initially in July 2009, the Company had recorded $12.1 million
in goodwill for the PPR acquisition, that was increased by $4.5 million in
December 2009 upon completion of the Company’s review of the income tax
attributes and deferred taxes related to the PPR.purchase accounting. The
Company recorded goodwill of approximately $5.6 million in connection with the
Resolve Technology acquisition in October 2009
During
the fourth quarters of 2008 and 2009, the Company completed the annual
impairment test of goodwill and concluded that goodwill was not
impaired.
F-20
COSTAR
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
¾
(CONTINUED)
8.
INTANGIBLES AND OTHER ASSETS
Intangibles
and other assets consist of the following (in thousands, except amortization
period data):
|
|
Weighted-Average | |||||||||||
| December 31, | Amortization Period | |||||||||||
| 2008 |
2009
|
(in
years)
|
||||||||||
|
Building
photography
|
$ | 11,011 | $ | 11,504 | 5 | |||||||
|
Accumulated
amortization
|
(7,711 | ) | (9,089 | ) | ||||||||
|
Building
photography, net
|
3,300 | 2,415 | ||||||||||
|
Acquired
database technology
|
20,711 | 25,790 | 4 | |||||||||
|
Accumulated
amortization
|
(20,361 | ) | (21,144 | ) | ||||||||
|
Acquired
database technology, net
|
350 | 4,646 | ||||||||||
|
Acquired
customer base
|
48,198 | 55,770 | 10 | |||||||||
|
Accumulated
amortization
|
(37,192 | ) | (41,208 | ) | ||||||||
|
Acquired
customer base, net
|
11,006 | 14,562 | ||||||||||
|
Acquired
trade names and other
|
7,744 | 9,755 | 7 | |||||||||
|
Accumulated
amortization
|
(5,979 | ) | (7,988 | ) | ||||||||
|
Acquired
trade names and other, net
|
1,765 | 1,767 | ||||||||||
|
Intangibles
and other assets, net
|
$ | 16,421 | $ | 23,390 | ||||||||
Amortization
expense for intangibles and other assets was approximately $8.4 million for the
years ended December 31, 2007 and 2008, respectively and $7.1 million for the
year ended December 31, 2009.
In
the aggregate, amortization for intangibles and other assets existing as of
December 31, 2009 for future periods is expected to be approximately $3.8
million, $3.4 million, $3.3 million, $2.3 million and $1.8 million for the years
ending December 31, 2010, 2011, 2012, 2013 and 2014, respectively.
F-21
COSTAR
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
¾
(CONTINUED)
9.
INCOME TAXES
The
components of the provision (benefit) for income taxes attributable to
operations consist of the following (in thousands):
|
Year
Ended December 31,
|
||||||||||||
|
2007
|
2008
|
2009
|
||||||||||
|
Current:
|
||||||||||||
|
Federal
|
$ | 574 | $ | 18,289 | $ | 15,194 | ||||||
|
State
|
821 | 3,842 | 1,593 | |||||||||
|
Foreign
|
¾ | ¾ | 26 | |||||||||
|
Total
current
|
1,395 | 22,131 | 16,813 | |||||||||
|
Deferred:
|
||||||||||||
|
Federal
|
9,716 | (408 | ) | (2,097 | ) | |||||||
|
State
|
72 | (52 | ) | (199 | ) | |||||||
|
Foreign
|
(1,237 | ) | (1,592 | ) | (122 | ) | ||||||
|
Total
deferred
|
8,551 | (2,052 | ) | (2,418 | ) | |||||||
|
Total
provision for income taxes
|
$ | 9,946 | $ | 20,079 | $ | 14,395 | ||||||
The
components of deferred tax assets and liabilities consists of the following (in
thousands):
|
December
31,
|
||||||||
|
2008
|
2009
|
|||||||
|
Deferred
tax assets:
|
||||||||
|
Reserve
for bad debts
|
$ | 928 | $ | 1,093 | ||||
|
Accrued
compensation
|
2,144 | 3,156 | ||||||
|
Stock
compensation
|
2,115 | 3,168 | ||||||
|
Net
operating losses
|
3,077 | 2,985 | ||||||
|
Accrued reserve
|
¾ | 238 | ||||||
|
Capital
loss carryovers
|
345 | 348 | ||||||
|
Unrealized
loss on securities
|
2,088 | 1,076 | ||||||
|
Other
liabilities
|
1,401 | 317 | ||||||
|
Total
deferred tax assets
|
12,098 | 12,381 | ||||||
|
Deferred
tax liabilities:
|
||||||||
|
Prepaids
|
(522 | ) | (638 | ) | ||||
|
Depreciation
|
(626 | ) | (587 | ) | ||||
|
Intangibles
|
(2,607 | ) | (2,743 | ) | ||||
|
Total
deferred tax
liabilities
|
(3,755 | ) | (3,968 | ) | ||||
|
Net deferred tax
asset
|
8,343 | 8,413 | ||||||
|
Valuation
allowance
|
(3,047 | ) | (2,985 | ) | ||||
|
Net deferred
taxes
|
$ | 5,296 | $ | 5,428 | ||||
The net
long-term deferred tax liability shown on the balance sheet includes deferred
tax liabilities and assets related to the international operations of the
Company.
F-22
COSTAR
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
¾
(CONTINUED)
9. INCOME TAXES
¾
(CONTINUED)
For
the years ended December 31, 2008 and 2009, a valuation allowance has been
established for certain deferred tax assets due to the uncertainty of
realization. The Company’s change in valuation allowance was an increase of
approximately $3.0 million for the year ended December 31, 2008 and a decrease
of approximately $62,000 for the year ended December 31, 2009.
The
decrease for the year ended December 31, 2009 is primarily due to the decrease
in unrealized losses on securities, which was offset by an increase in the
valuation allowance for foreign loss carryforwards. The valuation allowance for
the deferred tax asset for unrealized losses has been recorded as an adjustment
to accumulated other comprehensive loss. The valuation allowance for the years
ended December 31, 2008 and 2009 also includes an allowance for capital loss
carryforwards and for state net operating loss carryforwards.
For
the year ended December 31, 2009, the Company had income of approximately $39.0
million subject to applicable U.S. federal and state income tax laws and a loss
of approximately $5.9 million subject to applicable international tax
laws.
The
Company’s provision for income taxes resulted in effective tax rates that varied
from the statutory federal income tax rate as follows (in
thousands):
|
Year
Ended December 31,
|
||||||||||||
|
2007
|
2008
|
2009
|
||||||||||
|
Expected
federal income tax provision at statutory rate
|
$ | 8,805 | $ | 15,646 | $ | 11,581 | ||||||
|
State
income taxes, net of federal benefit
|
841 | 2,505 | 1,778 | |||||||||
|
Foreign
income taxes, net effect
|
156 | 497 | 347 | |||||||||
|
Stock
compensation
|
146 | 87 | 300 | |||||||||
|
(Decrease)
increase in valuation allowance
|
(274 | ) | 1,023 | 1,446 | ||||||||
|
Disregarded
entity election
|
¾ | ¾ | (1,477 | ) | ||||||||
|
Other
adjustments
|
272 | 321 | 420 | |||||||||
|
Income
tax expense, net
|
$ | 9,946 | $ | 20,079 | $ | 14,395 | ||||||
The
Company paid approximately $1.1 million, $13.4 million, and $19.4 million in
income taxes for the years ended December 31, 2007, 2008 and 2009,
respectively.
The
Company has net operating loss carryforwards for international income tax
purposes of approximately $12.6 million, which do not expire.
The
Company adopted FASB authoritative guidance for uncertain income tax positions
on January 1, 2007. As a result of the implementation of this guidance, the
Company recognized no material adjustment in the liability for unrecognized
income tax benefits. At the adoption date of January 1, 2007, the Company had
$217,000 of unrecognized tax benefits, all of which would favorably affect the
effective tax rate if recognized in future periods, and $52,000 of accrued
penalties and $47,000 of accrued interest. The Company’s continuing practice is
to recognize interest and penalties related to income tax matters in income tax
expense.
The
following tables summarize the activity related to the Company’s unrecognized
tax benefits (in thousands):
|
Unrecognized
tax benefit as of January 1,
2007
|
$ | 217 | ||
|
Increase
for current year tax
positions
|
44 | |||
|
Decrease
for prior year tax
positions
|
(6 | ) | ||
|
Expiration
of the statute of limitation for assessment of
taxes
|
(22 | ) | ||
|
Unrecognized
tax benefit as of December 31,
2007
|
$ | 233 |
F-23
COSTAR
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
¾
(CONTINUED)
9. INCOME TAXES
¾
(CONTINUED)
|
Unrecognized
tax benefit as of December 31,
2007
|
$ | 233 | ||
|
Increase
for current year tax
positions
|
1,451 | |||
|
Decrease
for prior year tax
positions
|
(9 | ) | ||
|
Expiration
of the statute of limitation for assessment of
taxes
|
(117 | ) | ||
|
Unrecognized
tax benefit as of December 31,
2008
|
1,558 | |||
|
Increase
for current year tax
positions
|
69 | |||
|
Increase
for prior year tax
positions
|
257 | |||
|
Expiration
of the statute of limitation for assessment of
taxes
|
(28 | ) | ||
|
Unrecognized
tax benefit as of December 31,
2009
|
$ | 1,856 |
Approximately
$217,000 and $142,000 of the unrecognized tax benefit as of December 31, 2009,
and 2008, respectively, would favorably affect the annual effective tax rate, if
recognized in future periods. During 2009, the Company recognized approximately
$(10,000) of interest and $20,000 of penalties, and had total accruals of
approximately $164,000 for interest and $54,000 for penalties as of December 31,
2009. During 2008, the Company recognized approximately $145,000 of interest and
$9,000 of penalties, and had total accruals of approximately $173,000 for
interest and $34,000 for penalties as of December 31, 2008. The Company does not
anticipate the amount of the unrecognized tax benefits to change significantly
over the next twelve months.
The
Company’s federal and state income tax returns for tax years 2006 through 2008
remain open to examination. The Company’s U.K. income tax returns for tax years
2003 through 2008 remain open to examination.
10.
GAIN ON LEASE SETTLEMENT, NET
On
September 14, 2007, CoStar Limited, a wholly owned U.K. subsidiary of CoStar,
entered into an agreement with Trafigura Limited to assign to Trafigura the
leasehold interest in the office space located in London. The lease assignment
was completed on December 19, 2007. As a result, CoStar U.K. was paid
approximately $7.6 million, net of expenses, for the assignment of the lease.
The expenses associated with the lease settlement included legal, moving and the
disposal of assets.
11.
COMMITMENTS AND CONTINGENCIES
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, 2007, 2008 and 2009 was approximately
$8.1 million, $8.0 million and $9.1 million, respectively.
Future
minimum lease payments as of December 31, 2009 are as follows (in
thousands):
|
2010
|
$ | 10,530 | ||
|
2011
|
6,840 | |||
|
2012
|
4,911 | |||
|
2013
|
2,410 | |||
|
2014
|
651 | |||
|
2015
and thereafter
|
883 | |||
| $ | 26,225 | |||
F-24
COSTAR
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
¾
(CONTINUED)
11.
COMMITMENTS AND CONTINGENCIES
¾
(CONTINUED)
The
Company and its wholly owned subsidiary CoStar U.K. Limited are defendants in
legal proceedings filed in England by Nokia U.K. Limited (“Nokia”) related to
obligations under an agreement to sublease certain office space from
Nokia. Nokia served its complaint upon the Company in September 2009,
and the litigation is in its very early stages. If there is a trial,
it is not expected to occur until October 2010. The Company has filed a response
asserting that Nokia’s claim is without merit. The Company intends to
defend itself vigorously against Nokia’s claim. Since the outcome of these
legal proceedings is uncertain at this time and because Nokia has requested
equitable relief as an alternative to financial relief, the Company cannot
estimate the amount of liability, if any, that could result from an adverse
resolution of this matter.
On
December 23, 2008, the Company initiated a Financial Industry Regulatory
Authority (“FINRA”) arbitration against Credit Suisse First Boston (“CSFB”)
related to CSFB’s purchase of auction rate securities for the Company’s
account. An arbitration hearing was originally scheduled to begin during
the week beginning December 7, 2009, but was rescheduled at the request of CSFB
and is now set to begin on March 8, 2010. The Company expects to receive a
ruling on its claim during the second quarter of 2010. Since the outcome
of this legal proceeding is uncertain at this time, the Company cannot estimate
the amount of gain or loss, if any, that could result from the resolution of
this matter.
On
December 8, 2009, a former employee filed a lawsuit against the Company in the
United States District Court for the Southern District of California alleging
violations of the Fair Labor Standards Act and California state wage-and-hour
laws and seeking unspecified damages under those laws. The complaint also
seeks to declare a class of all similarly situated employees to pursue similar
claims. The Company believes that the lawsuit is meritless and intends to
defend itself vigorously against these claims and any certification of class
status. Nevertheless, because the lawsuit is in its early stages, the
outcome of the claim is uncertain at this time and the Company cannot estimate
the amount of liability, if any, that could result from an adverse resolution of
this matter.
In
December 2009, the Company and LoopNet, Inc. settled all pending litigation
between the companies. No monetary consideration was involved in the
settlement.
Currently,
and from time to time, the Company is involved in litigation incidental to the
conduct of its business. In accordance with GAAP, the Company records
a provision for a liability when it is both probable that a liability has been
incurred and the amount can be reasonably estimated. At the present
time, while it is reasonably possible that an unfavorable outcome may occur as a
result of the Company’s current litigation, management has concluded that it is
not probable that a loss has been incurred in connection with the Company’s
current litigation. In addition, the Company is unable to estimate
the possible loss or range of loss that could result from an unfavorable outcome
in the Company’s current litigation and accordingly, the Company has not
recognized any liability in the consolidated financial statements for
unfavorable results, if any. Legal defense costs are expensed as
incurred.
F-25
COSTAR
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
12. SEGMENT
REPORTING
Due to
the increased size, complexity, and funding requirements associated with the
Company’s international expansion, in 2007 the Company began to manage the
business geographically in two operating segments, with the primary areas of
measurement and decision-making being the U.S. and International, which includes
the U.K. and France. The Company’s subscription-based information services,
consisting primarily of CoStar Property Professional
®
,
CoStar Tenant
®
,
CoStar COMPS Professional
®
,
and FOCUS
TM
services, currently generate more than 95% of the Company’s total
revenues. CoStar Property Professional, CoStar Tenant, and CoStar COMPS
Professional are generally sold as a suite of similar services and comprise the
Company’s primary service offering in the U.S. operating
segment. FOCUS is the Company’s primary service offering in the
International operating segment. Management relies on an internal management
reporting process that provides revenue and segment EBITDA, which is the
Company’s net income before interest, income taxes, depreciation and
amortization. Management believes that segment EBITDA is an appropriate measure
for evaluating the operational performance of our segments. EBITDA is used by
management to internally measure operating and management performance and to
evaluate the performance of the business. However, this measure should be
considered in addition to, not as a substitute for or superior to, income from
operations or other measures of financial performance prepared in accordance
with GAAP.
Summarized
information by segment was as follows (in thousands):
|
Year
Ended December 31,
|
||||||||||||
|
2007
|
2008
|
2009
|
||||||||||
|
Revenues
|
||||||||||||
|
United
States
|
$ | 170,298 | $ | 190,075 | $ | 191,556 | ||||||
|
International
|
||||||||||||
|
External
customers
|
22,507 | 22,353 | 18,103 | |||||||||
|
Intersegment
revenue
|
¾ | ¾ | 898 | |||||||||
|
Total
international revenue
|
22,507 | 22,353 | 19,001 | |||||||||
|
Intersegment
eliminations
|
¾ | ¾ | (898 | ) | ||||||||
|
Total
revenues
|
$ | 192,805 | $ | 212,428 | $ | 209,659 | ||||||
|
EBITDA
|
||||||||||||
|
United
States
|
$ | 32,872 | $ | 58,813 | $ | 47,697 | ||||||
|
International
|
1,127 | (2,224 | ) | (1,186 | ) | |||||||
|
Total
EBITDA
|
$ | 33,999 | $ | 56,589 | $ | 46,511 | ||||||
|
Reconciliation
of EBITDA to net income
|
||||||||||||
|
EBITDA
|
$ | 33,999 | $ | 56,589 | $ | 46,511 | ||||||
|
Purchase
amortization in cost of revenues
|
(2,170 | ) | (2,284 | ) | (2,389 | ) | ||||||
|
Purchase
amortization in operating expenses
|
(5,063 | ) | (4,880 | ) | (3,412 | ) | ||||||
|
Depreciation
and other amortization
|
(8,914 | ) | (9,637 | ) | (8,875 | ) | ||||||
|
Interest
income, net
|
8,045 | 4,914 | 1,253 | |||||||||
|
Income
tax expense, net
|
(9,946 | ) | (20,079 | ) | (14,395 | ) | ||||||
|
Net
income
|
$ | 15,951 | $ | 24,623 | $ | 18,693 | ||||||
Intersegment
revenue is attributable to services performed by Property and Portfolio Research
Ltd., a wholly owned subsidiary of PPR, for PPR. Intersegment revenue
is recorded at cost plus an agreed margin, which the Company believes
approximates fair value. U.S. EBITDA includes a corresponding cost
for the services performed by Property and Portfolio Research Ltd. for
PPR
F-26
COSTAR
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
|
12.
|
SEGMENT
REPORTING — (CONTINUED)
|
International
EBITDA includes a corporate allocation of approximately $2.6 million, $1.1
million and $500,000
for the years ended
December 31, 2007, 2008 and 2009, respectively.
Summarized
information by segment consists of the following (in thousands):
|
December
31,
|
||||||||
|
2008
|
2009
|
|||||||
|
Property
and equipment, net
|
||||||||
|
United
States
|
$ | 13,927 | $ | 14,851 | ||||
|
International
|
2,949 | 4,311 | ||||||
|
Total
property and equipment,
net
|
$ | 16,876 | $ | 19,162 | ||||
|
Goodwill
|
||||||||
|
United
States
|
$ | 31,547 | $ | 55,260 | ||||
|
International
|
22,781 | 25,061 | ||||||
|
Total
goodwill
|
$ | 54,328 | $ | 80,321 | ||||
|
Assets
|
||||||||
|
United
States
|
$ | 353,084 | $ | 424,479 | ||||
|
International
|
43,474 | 44,558 | ||||||
|
Total
segment assets
|
$ | 396,558 | $ | 469,037 | ||||
|
Reconciliation
of segment assets to total assets
|
||||||||
|
Total
segment
assets
|
$ | 396,558 | $ | 469,037 | ||||
|
Investment
in
subsidiaries
|
(18,343 | ) | (18,344 | ) | ||||
|
Intercompany
receivables
|
(43,831 | ) | (46,114 | ) | ||||
|
Total
assets
|
$ | 334,384 | $ | 404,579 | ||||
|
Liabilities
|
||||||||
|
United
States
|
$ | 24,180 | $ | 37,838 | ||||
|
International
|
40,053 | 46,678 | ||||||
|
Total
segment
liabilities
|
$ | 64,233 | $ | 84,516 | ||||
|
Reconciliation
of segment liabilities to total liabilities
|
||||||||
|
Total
segment
liabilities
|
$ | 64,233 | $ | 84,516 | ||||
|
Intercompany
payables
|
(33,270 | ) | (38,943 | ) | ||||
|
Total
liabilities
|
$ | 30,963 | $ | 45,573 | ||||
F-27
COSTAR
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
¾
(CONTINUED)
13. STOCKHOLDERS’
EQUITY
Preferred
Stock
The
Company has 2,000,000 shares of preferred stock, $0.01 par value, authorized for
issuance. The Board of Directors may issue the preferred stock from time to time
as shares of one or more classes or series.
Common
Stock
The
Company has 30,000,000 shares of common stock, $0.01 par value, authorized for
issuance. Dividends may be declared and paid on the common stock, subject in all
cases to the rights and preferences of the holders of preferred stock and
authorization by the Board of Directors. In the event of liquidation or winding
up of the Company and after the payment of all preferential amounts required to
be paid to the holders of any series of preferred stock, any remaining funds
shall be distributed among the holders of the issued and outstanding common
stock.
14. NET
INCOME PER SHARE
The
following table sets forth the calculation of basic and diluted net income per
share (in thousands except per share data):
|
Year
Ended December 31,
|
||||||||||||
|
2007
|
2008
|
2009
|
||||||||||
|
Numerator:
|
||||||||||||
|
Net
income
|
$ | 15,951 | $ | 24,623 | $ | 18,693 | ||||||
|
Denominator:
|
||||||||||||
|
Denominator
for basic net income per share
¾
weighted-average outstanding shares
|
19,044 | 19,372 | 19,780 | |||||||||
|
Effect
of dilutive securities:
|
||||||||||||
|
Stock
options and restricted stock
|
360 | 178 | 145 | |||||||||
|
Denominator
for diluted net income per share
¾
weighted-average outstanding shares
|
19,404 | 19,550 | 19,925 | |||||||||
|
Net
income per share
¾
basic
|
$ | 0.84 | $ | 1.27 | $ | 0.95 | ||||||
|
Net
income per share
¾
diluted
|
$ | 0.82 | $ | 1.26 | $ | 0.94 | ||||||
Stock
options to purchase approximately 80,400, 250,200 and 483,800 shares were
outstanding as of December 31, 2007, 2008 and 2009, respectively, but were not
included in the computation of diluted earnings per share because the exercise
price of the stock options was greater than the average share price of the
common shares and, therefore, the effect would have been
anti-dilutive.
F-28
COSTAR
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
¾
(CONTINUED)
15.
EMPLOYEE BENEFIT PLANS
Stock
Incentive Plans
In June
1998, the Company’s Board of Directors adopted the 1998 Stock Incentive Plan (as
amended, the “1998 Plan”) prior to consummation of the Company’s initial public
offering. In April 2007, the Company’s Board of Directors adopted the
CoStar Group, Inc. 2007 Stock Incentive Plan (as amended, the “2007 Plan”),
subject to stockholder approval, which was obtained on June 7,
2007. All shares of common stock that were authorized for issuance
under the 1998 Plan that, as of June 7, 2007, remained available for issuance
under the 1998 Plan (excluding shares subject to outstanding awards) were rolled
into the 2007 Plan and, as of that date, no shares of common stock were
available under the 1998 Plan. The 1998 Plan continues to govern
unexercised and unexpired awards issued under the 1998 Plan prior to June 7,
2007. The 1998 Plan provides for the grant of stock and stock options
to officers, directors and employees of the Company and its subsidiaries. Stock
options granted under the 1998 Plan might be incentive or non-qualified. The
exercise price for an incentive stock option may not be less than the fair
market value of the Company’s common stock on the date of grant. The
vesting period of the options and restricted stock grants is determined by the
Board of Directors and is generally three to four years. Upon the occurrence of
a Change of Control, as defined in the 1998 Plan, all outstanding unexercisable
options and restricted stock grants under the 1998 Plan immediately become
exercisable.
The 2007
Plan provides for the grant of stock options, restricted stock, restricted stock
units, and stock appreciation rights to officers, employees, directors and
consultants of the Company and its subsidiaries. Stock options granted under the
2007 Plan may be non-qualified or may qualify as incentive stock options. Except
in limited circumstances related to a merger or other acquisition, the exercise
price for an option may not be less than the fair market value of the Company’s
common stock on the date of grant. The vesting period for each grant
of options, restricted stock, restricted stock units and stock appreciation
rights under the 2007 Plan is determined by the Board of Directors and is
generally three to four years, subject to minimum vesting periods for restricted
stock and restricted stock units of at least one year. The Company has reserved
the following shares of common stock for issuance under the 2007 Plan: (a)
1,000,000 shares of common stock, plus (b) 121,875 shares of common stock that
were authorized for issuance under the 1998 Plan that, as of June 7, 2007,
remained available for issuance under the 1998 Plan (not including any Shares
that were subject as of such date to outstanding awards under the 1998 Plan),
and (c) any shares of common stock subject to outstanding awards under the 1998
Plan as of June 7, 2007 that on or after such date cease for any reason to be
subject to such awards (other than by reason of exercise or settlement of the
awards to the extent they are exercised for or settled in vested and
nonforfeitable shares). Unless terminated sooner, the 2007 Plan will terminate
in April 2017, but will continue to govern unexercised and unexpired awards
issued under the 2007 Plan prior to that date. Approximately 880,000
and 430,000 shares were available for future grant under the 2007 Plan as of
December 31, 2008 and 2009, respectively.
F-29
COSTAR
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
¾
(CONTINUED)
15.
EMPLOYEE BENEFIT PLANS
¾
(CONTINUED)
Stock Incentive Plans
¾
(Continued)
Option
activity was as follows:
|
Number
of Shares
|
Range
of Exercise Price
|
Weighted-
Average
Exercise
Price
|
Weighted-
Average Remaining Contract Life (in years)
|
Aggregate
Intrinsic Value
(in
thousands)
|
||||||||||||||||
|
Outstanding
at December 31, 2006
|
1,274,477 | $ | 9.00 - $52.13 | $ | 32.23 | |||||||||||||||
|
Granted
|
7,000 | $ | 48.25 - $54.12 | $ | 50.77 | |||||||||||||||
|
Exercised
|
(288,757 | ) | $ | 9.00 - $45.18 | $ | 28.16 | ||||||||||||||
|
Canceled
or expired
|
(24,875 | ) | $ | 21.28 - $51.92 | $ | 44.82 | ||||||||||||||
|
Outstanding
at December 31, 2007
|
967,845 | $ | 16.20 - $54.12 | $ | 33.25 | |||||||||||||||
|
Granted
|
93,900 | $ | 43.99 - $55.07 | $ | 45.76 | |||||||||||||||
|
Exercised
|
(198,434 | ) | $ | 17.77 - $45.18 | $ | 33.05 | ||||||||||||||
|
Canceled
or expired
|
(47,725 | ) | $ | 39.00 - $52.13 | $ | 46.36 | ||||||||||||||
|
Outstanding
at December 31, 2008
|
815,586 | $ | 16.20 - $55.07 | $ | 33.98 | |||||||||||||||
|
Granted
|
267,756 | $ | 25.00 - $40.13 | $ | 31.05 | |||||||||||||||
|
Exercised
|
(85,228 | ) | $ | 17.35 - $36.38 | $ | 26.20 | ||||||||||||||
|
Canceled
or expired
|
(44,818 | ) | $ | 30.06 - $46.81 | $ | 39.40 | ||||||||||||||
|
Outstanding
at December 31, 2009
|
953,296 | $ | 16.20 - $55.07 | $ | 33.60 | 5.54 | $ | 9,119 | ||||||||||||
|
Exercisable
at December 31, 2007
|
826,782 | $ | 16.20 - $52.13 | $ | 31.07 | |||||||||||||||
|
Exercisable
at December 31, 2008
|
701,975 | $ | 16.20 - $54.12 | $ | 31.84 | |||||||||||||||
|
Exercisable
at December 31, 2009
|
650,063 | $ | 16.20 - $55.07 | $ | 33.60 | 3.87 | $ | 6,376 | ||||||||||||
The
aggregate intrinsic value is calculated as the difference between (i) the
closing price of the common stock at December 31, 2007, 2008 and 2009 and (ii)
the exercise prices of the underlying awards, multiplied by the shares
underlying options as of December 31, 2007, 2008 and 2009, that had an exercise
price less than the closing price on that date. Options to purchase 288,757,
198,434, and 85,228 shares were exercised for the years ended December 31, 2007,
2008, and 2009, respectively. The aggregate intrinsic value of
options exercised, determined as of the date of option exercise, was $7.5
million, $3.4 million and $1.2 million, respectively.
At
December 31, 2009, there was $11.3 million of unrecognized compensation cost
related to stock-based payments, net of forfeitures, which is expected to be
recognized over a weighted-average-period of 2.2 years.
The
weighted-average grant date fair value of each option granted during the years
ended December 2007, 2008 and 2009 was $32.70, $27.81and $12.72,
respectively.
F-30
COSTAR
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
¾
(CONTINUED)
15.
EMPLOYEE BENEFIT PLANS
¾
(CONTINUED)
Stock
Incentive Plans
¾
(Continued)
The
Company estimated the fair value of each option granted on the date of grant
using the Black-Scholes option-pricing model, using the assumptions noted in the
following table:
|
Year
Ended December 31,
|
||||||||||||
|
2007
|
2008
|
2009
|
||||||||||
|
Dividend
yield
|
0 | % | 0 | % | 0 | % | ||||||
|
Expected
volatility
|
61 | % | 59 | % | 43 | % | ||||||
|
Risk-free
interest rate
|
4.7 | % | 3.0 | % | 2.2 | % | ||||||
|
Expected
life (in years)
|
5 | 5 | 3 | |||||||||
The
assumptions above and the estimation of expected forfeitures are based on
multiple facts, including historical employee behavior patterns of exercising
options and post-employment termination behavior, expected future employee
option exercise patterns, and the historical volatility of the Company’s stock
price.
The
following table summarizes information regarding options outstanding at December
31, 2009:
|
Options
Outstanding
|
Options
Exercisable
|
|||||||||||||||||||||
|
Range
of
Exercise
Price
|
Number
of Shares
|
Weighted-Average
Remaining Contractual Life (in years)
|
Weighted-Average
Exercise Price
|
Number
of Shares
|
Weighted-Average
Exercise Price
|
|||||||||||||||||
| $ | 16.20 - $20.30 | 146,522 | 2.13 | $ | 18.85 | 146,522 | $ | 18.85 | ||||||||||||||
| $ | 20.60 - $24.88 | 44,000 | 2.33 | $ | 23.13 | 44,000 | $ | 23.13 | ||||||||||||||
| $ | 25.00 - $25.00 | 133,600 | 9.16 | $ | 25.00 | 0 | $ | 0.00 | ||||||||||||||
| $ | 25.01 - $30.06 | 139,516 | 3.26 | $ | 28.71 | 139,516 | $ | 28.71 | ||||||||||||||
| $ | 30.75 - $37.42 | 108,276 | 8.93 | $ | 36.62 | 7,063 | $ | 31.86 | ||||||||||||||
| $ | 38.63 - $39.53 | 106,057 | 4.00 | $ | 39.10 | 106,057 | $ | 39.10 | ||||||||||||||
| $ | 39.81 - $43.99 | 106,375 | 7.31 | $ | 43.00 | 50,289 | $ | 42.56 | ||||||||||||||
| $ | 44.06 - $51.92 | 150,950 | 5.74 | $ | 47.89 | 149,616 | $ | 47.88 | ||||||||||||||
| $ | 54.12 - $54.12 | 3,000 | 7.42 | $ | 54.12 | 2,000 | $ | 54.12 | ||||||||||||||
| $ | 55.07 - $55.07 | 15,000 | 8.67 | $ | 55.07 | 5,000 | $ | 55.07 | ||||||||||||||
| $ | 16.20 - $55.07 | 953,296 | 5.54 | $ | 33.60 | 650,063 | $ | 33.60 | ||||||||||||||
The
following table presents unvested restricted stock awards activity for the year
ended December 31, 2009:
|
Number
of Shares
|
Weighted-Average
Grant Date
Fair
Value per Share
|
|||||||
|
Unvested
restricted stock at December 31,
2008
|
273,353 | $ | 49.12 | |||||
|
Granted
|
236,661 | $ | 29.43 | |||||
|
Vested
|
(67,433 | ) | $ | 45.52 | ||||
|
Canceled
|
(23,234 | ) | $ | 34.33 | ||||
|
Unvested
restricted stock at December 31,
2009
|
419,347 | $ | 39.40 | |||||
F-31
COSTAR
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
¾
(CONTINUED)
15.
EMPLOYEE BENEFIT PLANS
¾
(CONTINUED)
Employee
401(k) Plan
The
Company maintains a 401(k) Plan (the “401(k)”) as a defined contribution
retirement plan for all eligible employees. The 401(k) provides for
tax-deferred contributions of employees’ salaries, limited to a maximum annual
amount as established by the Internal Revenue Service. In 2007and 2008, the
Company matched 100% of employee contributions up to a maximum of 6% of total
compensation. In 2009, the Company matched 50% 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, 2007, 2008 and 2009 were approximately $2.3 million, $2.6 million
and $1.4 million, respectively. The Company paid administrative expenses in
connection with the 401(k) plan of approximately $22,000, $28,000 and $0 for the
years ended December 31, 2007, 2008 and 2009, respectively.
Employee
Pension Plan
The
Company maintains a company personal pension plan for all eligible employees in
the Company’s London, England office. The plan is a defined contribution plan.
Employees are eligible to contribute a portion of their salaries, subject to a
maximum annual amount as established by the Inland Revenue. The Company
contributes a match subject to the percentage of the employees’ contribution.
Amounts contributed to the plan by the Company to match employee contributions
for the years ended December 31, 2007, 2008 and 2009 were approximately
$281,000, $265,000 and $130,000, respectively.
Employee
Stock Purchase Plan
As of
August 1, 2006, the Company introduced an Employee Stock Purchase Plan (“ESPP”),
pursuant to which eligible employees participating in the plan authorize the
Company to withhold from the employees’ compensation and use the withheld
amounts to purchase shares of the Company's common stock at 90% of the market
price. Participating employees are able to purchase common stock under this plan
during the offering period. The offering period begins the second Saturday
before each of the Company’s regular pay dates and ends on each of the Company’s
regular pay dates. There were 78,840 and 72,237 shares available for
purchase under the plan as of December 31, 2008 and 2009, respectively and
approximately 7,400 and 6,600 shares of the Company’s common stock were
purchased during 2008 and 2009, respectively.
16.
RELATED PARTY TRANSACTIONS
In April
2009, the Company entered into an engagement with ghSMART & Company, Inc.
(“ghSMART”), a management consulting firm, to evaluate the Company’s sales force
senior management and provide guidance with respect to hiring and recruiting
best practices for the Company’s sales force. Randy Street, a Partner of
ghSMART, is the brother-in-law of the Company’s Chief Executive Officer. Mr.
Street has acted and will continue to act as the senior client manager on this
project. He has a less than 0.5 percent equity stake in ghSMART. Mr. Street is
paid 25 percent of the amounts paid by the Company pursuant to the engagement.
Pursuant to the engagement, the Company paid ghSMART approximately $202,000 plus
expenses. The Audit Committee reviewed and approved the engagement with ghSMART
prior to commencement of the engagement. In October 2009, the Audit
Committee reviewed and approved phase II of the engagement for an additional
amount of approximately $255,000 plus expenses. Mr. Street will act in the same
capacity during phase II and receive the same percentage compensation for this
portion of the engagement. The Company may enter into additional engagements
with ghSMART in the future.
F-32
COSTAR
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
¾
(CONTINUED)
17.
SUBSEQUENT EVENTS
In
February 2010, the Company purchased a 169,429 square-foot LEED Gold certified
office building located at 1331 L Street, NW in downtown Washington, D.C.
together with the tenancy in the underlying ground lease for the property for a
purchase price of $41.25 million in cash. This facility will be used primarily
by the Company’s U.S. segment. The Company intends to begin relocating its
Bethesda-based employees and infrastructure to the new building starting in the
second quarter of 2010. The Company currently expects to complete its relocation
by October 2010 and allow the lease of its Bethesda property to
expire.
In
February 2010, the Company assumed the ground lease for the parcel of land under
a building purchased in Washington, D.C. The lease, which expires February 29,
2088, requires the payment of minimum annual rent of $778,000 through February
29, 2012, then $918,040 annually to February 29, 2024. Thereafter, the minimum
rate is adjusted to fair market value, as defined in the lease, once every 7
years.
Subsequent
events have been evaluated through February 25, 2010, the date these financial
statements were issued.
F-33
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Submission Of Matters To A Vote Of Security HoldersPart IIItem 5. Market For The Registrant S Common Stock, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Consolidated Financial and Operating DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accountant Fees and ServicesPart IVItem 15. Exhibits and Financial Statement Schedules