COSTAR GROUP, INC. - Annual Report: 2008 (Form 10-K)
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, 2008
Commission
file number 0-24531
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 | |
(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
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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:
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 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.
Large
accelerated filer o
|
Accelerated
filer x
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|
Non-accelerated
filer o
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Smaller
reporting company o
|
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, 2008 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 $460 million.
As of
February 17, 2009, there were 19,729,419 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, 2008, are incorporated by reference
into Part III of this Report.
TABLE
OF CONTENTS
PART
I
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Item
1.
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3
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Item
1A.
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13
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Item
1B.
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20
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Item
2.
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20
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Item
3.
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20
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Item
4.
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PART
II
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Item
5.
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21
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Item
6.
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23
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Item
7.
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24
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Item
7A.
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36
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Item
8.
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37
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Item
9.
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37
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Item
9A.
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37
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Item
9B.
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38
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PART
III
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Item
10.
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39
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Item
11.
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39
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Item
12.
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39
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Item
13.
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39
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Item
14.
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39
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PART
IV
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Item
15.
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39
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40
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41
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F-1
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2
PART
I
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 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
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., and
February 2007 acquisition of Property Investment Exchange Limited, 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 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 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 services; and
a large base of clients. Our database has been developed and enhanced for more
than 21 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.
CoStar
intends to continue to grow its standardized platform of commercial real estate
information/marketing services. In 2004, CoStar began research for a
21-market U.S. expansion effort. By the end of the first quarter of
2006, CoStar 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 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.
3
CoStar
also intends to continue to grow and expand the coverage of its service
offerings within the U.K. In December 2006, CoStar’s 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. 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.
Our
subscription-based information/marketing services, consisting primarily of
CoStar Property Professional, CoStar Tenant, CoStar COMPS Professional and FOCUS
services, currently generate more then 90% of our total revenues. Our contracts
for our subscription-based information/marketing 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 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. 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.
There is a strong need for an efficient marketplace, where commercial real
estate professionals can exchange information, evaluate opportunities using
standardized data and interact with each other on a continuous
basis.
A large
number of parties involved in the commercial real estate and related business
community 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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•
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Property
owners
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Mortgage-backed
security issuers
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•
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Property
managers
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•
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Appraisers
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•
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Design
and construction professionals
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•
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Pension
fund managers
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•
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Real
estate developers
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•
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Reporters
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Real
estate investment trust managers
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•
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Tenant
vendors
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•
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Investment
bankers
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•
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Building
services vendors
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•
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Commercial
bankers
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•
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Communications
providers
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Mortgage
bankers
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•
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Insurance
companies’ managers
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•
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Mortgage
brokers
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•
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Institutional
advisors
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•
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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.
4
The
creation of a standardized information platform for commercial real estate
requires an infrastructure including a standardized database, accurate and
comprehensive research capabilities, easy to use technology and intensive
participant interaction. By combining its extensive database, approximately 900
researchers and outside contractors, technological expertise and broad customer
base, CoStar believes that it has 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 services. However, we believe that even in a
weakened economy there is a continuing need for accurate, standardized
commercial real estate information/marketing services. We believe
that access to continuously researched 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 21 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 30, 2009, 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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•
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More
than 1.1 million sale and lease
listings;
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Over
3.2 million total properties;
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Over
8.9 billion square feet of sale and lease
listings;
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Over
5.7 million tenants;
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More
than 1.3 million sales transactions valued in the aggregate at over $3.1
trillion; and
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Approximately
7.6 million digital attachments, including building photographs, aerial
photographs, plat maps and floor
plans.
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This
highly complex database is comprised of hundreds of data fields, tracking such
categories as:
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•
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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 2008, 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 30, 2009, we have approximately 900 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.
5
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 147 high-tech field research vehicles in 41 states and the
U.K. Of these vehicles, 100 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 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.
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:
·
|
calling
our information sources on recently updated properties to re-verify
information;
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·
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reviewing
calls our researchers made to their industry contacts to ensure data
reported to the researcher is entered correctly into the
database;
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·
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performing
periodic research audits and field checks to determine if we correctly
canvassed buildings;
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·
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providing
training and retraining to our research professionals to ensure accurate
data compilation; and
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·
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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 30, 2009, CoStar had a staff of 90 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.
6
Our
information technology team is responsible for developing and maintaining CoStar
products, including CoStar Property Professional, CoStar Property Express,
CoStar COMPS, CoStar Tenant, CoStar Showcase, CoStar Commercial MLS and CoStar
Connect, as well as our international products. In 2006, CoStar
released a major upgrade to its CoStar COMPS service that provides customers
with over 100 improvements, including access to for sale information, aerials
and enhanced mapping. 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.
CoStar has also begun development of an international platform, which will allow
CoStar to offer CoStar Property Professional in international
countries.
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 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 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 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.
Our
various information/marketing services are described in detail in the following
paragraphs as of January 30, 2009:
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 services, are 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 service 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.
7
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 GoogleTM,
Yahoo® and
Costar.com to find commercial properties. When customers sign up for
CoStar Showcase, their listings become accessible to visitors to Costar.com, who
can search those listings for free. To drive traffic to CoStar Showcase
subscriber listings, CoStar invests in GoogleTM and
Yahoo® 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 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.
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.
8
CoStar Professional
Directory® CoStar
Professional Directory, a service available exclusively to CoStar Property
Professional subscribers, provides detailed contact information for
approximately 1.1 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, and are available for purchase by
non-subscribers.
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.
FOCUS™ CoStar’s
U.K. subsidiary, CoStar UK Limited, offers several services, the primary of
which 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 30, 2009.
9
Brokers
|
Lenders,
Investment Bankers
|
Institutional
Advisors, Asset Managers
|
||
CB
Richard Ellis
|
Capmark
— U.K.
|
BlackRock
|
||
CB
Richard Ellis — U.K.
|
Deutsche
Bank
|
Prudential
|
||
Colliers
|
Wells
Fargo
|
Prudential
— U.K.
|
||
Colliers
Conrad Ritblat Erdman — U.K.
|
JP
Morgan Chase Bank
|
Metropolitan
Life
|
||
Cushman
& Wakefield
|
Key
Bank
|
ING
Clarion Partners
|
||
Cushman
& Wakefield — U.K.
|
TD
Bank
|
Duke
Realty Corporation
|
||
Weichert
Commercial Brokerage
|
Citibank
|
USAA
Real Estate Company
|
||
Jones
Lang LaSalle
|
AEGON
USA Realty Advisors, Inc.
|
NorthMarq
Capital
|
||
Jones
Lang LaSalle — U.K.
|
Capmark
Financial Group, Inc.
|
AEW
Capital Management LP
|
||
Grubb
& Ellis
|
East
West Bank
|
Progressive
Casualty Insurance Co.
|
||
Gerald
Eve — U.K.
|
Q10
Bonneville Mortgage Company
|
|||
Drivers
Jonas — U.K.
|
||||
Lambert
Smith Hampton — U.K.
|
||||
Charles
Dunn Company, Inc.
|
||||
Marcus
& Millichap
|
Owners,
Developers
|
Appraisers,
Accountants
|
||
Mohr
Partners
|
Hines
|
Integra
|
||
Newmark
& Company Real Estate
|
LNR
Property Corp
|
Deloitte
|
||
CRESA
Partners
|
Shorenstein
Company, LLC
|
Deloitte
— U.K.
|
||
Studley
|
Mack-Cali
|
Marvin
F. Poer
|
||
Coldwell
Banker Commercial NRT
|
Manulife
Financial
|
KPMG
|
||
UGL
Equis
|
Industrial
Developments International (IDI)
|
GE
Capital
|
||
FirstService
Williams
|
Land
Securities — U.K.
|
PGP
Valuation
|
||
GVA
Advantis
|
Thomson
Reuters
|
|||
Binswanger
|
||||
Re/Max
|
||||
Carter
|
Retailers
|
Government
Agencies
|
||
USI
Real Estate Brokerage Services
|
Nationwide
Insurance
|
U.S.
General Services Administration
|
||
DAUM
Commercial Real Estate
|
Café
Rio Mexican Grill, Inc.
|
County
of Los Angeles
|
||
Services
|
Merle
Norman Cosmetics, Inc.
|
Internal
Revenue Service
|
||
HFF
|
Massage
Envy
|
City
of Chicago
|
||
U.S.
Equities Realty
|
7-Eleven
|
Cook
County Assessor’s Office
|
||
Sperry
Van Ness
|
Dollar
General Corporation
|
U.S.
Department of Housing and
|
||
DTZ
— U.K.
|
Walgreens
|
Urban
Development
|
||
Savillis
Commercial — U.K.
|
Town
Fair Tire
|
Corporation
of London — U.K.
|
||
Atis
Real — U.K.
|
Rent-A-Center
|
Scottish
Enterprise — U.K.
|
||
GVA
Grimley — U.K.
|
Spencer
Gifts LLC
|
Federal
Reserve Bank of New York
|
||
King
Sturge — U.K.
|
||||
REITs
|
Property
Managers
|
Vendors
|
||
Brandywine
Realty Trust
|
Transwestern
Commercial Services
|
Turner
Construction Company
|
||
Brookfield
Properties
|
Lincoln
Property Company
|
Kastle
Systems
|
||
Boston
Properties
|
PM
Realty Group
|
Comcast
Corporation
|
||
Liberty
Property Trust
|
Navisys
Group
|
ADT
Security
|
||
Kimco Realty Corporation |
Osprey
Management Company
|
MWB
— U.K.
|
||
Vornado Realty Trust |
Leggat
McCall Properties
|
Cox
Communications, Inc.
|
||
Simon Property Group, Inc. | Asset Plus Corporation |
Clear
Channel Outdoor
|
||
Morlin Asset Management LP |
Verizon
Communications, Inc.
|
|||
10
For the
years ended December 31, 2006, 2007 and 2008, no single client accounted for
more than 5% of our revenues.
Sales
and Marketing
As of
January 30, 2009, we had 220 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 22 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 Maryland offices.
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 local business journals; 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
website, www.CoStar.com, and
allows each visitor to search those property listings for
free. CoStar Showcase draws additional traffic to our website through
searches on GoogleTM and
Yahoo®. 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.
11
Competition
The
market for information/marketing services generally is competitive and rapidly
changing. In the commercial real estate industry, the principal competitive
factors for commercial real estate information/marketing 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., Reed Business
Information Limited, officespace.com, MrOfficeSpace.com, and TenantWise,
Inc;
|
|
•
|
publishers
and distributors of information/marketing services, including regional
providers and national print publications, such as Black’s Guide, Property
and Portfolio Research, Torto Wheaton Research, 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, the
Commercial Association of Realtors Data Services and the Association of
Industrial Realtors;
|
|
•
|
in-house
research departments operated by commercial real estate brokers;
and
|
|
•
|
public
record providers.
|
As the
commercial real estate information/marketing services marketplace develops,
additional competitors (including companies which could have greater access to
data, financial, product development, technical or marketing resources than we
do) may enter the market and competition may intensify. While we believe that we
have successfully differentiated ourselves from existing competitors,
competition could materially harm our business.
Proprietary
Rights
To
protect our proprietary rights in our methodologies, database, software,
trademarks and other intellectual property, we depend upon a combination
of:
|
•
|
trade
secret, copyright, 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.
|
12
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 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 three patents in the U.S. which
expire in 2020, 2021 and 2022, 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 30, 2009, we employed 1,178 employees. None of our employees is
represented by a labor union. We have experienced no work stoppages. We believe
that our employee relations are excellent.
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.
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 2009 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.
13
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 downturn or consolidation in the
commercial real estate industry may decrease customer demand for our
services. The continuing decline in the commercial real estate industry’s
leasing activity, rental rates and absorption rates and the on-going downturn in
the commercial real estate market’s for sale activity may affect our ability to
generate revenues and may lead to more cancellations by our current or future
customers, both of which could cause our revenues or our revenue growth rate 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 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 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 or our revenue growth to
decline and reduce our profitability.
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 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
14
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 current economic conditions, we have recently seen an
increase in customer cancellations, reductions of services and failures to
timely pay amounts due us. If we 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 services. Our subscription-based
information/marketing 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, revenues and our revenue
growth rate 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 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.
Fluctuating foreign currencies may
negatively impact our business, results of operations and financial
position. Due to our acquisitions of CoStar UK Limited (formerly FOCUS
Information Limited), SPN, Grecam S.A.S. and Propex, 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. Recently, foreign currency exchange rates have
fluctuated greatly 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.
15
If we are unable to sustain our
revenue growth or our operating costs are higher than expected, our
profitability may be reduced and our operating results may fluctuate
significantly. We may not be able to accurately forecast our 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 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. Additionally, we may not be able
to sustain our historic revenue growth rates and our percentage revenue growth
rates may decline. Our revenue and operating profit growth depend on
continued 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 economies 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 and revenue growth 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 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, 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.
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 services to
users.
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 1st 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 Statement of
Financial Accounting Standards (“SFAS”) No. 142 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, 2008, we had $54.3 million of goodwill, $31.5 million in our U.S.
segment and $22.8 million in our International segment.
16
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.
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.
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. Recent 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, 2008, we held $33.1 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.
17
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, 2008. 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, 2008, we determined there was a
decline in the fair value of our ARS investments of approximately $3.7
million. The decline was deemed to be a temporary impairment and
recorded as an unrealized loss in other comprehensive income 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 other comprehensive income or an
other-than-temporary impairment charge to earnings on these investments, which
would reduce our profitability and adversely affect our financial
position.
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 services and could reduce our
profitability.
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 2009, 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.
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.
We may not be able to successfully
introduce new or upgraded information/marketing 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
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 or our revenue growth rate and reducing our
profitability.
18
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 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 services. If we experience technical
problems in distributing our services, we could experience reduced demand for
our information/marketing 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 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 services. Our success depends on our
clients’ confidence in the comprehensiveness, accuracy and reliability of the
data we provide. The task of establishing and maintaining accurate and reliable
data is challenging. If our data, including the data we obtain from third
parties, 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.
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; managing geographically remote
operations, such as SPN in Scotland, Grecam S.A.S. in France, CoStar U.K.
Limited and Propex 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 more restrictive than we are willing to accept.
Temporary or permanent outages of
our computers, software or telecommunications equipment could lead to reduced
demand for our information/marketing 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 services to
clients, we could experience reduced demand for our information/marketing
services, lower revenues and increased costs.
19
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 the first
quarter of 2006, we adopted the provisions of SFAS 123R, which required us to
expense the value of granted stock options. We recorded $2.9 million in
compensation charges for stock options in 2006.
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 is located in Bethesda, Maryland, where we occupy
approximately 60,000 square feet of office space. Our main lease for our
Bethesda, Maryland headquarters expires on March 31, 2010. This
facility is used primarily by our U.S. segment.
In
addition to our Bethesda, Maryland facility, our research operations are
principally run out of leased spaces in San Diego, California; Columbia,
Maryland; White Marsh, Maryland; London, England; 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; Tustin,
California; Indianapolis; 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, 2008.
20
PART
II
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, 2007
|
||||||||
First
Quarter
|
$ | 52.15 | $ | 43.44 | ||||
Second
Quarter
|
$ | 55.71 | $ | 44.95 | ||||
Third
Quarter
|
$ | 58.49 | $ | 50.70 | ||||
Fourth
Quarter
|
$ | 61.65 | $ | 44.48 | ||||
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 |
As of
February 1, 2009, there were approximately 260 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. We did not issue any unregistered securities during the
quarter ended December 31, 2008.
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, 2008:
ISSUER
PURCHASES OF EQUITY SECURITIES
Month,
2008
|
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
|
4,220
(1)
|
$29.37
|
¾
|
¾
|
Total
|
4,220
|
$29.37
|
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.
21
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, 2003, and ending on December
31, 2008, and assumes the reinvestment of any dividends. You should note that
this performance is historical and is not necessarily indicative of future price
performance.
![compchart](https://www.sec.gov/Archives/edgar/data/0001057352/000105735209000013/chart2008v2.jpg)
Company
/ Index
|
12/31/03
|
12/31/04
|
12/31/05
|
12/31/06
|
12/31/07
|
12/31/08
|
CoStar
Group, Inc.
|
100
|
110.74
|
103.53
|
128.44
|
113.31
|
78.99
|
S&P
500 Index
|
100
|
110.88
|
116.33
|
134.70
|
142.10
|
89.53
|
S&P
500 Application Software Index
|
100
|
111.63
|
123.57
|
130.15
|
144.57
|
79.03
|
22
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, 2008. The consolidated statement of
operations data shown below for each of the three years ended December 31, 2006,
2007, and 2008 and the consolidated balance sheet data as of December 31, 2007
and 2008 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, 2004 and 2005 and the consolidated balance sheet
data as of December 31, 2004, 2005, and 2006 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:
|
2004
|
2005
|
2006
|
2007
|
2008
|
|||||||||||||||
Revenues
|
$ | 112,085 | $ | 134,338 | $ | 158,889 | $ | 192,805 | $ | 212,428 | ||||||||||
Cost
of revenues
|
35,384 | 44,286 | 56,136 | 76,704 | 73,408 | |||||||||||||||
Gross
margin
|
76,701 | 90,052 | 102,753 | 116,101 | 139,020 | |||||||||||||||
Operating
expenses
|
69,955 | 82,710 | 88,672 | 98,249 | 99,232 | |||||||||||||||
Income
from operations
|
6,746 | 7,342 | 14,081 | 17,852 | 39,788 | |||||||||||||||
Interest
and other income, net
|
1,314 | 3,455 | 6,845 | 8,045 | 4,914 | |||||||||||||||
Income
before income taxes
|
8,060 | 10,797 | 20,926 | 25,897 | 44,702 | |||||||||||||||
Income
tax (benefit) expense , net
|
(16,925 | ) | 4,340 | 8,516 | 9,946 | 20,079 | ||||||||||||||
Net
income
|
$ | 24,985 | $ | 6,457 | $ | 12,410 | $ | 15,951 | $ | 24,623 | ||||||||||
Net
income per share -
basic
|
$ | 1.38 | $ | 0.35 | $ | 0.66 | $ | 0.84 | $ | 1.27 | ||||||||||
Net
income per share -
diluted
|
$ | 1.33 | $ | 0.34 | $ | 0.65 | $ | 0.82 | $ | 1.26 | ||||||||||
Weighted
average shares outstanding -
basic
|
18,165 | 18,453 | 18,751 | 19,044 | 19,372 | |||||||||||||||
Weighted
average shares outstanding -
diluted
|
18,827 | 19,007 | 19,165 | 19,404 | 19,550 |
As
of December 31,
|
||||||||||||||||||||
Consolidated
Balance Sheet Data:
|
2004
|
2005
|
2006
|
2007
|
2008
|
|||||||||||||||
Cash,
cash equivalents, short-term and long-term investments
|
$ | 117,069 | $ | 134,185 | $ | 158,148 | $ | 187,426 | $ | 224,590 | ||||||||||
Working
capital
|
107,875 | 124,501 | 154,606 | 167,441 | 183,347 | |||||||||||||||
Total
assets
|
232,691 | 248,059 | 275,437 | 321,843 | 334,384 | |||||||||||||||
Total
liabilities
|
21,747 | 23,263 | 25,327 | 40,038 | 30,963 | |||||||||||||||
Stockholders’
equity
|
210,944 | 224,796 | 250,110 | 281,805 | 303,421 |
As
of December 31,
|
||||||||||||||||||||
Other
Operating Data:
|
2004
|
2005
|
2006
|
2007
|
2008
|
|||||||||||||||
Number
of subscription client sites
|
9,489 | 11,464 | 13,257 | 14,467 | 15,920 | |||||||||||||||
Millions
of properties in database
|
1.6 | 1.8 | 2.1 | 2.7 | 3.2 |
23
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 “¾Risk 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
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 services than any of our competitors and believe we
generate more revenues than any of our competitors. We have created a
standardized information/marketing platform where the 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, analytic information,
data integration, and industry news. Our service offerings span all commercial
property types – office, industrial, retail, land, mixed-use, hospitality and
multifamily.
Since
1994, we have expanded the geographical coverage of our existing
information/marketing services and developed new information/marketing 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
(“SPN”). 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 leading
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. The more recent acquisitions are discussed later
in this section under the heading “Recent Acquisitions.”
24
In 2004,
we began our expansion into 21 new metropolitan markets throughout the U.S., as
well as 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 new 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, 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., increased our U.S. field research
fleet by adding 89 vehicles and hired researchers to staff these vehicles. In
March 2007, we signed a long-term lease for a new research facility in White
Marsh, Maryland, in support of our expanded research efforts and hired and
trained additional researchers and other personnel. We released our CoStar
Property Professional service in the 81 new CBSAs across the U.S. in the fourth
quarter of 2007.
In
connection with our acquisitions of Propex and Grecam, we intend to expand the
coverage of our service offerings within the U.K. and integrate our
international operations more fully with those of 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 earnings. In fact,
our results for 2008 reflect growth in earnings as a result of these investments
in our business.
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 shareholders 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 volatilities may continue, which may significantly impact (either
positively or negatively) our reported financial results and consolidated trends
and comparisons.
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. In addition, in April 2008, as described above we
acquired the online commercial real estate information assets of First CLS, Inc.
(doing business as the Dorey Companies and DoreyPRO). 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 2009 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 the
economic conditions, we have recently seen an uptick in customer cancellations,
reductions of services and failures to pay amounts due us. If
cancellations, reductions of services and failures to pay continue to rise, and
we are unable to offset the resulting decrease in revenue by increasing sales to
new or existing customers, our revenues will be adversely affected and our
revenue may decline. Additionally, current conditions may cause
customers to reduce expenses, when reducing expenses, customers may be forced to
purchase fewer services or cancel all services. We compete against
many other commercial real estate information/marketing 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 and there can be no
assurance that any of the governmental or private sector initiatives designed to
strengthen the economy will be successful. Because of the current
uncertainties in the economic environment, we may not be able to accurately
forecast our revenue. However, we continue to believe that the
company is positioned to generate continued, sustained earnings through the end
of 2009.
25
We
currently issue restricted stock and stock options 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
alternative 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. We incurred
approximately $4.9 million in total equity compensation expense in
2008.
Our
subscription-based information/marketing services, consisting primarily of
CoStar Property Professional, CoStar Tenant, CoStar COMPS Professional, and
FOCUS services currently generate more than 90% 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. Our contracts for our
subscription-based information/marketing services typically have a minimum term
of one year and renew automatically. Upon renewal, many of the 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
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
year ended December 31, 2007, our contract renewal rate was over
90%. For the year ended December 31, 2008, our contract renewal rate
was approximately 89%. As discussed above, our contract renewal rate
may continue to decline if continuing negative economic conditions lead to
business failures and/or consolidations and further reductions in customer
spending and 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.
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.
|
26
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 1st 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
Statement of Financial Accounting Standards (“SFAS”) No. 142 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.
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.
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 these non-GAAP financial measures 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.
27
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 21 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 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.
|
|
·
|
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.
28
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,
|
||||||||||||
2006
|
2007
|
2008
|
||||||||||
Net
income
|
$ | 12,410 | $ | 15,951 | $ | 24,623 | ||||||
Purchase
amortization in cost of
revenues
|
1,205 | 2,170 | 2,284 | |||||||||
Purchase
amortization in operating
expenses
|
4,183 | 5,063 | 4,880 | |||||||||
Depreciation
and other
amortization
|
6,421 | 8,914 | 9,637 | |||||||||
Interest
income,
net
|
(6,845 | ) | (8,045 | ) | (4,914 | ) | ||||||
Income
tax expense,
net
|
8,516 | 9,946 | 20,079 | |||||||||
EBITDA
|
$ | 25,890 | $ | 33,999 | $ | 56,589 | ||||||
Cash
flows provided by (used in)
|
||||||||||||
Operating
activities
|
$ | 32,587 | $ | 51,732 | $ | 40,908 | ||||||
Investing
activities
|
$ | (28,329 | ) | $ | (40,331 | ) | $ | 52,430 | ||||
Financing
activities
|
$ | 5,582 | $ | 8,161 | $ | 11,475 |
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,
|
||||||||||||||||||||||||
2006
|
2007
|
2008
|
||||||||||||||||||||||
Revenues
|
$ | 158,889 | 100.0 | % | $ | 192,805 | 100.0 | % | $ | 212,428 | 100.0 | % | ||||||||||||
Cost
of
revenues
|
56,136 | 35.3 | 76,704 | 39.8 | 73,408 | 34.6 | ||||||||||||||||||
Gross
margin
|
102,753 | 64.7 | 116,101 | 60.2 | 139,020 | 65.4 | ||||||||||||||||||
Operating
expenses:
|
||||||||||||||||||||||||
Selling
and
marketing
|
41,774 | 26.3 | 51,777 | 26.9 | 41,705 | 19.6 | ||||||||||||||||||
Software
development
|
12,008 | 7.6 | 12,453 | 6.5 | 12,759 | 6.0 | ||||||||||||||||||
General
and
administrative
|
30,707 | 19.3 | 36,569 | 19.0 | 39,888 | 18.8 | ||||||||||||||||||
Gain
on lease settlement, net
|
¾ | 0.0 | (7,613 | ) | (3.9 | ) | ¾ | 0.0 | ||||||||||||||||
Purchase
amortization
|
4,183 | 2.6 | 5,063 | 2.6 | 4,880 | 2.3 | ||||||||||||||||||
Total
operating
expenses
|
88,672 | 55.8 | 98,249 | 51.0 | 99,232 | 46.7 | ||||||||||||||||||
Income
from
operations
|
14,081 | 8.9 | 17,852 | 9.3 | 39,788 | 18.7 | ||||||||||||||||||
Interest
and other income, net
|
6,845 | 4.3 | 8,045 | 4.2 | 4,914 | 2.3 | ||||||||||||||||||
Income
before income
taxes
|
20,926 | 13.2 | 25,897 | 13.4 | 44,702 | 21.0 | ||||||||||||||||||
Income
tax expense,
net
|
8,516 | 5.4 | 9,946 | 5.2 | 20,079 | 9.5 |
|
|||||||||||||||||
Net
income
|
$ | 12,410 | 7.8 | % | $ | 15,951 | 8.3 | % | $ | 24,623 | 11.6 | % |
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/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/marketing services represented more than 90% of our total
revenues.
29
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/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.
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.
30
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/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.
Comparison
of Year Ended December 31, 2007 and Year Ended December 31, 2006
Revenues. Revenues grew 21.3%
to $192.8 million in 2007, from $158.9 million in 2006. This increase in revenue
has resulted from continued penetration of our subscription-based information
services, the successful cross-selling of additional products and services to
our existing customer base combined with a continued high renewal rate, and
additional revenues from acquired companies, including Grecam, acquired in
December 2006, and Propex, acquired in February 2007. 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, 2007, our subscription-based information services represented
approximately 95% of our total revenues.
Gross Margin. Gross margin
increased to $116.1 million in 2007, from $102.8 million in 2006. The gross
margin percentage decreased to 60.2% in 2007, from 64.7% in 2006. The increase
in the gross margin amount resulted principally from revenue growth from our
subscription-based information services, partially offset by an increase in cost
of revenues. The decrease in gross margin percentage was principally due to an
increase in the cost of revenues to $76.7 million for 2007, from $56.1 million
for 2006. The increase in cost of revenues resulted from increased research
department hiring, training, compensation and other operating costs, principally
in connection with our retail and 81 new CBSA expansions, and our international
expansion, as well as increased cost structures associated with the acquisitions
of Grecam and Propex.
Selling and Marketing
Expenses. Selling and marketing expenses increased to $51.8 million in
2007, from $41.8 million in 2006, and increased as a percentage of revenues to
26.9% in 2007, from 26.3% in 2006. The increase in the amount of selling and
marketing expenses is primarily due to increased growth in the sales force,
increased marketing efforts, as well as increased cost structures associated
with the acquisition of Propex.
Software Development
Expenses. Software development expenses increased to $12.5 million in
2007, from $12.0 million in 2006, and decreased as a percentage of revenues to
6.5% in 2007, from 7.6% in 2006. The increase in the amount of software
development expenses was primarily due to increased costs associated with the
continued development of an international platform. The decrease in the
percentage was primarily due to our continued efforts to control and leverage
our costs.
General and Administrative
Expenses. General and administrative expenses increased to $36.6 million
in 2007, from $30.7 million in 2006, and decreased slightly as a percentage
of revenues to 19.0% in 2007, from 19.3% in 2006. The increase primarily
includes increases in personnel expenses, cost structures associated with the
acquisition of Propex and equity compensation.
31
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 2006.
Purchase Amortization.
Purchase amortization increased to $5.1 million in 2007, from $4.2 million in
2006, and remained consistent as a percentage of revenues at 2.6% in 2007 and
2006. This increase in the amount was due to the acquisitions of Grecam and
Propex.
Interest and Other Income, Net.
Interest and other income, net increased to $8.0 million in 2007, from
$6.8 million in
2006. This increase was primarily due to higher interest income as a result of
higher total short-term investment balances for 2007 and increased interest
rates for 2007 as compared to 2006.
Income Tax Expense, Net.
Income tax expense, net increased to $9.9 million in 2007, from $8.5
million in 2006. This increase was due to higher income before income taxes for
2007, partially offset by a lower effective tax rate. 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, 2007 and Year Ended
December 31, 2006
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 revenue and segment 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. U.S. revenues
increased to $170.3 million from $146.1 million for the years ended December 31,
2007 and 2006, respectively. This increase in U.S. revenue is due to further
penetration of our U.S. subscription-based information services and the
successful cross-selling into our customer base across our service platform in
existing markets, combined with a continued high renewal rate. International
revenues increased to $22.5 million from $12.8 million for the years ended
December 31, 2007 and 2006, respectively. This increase in international revenue
is principally a result of a combination of further penetration of our
subscription-based information services in the U.K. and the acquisitions of
Grecam and Propex.
Segment EBITDA. U.S. EBITDA
increased to $32.9 million from $26.2 million for the years ended December 31,
2007 and 2006, respectively. The increase in U.S. EBITDA was due to increased
revenues, partially offset by increased research costs and growth in our sales
force as a result of our expansion. International EBITDA increased to $1.1
million from a loss of $315,000 for the years ended December 31, 2007 and 2006,
respectively. This increase is primarily due to the assignment of our lease to
Trafigura, offset by our increased investment in international expansion.
International EBITDA also includes a corporate allocation of approximately $2.6
million and $1.0 million for the years ended December 31, 2007 and 2006,
respectively. The corporate allocation represents costs incurred for U.S.
employees involved in international management and expansion
activities.
32
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):
2007
|
2008
|
|||||||||||||||||||||||||||||||
Mar.
31
|
Jun.
30
|
Sep.
30
|
Dec.
31
|
Mar.
31
|
Jun.
30
|
Sep.
30
|
Dec.
31
|
|||||||||||||||||||||||||
Revenues
|
$ | 44,831 | $ | 47,794 | $ | 49,340 | $ | 50,840 | $ | 52,264 | $ | 53,478 | $ | 53,757 | $ | 52,929 | ||||||||||||||||
Cost
of revenues
|
17,826 | 19,318 | 19,551 | 20,009 | 19,721 | 18,341 | 17,613 | 17,733 | ||||||||||||||||||||||||
Gross
margin
|
27,005 | 28,476 | 29,789 | 30,831 | 32,543 | 35,137 | 36,144 | 35,196 | ||||||||||||||||||||||||
Operating
expenses
|
25,569 | 28,230 | 25,952 | 18,498 | 25,313 | 26,627 | 24,864 | 22,428 | ||||||||||||||||||||||||
Income
from operations
|
1,436 | 246 | 3,837 | 12,333 | 7,230 | 8,510 | 11,280 | 12,768 | ||||||||||||||||||||||||
Interest
and other income, net
|
1,862 | 1,891 | 2,072 | 2,220 | 1,938 | 1,243 | 951 | 782 | ||||||||||||||||||||||||
Income
before income taxes
|
3,298 | 2,137 | 5,909 | 14,553 | 9,168 | 9,753 | 12,231 | 13,550 | ||||||||||||||||||||||||
Income
tax expense, net
|
1,484 | 962 | 2,659 | 4,841 | 4,126 | 4,318 | 5,586 | 6,049 | ||||||||||||||||||||||||
Net
income
|
$ | 1,814 | $ | 1,175 | $ | 3,250 | $ | 9,712 | $ | 5,042 | $ | 5,435 | $ | 6,645 | $ | 7,501 | ||||||||||||||||
Net
income per share -
basic
|
$ | 0.10 | $ | 0.06 | $ | 0.17 | $ | 0.51 | $ | 0.26 | $ | 0.28 | $ | 0.34 | $ | 0.39 | ||||||||||||||||
Net
income per share -
diluted
|
$ | 0.09 | $ | 0.06 | $ | 0.17 | $ | 0.50 | $ | 0.26 | $ | 0.28 | $ | 0.34 | $ | 0.38 |
2007
|
2008
|
|||||||||||||||||||||||||||||||
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
|
39.8 | 40.4 | 39.6 | 39.4 | 37.7 | 34.3 | 32.8 | 33.5 | ||||||||||||||||||||||||
Gross
margin
|
60.2 | 59.6 | 60.4 | 60.6 | 62.3 | 65.7 | 67.2 | 66.5 | ||||||||||||||||||||||||
Operating
expenses
|
57.0 | 59.1 | 52.6 | 36.4 | 48.5 | 49.8 | 46.2 | 42.4 | ||||||||||||||||||||||||
Income
from operations
|
3.2 | 0.5 | 7.8 | 24.2 | 13.8 | 15.9 | 21.0 | 24.1 | ||||||||||||||||||||||||
Interest
and other income, net
|
4.1 | 4.0 | 4.2 | 4.4 | 3.7 | 2.3 | 1.8 | 1.5 | ||||||||||||||||||||||||
Income
before income taxes
|
7.3 | 4.5 | 12.0 | 28.6 | 17.5 | 18.2 | 22.8 | 25.6 | ||||||||||||||||||||||||
Income
tax expense, net
|
3.3 | 2.0 | 5.4 | 9.5 | 7.9 | 8.0 | 10.4 | 11.4 | ||||||||||||||||||||||||
Net
income
|
4.0 | % | 2.5 | % | 6.6 | % | 19.1 | % | 9.6 | % | 10.2 | % | 12.4 | % | 14.2 | % |
Recent
Acquisitions
Propex. On February 16, 2007,
CoStar Limited acquired Property Investment Exchange Limited (“Propex”), a
provider of web-based commercial property information and operator of an
electronic platform that facilitates the exchange of investment property in the
U.K. Propex’s suite of electronic platforms and listing websites give users
access to the U.K. commercial property investment and leasing markets. CoStar
Limited acquired all outstanding capital stock of Propex for approximately $22.0
million, consisting of cash, deferred consideration and 21,526 shares of CoStar
common stock.
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 payable within approximately six months of the one-year
anniversary of closing.
Accounting Treatment. These
acquisitions were accounted for using purchase accounting. The purchase price
for the Propex acquisition was primarily allocated to acquired customer base,
trade names, and goodwill. The purchase price for the First CLS, Inc.
acquisition was primarily allocated to acquired customer base. 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 Propex acquired trade name is being
amortized on a straight-line basis over
33
three
years. We recorded goodwill of approximately $15.0 million for the
Propex acquisition and $1.1 million for the First CLS, Inc. acquisition.
Goodwill is not amortized, but is subject to annual impairment tests. The
results of operations of Propex and First CLS, Inc. 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 either
acquisition.
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 $195.3
million at December 31, 2008 compared to $187.4 million at December 31, 2007.
The increase in cash, cash equivalents and short-term investments for the year
ended December 31, 2008 was primarily due to net cash from operating activities
of approximately $40.9 million partially offset by the reclassification of
approximately $33.1 million par value auction rate securities (“ARS”) from
short-term investments to long-term investments in the first quarter of
2008.
Net cash
provided by operating activities for the year ended December 31, 2008 was $40.9
million compared to $51.7 million for the year ended December 31, 2007. The
$10.8 million decrease in net cash provided by operating activities is primarily
due to approximately $3.3 million decreased cash receipts on accounts receivable
due to increased balances and declining economic conditions and increased
payments for accounts payable and accrued expenses of approximately $9.8 million
which included the $2.9 million payment of deferred consideration for the Propex
acquisition, approximately $400,000 in payments for a Propex data agreement, and
payment of approximately $1.4 million in value added taxes related to the lease
settlement.
Net cash
provided by investing activities was $52.4 million for the year ended December
31, 2008, compared to net cash used in investing activities of $40.3 million for
the year ended December 31, 2007. This $92.7 million increase in net cash
provided by investing activities was primarily due to the decision 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 in the year ended December 31, 2008 compared to a net purchase of
investments of approximately $9.3 million in the year ended December 31,
2007. In addition, we used $3.0 million in cash as initial
consideration for the purchase of First CLS, Inc. in the year ended December 31,
2008, as compared to $16.7 million in cash consideration used for the
acquisition of Propex in the year ended December 31, 2007. We also purchased
approximately $10.6 million less in property, equipment and other assets during
the year ended December 31, 2008 compared to the year ended December 30,
2007.
Net cash
provided by financing activities was $11.5 million for the year ended December
31, 2008 compared to $8.2 million for the year ended
December 31, 2007. The higher net cash provided by financing
activities in 2008 compared to 2007 is due to an increase in excess tax benefits
from stock options partially offset by a decrease in proceeds from the exercise
of stock options.
Contractual Obligations. The
following table summarizes our principal contractual obligations at December 31,
2008 and the effect such obligations are expected to have on our liquidity and
cash flows in future periods (in thousands):
Total
|
2009
|
2010-2011
|
2012-2013
|
2014
and
thereafter
|
||||||||||||||||
Operating
leases
|
$ | 23,596 | $ | 8,264 | $ | 10,041 | $ | 4,276 | $ | 1,015 | ||||||||||
Purchase
obligations(1)
|
2,971 | 2,242 | 294 | 290 | 145 | |||||||||||||||
Total
contractual principal cash obligations
|
$ | 26,567 | $ | 10,506 | $ | 10,335 | $ | 4,566 | $ | 1,160 |
|
(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.
|
During
2008, we incurred capital expenditures of approximately $3.7 million. We expect
to make capital expenditures in 2009 of approximately $4.0 million to $7.0
million.
34
To date,
we have grown in part by acquiring other companies and we may continue to make
acquisitions. Our acquisitions may vary in size and could be material to our
current operations. We expect to use cash, stock, debt or other means of funding
to make these acquisitions. In April 2008, we paid $3.0 million in
initial cash consideration and made a commitment for deferred consideration
payable within approximately six months of the one-year anniversary of closing
for the online commercial real estate information assets of First CLS, Inc., an
Atlanta-based provider of local commercial real estate information.
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, 2008, we had $33.1 million of long-term investments in student loan
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.
As of
December 31, 2008, we had utilized all of our U.S. net operating loss
carryforwards for federal income tax purposes. As a result, we expect
our cash payments for taxes to be approximately $20.0 million to $23.0 million
in 2009.
Inflation
may affect the way we operate in the U.S. and abroad. In general, we believe
that over time we are able to increase the prices of our services to counteract
the majority of the inflationary effects of increasing costs. We do
not believe the impact of inflation has significantly affected our operations,
and we do not anticipate that inflation will have a material impact on our
operations in 2009.
Recent
Accounting Pronouncements
In June
2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. 48 “Accounting for Uncertainty in Income
Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”), which
became effective for our company as of January 1, 2007. FIN 48 addresses the
determination of how tax benefits claimed or expected to be claimed on a tax
return should be recorded in the financial statements. Under FIN 48, we must
recognize the tax benefit from an uncertain tax position only if it is
more-likely-than-not that the tax position will be sustained upon examination by
the taxing authorities, based on the technical merits of the position. The tax
benefits recognized in the financial statements from such a position are
measured based on the largest benefit that has a greater than fifty percent
likelihood of being realized upon ultimate resolution. Our reassessment of our
tax positions in accordance with FIN 48 did not have a material impact on our
results of operations and financial position.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”
(“SFAS 157”), which defines fair value, establishes a framework for measuring
fair value in accordance with GAAP and expands disclosures about fair value
measurements. SFAS 157 does not require any new fair value measurements
under GAAP and is effective for fiscal years beginning after November 15,
2007. In February 2008, the FASB issued FASB Staff Position (“FSP”) 157-2,
“Partial Deferral of the
Effective Date of Statement 157”, (“FSP 157-2”), which delays the
effective date of SFAS 157 to January 1, 2009 for all non-financial assets and
non-financial liabilities, except those that are recognized or disclosed at fair
value in the consolidated financial statements on a recurring basis (at least
annually). Effective January 1, 2008, we adopted the portion of SFAS
157 that was not deferred under FSP 157-2. The adoption of SFAS 157
did not have a material impact on our results of operations and financial
position. In October 2008, the FASB issued FSP 157-3, “Determining the Fair Value of a
Financial Asset in a Market That Is Not Active” (“FSP 157-3”), which
clarifies the application of SFAS 157 to markets that are not active and
provides an example illustrating key considerations for determining the fair
value of financial assets when their markets are not active. FSP 157-3 was
effective upon issuance, including prior periods for which financial statements
had not been issued. The adoption of this standard did not have an impact on our
results of operations or financial position.
35
In
February 2007, the FASB issued SFAS No. 159, “Fair Value Option for Financial
Assets and Financial Liabilities — Including an amendment of FASB Statement
No. 115” (“SFAS 159”), 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. SFAS 159 is effective for
fiscal years beginning on or after December 31, 2007. We adopted SFAS 159 on
January 1, 2008 and have not elected to apply the fair value option to any of
our financial instruments. The adoption of SFAS 159 did not have a
material impact on our results of operations and financial
position.
In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business Combinations”
(“SFAS 141R”), which will change the accounting for any business combination we
enter into with an acquisition date after December 31, 2008. Under SFAS 141R, an
acquiring entity will be required to recognize all the assets acquired and
liabilities assumed in a transaction at the acquisition date fair value with
limited exceptions. SFAS 141R will change the accounting treatment and
disclosure for certain specific items in a business combination. SFAS 141R
will have an impact on accounting for business combinations once adopted, but
its effect will depend upon the specifics of any business combination with an
acquisition date subsequent to December 31, 2008.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements—An Amendment of ARB No. 51” (“SFAS
160”), which establishes new accounting and reporting standards for the
non-controlling interest in a subsidiary and for the deconsolidation of a
subsidiary. SFAS 160 is effective for fiscal years beginning on or after
December 15, 2008. The adoption of SFAS 160 is not expected to have a
material impact on our results of operations or financial position.
In April
2008, the FASB issued FSP SFAS No. 142-3, “Determination of the Useful Life of
Intangible Assets” (“FSP 142-3”), which is effective for all fiscal years
and interim periods beginning after December 15, 2008. Early adoption of FSP
142-3 is not permitted. FSP 142-3 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, FSP 142-3 requires that we consider our experience regarding
renewal and extensions of similar arrangements in determining the useful life.
If we do not have experience with similar arrangements, FSP 142-3 requires that
we use the assumptions of a market participant putting the intangible to its
highest and best use in determining the useful life. The adoption of FSP 142-3
will impact intangibles acquired after December 31, 2008, and its effect will
depend on the specifics of the intangible acquired.
In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS 162”), which identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements. SFAS 162 is effective as of November
17, 2008. The adoption of SFAS 162 did not have a material impact on our results
of operations or financial position.
We
provide information/marketing 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, 2008, revenue
denominated in foreign currencies was approximately 11% of total
revenue. For the year ended December 31, 2008, our revenue would have
decreased by approximately $2.2 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, 2008 would have resulted in a decrease of approximately $340,000 in
the carrying amount of net assets. For the year ended December 31, 2008, our
revenue would have increased by approximately $2.2 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,
2008 would have resulted in a increase of approximately $340,000 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, 2008, accumulated other comprehensive income (loss) included a loss
from foreign currency translation adjustments of approximately $8.5
million.
36
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,
2008. As of December 31, 2008, we had $195.3 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, 2008, auctions for $33.1 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, 2008, we
determined that there was a decline in the fair value of our ARS investments of
approximately $3.7 million, which was deemed to be a temporary impairment and
recorded as an unrealized loss in other comprehensive income 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 other comprehensive income 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 $70.7 million in intangible assets as of December 31, 2008. As of
December 31, 2008, 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.
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.
37
As of
December 31, 2008, 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, 2008
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.
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,
2008.
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.
38
PART
III
The
information required by this Item is incorporated by reference to our Proxy
Statement for our 2009 annual meeting of stockholders.
Item
11.
|
The information required by this Item
is incorporated by reference to our Proxy Statement for our 2009 annual meeting
of stockholders.
Item
12.
|
The
information required by this Item is incorporated by reference to our Proxy
Statement for our 2009 annual meeting of stockholders.
The
information required by this Item is incorporated by reference to our Proxy
Statement for our 2009 annual meeting of stockholders.
The
information required by this Item is incorporated by reference to our Proxy
Statement for our 2009 annual meeting of stockholders.
PART
IV
(a)(1)
The following financial statements are filed as a part of this report: CoStar
Group, Inc. Consolidated Financial Statements.
(a)(2)
All 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.
39
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 23rd
day of February 2009.
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 23,
2009
|
||
Michael
R. Klein
|
||||
/S/ Andrew C. Florance |
Chief
Executive Officer and
|
February 23,
2009
|
||
Andrew
C. Florance
|
President
and a Director
|
|||
(Principal
Executive Officer)
|
||||
/S/ Brian J. Radecki |
Chief
Financial Officer
|
February
23, 2009
|
||
Brian
J. Radecki
|
(Principal
Financial and Accounting Officer)
|
|||
/S/ David Bonderman |
Director
|
February 23,
2009
|
||
David
Bonderman
|
||||
/S/ Warren H. Haber |
Director
|
February
23, 2009
|
||
Warren
H. Haber
|
||||
/S/ Josiah O. Low, III |
Director
|
February 23,
2009
|
||
Josiah
O. Low, III
|
||||
/S/ Christopher Nassetta |
Director
|
February 23,
2009
|
||
Christopher
Nassetta
|
||||
/S/ Michael Glosserman |
Director
|
February 23,
2009
|
||
Michael
Glosserman
|
40
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 (filed herewith).
|
|
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 (filed
herewith).
|
|
*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 (filed
herewith).
|
|
*10.9
|
Form
of 2007 Plan Incentive Stock Option Grant Agreement between the Registrant
and Andrew C. Florance (filed herewith).
|
|
*10.10
|
Form
of 2007 Plan Nonqualified Stock Option Grant Agreement between the
Registrant and certain of its officers and employees (filed
herewith).
|
|
*10.11
|
Form
of 2007 Plan Nonqualified Stock Option Grant Agreement between the
Registrant and certain of its directors (filed
herewith).
|
|
*10.12
|
Form
of 2007 Plan Nonqualified Stock Option Grant Agreement between the
Registrant and Andrew C. Florance (filed herewith).
|
|
*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).
|
41
INDEX
TO EXHIBITS ¾
(Continued)
Exhibit
No.
|
Description
|
|
*10.16
|
First
Amendment to Andrew C. Florance Employment Agreement, effective January 1,
2009 (filed herewith).
|
|
*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 UK 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
|
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.
42
COSTAR
GROUP, INC.
Reports
of Independent Registered Public Accounting
Firm
|
F-2
|
Consolidated
Statements of Operations for the years ended December 31, 2006, 2007 and
2008
|
F-4
|
Consolidated
Balance Sheets as of December 31, 2007 and
2008
|
F-5
|
Consolidated
Statements of Stockholders’ Equity for the years ended December 31, 2006,
2007 and 2008
|
F-6
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2006, 2007 and
2008
|
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, 2008 and 2007, and the related consolidated statements of
operations, stockholders’ equity and cash flows for each of the three years in
the period ended December 31, 2008. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We
conducted our audits in accordance with 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, 2008 and 2007, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
2008, in conformity with U.S. generally accepted accounting
principles.
As also
discussed in Note 9 to the consolidated financial statements, under the heading
Income Taxes, the Company adopted FASB Interpretation No. 48 “Accounting for Uncertainty in Income
Taxes- an interpretation of FASB Statement No. 109” 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, 2008, 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 19, 2009 expressed an
unqualified opinion thereon.
/S/ Ernst
& Young LLP
McLean,
Virginia
February 19,
2009
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, 2008, 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, 2008, 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, 2008 and 2007 and the related consolidated statements of
operations, stockholders’ equity and cash flows for each of the three years in
the period ended December 31, 2008 of CoStar Group, Inc. and our report dated
February 19, 2009 expressed an unqualified opinion thereon.
/S/ Ernst
& Young LLP
McLean,
Virginia
February
19, 2009
F-3
COSTAR
GROUP, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(in
thousands, except per share data)
Year
Ended December 31,
|
||||||||||||
2006
|
2007
|
2008
|
||||||||||
Revenues
|
$ | 158,889 | $ | 192,805 | $ | 212,428 | ||||||
Cost
of revenues
|
56,136 | 76,704 | 73,408 | |||||||||
Gross
margin
|
102,753 | 116,101 | 139,020 | |||||||||
Operating
expenses:
|
||||||||||||
Selling
and marketing
|
41,774 | 51,777 | 41,705 | |||||||||
Software
development
|
12,008 | 12,453 | 12,759 | |||||||||
General
and administrative
|
30,707 | 36,569 | 39,888 | |||||||||
Gain
on lease settlement, net
|
¾ | (7,613 | ) | ¾ | ||||||||
Purchase
amortization
|
4,183 | 5,063 | 4,880 | |||||||||
88,672 | 98,249 | 99,232 | ||||||||||
Income
from operations
|
14,081 | 17,852 | 39,788 | |||||||||
Interest
and other income, net
|
6,845 | 8,045 | 4,914 | |||||||||
Income
before income taxes
|
20,926 | 25,897 | 44,702 | |||||||||
Income
tax expense, net
|
8,516 | 9,946 | 20,079 | |||||||||
Net
income
|
$ | 12,410 | $ | 15,951 | $ | 24,623 | ||||||
Net
income per share ¾
basic
|
$ | 0.66 | $ | 0.84 | $ | 1.27 | ||||||
Net
income per share ¾
diluted
|
$ | 0.65 | $ | 0.82 | $ | 1.26 | ||||||
Weighted
average outstanding shares ¾
basic
|
18,751 | 19,044 | 19,372 | |||||||||
Weighted
average outstanding shares ¾
diluted
|
19,165 | 19,404 | 19,550 |
See
accompanying notes.
F-4
COSTAR
GROUP, INC.
CONSOLIDATED
BALANCE SHEETS
(in
thousands except per share data)
December
31,
|
||||||||
2007
|
2008
|
|||||||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 57,785 | $ | 159,982 | ||||
Short-term
investments
|
129,641 | 35,268 | ||||||
Accounts
receivable, less allowance for doubtful accounts of approximately $2,959
and $3,213 as of December 31, 2007 and 2008, respectively
|
10,875 | 12,294 | ||||||
Deferred
income taxes, net
|
2,716 | 2,036 | ||||||
Prepaid
expenses and other current assets
|
4,661 | 2,903 | ||||||
Total
current
assets
|
205,678 | 212,483 | ||||||
Long-term
investments
|
¾ | 29,340 | ||||||
Deferred
income taxes,
net
|
2,233 | 3,392 | ||||||
Property
and equipment,
net
|
24,045 | 16,876 | ||||||
Goodwill
|
61,854 | 54,328 | ||||||
Intangibles
and other assets,
net
|
25,711 | 16,421 | ||||||
Deposits
and other
assets
|
2,322 | 1,544 | ||||||
Total
assets
|
$ | 321,843 | $ | 334,384 | ||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$ | 3,299 | $ | 1,636 | ||||
Accrued
wages and
commissions
|
7,489 | 7,217 | ||||||
Accrued
expenses
|
15,505 | 7,754 | ||||||
Income
taxes
payable
|
191 | 1,907 | ||||||
Deferred
revenue
|
10,374 | 9,442 | ||||||
Deferred
rent
|
1,379 | 1,180 | ||||||
Total
current
liabilities
|
38,237 | 29,136 | ||||||
Deferred
income taxes,
net
|
1,801 | 132 | ||||||
Income
taxes
payable
|
¾ | 1,695 | ||||||
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; 19,474 and 19,733 issued
and outstanding as of December 31, 2007 and 2008,
respectively
|
195 | 197 | ||||||
Additional
paid-in capital
|
317,570 | 333,983 | ||||||
Accumulated
other comprehensive income (loss)
|
5,626 | (13,796 | ) | |||||
Accumulated
deficit
|
(41,586 | ) | (16,963 | ) | ||||
Total
stockholders’
equity
|
281,805 | 303,421 | ||||||
Total
liabilities and stockholders’
equity
|
$ | 321,843 | $ | 334,384 |
See accompanying
notes
F-5
COSTAR
GROUP, INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
(in
thousands)
Additional
|
Accumulated
Other
|
Total
|
||||||||||||||||||||||||||||||
Comprehensive
Income
|
Common
Stock
|
Paid-In
Capital
|
Unearned
Compensation
|
Comprehensive
Income
(Loss)
|
Accumulated
Deficit
|
Stockholders’
Equity
|
||||||||||||||||||||||||||
Shares
|
Amount
|
|||||||||||||||||||||||||||||||
Balance
at December 31, 2005
|
18,674 | $ | 187 | $ | 295,920 | $ | (2,712 | ) | $ | 1,348 | $ | (69,947 | ) | $ | 224,796 | |||||||||||||||||
Net
income
|
12,410 | ¾ | ¾ | ¾ | ¾ | ¾ | 12,410 | 12,410 | ||||||||||||||||||||||||
Foreign
currency translation adjustment
|
2,950 | ¾ | ¾ | ¾ | ¾ | 2,950 | ¾ | 2,950 | ||||||||||||||||||||||||
Net
unrealized gain on short-term investments
|
222 | ¾ | ¾ | ¾ | ¾ | 222 | ¾ | 222 | ||||||||||||||||||||||||
Comprehensive
income
|
$ | 15,582 | ||||||||||||||||||||||||||||||
Exercise
of stock options
|
270 | 3 | 6,566 | ¾ | ¾ | ¾ | 6,569 | |||||||||||||||||||||||||
Swaps
of shares for exercise
|
(20 | ) | (1 | ) | (938 | ) | ¾ | ¾ | ¾ | (939 | ) | |||||||||||||||||||||
Restricted
stock grants
|
165 | 2 | 34 | ¾ | ¾ | ¾ | 36 | |||||||||||||||||||||||||
Restricted
stock grants surrendered
|
(12 | ) | ¾ | (234 | ) | ¾ | ¾ | ¾ | (234 | ) | ||||||||||||||||||||||
Stock
compensation expense, net of forfeitures
|
¾ | ¾ | 4,094 | ¾ | ¾ | ¾ | 4,094 | |||||||||||||||||||||||||
Employee
Stock Purchase Plan (ESPP)
|
4 | ¾ | 206 | ¾ | ¾ | ¾ | 206 | |||||||||||||||||||||||||
Impact
upon adoption of SFAS 123R
|
¾ | ¾ | (2,712 | ) | 2,712 | ¾ | ¾ | ¾ | ||||||||||||||||||||||||
Balance
at December 31, 2006
|
19,081 | 191 | 302,936 | ¾ | 4,520 | (57,537 | ) | 250,110 | ||||||||||||||||||||||||
FIN
48 Adjustment
|
¾ | ¾ | 26 | ¾ | ¾ | ¾ | 26 | |||||||||||||||||||||||||
Balance
at January 1, 2007
|
19,081 | 191 | 302,962 | ¾ | 4,520 | (57,537 | ) | 250,136 | ||||||||||||||||||||||||
Net
income
|
15,951 | ¾ | ¾ | ¾ | ¾ | ¾ | 15,951 | 15,951 | ||||||||||||||||||||||||
Foreign
currency translation adjustment
|
873 | ¾ | ¾ | ¾ | ¾ | 873 | ¾ | 873 | ||||||||||||||||||||||||
Net
unrealized gain on short-term investments
|
233 | ¾ | ¾ | ¾ | ¾ | 233 | ¾ | 233 | ||||||||||||||||||||||||
Comprehensive
income
|
$ | 17,057 | ||||||||||||||||||||||||||||||
Exercise
of stock options
|
289 | 3 | 8,127 | ¾ | ¾ | ¾ | 8,130 | |||||||||||||||||||||||||
Restricted
stock grants
|
131 | 1 | (1 | ) | ¾ | ¾ | ¾ | ¾ | ||||||||||||||||||||||||
Restricted
stock grants surrendered
|
(58 | ) | ¾ | (635 | ) | ¾ | ¾ | ¾ | (635 | ) | ||||||||||||||||||||||
Consideration
for Propex
|
22 | ¾ | 1,010 | ¾ | ¾ | ¾ | 1,010 | |||||||||||||||||||||||||
Stock
compensation expense, net of forfeitures
|
¾ | ¾ | 5,440 | ¾ | ¾ | ¾ | 5,440 | |||||||||||||||||||||||||
ESPP
|
9 | ¾ | 407 | ¾ | ¾ | ¾ | 407 | |||||||||||||||||||||||||
Excess
tax benefit for exercised stock options
|
¾ | ¾ | 260 | ¾ | ¾ | ¾ | 260 | |||||||||||||||||||||||||
Balance
at December 31, 2007
|
19,474 | 195 | 317,570 | ¾ | 5,626 | (41,586 | ) | 281,805 | ||||||||||||||||||||||||
Net
income
|
24,623 | ¾ | ¾ | ¾ | ¾ | ¾ | 24,623 | 24,623 | ||||||||||||||||||||||||
Foreign
currency translation adjustment
|
(14,061 | ) | ¾ | ¾ | ¾ | ¾ | (14,061 | ) | ¾ | (14,061 | ) | |||||||||||||||||||||
Net
unrealized loss on short-term investments
|
(5,361 | ) | ¾ | ¾ | ¾ | ¾ | (5,361 | ) | ¾ | (5,361 | ) | |||||||||||||||||||||
Comprehensive
income
|
$ | 5,201 | ||||||||||||||||||||||||||||||
Exercise
of stock options
|
198 | 2 | 6,555 | ¾ | ¾ | ¾ | 6,557 | |||||||||||||||||||||||||
Restricted
stock grants
|
102 | 1 | ¾ | ¾ | ¾ | ¾ | 1 | |||||||||||||||||||||||||
Restricted
stock grants surrendered
|
(49 | ) | (1 | ) | (695 | ) | ¾ | ¾ | ¾ | (696 | ) | |||||||||||||||||||||
Stock
compensation expense, net of forfeitures
|
¾ | ¾ | 4,907 | ¾ | ¾ | ¾ | 4,907 | |||||||||||||||||||||||||
ESPP
|
8 | ¾ | 329 | ¾ | ¾ | ¾ | 329 | |||||||||||||||||||||||||
Excess
tax benefit for exercised stock options
|
¾ | ¾ | 5,317 | ¾ | ¾ | ¾ | 5,317 | |||||||||||||||||||||||||
Balance
at December 31, 2008
|
19,733 | $ | 197 | $ | 333,983 | $ | ¾ | $ | (13,796 | ) | $ | (16,963 | ) | $ | 303,421 |
See
accompanying notes.
F-6
COSTAR
GROUP, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
thousands)
Year
Ended December 31,
|
||||||||||||
2006
|
2007
|
2008
|
||||||||||
Operating
activities:
|
||||||||||||
Net
income
|
$ | 12,410 | $ | 15,951 | $ | 24,623 | ||||||
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||||
Depreciation
|
5,734 | 7,778 | 8,360 | |||||||||
Amortization
|
6,076 | 8,369 | 8,441 | |||||||||
Deferred
income tax expense, net
|
7,658 | 9,946 | 2,148 | |||||||||
Provision
for losses on accounts receivable
|
1,813 | 2,464 | 4,042 | |||||||||
Excess
tax benefit from stock options
|
¾ | ¾ | (5,317 | ) | ||||||||
Stock-based
compensation expense
|
4,155 | 5,440 | 4,940 | |||||||||
Changes
in operating assets and liabilities, net of acquisitions:
|
||||||||||||
Accounts
receivable
|
(5,080 | ) | (2,944 | ) | (6,196 | ) | ||||||
Interest
receivable
|
(164 | ) | (67 | ) | 533 | |||||||
Prepaid
expenses and other current assets
|
(1,205 | ) | (755 | ) | 1,464 | |||||||
Deposits
|
(246 | ) | (670 | ) | 652 | |||||||
Accounts
payable and accrued expenses
|
688 | 6,721 | (3,044 | ) | ||||||||
Deferred
revenue
|
748 | (501 | ) | 262 | ||||||||
Net
cash provided by operating activities
|
32,587 | 51,732 | 40,908 | |||||||||
Investing
activities:
|
||||||||||||
Purchases
of short-term investments
|
(108,876 | ) | (116,609 | ) | (4,839 | ) | ||||||
Sales
of short-term investments
|
95,393 | 107,286 | 63,949 | |||||||||
Purchases
of property and equipment and other assets
|
(12,959 | ) | (14,271 | ) | (3,656 | ) | ||||||
Acquisitions,
net of cash acquired
|
(1,887 | ) | (16,737 | ) | (3,024 | ) | ||||||
Net
cash (used in) provided by investing activities
|
(28,329 | ) | (40,331 | ) | 52,430 | |||||||
Financing
activities:
|
||||||||||||
Excess
tax benefit from stock options
|
¾ | ¾ | 5,317 | |||||||||
Proceeds
from transactions in stock based plans
|
5,582 | 8,161 | 6,158 | |||||||||
Net
cash provided by financing activities
|
5,582 | 8,161 | 11,475 | |||||||||
Effect
of foreign currency exchange rates on cash and cash
equivalents
|
254 | 64 | (2,616 | ) | ||||||||
Net
increase in cash and cash equivalents
|
10,094 | 19,626 | 102,197 | |||||||||
Cash
and cash equivalents at beginning of year
|
28,065 | 38,159 | 57,785 | |||||||||
Cash
and cash equivalents at end of year
|
$ | 38,159 | $ | 57,785 | $ | 159,982 |
See
accompanying notes
F-7
COSTAR
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2008
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 services to the commercial real estate and
related business community and operates within two segments, U.S. and
International. The Company’s information/marketing 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 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.
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 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.
Significant
Customers
No single
customer accounted for more than 5% of the Company’s revenues for each of the
years ended December 31, 2006, 2007 and 2008.
F-8
COSTAR
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS ¾ (CONTINUED)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ¾ (CONTINUED)
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. 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,
2008 and 2007.
Comprehensive
Income
The
components of accumulated other comprehensive income were as follows (in
thousands):
Year
Ended December 31,
|
||||||||
2007
|
2008
|
|||||||
Foreign
currency translation adjustment
|
$ | 5,540 | $ | (8,521 | ) | |||
Accumulated
net unrealized gain (loss) on investments, net of tax
|
86 | (5,275 | ) | |||||
Total
accumulated other comprehensive income (loss)
|
$ | 5,626 | $ | (13,796 | ) |
Advertising
Costs
The
Company expenses advertising costs as incurred. Advertising expense were
approximately $4.0 million, $2.3 million and $2.8 million for the years ended
December 31, 2006, 2007 and 2008, respectively.
Income
Taxes
The
Company provides for income taxes under the provisions of Statement of Financial
Accounting Standards No. 109 “Accounting for Income Taxes”
(“SFAS No. 109”). 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 the 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
On
January 1, 2006, the Company adopted Statement of Financial Accounting Standards
No. 123R “Share Based
Payment” (“SFAS 123R”), which addresses the accounting for share-based
payment transactions in which the Company receives employee services in exchange
for equity instruments., The statement generally requires that equity
instruments issued in such transactions be accounted for using a fair-value
based method and the fair value of such equity instruments be 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)
Under the
fair-value recognition provisions of SFAS 123R, stock-based compensation cost is
estimated at the grant date based on the fair value of the awards expected to
vest and recognized as expense ratably over the requisite service period of the
award. The Company recognizes compensation costs for awards with
graded vesting on a straight-line basis.
The
Company adopted SFAS 123R using the modified prospective method, which requires
the application of the accounting standard as of January 1, 2006. SFAS 123R
requires forfeitures to be estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from those
estimates. Upon adoption of SFAS 123R, the Company recorded a charge of
approximately $35,000 representing the cumulative effect of a change in
accounting principle. This amount was recorded in general and administrative
expenses in the consolidated statements of operations for the year ended
December 31, 2006.
The
impact of the adoption of SFAS 123R on the Company's results of operations for
the year ended December 31, 2006, was as follows (in thousands, except per share
data):
Income
from
operations
|
$ | (2,860 | ) | |
Income
before
taxes
|
$ | (2,860 | ) | |
Net
income
|
$ | (1,784 | ) | |
Basic
earnings per
share
|
$ | (0.10 | ) | |
Diluted
earnings per
share
|
$ | (0.09 | ) |
SFAS 123R
requires cash flows resulting from excess tax benefits to be classified as part
of cash flows from financing activities. Excess tax benefits represent tax
benefits related to exercised options in excess of the associated deferred tax
asset for such options. There were no excess tax benefits as a result of
adopting SFAS 123R for the year ended December 31, 2006, and no amounts were
classified as an operating cash outflow or a financing cash inflow in the
accompanying consolidated statement of cash flows. Net cash proceeds
from the exercise of stock options were approximately $6.6 million; $8.1 million
and $6.6 million for the years ended December 31, 2006, 2007 and 2008,
respectively. There were approximately $5.3 million of excess tax
benefits realized from stock option exercises for the year ended December 31,
2008.
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,
|
||||||||||||
2006
|
2007
|
2008
|
||||||||||
Cost
of
revenues
|
$ | 317 | $ | 926 | $ | 547 | ||||||
Selling
and
marketing
|
1,263 | 1,118 | 400 | |||||||||
Software
development
|
202 | 340 | 423 | |||||||||
General
and
administrative
|
2,373 | 3,056 | 3,570 | |||||||||
Total
|
$ | 4,155 | $ | 5,440 | $ | 4,940 |
F-10
COSTAR
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS ¾ (CONTINUED)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ¾ (CONTINUED)
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, 2007 and 2008, cash of $754,000 and $518,000, respectively, was
held to support letters of credit for security deposits.
Investments
The
Company accounts for investments in accordance with Statement of Financial
Accounting Standards No. 115“Accounting for Certain Investments
in Debt and Equity Securities” (“SFAS No. 115”), The Company determines
the appropriate classification of 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.
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
|
Internal
use software costs are capitalized in accordance with Statement of Position No.
98-1, “Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use” (“SOP
98-1”). Qualifying 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.
F-11
COSTAR
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS ¾ (CONTINUED)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ¾ (CONTINUED)
Goodwill,
Intangibles and Other Assets
Goodwill
represents the excess of costs over the fair value of assets of businesses
acquired. Goodwill and intangible assets subject to amortization that arose from
acquisitions prior to July 1, 2001, have been amortized on a straight-line basis
over their estimated useful lives in accordance with Accounting Principles Board
Opinion No. 17, “Intangible
Assets” (“APB 17”). The Company adopted the provisions of Statement of
Financial Accounting Standards No. 142, “Goodwill and Other Intangible
Assets” (“SFAS 142”), as of January 1, 2002. 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 in accordance with the provisions of SFAS No.
142. 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 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. The impairment loss is
measured 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.
SFAS
No. 142 also requires that intangible assets with estimable useful lives that
arose from acquisitions on or after July 1, 2001, be 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 in accordance with Statement
of Financial Accounting Standards No. 144 (“SFAS 144”), “Accounting for Impairment or
Disposal of Long-Lived Assets”.
Acquired
database technology, customer base and trade names and other are related to the
Company’s acquisitions (See Notes 3 and 6). 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.
Long-Lived
Assets
In
accordance with SFAS 144, 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.
Goodwill
and intangible assets not subject to amortization are tested annually for
impairment by reporting unit, and are tested for impairment more frequently if
events and circumstances indicate that the asset might be impaired. The
Company’s operating segments, U.S. and International, are the reporting units
tested for potential impairment under SFAS No. 142. An impairment loss is
recognized to the extent that the carrying amount exceeds the asset’s fair
value.
F-12
COSTAR
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS ¾ (CONTINUED)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ¾ (CONTINUED)
Recent
Accounting Pronouncements
In June
2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. 48 “Accounting for Uncertainty in Income
Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”), which
became effective for the Company as of January 1, 2007. FIN 48 addresses the
determination of how tax benefits claimed or expected to be claimed on a tax
return should be recorded in the financial statements. Under FIN 48, the Company
must recognize the tax benefit from an uncertain tax position only if it is
more-likely-than-not that the tax position will be sustained upon examination by
the taxing authorities, based on the technical merits of the position. The tax
benefits recognized in the financial statements from such a position are
measured based on the largest benefit that has a greater than fifty percent
likelihood of being realized upon ultimate resolution. The Company’s
reassessment of its tax positions in accordance with FIN 48 did not have a
material impact on its results of operations and financial
position.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”
(“SFAS 157”), which defines fair value, establishes a framework for measuring
fair value in accordance with GAAP and expands disclosures about fair value
measurements. SFAS 157 does not require any new fair value measurements
under GAAP and is effective for fiscal years beginning after November 15,
2007. In February 2008, the FASB issued FASB Staff Position (“FSP”) 157-2,
“Partial Deferral of the
Effective Date of Statement 157” (“FSP 157-2”), which delays the
effective date of SFAS 157 to January 1, 2009 for all non-financial assets and
non-financial liabilities, except those that are recognized or disclosed at fair
value in the consolidated financial statements on a recurring basis (at least
annually). Effective January 1, 2008, the Company adopted the portion
of SFAS 157 that was not deferred under FSP 157-2. The adoption of
SFAS 157 did not have a material impact on the Company’s results of operations
or financial position. In October 2008, the FASB issued FSP 157-3,
“Determining the Fair Value of
a Financial Asset in a Market That Is Not Active” (“FSP 157-3”), which
clarifies the application of SFAS 157 to markets that are not active and
provides an example illustrating key considerations for determining the fair
value of financial assets when their markets are not active. FSP 157-3 was
effective upon issuance, including prior periods for which financial statements
had not been issued. The adoption of this standard did not have an impact on the
Company’s results of operations or financial position.
In
February 2007, the FASB issued SFAS No. 159, “Fair Value Option for Financial
Assets and Financial Liabilities — Including an amendment of FASB Statement
No. 115” (“SFAS 159”), 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. SFAS 159 is effective for
fiscal years beginning on or after December 31, 2007. The Company adopted SFAS
159 on January 1, 2008 and has elected not to apply the fair value option to any
of its financial instruments. The adoption of SFAS 159 did not have a
material impact on the Company’s results of operations or financial
position.
In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business Combinations” (“SFAS
141R”), which will change the accounting for any business combination the
Company enters into with an acquisition date after December 31, 2008. Under SFAS
141R, an acquiring entity will be required to recognize all the assets acquired
and liabilities assumed in a transaction at the acquisition date fair value with
limited exceptions. SFAS 141R will change the accounting treatment and
disclosure for certain specific items in a business combination. SFAS 141R
will have an impact on accounting for business combinations once adopted, but
its effect will depend upon the specifics of any business combination with an
acquisition date subsequent to December 31, 2008.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements—An Amendment of ARB No. 51” (“SFAS
160”), which establishes new accounting and reporting standards for the
non-controlling interest in a subsidiary and for the deconsolidation of a
subsidiary. SFAS 160 is effective for fiscal years beginning on or after
December 15, 2008. The adoption of SFAS 160 is not expected to have a
material impact on the Company’s results of operations or financial
position.
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 April
2008, the FASB issued FSP SFAS No. 142-3, “Determination of the Useful Life of
Intangible Assets” (“FSP 142-3”), which is effective for all fiscal years
and interim periods beginning after December 15, 2008. Early adoption of FSP
142-3 is not permitted. FSP 142-3 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, FSP 142-3 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, FSP 142-3 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 adoption of FSP
142-3 will impact intangibles acquired after December 31, 2008, and its effect
will depend on the specifics of the intangible acquired.
In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS 162”), which identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements. SFAS 162 is effective as of November
17, 2008. The adoption of SFAS 162 did not have a material impact on the
Company’s results of operations or financial position.
3.
ACQUISITIONS
On
February 16, 2007, CoStar Limited, a wholly owned U.K. subsidiary of
CoStar, acquired all of the outstanding capital stock of Property Investment
Exchange Limited (“PropexTM”) for
approximately $22.0 million, consisting of cash, deferred consideration and
21,526 shares of CoStar common stock. Propex provides web-based commercial
property information and operates an electronic platform that facilitates the
exchange of investment property in the U.K. Propex’s suite of electronic
platforms and listing websites give users access to the U.K. commercial property
investment and leasing markets.
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 payable within approximately six months
of the one-year anniversary of closing.
These
acquisitions were accounted for using the purchase method of accounting. The
purchase price of the Propex acquisition was primarily allocated to customer
base, trade name, and goodwill. The purchase price of the First CLS, Inc.
acquisition was primarily allocated to acquired customer base. 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 Propex acquired trade name is
amortized on a straight-line basis over three years. We recorded goodwill of
approximately $15.0 million for the Propex acquisition and $1.1 million for the
First CLS, Inc. acquisition. Goodwill is not amortized, but is
subject to annual impairment tests. The results of operations of Propex and
First CLS, Inc. have been consolidated with those of the Company since the date
of the acquisition and are not considered material to our consolidated financial
statements. Accordingly, pro forma financial information has not been presented
for either acquisition.
F-14
COSTAR
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS ¾ (CONTINUED)
4.
INVESTMENTS
The
Company accounts for investments in accordance with Statement of Financial
Accounting Standards No. 115“Accounting for Certain Investments
in Debt and Equity Securities” (“SFAS No. 115”). The Company determines
the appropriate classification of 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,
2008 are as follows (in thousands):
Maturity
|
Fair
Value
|
|||
Due
in:
|
||||
2009
|
$ | 5,226 | ||
2010-2013
|
26,881 |
|
||
2014-2018
|
917 | |||
2019
and thereafter
|
31,131 | |||
64,155 | ||||
Securities
with multiple maturities
|
453 | |||
Investments
|
$ | 64,608 |
The
realized gains on the Company’s investments for the years ended December 31,
2007 and 2008 was approximately $24,000 and $329,000,
respectively. The realized losses on the Company’s investments for
the years ended December 31, 2007 and 2008 was approximately $232,000 and
$489,000, 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 other comprehensive income 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.
The
unrealized losses on the Company’s investments as of December 31, 2007 and 2008
were generated primarily from increases 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 has the ability to hold these investments
until a recovery of fair value, which may be maturity, it does not consider
these investments to be other-than-temporarily impaired as of December 31, 2007
and 2008.
F-15
COSTAR
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS ¾
(CONTINUED)
4.
INVESTMENTS ¾
(CONTINUED)
The
components of the investments in a loss position for more than twelve months
consists of the following (in thousands):
December
31,
|
||||||||||||||||
2007
|
2008
|
|||||||||||||||
Aggregate
Fair
Value
|
Gross
Unrealized
Losses
|
Aggregate
Fair
Value
|
Gross
Unrealized
Losses
|
|||||||||||||
Federal
debt securities
|
$ | 1,592 | $ | (15 | ) | $ | ¾ | $ | ¾ | |||||||
Corporate
debt securities
|
13,886 | (49 | ) | 22,136 | (1,494 | ) | ||||||||||
$ | 15,478 | $ | (64 | ) | $ | 22,136 | $ | (1,494 | ) |
The
components of the investments in a loss position for less than twelve months
consists of the following (in thousands):
December
31,
|
||||||||||||||||
2007
|
2008
|
|||||||||||||||
Aggregate
Fair
Value
|
Gross
Unrealized
Losses
|
Aggregate
Fair
Value
|
Gross
Unrealized
Losses
|
|||||||||||||
Auction
rate securities
|
$ | ¾ | $ | ¾ | $ | 29,340 | $ | (3,710 | ) | |||||||
Federal
debt securities
|
531 | (1 | ) | 19 | (1 | ) | ||||||||||
Corporate
debt securities
|
21,234 | (148 | ) | 6,976 | (366 | ) | ||||||||||
$ | 21,765 | $ | (149 | ) | $ | 36,335 | $ | (4,077 | ) |
The gross
unrealized gains as of December 31, 2007 and 2008 were approximately $330,000
and $128,000, respectively.
5.
FAIR VALUE
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”
(“SFAS 157”), 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 the provisions of SFAS 157 as of January
1, 2008 for financial instruments. Although the adoption of SFAS 157
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.
F-16
COSTAR
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS ¾ (CONTINUED)
5.
FAIR VALUE ¾
(CONTINUED)
SFAS 157
establishes 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.
In
accordance with SFAS 157, the following table represents the Company's fair
value hierarchy for its financial assets (cash, cash equivalents and
investments) measured at fair value on a recurring basis as of December 31, 2008
(in thousands):
Level
1
|
Level
2
|
Level
3
|
Total
|
|||||||||||||
Cash
|
$ | 29,297 | $ | ¾ | $ | ¾ | $ | 29,297 | ||||||||
Money
market
funds
|
130,685 | ¾ | ¾ | 130,685 | ||||||||||||
Corporate
debt securities
|
¾ | 35,132 | ¾ | 35,132 | ||||||||||||
Government-sponsored
enterprise obligations
|
¾ | 136 | ¾ | 136 | ||||||||||||
Auction
rate securities
|
¾ | ¾ | 29,340 | 29,340 | ||||||||||||
Total
|
$ | 159,982 | $ | 35,268 | $ | 29,340 | $ | 224,590 |
The
Company’s Level 2 assets consist of corporate debt securities and
government-sponsored enterprise obligations, which do not have directly
observable quoted prices in active markets. The Company’s corporate
debt securities are valued using matrix pricing, which is an acceptable
practical expedient under SFAS 157 for inputs.
The
Company’s Level 3 assets consist of variable rate debt instruments with an
auction-reset feature, Auction Rate Securities (“ARS”), whose underlying assets
are primarily student loan securities supported by guarantees from the FFELP of
the U.S. Department of Education.
The
following table presents the Company’s Level 3 assets measured at fair value on
a recurring basis using significant unobservable inputs as defined in SFAS 157,
as of December 31, 2008 (in thousands):
Auction
Rate
Securities
|
||||
Balance
at December 31, 2007
|
$ | 53,975 | ||
Unrealized
loss included in other comprehensive income
|
(3,710 | ) | ||
Settlements
|
(20,925 | ) | ||
Balance
at December 31, 2008
|
$ | 29,340 |
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. Typically, the carrying value of ARS approximates fair value
due to frequent resetting of the interest rates.
As of
December 31, 2008, the Company held ARS with $33.1 million par value, all of
which failed to settle at auctions. 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,
2008.
F-17
COSTAR
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS ¾ (CONTINUED)
5.
FAIR VALUE ¾
(CONTINUED)
While
the Company continues to earn interest on its ARS investments at the maximum
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,
2008. 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,
2008, the Company determined there was a decline in the fair value of its ARS
investments of approximately $3.7 million. The decline was deemed to
be a temporary impairment and recorded as an unrealized loss in other
comprehensive income 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 other
comprehensive income or an other-than-temporary impairment charge to earnings on
these investments.
6.
PROPERTY AND EQUIPMENT
Property
and equipment consists of the following (in thousands):
December
31,
|
||||||||
2007
|
2008
|
|||||||
Leasehold
improvements
|
$ | 8,357 | $ | 7,808 | ||||
Furniture,
office equipment and research
vehicles
|
19,874 | 19,305 | ||||||
Computer
hardware and
software
|
27,735 | 27,938 | ||||||
55,966 | 55,051 | |||||||
Accumulated
depreciation and
amortization
|
(31,921 | ) | (38,175 | ) | ||||
Property
and equipment,
net
|
$ | 24,045 | $ | 16,876 |
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, 2006
|
$ | 30,428 | $ | 16,069 | $ | 46,497 | ||||||
Acquisitions
|
¾ | 14,806 | 14,806 | |||||||||
Effect
of foreign currency translation
|
¾ | 551 | 551 | |||||||||
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 |
The
Company recorded goodwill of approximately $15.0 million for the Propex
acquisition in February 2007. The Company recorded goodwill of
approximately $1.1 million in connection with the First CLS, Inc. acquisition in
April 2008. The decrease in goodwill in 2008 is related to foreign currency
fluctuations.
During
the fourth quarters of 2007 and 2008, the Company completed the annual
impairment test of goodwill and concluded that goodwill was not
impaired.
F-18
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):
December
31,
|
Weighted-
Average
Amortization
Period
(in
years)
|
||||||||
2007
|
2008
|
||||||||
Building
photography
|
$
|
10,799
|
$
|
11,011
|
5
|
||||
Accumulated
amortization
|
(6,708
|
)
|
(7,711
|
)
|
|||||
Building
photography, net
|
4,091
|
3,300
|
|||||||
Acquired
database technology
|
21,390
|
20,711
|
4
|
||||||
Accumulated
amortization
|
(20,573
|
)
|
(20,361
|
)
|
|||||
Acquired
database technology, net
|
817
|
350
|
|||||||
Acquired
customer base
|
50,891
|
48,198
|
10
|
||||||
Accumulated
amortization
|
(34,374
|
)
|
(37,192
|
)
|
|||||
Acquired
customer base, net
|
16,517
|
11,006
|
|||||||
Acquired
trade names and other
|
9,089
|
7,744
|
6
|
||||||
Accumulated
amortization
|
(4,803
|
)
|
(5,979
|
)
|
|||||
Acquired
trade names and other, net
|
4,286
|
1,765
|
|||||||
Intangibles
and other assets, net
|
$
|
25,711
|
$
|
16,421
|
Amortization
expense for intangibles and other assets was approximately $6.1 million for the
year ended December 31, 2006 and $8.4 million for the years ended December 31,
2007 and 2008, respectively.
In the
aggregate, amortization for intangibles and other assets existing as of December
31, 2008 for future periods is expected to be approximately $5.4 million, $2.4
million, $1.9 million, $1.1 million and $1.0 million for the years ending
December 31, 2009, 2010, 2011, 2012 and 2013,
respectively.
F-19
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,
|
||||||||||||
2006
|
2007
|
2008
|
||||||||||
Current:
|
||||||||||||
Federal
|
$ | 414 | $ | 574 | $ | 18,289 | ||||||
State
|
220 | 821 | 3,842 | |||||||||
Total
current
|
634 | 1,395 | 22,131 | |||||||||
Deferred:
|
||||||||||||
Federal
|
7,497 | 9,716 | (408 | ) | ||||||||
State
|
1,077 | 72 | (52 | ) | ||||||||
Foreign
|
(692 | ) | (1,237 | ) | (1,592 | ) | ||||||
Total
deferred
|
7,882 | 8,551 | (2,052 | ) | ||||||||
Total
provision for income taxes
|
$ | 8,516 | $ | 9,946 | $ | 20,079 |
The
components of deferred tax assets and liabilities consists of the following (in
thousands):
December
31,
|
||||||||
2007
|
2008
|
|||||||
Deferred
tax assets:
|
||||||||
Reserve
for bad
debts
|
$ | 799 | $ | 928 | ||||
Accrued
compensation
|
1,286 | 2,144 | ||||||
Stock
compensation
|
1,603 | 2,115 | ||||||
Net
operating
losses
|
3,177 | 3,077 | ||||||
Restructuring
reserve
|
45 | ¾ | ||||||
Alternative
minimum tax
credits
|
1,393 | ¾ | ||||||
Capital
loss
carryovers
|
¾ | 345 | ||||||
Unrealized
loss on
securities
|
¾ | 2,088 | ||||||
Other
liabilities
|
1,001 | 1,401 | ||||||
Total
deferred tax
assets
|
9,304 | 12,098 | ||||||
Deferred
tax liabilities:
|
||||||||
Prepaids
|
(739 | ) | (522 | ) | ||||
Depreciation
|
(427 | ) | (626 | ) | ||||
Identified
intangibles associated with purchase
accounting
|
(4,927 | ) | (2,607 | ) | ||||
Total
deferred tax
liabilities
|
(6,093 | ) | (3,755 | ) | ||||
Net
deferred tax
asset
|
3,211 | 8,343 | ||||||
Valuation
allowance
|
(63 | ) | (3,047 | ) | ||||
Net
deferred
taxes
|
$ | 3,148 | $ | 5,296 |
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-20
COSTAR
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS ¾ (CONTINUED)
9. INCOME TAXES ¾ (CONTINUED)
For the
years ended December 31, 2007 and 2008, 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 a decrease of
approximately $274,000 for the year ended December 31, 2007 and an increase of
approximately $3.0 million for the year ended December 31, 2008. The increase
for the year ended December 31, 2008 is due to an increase in the valuation
allowance required for the deferred tax assets for international loss
carryforwards, capital loss carryforwards, and unrealized losses on
securities. The increase in the valuation allowance for the deferred tax asset
for unrealized losses has been recorded as an adjustment to other comprehensive
income. The valuation allowance for the year ended December 31, 2007 was
primarily attributable to deferred tax assets for state net operating loss
carryforwards.
For the
year ended December 31, 2008, the Company had income of approximately $52.7
million subject to applicable U.S. federal and state income tax laws and a loss
of approximately $8.0 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,
|
||||||||||||
2006
|
2007
|
2008
|
||||||||||
Expected
federal income tax provision at statutory rate
|
$ | 7,115 | $ | 8,805 | $ | 15,646 | ||||||
State
income taxes, net of federal benefit
|
1,014 | 841 | 2,505 | |||||||||
Foreign
income taxes, net effect
|
119 | 156 | 497 | |||||||||
Stock
compensation
|
528 | 146 | 87 | |||||||||
(Decrease)
increase in valuation allowance
|
(267 | ) | (274 | ) | 1,023 | |||||||
Other
adjustments
|
7 | 272 | 321 | |||||||||
Income
tax expense, net
|
$ | 8,516 | $ | 9,946 | $ | 20,079 |
The
Company paid approximately $858,000, $1.1 million, and $13.4 million in income
taxes for the years ended December 31, 2006, 2007 and 2008,
respectively.
The
Company has net operating loss carryforwards for international income tax
purposes of approximately $10.1 million, which do not expire.
The
Company adopted FIN 48 on January 1, 2007. As a result of the implementation of
FIN 48, 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 | |||
Increase
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-21
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 | |||
Increase
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 |
Approximately
$142,000 and $233,000 of the unrecognized tax benefit as of December 31, 2008,
and 2007, respectively, would favorably affect the annual effective tax rate, if
recognized in future periods. 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. During 2007, the Company recognized approximately $36,000 of interest and
$11,000 of penalties, and had total accruals of approximately $74,000 for
interest and $57,000 for penalties as of December 31, 2007. 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 2005 through 2007
remain open to examination. The Company’s U.K. income tax returns for tax years
2002 through 2007 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, 2006, 2007 and 2008 was approximately
$7.0 million, $8.1 million and $8.0 million, respectively.
Future
minimum lease payments as of December 31, 2008 are as follows (in
thousands):
2009
|
$ | 8,264 | ||
2010
|
5,652 | |||
2011
|
4,389 | |||
2012
|
3,221 | |||
2013
|
1,055 | |||
2014
and thereafter
|
1,015 | |||
$ | 23,596 |
Currently,
and from time to time, the Company is involved in litigation incidental to the
conduct of its business. The Company is not a party to any lawsuit or
proceeding that, in the opinion of management, is likely to have a material
adverse effect on its financial position or results of
operations.
F-22
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/marketing
services, consisting primarily of CoStar Property Professional®,
CoStar Tenant®,
CoStar COMPS Professional®,
and FOCUSTM
services, currently generate more than 90% 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,
|
||||||||||||
2006
|
2007
|
2008
|
||||||||||
Revenues
|
||||||||||||
United
States
|
$ | 146,073 | $ | 170,298 | $ | 190,075 | ||||||
International
|
12,816 | 22,507 | 22,353 | |||||||||
Total
revenues
|
$ | 158,889 | $ | 192,805 | $ | 212,428 | ||||||
EBITDA
|
||||||||||||
United
States
|
$ | 26,205 | $ | 32,872 | $ | 58,813 | ||||||
International
|
(315 | ) | 1,127 | (2,224 | ) | |||||||
Total
EBITDA
|
$ | 25,890 | $ | 33,999 | $ | 56,589 | ||||||
Reconciliation
of EBITDA to net income
|
||||||||||||
EBITDA
|
$ | 25,890 | $ | 33,999 | $ | 56,589 | ||||||
Purchase
amortization in cost of revenues
|
(1,205 | ) | (2,170 | ) | (2,284 | ) | ||||||
Purchase
amortization in operating expenses
|
(4,183 | ) | (5,063 | ) | (4,880 | ) | ||||||
Depreciation
and other amortization
|
(6,421 | ) | (8,914 | ) | (9,637 | ) | ||||||
Interest
income, net
|
6,845 | 8,045 | 4,914 | |||||||||
Income
tax expense, net
|
(8,516 | ) | (9,946 | ) | (20,079 | ) | ||||||
Net
income
|
$ | 12,410 | $ | 15,951 | $ | 24,623 |
International
EBITDA includes a corporate allocation of approximately $1.0 million, $2.6
million and $1.1 million for the years ended December 31, 2006, 2007 and 2008,
respectively.
F-23
COSTAR
GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
12.
|
SEGMENT
REPORTING — (CONTINUED)
|
Summarized
information by segment consists of the following (in thousands):
December
31,
|
||||||||
2007
|
2008
|
|||||||
Property
and equipment, net
|
||||||||
United
States
|
$ | 18,162 | $ | 13,927 | ||||
International
|
5,883 | 2,949 | ||||||
Total
property and equipment,
net
|
$ | 24,045 | $ | 16,876 | ||||
Goodwill
|
||||||||
United
States
|
$ | 30,428 | $ | 31,547 | ||||
International
|
31,426 | 22,781 | ||||||
Total
goodwill
|
$ | 61,854 | $ | 54,328 | ||||
Assets
|
||||||||
United
States
|
$ | 308,373 | $ | 353,084 | ||||
International
|
72,659 | 43,474 | ||||||
Total
segment
assets
|
$ | 381,032 | $ | 396,558 | ||||
Reconciliation
of segment assets to total assets
|
||||||||
Total
segment
assets
|
$ | 381,032 | $ | 396,558 | ||||
Investment
in
subsidiaries
|
(18,343 | ) | (18,343 | ) | ||||
Intercompany
receivables
|
(40,846 | ) | (43,831 | ) | ||||
Total
assets
|
$ | 321,843 | $ | 334,384 | ||||
Liabilities
|
||||||||
United
States
|
$ | 21,581 | $ | 24,180 | ||||
International
|
61,025 | 40,053 | ||||||
Total
segment
liabilities
|
$ | 82,606 | $ | 64,233 | ||||
Reconciliation
of segment liabilities to total liabilities
|
||||||||
Total
segment
liabilities
|
$ | 82,606 | $ | 64,233 | ||||
Intercompany
payables
|
(42,568 | ) | (33,270 | ) | ||||
Total
liabilities
|
$ | 40,038 | $ | 30,963 |
F-24
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,
|
||||||||||||
2006
|
2007
|
2008
|
||||||||||
Numerator:
|
||||||||||||
Net
income
|
$ | 12,410 | $ | 15,951 | $ | 24,623 | ||||||
Denominator:
|
||||||||||||
Denominator
for basic net income per share ¾ weighted-average
outstanding shares
|
18,751 | 19,044 | 19,372 | |||||||||
Effect
of dilutive securities:
|
||||||||||||
Stock
options and restricted stock
|
414 | 360 | 178 | |||||||||
Denominator
for diluted net income per share ¾ weighted-average
outstanding shares
|
19,165 | 19,404 | 19,550 | |||||||||
Net
income per share ¾
basic
|
$ | 0.66 | $ | 0.84 | $ | 1.27 | ||||||
Net
income per share ¾
diluted
|
$ | 0.65 | $ | 0.82 | $ | 1.26 |
Stock
options to purchase approximately 86,900, 80,400 and 250,200 shares were
outstanding as of December 31, 2006, 2007 and 2008, 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-25
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 1.1
million and 880,000 shares were available for future grant under the 2007 Plan
as of December 31, 2007 and 2008, respectively.
F-26
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, 2005
|
1,473,897 | $ | 9.00 - $52.13 | $ | 29.76 | |||||||||||||||
Granted
|
96,900 | $ | 51.92 | $ | 51.92 | |||||||||||||||
Exercised
|
(269,755 | ) | $ | 9.00 - $45.18 | $ | 24.35 | ||||||||||||||
Canceled
or expired
|
(26,565 | ) | $ | 18.28 - $45.18 | $ | 37.85 | ||||||||||||||
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 | 4.77 | $ | 3,692 | ||||||||||||
Exercisable
at December 31, 2006
|
929,324 | $ |
9.00
- $52.13
|
$ | 28.93 | |||||||||||||||
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 | 4.10 | $ | 3,692 |
The
aggregate intrinsic value is calculated as the difference between (i) the
closing price of the common stock at December 31, 2006, 2007 and 2008 and (ii)
the exercise prices of the underlying awards, multiplied by the shares
underlying options as of December 31, 2006, 2007 and 2008, that had an exercise
price less than the closing price on that date. Options to purchase 269,755,
288,757, and 198,434 shares were exercised for the years ended December 31,
2006, 2007, and 2008, respectively. The aggregate intrinsic value of
options exercised, determined as of the date of option exercise, was $7.4
million, $7.5 million and $3.4 million, respectively.
At
December 31, 2008, there was $10.5 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 1.9 years.
The
weighted-average grant date fair value of each option granted during the years
ended December 2006, 2007 and 2008 was $33.45, $32.70 and $27.81,
respectively.
F-27
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,
|
||||||||||||
2006
|
2007
|
2008
|
||||||||||
Dividend
yield
|
0 | % | 0 | % | 0 | % | ||||||
Expected
volatility
|
61 | % | 61 | % | 59 | % | ||||||
Risk-free
interest rate
|
4.7 | % | 4.7 | % | 3.0 | % | ||||||
Expected
life (in years)
|
5 | 5 | 5 |
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, 2008:
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 - $18.06 | 99,617 | 2.76 | $ | 17.94 | 99,617 | $ | 17.94 | ||||||||||||||
$ | 18.12 - $22.87 | 102,828 | 3.44 | $ | 20.78 | 102,828 | $ | 20.78 | ||||||||||||||
$ | 23.06 - $28.15 | 118,171 | 3.45 | $ | 27.04 | 118,171 | $ | 27.04 | ||||||||||||||
$ | 29.00 - $30.75 | 95,275 | 3.19 | $ | 30.33 | 95,275 | $ | 30.33 | ||||||||||||||
$ | 32.00 - $39.00 | 89,932 | 4.59 | $ | 38.75 | 89,932 | $ | 38.75 | ||||||||||||||
$ | 39.53 - $43.99 | 135,938 | 6.91 | $ | 42.49 | 63,063 | $ | 40.79 | ||||||||||||||
$ | 44.06 - $45.18 | 85,625 | 5.76 | $ | 44.83 | 85,625 | $ | 44.83 | ||||||||||||||
$ | 46.81 - $51.92 | 70,200 | 7.64 | $ | 51.49 | 46,464 | $ | 51.48 | ||||||||||||||
$ | 54.12 - $54.12 | 3,000 | 8.42 | $ | 54.12 | 1,000 | $ | 54.12 | ||||||||||||||
$ | 55.07 - $55.07 | 15,000 | 9.67 | $ | 55.07 | 0 | $ | 0.00 | ||||||||||||||
$ | 16.20 - $55.07 | 815,586 | 4.77 | $ | 33.98 | 701,975 | $ | 31.84 |
The
following table presents unvested restricted stock awards activity for the year
ended December 31, 2008:
Number
of Shares
|
Weighted-Average
Grant Date
Fair
Value per Share
|
|||||||
Unvested
restricted stock at December 31,
2007
|
258,588 | $ | 48.55 | |||||
Granted
|
102,177 | $ | 48.76 | |||||
Vested
|
(54,009 | ) | $ | 46.49 | ||||
Canceled
|
(33,403 | ) | $ | 47.86 | ||||
Unvested
restricted stock at December 31,
2008
|
273,353 | $ | 49.12 |
F-28
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 2006, 2007 and 2008,
the Company matched 100% 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, 2006, 2007 and 2008 were
approximately $2.0 million, $2.3 million and $2.6 million, respectively. The
Company paid administrative expenses in connection with the 401(k) plan of
approximately $25,000, $22,000 and $28,000 for the years ended December 31,
2006, 2007 and 2008, 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, 2006, 2007 and 2008 were approximately
$193,000, $281,000 and $265,000, 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 86,308 and 78,840 shares available for
purchase under the plan as of December 31, 2007 and 2008, respectively and
approximately 9,000 and 7,400 shares of the Company’s common stock were
purchased during 2007 and 2008, respectively.
F-29