<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED: JUNE 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM TO
-------- --------
COMMISSION FILE NUMBER: 0-24531
COSTAR GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 52-2091509
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
2 BETHESDA METRO CENTER
BETHESDA, MD 20814
(301) 215-8300
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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 for the past 90 days. Yes [ X ] - No [ ]
As of July 2, 2000, there were 15,401,567 shares outstanding of the Registrant's
Common Stock, par value $.01.
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COSTAR GROUP, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Statements of Operations.........................................................3
Condensed Consolidated Balance Sheets...................................................................4
Condensed Consolidated Statements of Cash Flows.........................................................5
Notes to Condensed Consolidated Financial Statements....................................................6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations.........................................................9
Item 3 - Quantitative and Qualitative Disclosures About Market Risk............................................ 13
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings......................................................................................13
Item 2 - Changes in Securities..................................................................................13
Item 3 - Defaults upon Senior Securities........................................................................13
Item 4 - Submission of Matters to a Vote of Security Holders....................................................13
Item 5 - Other Information......................................................................................14
Item 6 - Exhibits and Reports on Form 8-K.......................................................................14
Signatures.......................................................................................................15
</TABLE>
2
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PART 1 FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
CoStar Group, Inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------- ----------------------
2000 1999 2000 1999
-------------------------- ----------------------
<S> <C> <C> <C> <C>
Revenues $ 14,572 $ 7,178 $ 25,944 $ 13,305
Cost of revenues 7,730 3,068 13,707 5,662
-------------------------- -----------------------
Gross margin 6,842 4,110 12,237 7,643
Operating expenses:
Selling and marketing 11,168 3,923 19,570 7,006
Software development 1,004 309 1,722 549
General and administrative 6,660 2,572 12,081 4,508
Purchase amortization 2,739 548 4,476 1,048
Acquired in-process development - - 5,812 -
--------------------------- ----------------------
21,571 7,352 43,661 13,111
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Loss from operations (14,729) (3,242) (31,424) (5,468)
Loss on disposal of assets (182) - (182) -
Other income, net 933 616 1,959 678
--------------------------- -----------------------
Net loss before income taxes (13,978) (2,626) (29,647) (4,790)
Income tax benefit 845 - 1,410 -
---------------------------- ----------------------
Net loss $ (13,133) $(2,626) $(28,237) $ (4,790)
============================ =======================
Basic and diluted net loss per share $ (0.85) $ (0.23) $ (1.91) $ (0.45)
============================ ======================
Weighted average common shares 15,391 11,510 14,822 10,572
============================ ======================
</TABLE>
See accompanying notes.
3
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CoStar Group, Inc.
Condensed Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------------------------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 64,258 $ 94,074
Accounts receivable, less allowance for doubtful
accounts of $1,482 and $756 as of
June 30, 2000 and December 31, 1999 7,612 2,841
Prepaid expenses and other current assets 1,660 2,458
----------------------------
Total current assets 73,530 99,373
Property and equipment 20,517 8,259
Accumulated depreciation (3,371) (2,377)
----------------------------
17,146 5,882
Intangible and other assets 90,292 31,222
Deposits 587 428
----------------------------
Total assets $181,555 $136,905
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 13,710 $ 7,585
Deferred revenue 8,503 2,635
----------------------------
Total current liabilities 22,213 10,220
Long term liabilities 1,906 -
Deferred taxes 11,100 6,988
Stockholders' equity 146,336 119,697
----------------------------
Total liabilities and stockholders' equity $181,555 $136,905
============================
</TABLE>
See accompanying notes.
4
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CoStar Group, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
---------------------------
2000 1999
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<S> <C> <C>
Operating activities:
Net loss $ (28,237) $ (4,790)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation 994 480
Amortization 6,835 1,732
Acquired in-process development 5,812 -
Loss on disposal of assets 182 -
Provision for losses on accounts receivable 726 274
Income tax benefit (1,410) -
Non-cash charges - 9
Changes in operating assets and liabilities 589 411
---------------------------
Net cash used in operating activities (14,509) (1,884)
Investing activities:
Net purchases of property and equipment (8,391) (2,100)
Intangible and other assets (2,976) ( 677)
Acquisitions (net of acquired cash) (2,407) (9,993)
---------------------------
Net cash used in investing activities (13,774) (12,770)
Financing activities:
Payment of long term liability (2,625) -
Net proceeds from exercise of stock options 1,092 -
Net proceeds from public offering - 97,411
---------------------------
Net cash (used in) provided by financing activities (1,533) 97,411
Net (decrease)/increase in cash and cash equivalents (29,816) 82,757
Cash and cash equivalents at beginning of period 94,074 19,667
---------------------------
Cash and cash equivalents at end of period $ 64,258 $102,424
===========================
</TABLE>
See accompanying notes.
5
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COSTAR GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
CoStar Group, Inc. (the "Company") has created a comprehensive,
proprietary, national database of commercial real estate information for
metropolitan areas throughout the United States. Based on its unique database,
the Company provides information to the commercial real estate and related
business community and operates within one reportable business segment. The
information is distributed to its clients under license agreements, which are
typically one to three years in duration.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
CoStar Group, Inc. is a Delaware corporation and was incorporated in
February 1998 to succeed its predecessors, Realty Information Group L.P.
("RIGLP") and OLD RIG, Inc. ("RIGINC"). RIGLP was an operating entity, while
RIGINC was a shell holding entity. In connection with the Company's Initial
Public Offering on July 1, 1998 ("the Offering"), RIGLP and RIGINC merged with
the Company pursuant to the RIG Contribution Agreement dated March 5, 1998. The
limited partners of RIGLP (other than RIGINC) and all of the stockholders of
RIGINC received 3.03 shares of Common Stock of the Company per each limited
partnership unit or share of common stock exchanged, for a total of 5,754,017
shares. As a result of the reorganization of these entities, the Company owned
(directly or indirectly) all of the capital stock of RIGINC and all the equity
of RIGLP.
The merger has been accounted for as a reorganization of entities under
common control similar to a pooling of interests. Following the merger, each
shareholder of the Company maintained their exact same ownership of the
operating entity, RIGLP, as before the merger. The transfer of assets and
liabilities of RIGLP and RIGINC have been recorded at the historical carrying
values. The financial statements are presented as if the Company was in
existence throughout all periods presented, as one operating entity. All share
amounts have been restated to reflect the conversion of partnership units to
common stock of the Company. On January 1, 1999, RIGLP and RIGINC were merged
into a newly formed corporation, CoStar Realty Information, Inc. ("CoStar
Realty"), a wholly owned subsidiary of the Company.
Additionally, the consolidated financial statements of the Company include
the accounts of New Market Systems ("NMS") acquired on March 1, 1997, C Data
Services, Inc. ("CDS") acquired on August 14, 1998, LeaseTrend, Inc.
("LeaseTrend") acquired on January 8, 1999, Jamison Research, Inc. ("Jamison")
acquired on January 22, 1999, ARES Development Group, LLC ("ARES") acquired on
September 15, 1999, and COMPS.COM, Inc. ("Comps") acquired on February 10, 2000.
CDS was merged into CoStar Realty on January 1, 1999, and LeaseTrend and Jamison
were merged into CoStar Realty on December 31, 1999.
CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries after elimination of all significant intercompany
transactions.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
RECLASSIFICATIONS
Certain previously reported amounts have been reclassified to conform to
the Company's current presentation.
6
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3. ACQUISITIONS
On August 14, 1998, the Company acquired Houston-based commercial real
estate information provider, C Data Services, Inc. CDS was acquired in a
transaction in which the former stockholders of CDS received 93,530 shares of
common stock of the Company and approximately $9,000 in cash. The transaction
was accounted for as a purchase and the consideration was valued for accounting
purposes at approximately $617,000 including acquisition expenses.
On January 8, 1999, the Company acquired all of the common stock of
LeaseTrend, Inc., a Cincinnati based provider of commercial real estate
information, for $4,500,000 in cash and 566,671 shares of the Company's common
stock. The transaction was accounted for as a purchase and the consideration was
valued for accounting purposes at approximately $9,200,000 including acquisition
expenses.
On January 22, 1999, the Company acquired all of the common stock of
Jamison Research, Inc., an Atlanta based provider of commercial real estate
information, for $5,284,000 in cash and 446,637 shares of the Company's common
stock. The transaction was accounted for as a purchase and the consideration was
valued for accounting purposes at approximately $10,300,000 including
acquisition expenses.
On September 15, 1999, the Company acquired all of the membership interests
of ARES Development Group, LLC, Los Angeles based developers and distributors of
ARES for ACT!, for $250,000 in cash and 33,208 shares of the Company's common
stock. The transaction was accounted for as a purchase and the consideration was
valued for accounting purposes at approximately $1,265,000 including acquisition
expenses. In addition, the acquisition agreement provides for $1,000,000 of
additional consideration (in a combination of cash and stock) that may be paid
by the Company upon the achievement of certain operating goals by the members of
ARES. In February 2000, the Company issued 2,140 shares of its common stock and
paid $437,500 in cash to the members of ARES for the achievement of the first
operating goal by the members of ARES.
On February 10, 2000, the Company completed the acquisition of Comps under
a merger agreement, dated as of November 3, 1999, among the Company, Comps and
Acq Sub, Inc. ("Acq Sub"), a wholly owned subsidiary of the Company. Comps'
primary asset is a database of commercial real estate sales information. In
connection with the transaction, Comps was merged with and into Acq Sub, which
was the surviving corporation in the merger. Immediately after the merger, Acq
Sub changed its name to Comps, Inc. The aggregate consideration included
$49,015,905 in cash paid to former holders of Comps common stock (excluding cash
paid for fractional shares), and 2,258,738 shares of the Company's common stock
(including shares issued to former warrant holders of Comps). The transaction
was accounted for as a purchase and the consideration was valued for accounting
purposes at approximately $101,379,000 including acquisition expenses. The
purchase price has been allocated on a preliminary basis to the assets and
liabilities acquired based on the estimated fair values of the assets acquired
and liabilities assumed.
The operations of all acquired businesses were included in the Company's
statement of operations after the respective date of acquisitions. Except for
the portion of the purchase price of acquisitions acquired with cash, these
transactions have been excluded from the statements of cash flows.
The Company's unaudited pro forma condensed consolidated statements of
operations for the six month periods ended June 30, 2000 and 1999, assuming the
acquisition of LeaseTrend, Jamison, ARES and Comps had been consummated as of
January 1 of each period, is summarized as follows (in thousands, except per
share data):
<TABLE>
<CAPTION>
For the Six Month Period
Ended June 30,
2000 1999
------------------------
<S> <C> <C>
Revenues $ 27,619 $ 13,617
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Net loss $(33,053) $( 4,934)
======== ========
Weighted average shares 15,331 10,652
======== ========
Net loss per share - basic and diluted $ (2.16) $ (0.46)
======== ========
</TABLE>
7
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4. INTANGIBLE AND OTHER ASSETS
Intangible and other assets consists of the following (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
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<S> <C> <C>
Capitalized product development costs $ 1,489 $ 1,435
Accumulated amortization (760) (617)
-------- --------
729 818
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Building photography 4,000 3,118
Acquired technology 19,708 3,552
Customer base 31,600 19,347
Tradename 4,198 -
Goodwill 42,256 9,894
Accumulated amortization (12,199) (5,507)
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89,563 30,404
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Intangible and other assets $90,292 $ 31,222
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</TABLE>
8
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ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements, which involve
risks and uncertainties. Our actual results could differ materially from those
in such forward-looking statements as a result of certain factors, including
those set forth in the Company's Annual Report on Form 10-K for the year ended
December 31, 1999, the Company's registration on Form S-3 filed June 16, 2000,
and the Company's other filings with the Securities and Exchange Commission. The
following discussion should be read in conjunction with the Company's filings
with the Securities and Exchange Commission and the unaudited condensed
consolidated financial statements included herein.
OVERVIEW
The Company is the leading provider of information services to the U.S.
commercial real estate industry. We are creating a digital marketplace where the
members of the commercial real estate and related business community can
continuously interact and facilitate transactions by efficiently exchanging
accurate and standardized information. Our wide array of digital service
offerings includes a leasing marketplace, a selling marketplace, comparable
sales information, decision support, tenant information, property marketing, and
industry news. Substantially all of our current services are digitally delivered
over the Internet.
We completed our initial public offering in July 1998 and received net
proceeds of approximately $22.7 million. We primarily used those net proceeds to
fund the geographic and service expansion of our business, including three
strategic acquisitions, and to expand our sales and marketing organization. In
May 1999, we completed a follow-on public offering and received net proceeds of
approximately $97.4 million. We used a portion of those net proceeds to fund the
acquisition of Comps, and we expect to use the remainder of the proceeds
primarily for development and distribution of new services, expansion of all
existing services across our current markets, geographic expansion in the U.S.
and international markets, strategic acquisitions and working capital and
general corporate purposes.
From 1994 through June 2000, we expanded the geographical coverage of our
existing services and developed new services. In addition to internal growth,
this expansion included the acquisitions of Chicago ReSource, Inc. in Chicago in
1996 and New Market Systems, Inc. in San Francisco in 1997. In August 1998, we
expanded into the Houston region through the acquisition of Houston-based real
estate information provider C Data Services, Inc. In January 1999, we expanded
further into the Midwest and Florida by acquiring LeaseTrend, and into Atlanta
and Dallas/Fort Worth by acquiring Jamison. In September 1999, we acquired ARES,
a Los Angeles based developer and distributor of ARES for ACT!. In February
2000, we acquired Comps.
We consider regions that have had ongoing operations for at least 18 months
to be established, and we currently generate positive cash flow from our
operations in established regions. As of June 30, 2000, the following regions
are those that have been in operation for more than 18 months and that we
consider to be established: Washington, New York, Los Angeles, Chicago, San
Francisco, Philadelphia, Boston and Houston. These regions provide us with
substantial cash flow, which we reinvest into the business. Since our inception,
the development of our business has required substantial investments for the
expansion of services and the establishment of operating regions, which has
resulted in substantial net losses on an overall basis.
The incremental cost of introducing new services in an established region
in the future may reduce the profitability of a region or cause it to incur
losses. We expect continued development and distribution of new services,
expansion of all existing services across current markets and geographic
expansion in the United States and international markets. Therefore, while we
expect operations in existing established regions to remain profitable and
provide substantial funding, we expect our overall expansion activities to
generate significant losses and negative cash flow from operations during the
next 18 months.
Although our services are expanding rapidly, our CoStar Property, CoStar
Tenant and CoStar COMPS services currently generate the largest portion of our
revenue. The CoStar Property, CoStar Tenant and CoStar COMPS contracts range
from terms of one to three years and generally renew automatically. Upon
renewal, many of the contract rates increase automatically in accordance with
contract provisions or as a result of renegotiations. To encourage clients to
use our services regularly, we generally charge fixed amounts rather than fees
based on actual system usage. We charge our clients based on the number of
sites, organization size, the company's business focus, and the number of
services to which a client subscribes. Our contract renewal rate currently
exceeds 90% on an annual basis. Our clients pay contract fees on an annual,
quarterly, or monthly basis. We recognize this revenue over the life of the
contract on a straight-line basis beginning with the installation or renewal
date. Annual and quarterly advance payments result in deferred revenue,
substantially reducing the working capital requirements generated by the growth
in our accounts receivable.
9
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THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO
THREE MONTHS ENDED JUNE 30, 2000
REVENUES. Revenues increased 103% from $7,178,000 for the three months ended
June 30, 1999 to $14,572,000 for the three months ended June 30, 2000. The
increase resulted primarily from growth in the Company's client base in
established regions, expansion of emerging regions entered during 1999 and
revenues from Comps. Our Comps Division contributed $4.3 million to revenues
for the three months ended June 30, 2000.
GROSS MARGINS. Gross margins increased 66% from $4,110,000 for the three months
ended June 30, 1999 to $6,842,000 for the three months ended June 30, 2000,
while gross margin percentages were 57% and 47% of revenue, respectively. The
increase in gross margins resulted principally from significant revenue growth
from established regions. The decline in gross margin percentages resulted
primarily from investments in research for the expansion in both emerging and
acquired regions and from lower gross margins in the recently acquired Comps
business. Furthermore, cost of revenues for the three months ended June 30, 2000
includes purchase price amortization from the LeaseTrend, Jamison, ARES and
Comps acquisitions of approximately $1,277,000 compared to approximately
$187,000 for the same period in 1999.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses increased 185%
from $3,923,000 for the three months ended June 30, 1999 to $11,168,000 for the
three months ended June 30, 2000. Selling and marketing expenses increased
primarily as a result of the continued expansion of the sales force and
marketing efforts required for growth, particularly in emerging regions, and for
the marketing surrounding the launch of our CoStar Exchange product.
SOFTWARE DEVELOPMENT. Software development expenses increased 225% from $309,000
for three months ended June 30, 1999 to $1,004,000 for the three months ended
June 30, 2000 reflecting development costs for the increased number of products
we now support including CoStar COMPS and CoStar Exchange.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 159% from $2,572,000 for the three months ended June 30, 1999 to
$6,660,000 for the three months ended June 30, 2000. General and administrative
expenses primarily increased due to the hiring of new employees to support the
expanding scope of our operations and client base and also the increase in
employees due to Comps.
PURCHASE AMORTIZATION. Purchase amortization increased 400% from $548,000 for
the three months ended June 30, 1999 to $2,739,000 for the three months ended
June 30, 2000. Purchase amortization increased primarily due to the acquisition
of Comps.
OTHER INCOME, NET. Interest and other income increased from $616,000 for the
three months ended June 30, 1999 to $933,000 for the three months ended June 30,
2000. This increase was a direct result of interest earned on the proceeds from
the follow-on public offering.
INCOME TAX BENEFIT. An income tax benefit of $845,000 for the three months ended
June 30, 2000 is a result of the impact of the reversal of the deferred tax
liability in connection with the amortization of identified intangible assets
established during recent acquisitions.
10
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SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO
SIX MONTHS ENDED JUNE 30, 2000
REVENUES. Revenues increased 95% from $13,305,000 for the six months ended June
30, 1999 to $25,944,000 for the six months ended June 30, 2000. The increase
resulted primarily from growth in the Company's client base in established
regions, expansion of emerging regions entered during 1999 and revenues from
Comps. Our Comps Division contributed $6.2 million to revenues for the six
months ended June 30, 2000.
GROSS MARGINS. Gross margins increased 60% from $7,643,000 for the six months
ended June 30, 1999 to $12,237,000 for the six months ended June 30, 2000, while
gross margin percentages were 57% and 47% of revenue, respectively. The increase
in gross margins resulted principally from significant revenue growth from
established regions. The decline in gross margin percentages resulted primarily
from investments in research for the expansion in both emerging and acquired
regions and from lower gross margins in the recently acquired Comps business.
Furthermore, cost of revenues for the six months ended June 30, 2000
includes purchase price amortization from the LeaseTrend, Jamison, ARES and
Comps acquisitions of approximately $2,121,000 compared to approximately
$390,000 for the same period in 1999.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses increased 179%
from $7,006,000 for the six months ended June 30, 1999 to $19,570,000 for the
six months ended June 30, 2000. Selling and marketing expenses increased
primarily as a result of the continued expansion of the sales force and
marketing efforts required for growth, particularly in emerging regions, and for
the marketing surrounding the launch of our CoStar Exchange product.
SOFTWARE DEVELOPMENT. Software development expenses increased 214% from $549,000
for six months ended June 30, 1999 to $1,722,000 for the six months ended June
30, 2000 reflecting development costs for the increased number of products we
now support including CoStar COMPS and CoStar Exchange.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 168% from $4,508,000 for the six months ended June 30, 1999 to
$12,081,000 for the six months ended June 30, 2000. General and administrative
expenses increased due to the hiring of new employees to support the expanding
scope of our operations and client base and also the increase in employees due
to Comps.
PURCHASE AMORTIZATION. Purchase amortization increased 327% from $1,048,000 for
the six months ended June 30, 1999 to $4,476,000 for the six months ended June
30, 2000. Purchase amortization increased primarily due to the acquisition of
Comps.
ACQUIRED IN-PROCESS DEVELOPMENT. Acquired in-process development costs of
$5,812,000 for the six months ended June 30, 2000 consist of in-process
development costs written off as part of the Comps acquisition.
OTHER INCOME, NET. Interest and other income increased from $678,000 for the six
months ended June 30, 1999 to $1,959,000 for the six months ended June 30, 2000.
This increase was a direct result of interest earned on the proceeds from the
follow-on public offering.
INCOME TAX BENEFIT. An income tax benefit of $1,410,000 for the six months ended
June 30, 2000 is a result of the impact of the reversal of the deferred tax
liability in connection with the amortization of identified intangible assets
established during recent acquisitions.
11
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LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents balance was $64,258,000 at June 30, 2000, a
decrease of $29,816,000 from $94,074,000 at December 31, 1999. This decrease was
due principally to the $2,407,000 (net of acquired cash) used for the
acquisition of Comps on February 10, 2000, cash used in operating activities,
$8,391,000 in purchases of property and equipment, debt repayments of
$2,625,000, and $882,000 in purchased building photography. During the second
quarter of 2000, we financed our operations and growth through cash flow from
the established regions and the proceeds of the follow-on offering. Net cash
used in operations for the six months ended June 30, 2000 was $14,509,000
compared to net cash used by operating activities of $1,884,000 for the six
months ended June 30, 1999. This was a direct result of investments in research
for the expansion in both emerging and acquired regions, the development and
launch of new services and the acquisition of Comps. Additionally, we received
advance payments from clients on a number of contracts, resulting in the
generation of cash as reflected in the increased deferred revenue balances of
$8,503,000 and $2,635,000 as of June 30, 2000 and December 31, 1999,
respectively. This increase in deferred revenues was a result of the acquisition
of Comps as well as a large number of annual contracts billed in the first half
of 2000. We continue to experience overall operating losses as a result of our
recent expansion into emerging and acquired regions and development of new
services, while established regions continue to generate substantial cash flow
from operations.
Net cash used in investing activities amounted to $13,774,000 for the six
months ended June 30, 2000, including $2,407,000 (net of acquired cash) for the
acquisition of Comps. Additional investing activities included purchased
building photography and purchase of property and equipment, consisting
principally of leasehold improvements, computers and office equipment. As a
result of our expansion, we have entered into numerous operating leases for
office space throughout the country, including the Company's and Comps'
headquarters and have commitments for rent payments ranging from $2,436,000 to
$4,405,000 annually over the next ten years. Other than these leases and related
commitments for leasehold improvements, we currently have no material
commitments for capital expenditures.
To date, we have grown in part by acquiring other companies, and we may
continue to make acquisitions. Our acquisitions may vary in size and could be
material to our current operations. We expect to use cash, stock, or other means
of funding to make these acquisitions.
During the first six months of 2000, we experienced significant losses and
negative operating cash flow as a result of expansion in emerging regions,
expansion of services in established regions, costs for the introduction of new
products and the acquisition of Comps. Some of these costs are non recurring,
and many are fixed operating costs, which will not directly increase as a result
of the related expected growth in revenue. Based on current plans we believe
that our available cash combined with positive cash flow from our established
regions should be sufficient to fund our operations for at least the next two
years.
Through June 30, 1998, we operated as either a Subchapter S
corporation or a limited partnership, and we were not subject to corporate
income taxes. After June 30, 1998, we became a taxable entity. Although we have
experienced losses to date, future profits, to the extent not offset by the
benefits of loss carryforwards, would result in income tax liabilities. Further,
the reversal of deferred taxes of approximately $11.1 million at June 30, 2000,
recorded in connection with the purchase of identifiable intangibles, will
result in a non-cash income tax benefit in future periods. These accounts are
subject to ongoing evaluation of our future tax liablities. During the second
quarter of 2000, we recorded a purchase price adjustment of approximately $7.0
million related to our acquisition of Comps. This adjustment resulted in a
decrease of the deferred tax liability and related goodwill.
We do not believe the impact of inflation has significantly affected our
operations.
12
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ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not have significant exposure to market risks associated
with the changes in interest rates related to its cash equivalent securities
held as of June 30, 2000.
PART II. OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
On November 5, 1999, a suit was filed in the Court of Chancery of the State
of Delaware in and for New Castle County under the caption Morris v. Avis, et al
(C.A. 197554). The suit alleged breaches of fiduciary duties by the former
members of the board of directors of Comps and Summit Partners. On November 8,
1999, a suit was filed in the Superior Court of the State of California of and
for the County of San Diego captioned Berghoff v. Comps.com et al (case no. GIC
738362). The allegations in the California lawsuit were similar to the
allegations in the Delaware suit. The plaintiffs in both of these lawsuits had
requested monetary damages and injunctive relief to prevent the consummation of
the merger between Comps and the Company. On January 6, 2000, the Delaware suit
was voluntarily dismissed by the plaintiff. On February 4, 2000, the parties to
the California lawsuit entered into a Memorandum of Understanding that sets
forth their agreement to settle the lawsuit. The parties subsequently negotiated
and executed a more detailed Joint Stipulation and Agreement of Compromise,
Settlement and Release ("Joint Stipulation"). On April 7, 2000, the Court
entered an Order of Preliminary Class Action Settlement, consistent with the
terms of the Joint Stipulation. The Court scheduled a final settlement hearing
for September 15, 2000, following appropriate notice to the class members.
ITEM 2 CHANGES IN SECURITIES
None
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of the Company's stockholders was held on June 21, 2000.
The following people were elected to the Board of Directors of the Company for a
one-year term: Michael Klein, Andrew Florance, Warren Haber, David Bonderman,
Josiah Low III, and John Simon. The vote was as follows: For, 14,068,388 shares;
and withheld, 100,748 shares.
Amendments to the Company's 1998 Stock Incentive Plan, as amended, were
approved upon the following vote: For, 11,805,941 shares; against, 1,743,375
shares; and abstain, 32,650 shares.
The appointment of Ernst & Young, LLP as independent public accountants of
the Company for the fiscal year ending December 31, 2000 was approved upon the
following vote: For 14,156,672 shares; against, 11,823 shares; and abstain 641
shares.
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ITEM 5 OTHER INFORMATION
None
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
A current report on Form 8-K was filed by the Company on August 2, 2000
with respect to the press release announcing the Company's second quarter
earnings.
EXHIBIT NUMBER: EXHIBIT DESCRIPTION:
10.1 CoStar Group, Inc. 1998 Stock Incentive Plan, as amended.
10.2 Employment Agreement for John Place.
27 Financial Data Schedule
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COSTAR GROUP, INC.
Date: August 14, 2000 By: /s/ Frank A. Carchedi
-------------------------------
Frank A. Carchedi
Chief Financial Officer
(Principal Financial and Accounting Officer
and Duly Authorized Officer)
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