================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X]X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
- --
ACT OF 1934
For the fiscal quarter ended JuneSeptember 30, 1999
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: 0-25913
COMPS.COM, INC.
(Exact name of registrant as specified in its charter)
DELAWAREDelaware 33-0645337
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization) Identification No.)
9888 CARROLL CENTRE ROAD, SUITE 100
92126-4581
SAN DIEGO, CA (Zip Code)92126-4580
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (858) 578-3000
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.
(1) Yes [X]X No (2) Yes X No
[_]----- ----- ----- ----
The number of shares outstanding of the Registrant's common stock as of JulyOctober
31, 1999, was 11,826,008.
================================================================================11,926,642
COMPS.COM, Inc.
INDEX
Page
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Balance Sheets at June 30, 1999 and
December 31, 1998............................................... 1
Condensed Statements of Operations for the three months
and six months ended June 30, 1999 and 1998..................... 2
Condensed Statements of Cash Flows for the six months
ended June 30, 1999 and 1998.................................... 3
Notes to Condensed Financial Statements........................... 4
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 6
ITEM 3. Quantitative and Qualitative Disclosures About
Market Risk..................................................... 19
PART II - OTHER INFORMATION
ITEM 1. LegaL Proceedings................................................. 19
ITEM 2. Changes in Securities and Use of Proceeds......................... 19
ITEM 3. Defaults upon Senior Securities................................... 20
ITEM 4. Submission of Matters to a Vote of Security Holders............... 20
ITEM 5. Other Information................................................. 20
ITEM 6. Exhibits and Reports on Form 8-K.................................. 21
Signatures..................................................................
COMPS.COM, INC.
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at September
30, 1999 and December 31, 1998............................. 1
Condensed Consolidated Statements of Operations for the three
months and nine months ended September 30, 1999 and 1998... 2
Condensed Consolidated Statements of Cash Flows for
the nine months ended September 30, 1999 and 1998.......... 3
Notes to Condensed Consolidated Financial Statements......... 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS........................ 6
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK................................................ 20
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS............................................ 20
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.................... 20
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.............................. 21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......... 21
ITEM 5. OTHER INFORMATION............................................ 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................. 21
Signatures.............................................................. 22
i
PART I. --- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COMPS.COM, Inc.
COMPS.COM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
JuneSEPTEMBER 30, DecemberDECEMBER 31,
1999 1998
-------- --------
(Note)------------------- --------------------
(NOTE)
Current assets:
Cash and cash equivalents $ 58,43931,778 $ 378
Marketable securities 17,734 -
Accounts receivable 2,0493,328 3,166
Prepaid expenses 462906 184
-------- --------------------------- --------------------
Total current assets 60,95053,746 3,728
Furniture and equipment, net 1,8122,521 1,471
Intangible assets, net 6,1079,246 3,179
Deposits and other assets 3002,384 36
-------- --------
Total assets $ 69,16967,897 $ 8,414
======== =========================== ====================
Current liabilities:
Accounts payable $ 1,856859 $ 531
Accrued liabilities 1,1081,551 1,020
Current portion of long-term debt 1,0421,040 979
Current portion of capital lease obligations 3222 49
Deferred subscription revenue 5,0975,263 5,503
-------- --------------------------- --------------------
Total current liabilities 9,1358,735 8,082
Long-term debt, less current portion 2,4743,844 1,101
Capital lease obligations, less current portion 1311 22
Deferred rent 6773 71
-------- --------------------------- --------------------
Total liabilities 11,68912,663 9,276
Redeemable convertible preferred stock - 7,009
Stockholders' equity (deficit)
Common stock 112114 30
Additional paid-in capital 76,32276,981 7,745
Warrants 514 398
Deferred compensation (3,877)(3,590) (4,487)
Accumulated deficit (15,591)(18,785) (11,557)
-------- ---------------------------- --------------------
Total stockholders' equity (deficit) 57,48055,234 (7,871)
-------- ---------------------------- --------------------
Total liabilities and stockholders' equity (deficit) $ 69,16967,897 $ 8,414
======== =========================== ====================
Note: The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See Notes to Condensed Consolidated Financial Statements.
1
COMPS.COM, Inc.
CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Three Months Six Months
Ended Ended
June 30, June 30,
------------------------- --------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------COMPS.COM, INC.
Condensed Consolidated Statements of Operations
(in thousands, except share and
per share data)
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ------------------------------
1999 1998 1999 1998
---------------------------- ------------------------------
Net revenues $ 3,8854,439 $ 3,3403,359 $ 7,40011,839 $ 6,3659,724
Cost of revenues 1,971 1,305 3,728 2,593
---------- ---------- ---------- ----------2,521 1,468 6,248 4,061
---------------------------- ------------------------------
Gross profit 1,914 2,035 3,672 3,7721,918 1,891 5,591 5,663
Operating expenses:
Selling and marketing 1,603 915 3,009 1,8232,413 979 5,422 2,805
Product development and
engineering 525 318 1,014 529710 395 1,725 925
General and administrative 1,635 713 2,574 1,3731,745 671 4,319 2,040
Amortization of intangible
assets 217 24 400464 - 864 72
Stock-based charges 249 3 578 4
---------- ---------- ---------- ----------252 9 830 13
---------------------------- ------------------------------
Total operating expenses 4,229 1,973 7,575 3,801
Income (loss)5,584 2,054 13,160 5,855
Loss from operations (2,315) 62 (3,903) (29)(3,666) (163) (7,569) (192)
Interest income (expense), net 63 (73) (4) (155)
---------- ---------- ---------- ----------472 (38) 468 (193)
---------------------------- ------------------------------
Net loss (2,252) (11) (3,907) (184)(3,194) (201) (7,101) (385)
Dividend accretion on preferred - (119) (435) (334)
stock
(343) (137) (435) (224)
---------- ---------- ---------- -------------------------------------- ------------------------------
Net loss attributable to common
stockholders $ (2,595)(3,194) $ (148)(320) $ (4,342)(7,536) $ (408)
========== ========== ========== ==========(719)
============================ ===============================
Net loss per share attributable
to common stockholders, basic $(.27) $(.09) $(.94) $(.20)
and diluted
$ (0.30) $ (0.04) $ (0.72) $ (0.12)
========== ========== ========== ====================================== ================================
Shares used in computing net loss
per share, basic and diluted 8,553,648 3,513,507 6,057,459 3,507,600
========== ========== ========== ==========11,850,163 3,526,199 8,009,578 3,513,867
============================ ================================
See Notes to Condensed Consolidated Financial Statements.
2
COMPS.COM, Inc.
COMPS.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Six Months Ended
JuneNINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------------------------------------------------------------------------------
1999 1998
--------- ------------------------------------ ----------------------------
OPERATING ACTIVITIESOperating activities
Net loss $(7,101) $ (3,907) $ (184)(385)
Adjustments to reconcile net loss to net cash (used in) provided
by operating activities:
Depreciation and amortization 751 3361,488 519
Compensation expense related to stock options 578 4830 13
Interest expense related to warrants 115 -
Provision for bad debts 66 26584 235
Interest imputed on note payable 30 2546 35
Changes in operating assets and liabilities, net of effects from
acquisitions:
Accounts receivable 720 1,134(444) (340)
Prepaid expenses (276) 41(719) 33
Deposits and other assets (274) -(250) 4
Accounts payable 1,325248 50
Accrued liabilities 89 (13)395 (60)
Deferred subscription revenue (153) (579)(109) 596
Deferred rent (5) (45)
--------- ---------2 (24)
---------------------------- --------------------------------
Net cash (used in) provided by operating activities (941) 1,034
--------- ---------(5,415) 676
============================ ================================
INVESTING ACTIVITIES
Investment in marketable securities (short and long-term) (19,830) -
Purchases of furniture and equipment (668) (484)(1,623) (786)
Purchases of intangible assets (1,913)various entities, net of cash acquired (3,202) -
--------------------------- -------------------------------
Net cash used in investing activities (2,581) (484)
--------- ---------(24,655) (786)
============================ ================================
FINANCING ACTIVITIES
Proceeds from notes payable 4003,400 -
Repayment of notes payable (345) (272)(3,648) (387)
Principal payments under capital lease obligations (27) (33)(39) (49)
Proceeds from sale of preferred stock, net of issuance costs - 1,137
Proceeds from exercise of common stock options 250 -and shares
issued in connection with Employee Stock Participation Plan 485 10
Proceeds from issuance of common stock, net of issuance costs 61,30561,272 -
--------- ------------------------------------ -------------------------------
Net cash provided by financing activities 61,583 832
--------- ---------61,470 711
--------------------------- -------------------------------
Net increase in cash and cash equivalents 58,061 1,38231,400 601
Cash and cash equivalents at beginning of period 378 352
--------- ------------------------------------ ------------------------------
Cash and cash equivalents at end of period $ 58,43931,778 $ 1,734
========= =========953
=========================== ==============================
SUPPLEMENTAL SCHEDULE OF NONCASHNON-CASH INVESTING AND FINANCING
ACTIVITIES:
Subordinated convertible noteNotes payable issued in connection with acquisition
of Inside Prospects of Californiavarious acquisitions $ 1,3503,007 $ -
========= ==================================== ==============================
See Notes to Condensed Consolidated Financial Statements.
3
COMPS.COM, Inc.
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNENotes to Condensed Consolidated Financial Statements
SEPTEMBER 30, 1999
1) Basis of Presentation --- The accompanying unaudited condensed consolidated
financial
--------------------- statements of COMPS.COM, Inc. (the "Company") have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the sixnine month
period ended JuneSeptember 30, 1999 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1999. These financial
statements should be read in conjunction with the financial statements and
notes thereto, together with management's discussion and analysis of
financial condition and results of operations, contained in the Company's
Registration Statement on Form S-1.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect amounts reported in the condensed consolidated financial
statements and related notes. Changes in those estimates may affect amounts
reported in future periods. Certain reclassifications have been made to
amounts included in the prior year's financial statements to conform to the
financial statement presentation for the three and sixnine month periods ended
JuneSeptember 30, 1999.
2) Revenue Recognition --- The Company recognizes product and related services
-------------------
revenue at the time of shipment or performance of services. A substantial
portion of the Company's revenuesrevenue come from subscription sales. Subscriptions
are recorded as accounts receivable and as deferred revenues at the time the
customer is invoiced. The Company provides an allowance for bad debts and
cancellations when accounts receivable and deferred revenuesrevenue are recorded.
Subscription revenue, net of reserve for cancellations, is recognized over
the subscription term.
In addition, the Company obtains fixed fees from its transaction support
services. The services provided include the development and hosting of a
specific Web site for a listed property and sending announcements via fax and
e-mail to potential buyers. The revenue from these services is recognized
ratably over the hosting period, which typically is one to four months.
Revenue from sponsors whose messages and links are located on the Company's
Web site or contained in the broadcast e-mail or fax to potential buyers is
recognized ratably over the period that the messages or links are displayed
or broadcast, provided that no significant Company obligations remain. In
certain circumstances, the Company may be obligated to provide a minimum
number of broadcasts or impressions. In these circumstances, the Company
recognizes revenue at the lesser of the ratio of impressions or broadcasts
delivered over the total guaranteed impressions or broadcasts or the
straight-line basis over the term of the agreements.
4
3) Segment Information --- The Company's reportable segments are business units
-------------------
that offer different products and services. The Company's transaction support
activity began in the third quarter of 1998, and therefore only the
information for the three month and sixnine month periods ended JuneSeptember 30,
1999 is included below.
Three Months Six Months
Ended JuneSeptember 30,
-----------------------------------------------------------------------------
1999 Ended June 30, 1999
-------------------------- --------------------------1998
------------------------------------- ----------------------------------
Transaction Transaction
Information Support Information Support
Services Services Services Services
----------- ----------- ----------- -----------
In Thousands In Thousands(In Thousands)
RevenuesRevenue from external customerscustomer $ 3,8574,412 $ 2827 $3,359 $ 7,315 $ 85-
Intersegment revenuesRevenues - - - -
Segment loss (1,555) (697) (2,610) (1,297)(2,363) (831) (171) (30)
Segment assets 5,061 2,858 5,061 2,8589,050 2,717 1,524 -
Nine Months Ended September 30,
-----------------------------------------------------------------------------
1999 1998
------------------------------------- -------------------------------------
Transaction Transaction
Information Support Information Support
Services Services Services Services
(In Thousands)
Revenue from external customer $11,727 $ 112 $9,724 $ -
Intersegment Revenues - - - -
Segment loss (4,973) (2,128) (355) (30)
Segment assets 9,050 2,717 1,524 -
4) Loss Per Share Data -- Basic- Basis and diluted net loss per share are computed
-------------------
using the weighted average number of Class AA. and Class B common shares
outstanding. The Class B non-voting common stock automatically converted
into Class A common stock upon the closing of the Company's initial public
offering, and was thereafter known as common stock. Options and warrants
were not included in the computation of diluted net loss per share because
the effecteffects would be antidilutive.
Upon the closing of the Company's initial public offering, all of the redeemable
convertible preferred stock outstanding as of the closing date was automatically
converted into an aggregate of 3,600,110 shares of common stock.
5) Initial Public Offering --- On May 10, 1999, the Company closed its initial
-----------------------
public offering by selling to the underwriters 4,500,000 shares of its
common stock for aggregate net proceeds of $61.3 million.
6) Acquisition of Assets --Acquisitions - On June 16,August 9, 1999, the Company acquired
--------------------- substantially all of
the assets of Inside Prospects of California.The Baca Information Group. The Company paid a total of
$3.2 million$1,060,000 for the assets, which included $1,650,000$300,000 in cash $1,350,000 inat the formclosing
and $60,000 of the purchase price as a subordinated convertible
note,hold back for any indemnity claims,
assumption of liability for$173,000 of certain liabilities (including deferred
subscription revenue of $127,300$17,000), acquisition costs of $ 33,000, and stock
options valued at $494,000.
On August 27, 1999, the Company acquired a) all of the outstanding stock of
Sendero Investments, Inc., b) all of the outstanding stock of Parramore,
Inc., and c) substantially all of the assets pertaining to the operations of
the Commercial Brokers Network business of ARA-D/FW, Inc. The Company paid a
total of $2,749,000 for these investments, which included $843,000 in cash,
four notes payable totaling $1,657,000, assumption of deferred subscription
revenue of $67,000, plus assumption of other liabilities of $61,000 and
acquisition costs of $52,700.$121,000.
7) Subsequent Event-On November 3, 1999, the Company and CoStar Group, Inc.
entered into a definitive agreement for a strategic business combination
which will be effected by the merger of COMPS.COM into a wholly owned
subsidiary of CoStar. The note is payablemerger agreement provides that each holder of a
share of COMPS.COM common stock may elect to receive either $7.50 in full on June 16,
2003, bears interest at 8% per annum payable monthly during the termcash or
0.31496 shares of CoStar common stock, but these elections will be adjusted
so that 50.1% of the note,COMPS.COM shares receive CoStar common stock and may be converted at the option49.9%
of the note holder into common stock
of the Company at any time after December 16, 2000 at $20 per share. The
intangible assets will be amortized over their estimated useful lives,
ranging from two to five years. The Company allocated the purchase price,
based upon management's best estimate as follows:
Current assets acquired $ 39,900
Furniture and equipment 24,200
Intangible assets 3,115,900
----------
Net purchase price $3,180,000
==========COMPS.COM shares receive cash.
5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion may contain forward-looking statements that involve risks and
uncertainties. Our actual results may differ materially from the results
discussed in such forward-looking statements. Factors that might cause such a
difference include, but are not limited to, those discussed in "Risks and
Uncertainties" below. We undertake no obligation to release publicly the
results of any revisions to these forward-looking statements to reflect events
or circumstances arising after the date hereof.
RECENT DEVELOPMENTS
In MayOn August 9, 1999, we completed our initial public offering of 4,500,000 shares
of common stock, providing us with proceeds, net of underwriting fees and
offering expenses totaling $6.2 million, of approximately $61.3 million.
In June 1999, wethe Company acquired substantially all of the assets of
Inside
ProspectsThe Baca Information Group. The Company paid a total of California.$1,060,000 for the
assets, which included $300,000 in cash at the closing, a hold back of $60,000
of the purchase price for any indemnity claims, assumption of $173,000 of
certain liabilities (including deferred subscription revenue of $17,000)
acquisition costs of $33,000, and stock options valued at $494,000.
The assettotal purchase price of $1,060,000, including acquisition costs of
$33,000 was allocated, based upon management's best estimate of expected future
results of the acquired assets, as follows:
Current assets $ 76,000
Furniture and equipment 10,000
Intangible assets 974,000
----------
$1,060,000
==========
The intangible assets are being amortized over estimated useful lives
ranging from three to five years.
On August 27, 1999, the Company acquired 1) all of the outstanding stock of
Sendero Investments, Inc., a Texas corporation ("Sendero"), 2) all of the
outstanding stock of Parramore, Inc., a Texas corporation ("Parramore"), and 3)
substantially all of the assets pertaining to the operations of the Commercial
Brokers Network business ("CBN") of ARA-D/FW, Inc., a Texas corporation. The
acquisitions were consummated on the terms set forth in the respective Stock
Purchase Agreements and Asset Purchase Agreement between the Company and Robert J.
Larking, dba Inside Prospects. Inside Prospects, whichdated August 27, 1999. Sendero
entered into a joint venture with ARA-D/FW to operate CBN. CBN is based in San Diego,
provides tenant database services in San Diego, Orange, Los Angeles, Riverside,
Ventura, and San Bernardino counties toa
comprehensive, internet-delivered, interactive, commercial real estate firmsresearch
and other
businesses. Aslistings service subscribed to by members involved in the commercial real
estate business in Central Texas. Parramore is in the business of June 1, 1999, Inside Prospects had approximately 24 full-time
equivalent employees.publishing and
selling the Flick Report, a bi-monthly Central Texas commercial real estate
trade journal.
Under the terms of the asset purchase agreement,Stock Purchase Agreement for Sendero, the Company
paid a total of $3.2 million$629,748 at the closing, including $1,650,000$223,058 of which was in cash $1,350,000and
$406,690 of which was in the form of a subordinated convertible note ("Sendero
Note"). The Sendero Note bears interest at 7% per annum payable monthly,
matures in August 2003, and can only be converted into common stock of the
Company if the Company defaults under the terms of the Sendero Note. During the
period in which a default under the terms of the Sendero Note has not been
cured, the number of shares of the Company's common stock issuable upon such a
conversion shall equal (i) the outstanding balance of the principal and accrued
interest of the Sendero Note at the time of conversion, divided by (ii) the
average of the closing prices of a share of the Company's common stock on the
Nasdaq National Market for thirty consecutive trading days ending on the trading
day immediately preceding the day of the default event.
Under the terms of the Stock Purchase Agreement for Parramore, the Company
paid a total of $980,560 at the closing, $347,316 of which was in cash and
$633,244 of which was in the form of a subordinated convertible note ("Parramore
Note"). The Parramore Note bears interest at 7% per annum payable monthly,
matures in August 2003, and can only be converted into common stock of the
Company if the Company defaults under the terms of the Parramore Note. During
the period in which a default under the terms of the Parramore Note has not been
cured, the number of shares of the Company's common stock issuable upon such a
conversion shall equal (i) the outstanding balance of the principal and accrued
interest of the Parramore Note at the time of conversion, divided by (ii) the
average of the closing prices of a share of the Company's common stock on the
Nasdaq National Market for thirty consecutive trading days ending on the trading
day immediately preceding the day of the default event.
Under the terms of the Asset Purchase Agreement for ARA-D/FW, Inc., the
Company paid a total of $889,692 (plus the assumption of liability for deferred
subscription revenuecertain liabilities not
to exceed $100,000) at the closing, $272,626 of $127,300which was in cash and acquisition costs$617,066
of $52,700.which was in the form of two subordinated convertible notes ("Notes") in the
amounts of $497,066 and $120,000. The note is
payable in full on June 16, 2003,the amount of $497,066 bears
interest at 8% per annum payable monthly, duringrequires semi-annual installments of
principal of $62,133, and matures in August 2003. The note in the termamount of
6
$120,000 bears interest at 8% per annum and is due in two equal payments of
principal plus accrued interest in February 2000 and August 2000. The Notes can
only be converted into common stock of the note,Company if the Company defaults under
the terms of the Notes. During the period in which a default under the terms of
the Notes has not been cured, the number of shares of the Company's common stock
issuable upon such a conversion shall equal (i) the outstanding balance of the
principal and accrued interest of the Notes at the time of conversion, divided
by (ii) the average of the closing prices of a share of the Company's common
stock on the Nasdaq National Market for thirty consecutive trading days ending
on the trading day immediately preceding the day of the default event.
The total purchase price of $2,749,000, including acquisition costs of
$121,000 assumption of deferred subscription revenue of $67,000 plus assumption
of other liabilities of $61,000 was allocated, based upon management's best
estimate of expected future results of the acquired assets, as follows:
Current assets $ 164,000
Furniture and equipment 30,000
Other assets 3,000
Intangible assets 2,552,000
----------
$2,749,000
==========
The intangible assets are being amortized over estimated useful lives
ranging from three to five years.
On November 3, 1999, the Company and CoStar Group, Inc. entered into a
definitive agreement for a strategic business combination between COMPS.COM and
CoStar which will be effected by the merger of COMPS.COM into a wholly owned
subsidiary of CoStar. The merger agreement provides that each holder of a share
of COMPS.COM common stock may elect to receive either $7.50 in cash or 0.31496
shares of CoStar common stock, but these elections will be adjusted so that
50.1% of the COMPS.COM shares receive CoStar common stock and 49.9% of the
COMPS.COM shares receive cash. The merger agreement allows COMPS.COM to consider
unsolicited acquisition proposals and may be converted atterminated in the option of Mr. Larking
into common stock at any time after December 16, 2000 at $20 per share.event COMPS.COM
accepts a superior proposal and pays CoStar a fee.
OVERVIEW
In January 1982, we first began providing sales information on commercial
properties in San Diego County. From 1982 through 1985, we expanded our coverage
throughout Southern California to Orange, Riverside, San Bernardino and Los
Angeles counties and to Phoenix and Tucson, Arizona. We continued our geographic
expansion from 1987 through 1992 with coverage of Northern California, Las Vegas
and Seattle. During the period from June 1994 through JuneSeptember 1999, we further
broadened our geographic reach to cover additional key markets including
Washington D.C., New York, Chicago, Boston, Atlanta, Denver, Baltimore,
Dallas/Fort Worth, Miami, Austin, Portland, Philadelphia, Newark, San Antonio,
Detroit, Cincinnati and San
Antonio.St. Louis. This expansion was driven by both internal
growth and acquisitions.
We originally offered paper-based commercial real estate transaction
information. In 1986, we introduced our CallCOMPS service, which permitted
customers to call in and obtain sales transaction information, and, in 1990, we
introduced a DOS-based subscription product. Through 1996, the majority of our
revenues continued to come from print subscriptions. In October 1996, we began
to offer our services on CD-ROM, allowing for the computerized manipulation of
data to provide more customized reports. During 1997, we discontinued almost all
of our print subscriptions and converted our customers to our CD-ROM services.
As a result, we provided a larger provision for cancellations in 1997 than in
1996. In 1998, our provision for cancellations was reduced to a level that was
more in line with our historical experience. Most recently, in January 1998, we
began to offer our information services on the Internet. This has allowed our
customers to receive updated commercial real estate transaction information more
frequently and analyze the data more quickly and easily. Delivery of our
information on the Internet and other electronic media has provided additional
value to customers, resulting in increased revenues from subscriptions and one-
time, fee-based transactions. For the sixnine month period ended JuneSeptember 30,
1999, approximately 24%31% of revenues were a result of services and products
ordered or delivered on the Internet as compared to approximately 3%7% in the same
period of 1998. In addition, for the sixnine month period ended JuneSeptember 30, 1999
approximately 12%10% of revenues were derived from Internet-related transactions
such as file transfer protocol (FTP) downloading, resulting in total Internet-relatedInternet-
related revenues of 36%41% of net revenues for the first sixnine months of 1999. We
expect this percentage to increase as more of our customers transition to using
our services and products on the Internet.
67
In November 1998, we acquired the assets of REALBID, LLC, a real estate
marketing services company whichthat supports commercial real estate transactions on
the Internet. In June 1999, we acquired the assets of Inside Prospects of
California, a company that provides tenant database services in Southern
California. In August 1999, we acquired 1) the assets of The Baca Information
Group, a company that provides real estate information services in Houston,
Texas, 2) all of the outstanding stock of Sendero, 3) all of the outstanding
stock of Parramore, and 4) all of the assets pertaining to the CBN operations of
ARA-D/FW, Inc. Sendero entered into a joint venture with ARA-D/FW to operate
CBN. CBN is a comprehensive, internet-delivered, interactive, commercial real
estate research and listings service subscribed to by members involved in the
commercial real estate business in Central Texas. Parramore is in the business
of publishing and selling the Flick Report, a bi-monthly Central Texas
commercial real estate trade journal.
The purchase price of the acquisitionthese acquisitions totaled approximately
$3.4
million,$10,577,000 of which consisted of $163,000 in cash, stock options granted$10,177,000 was allocated to the
principals valued at approximately $3.1 million and acquisition costs of
$54,000. Intangible assets of $3.3 million were recorded as a result of this
acquisition. These intangible assets will bethat are
being amortized over their estimated useful lives, ranging from three to five
years.
In the first sixnine months of 1999, we amortized $381,000$864,000 relating to thethese
intangible assets of REALBID, LLC. and Inside Prospects of California.assets. We currently expect to amortize the following amounts
relating to the intangible assets of REALBID, LLC and Inside Prospects of Californiathese acquisitions in the future: the
remainder of 1999--$731,000;576,000; 2000--$1,462,000; $2,307,000; 2001--$1,325,000;2,169,000; 2002--$1,133,000;
$1,895,000; 2003--$1,016,000;1,631,000; 2004--$246,000, 2005--$65,000.617,000.
Substantially all of our revenues have been derived from licensing our
sales comparable information, either on a subscription or a per use basis, both
offline and, to a lesser extent, on the Internet. In the first sixnine months of
1999, approximately 74%73% of our information licensing revenue was derived from
subscription contracts and approximately 26%27% was derived from fees paid on a per
use basis. The subscription licenses range from one to three years and generally
renew automatically for successive one-year terms. Many of the license rates
increase at the time of renewal. Subscribers pay contract license fees on an
annual, semi-annual, quarterly or monthly basis in advance of their license
term. We recognize this revenue on a straight line basis over the life of the
contract. Accordingly, contract license fees which are invoiced from a new
contract or upon contract renewal result in deferred revenue.
Since our November 1998 acquisition of REALBID, LLC, we have also begun to
derive revenues from our transaction support products. In the first sixnine months
of 1999, these revenues totaled approximately $85,000.$112,000. We derive all of our
transaction support product revenues from the delivery of products on the
Internet. We recognize these revenues as products are provided.
InIf our recently announced proposed merger with CoStar Group, Inc. (the
"CoStar Merger") is not able to be completed, in order to expand our operations,
we anticipate incurring additional expenses to:
. implement new Internet-related products;
. develop new databases;
. continue the integration of our REALBID products with our database;
. further automate our data collection process;
. acquire other companies; and
. integrate acquired databases into our standardized format.
WeIf the Costar Merger is not completed, we also intend to hire additional
programmers and research employees as needed to implement our product
development efforts and to continue to expand our database of commercial real
estate. In addition, we intend to further expand our sales force and marketing
team to develop new and existing strategic relationships and strengthen our
brand name as we enter new markets. Lastly, we anticipate incurring additional
costs related to being a public company, including directors' and officers'
liability insurance, investor relation programs and professional service fees.
As a result of these expenditures and other related factors, we expect to
continue to incur losses for the foreseeable future.
We have incurred significant net losses since our inception. As of JuneSeptember
30, 1999, we had an accumulated deficit of $15.6$18.8 million. Also, in connection
with the grant of 744,200 stock options to employees from February through
November 1998, we recorded deferred compensation of approximately $4.7 million
for the year ended December 31, 1998, representing the difference between the
fair value of our common stock for accounting purposes and the exercise price of
such options at the date of grant. Such amount is presented as a reduction of
stockholders' equity and amortized over the vesting period of the applicable
options, which is generally five years. In the first sixnine months of 1999, we
recorded $513,000$765,000 in stock-based compensation expense related to these stock
options and expect to record the following amounts in the future: the remainder
of 1999--$516,000;256,000; 2000--
$1,032,000;$1,025,000; 2001--$1,032,000;1,025,000; 2002--$935,000;928,000; and
2003--$360,000.
7356,000.
8
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data
expressed as a percentage of net revenues for the periods indicated:
Three Months Ended Six Months Ended
JuneTHREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, JuneSEPTEMBER 30,
-------------------------------- --------------------------------------------------------------------- --------------------------------------
1999 1998 1999 1998
--------- --------- --------- -------------------------- ------------------ ------------------ ---------------
Net revenuesrevenues.......................... 100% 100% 100% 100%
Cost of revenues 51% 39% 50% 41%
--------- --------- --------- ---------revenues...................... 57% 44% 53% 42%
----------------- ------------------ ------------------ ---------------
Gross profit 49% 61% 50% 59%profit.......................... 43% 56% 47% 58%
Operating expenses:
Selling and marketing 41% 27% 41%marketing................ 54% 29% 46% 28%
Product development and engineering 14% 10% 14% 8%engineering.. 16% 11% 15% 9%
General and administrative 42%administrative........... 39% 20% 36% 21% 35% 22%
Amortization of intangiblesintangibles.......... 10% - 7% 1%
Stock-based charges.................. 6% 1% 5%7% 1%
Stock-based charges 6% - 8% ------------------ ------------------ ------------------ ---------------
Total operating expenses 109% 59% 103%expenses............ 125% 61% 111% 60%
--------- --------- --------- ---------
Income (loss)----------------- ------------------ ------------------ ---------------
Loss from operations (60)operations.................. (82)% 2% (53)(5)% (1)(64)% (2)%
Interest income (expense), net 2% (3)net........ 10% (1)% -4% (2)%
--------- --------- --------- -------------------------- ------------------ ------------------ ---------------
Net loss (58)loss.............................. (72)% (1)(6)% (53)(60)% (3)(4)%
========= ========= ========= ========================== ================== ================== ===============
COMPARISON OF THREE MONTHS ENDED JUNESEPTEMBER 30, 1999 AND 1998
- -------------------------------------------------------
NET REVENUES
Our net revenues for the three months ended JuneSeptember 30, 1999 were $3.9$4.4
million, an increase of approximately $545,000$1.08 million or 16%32% from the same period
in 1998. The increase was primarily due to an increase in subscriptions as a
result of geographic expansion and further penetration of our existing markets,
and
increased revenues from our Internet products.products, and the addition of revenues from
recent acquisitions. We had no customer that accounted for more than 10% of our
net revenues in the three months ended JuneSeptember 30, 1999 or 1998.
COST OF REVENUES
Cost of revenues consists of compensation and benefits for research
personnel and research supplies. Our cost of revenues for the quarter ended
JuneSeptember 30, 1999 was $2.0$2.5 million, an increase of approximately $666,000$1.05 million
or 51%72% from the same period in 1998. Payroll and related costs contributed to
approximately 48%64% of the dollar increase in the secondthird quarter of 1999 as
compared to the secondthird quarter of 1998. The increase in dollar amount was also
due to an increase in sales transaction volume, geographic expansion and the
hiring of additional research employees. Cost of revenues as a percentage of
net revenues increased to 52%57% for the quarter ended JuneSeptember 30, 1999 from 39%44%
for the quarter ended JuneSeptember 30, 1998. The percentage increase was due to
hiring of additional personnel for expansion into new markets.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses consist of compensation and benefits for
sales and marketing personnel, as well as sales commissions to our direct sales
force. Our selling and marketing expenses for the three months ended JuneSeptember
30, 1999 were $1.6$2.4 million, an increase of approximately $688,000$1.43 million or 75%146%
from the same period in 1998. Approximately 65%56% of the dollar increase was
attributable to salaries and wages for additional sales and marketing employees.employees
and 15% was attributable to promotion and marketing expense. As a percentage of
net revenues, such expenses increased to 41%54% for the quarter ended JuneSeptember 30,
1999 from 27%29% for the quarter ended JuneSeptember 30, 1998. The percentage increase
in 1999 was primarily due to salaries and wages for additional sales and
marketing employees.
89
PRODUCT DEVELOPMENT AND ENGINEERING EXPENSES
Product development and engineering expenses consist primarily of
compensation and benefits for software engineers and quality assurance personnel
and expenses for contract programmers and developers. Our product development
and engineering expenses for the three months ended JuneSeptember 30, 1999 were
$525,000,$710,000, an increase of approximately $207,000$315,000 or 65%80% from the same period in
1998. As a percentage of net revenues, product development and engineering
expenses increased to 14%16% for the quarter ended JuneSeptember 30, 1999 from 10%12% for
the quarter ended JuneSeptember 30, 1998. The dollar and percentage increases were
primarily due to the hiring of additional software engineers and quality
assurance personnel for development of new Internet-related products.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses consist primarily of compensation and
benefits for finance and administrative personnel, professional fees, insurance
expenses and charges relating to merchant credit card fees and bad debts. Our
general and administrative expenses for the quarter ended JuneSeptember 30, 1999
were $1.6$1.7 million, an increase of approximately $922,000$1.07 million or 129%160% from the
same period in 1998. This dollar increase in general and administrative
expenses was due to the hiring of additional personnel, and an increase in legal and
accounting expenses related to potential acquisitions.acquisition activity, and an increase in
expenses relating to additional office space. As a percentage of net revenues,
such expenses increased to 42%39% for the quarter ended JuneSeptember 30, 1999 from 21%20%
for the quarter ended JuneSeptember 30, 1998. The increases in dollar expenses and
expenses as a percentage of net revenues were primarily due to increases in
payroll expense and professional fees.
AMORTIZATION OF INTANGIBLE ASSETS
Amortization of intangible assets consists of amortization expense related
to subscription contracts, databases, customer lists and goodwill of acquired
companies or operations. Amortization of intangible assets increased $193,000$464,000
in the quarter ended JuneSeptember 30, 1999 compared to the same period in 1998.
The increase is primarily due to amortization of the intangible assets of
REALBID acquired in November 1998.1998 and Inside Prospects of California acquired in
June 1999.
STOCK-BASED CHARGES
Stock-based charges consist primarily of compensation expense related to
the grant of 744,200 stock options to employees from February through November
1998. In connection with this grant we recorded deferred compensation of
approximately $4.7 million for the year ended December 31, 1998, representing
the difference between the fair value of our common stock and the exercise price
of such options at the date of grant.
INTEREST INCOME (EXPENSE)Interest Income (Expense), NETNet
Interest income (expense), net consists primarily of interest income earned
on investments from the proceeds from our initial public offering offset by
interest expense on our debt. Total interest income (expense), net for the three
months ended JuneSeptember 30, 1999 was $63,000,$472,000, an increase of approximately
$136,000$510,000 from the same period in 1998. The increase in interest income
(expense), net was primarily due to interest earned on proceeds from our initial
public offering.
COMPARISON OF SIXNINE MONTHS ENDED JUNESEPTEMBER 30, 1999 AND 1998
- -----------------------------------------------------
NET REVENUESNet Revenues
Our net revenues for the sixnine months ended JuneSeptember 30, 1999 were $7.4$11.8
million, an increase of approximately $1.0$2.1 million or 16%22% from the same period
in 1998. The increase was primarily due to an increase in subscriptions as a
result of geographic expansion and further penetration of our existing markets
and increased revenues from our 9
Internet products.products, and the addition of revenues
from recent acquisitions. We had no customer that accounted for more than 10%
of our net revenues in the sixnine months ended JuneSeptember 30, 1999 or 1998.
10
COST OF REVENUES
Cost of revenues consists of compensation and benefits for research
personnel and research supplies. Our cost of revenues for the sixnine months ended
JuneSeptember 30, 1999 was $3.7$6.2 million, an increase of approximately $1.1$2.18 million
or 44%54% from the same period in 1998. Payroll and related costs contributed to
approximately 68%66% of the dollar increase in the sixnine months ended JuneSeptember 30,
1999 as compared to the same period of 1998. The increase in dollar amount was
due to an increase in sales transaction volume, geographic expansion and the
hiring of additional research employees. Cost of revenues as a percentage of
net revenues increased to 50%53% for the sixnine months ended JuneSeptember 30, 1999 from
41%42% for the sixnine months ended JuneSeptember 30, 1998. The percentage increase was
due to hiring of additional personnel for expansion into new markets.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses consist of compensation and benefits for
sales and marketing personnel, as well as sales commissions to our direct sales
force. Our selling and marketing expenses for the sixnine months ended JuneSeptember
30, 1999 were $3.0$5.4 million, an increase of approximately $1.2$2.6 million or 65%93%
from the same period in 1998. Approximately 69%62% of the dollar increase was
attributable to salaries and wages for additional sales and marketing employees.employees,
and 10% was attributable to promotion and marketing expense. As a percentage of
net revenues, such expenses increased to 41%46% for the sixnine months ended JuneSeptember
30, 1999 from 29% for the sixnine months ended JuneSeptember 30, 1998. The percentage
increase in 1999 was primarily due to salaries and wages for additional sales
and marketing employees.
PRODUCT DEVELOPMENT AND ENGINEERING EXPENSES
Product development and engineering expenses consist primarily of
compensation and benefits for software engineers and quality assurance personnel
and expenses for contract programmers and developers. Our product development
and engineering expenses for the sixnine months ended JuneSeptember 30, 1999 were $1.0$1.7
million, an increase of approximately $485,000$800,000 or 92%86% from the same period in
1998. As a percentage of net revenues, product development and engineering
expenses increased to 14%15% for the sixnine months ended JuneSeptember 30, 1999 from 8%10%
for the sixnine months ended JuneSeptember 30, 1998. The dollar and percentage
increases were primarily due to the hiring of additional software engineers and
quality assurance personnel for development of new Internet-related products.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses consist primarily of compensation and
benefits for finance and administrative personnel, professional fees, insurance
expenses and charges relating to merchant credit card fees and bad debts. Our
general and administrative expenses for the sixnine months ended JuneSeptember 30, 1999
were $2.6$4.3 million, an increase of approximately $1.2$2.28 million or 87%112% from the
same period in 1998. This dollar increase in general and administrative expenses
was due to the hiring of additional personnel, and an increase in legal and
accounting expenses related to potential acquisitions.acquisition activity, and an increase in expenses
relating to additional office space. As a percentage of net revenues, such
expenses increased to 35%36% for the sixnine months ended JuneSeptember 30, 1999 from 22%21%
for the sixnine months ended JuneSeptember 30, 1998. The increases in dollar expenses
and expenses as a percentage of net revenues were primarily due to increases in
payroll expense and professional fees.
AMORTIZATION OF INTANGIBLE ASSETS
Amortization of intangible assets consists of amortization expense related
to subscription contracts, databases, customer lists and goodwill of acquired
companies or operations. Amortization of intangible assets increased $328,000$792,000
in the sixnine months ended JuneSeptember 30, 1999 compared to the same period in 1998.
The increase is primarily due to amortization of the intangible assets of
REALBID.
10
REALBID and Inside Prospects of California.
STOCK-BASED CHARGES
Stock-based charges consist of compensation expense related to the grant of
744,200 stock options to employees from February through November 1998. In
connection with this grant we recorded deferred compensation of approximately
$4.7 million for the year ended December 31, 1998, representing the difference
between the fair value of our common stock and the exercise price of such
options at the date of grant.
11
INTEREST INCOME (EXPENSE), NET
Interest income (expense), net consists primarily of interest income earned
on investments from the proceeds from the initial public offering offset by
interest expense on our debt. Total interest income (expense), net for the sixnine
months ended JuneSeptember 30, 1999 was ($4,000), a decrease$468,000, an increase of $151,000$661,000 from the
same period in 1998. The decreaseincrease in interest income (expense), net was
primarily due to interest earned on proceeds from the initial public offering.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations primarily through the
private placement of equity securities, borrowing arrangements and cash flow
from operations. In May 1999, we completed the sale of 4,500,000 shares of
common stock priced at $15.00 per share for an aggregate offering price of $67.5
million in an initial public offering. As of JuneSeptember 30, 1999, we had
approximately $58.4$51.6 million in cash, and cash equivalents and marketable securities,
an increase of approximately $58.0$51.2 million from $378,000 at December 31, 1998.
The increase was attributable to the proceeds of the offering, after deducting
underwriting fees and offering expenses.
For the sixnine months ended JuneSeptember 30, 1999, net cash used in operating
activities was $941,000$5.4 million compared to net cash provided by operating
activities of $1.0 million$676,000 for the same period in 1998. Net cash used in operating
activities consisted mostly of loss from operations, increases in prepaid
expenses, deposits and other assets and accounts receivable, partially offset by decreases in accounts
receivable,
increases in accounts payable, accrued liabilities and non cash charges such as
depreciation and amortization, compensation expense related to stock options,
interest expense related to warrants, provision for bad debts and imputed
interest on notes payable.
Net cash used in investing activities was $2.6$24.7 million for the sixnine months
ended JuneSeptember 30, 1999 and $484,000$786,000 for the same period in 1998. In 1998, our
investing activities consisted mostly of capital expenditures for computer
equipment and furniture. In 1999, our investing activities included capital
expenditures of $668,000$1.6 million, investment in marketable securities of $19.8
million, and the acquisition of Inside Prospects of California, the Real Estate Transaction Journal, AOBR, Inc.,
Inside Prospects of California, The Baca Information Group, Sendero Investments,
Inc., Parramore, Inc., and AOBR,ARA-D/FW, Inc. for $1.9an aggregate of $3.2 million.
Net cash provided by financing activities was $61.6$61.5 million for the sixnine
months ended JuneSeptember 30, 1999 and $832,000$711,000 for the same period in 1998. In
1998, net cash provided by financing activities resulted primarily from the
private placement of equity securities. Net cash provided by financing
activities in 1999 resulted almost entirely from the net proceeds relating to
our initial public offering. In April 1999, we entered into a $3.0 million
loan agreement with Silicon Valley Bank. This agreement provided $3.0 million
for working capital. Borrowings under this agreement were repaid on the closing
of our initial public offering. In connection with this loan, we issued
warrants exercisable for 14,670 shares of common stock with an exercise price of
$6.82 per share. The warrants expire in April 2006.
Our capital requirements depend on numerous factors, including our
geographic and product expansions, investments in our Web site and other
factors. We have experienced a substantial increase in our capital expenditures
and operating expenses since our inception consistent with our growth in
operations and staffing, and anticipate that this trend will continue for the
foreseeable future. As of JuneSeptember 30, 1999, our capital commitments for the
next twelve months included approximately $563,000$1,192,000 for operating leases,
$32,000$22,000 in capital leases and $1,073,000$1,040,000 for current debt. We had no material
commitments for capital expenditures at JuneSeptember 30, 1999, but we expect such
expenditures to be at least $2.0$1.0 million through the remainder of 1999. Such
expenditures will be primarily for computer equipment, furniture and fixtures
and leasehold improvements. We expect our expenses to
11
continue to increase as
we continue to evaluate possible strategic acquisitions, products and
technologies, expand our sales and marketing programs and conduct aggressive
brand promotions. Selling and marketing expenses and research and development
expenses are expected to increase in 1999 as a percentage of net revenues.
In September 1996, we entered into a $3.0 million loan agreement with
Venture Lending & Leasing, Inc. In connection with this loan agreement, we
issued to Venture Lending & Leasing, Inc. a warrant to purchase 156,285 shares
of our common stock at an exercise price of $2.40 per share, subject to
antidilutive adjustments. The warrant may be exercised in whole or in part at
any time. The warrant expires in September 2003. On June 30, 1999, the loan
agreement expired.
12
In February 1999, we entered into an additional $1.8 million loan agreement
with Venture Lending & Leasing, Inc. This agreement permits the use of funds for
either fixed asset acquisition or working capital. Under this loan agreement,
borrowings for fixed assets acquisition are due 48 months from the date of
disbursement and borrowings for working capital are due 36 months from the date
of disbursement. This loan agreement requires payment of 8.75% interest during
the term and a one-time 15% interest balloon payment upon completion of the
term. The notes issued under this loan agreement are secured by either all of
our fixed assets or all of our business assets. In connection with this loan
agreement, we issued a warrant to Venture Lending & Leasing, Inc. exercisable
for 25,773 shares of common stock at an exercise price of $8.73 per share. The
warrant was valued at $215,720. This amount will be amortized to interest
expense over the debt service period. The warrant may be exercised in whole or
in part at any time. The warrant expires in February 2008. At JuneSeptember 30,
1999, $1.8 million was available under this loan agreement. This loan agreement
expires on March 31, 2000.
We currently anticipate that the net proceeds of our recently completed
initial public offering, together with available funds, will be sufficient to
meet our anticipated needs and strategy for the next twelve months. After such
time, we may need to raise additional funds in order to fund more aggressive
brand name promotions or more rapid expansion, to develop new or enhanced
services and products, to respond to competitive pressures or to acquire
complementary businesses, technologies or services. Additional financing may not
be available on terms favorable to us, if at all. If adequate funds are not
available or not available on acceptable terms, we may be unable to fund our
expansion, successfully promote our brand name, take advantage of unanticipated
acquisition opportunities, develop or enhance services and products or respond
to competitive pressures. Any such inability could have a material adverse
effect on our business.
IMPACT OF THE YEAR 2000
We have not fully completed tests to assure that our information technology
systems will function properly in the year 2000. The computer systems and
software programs of many companies and governmental agencies are currently
coded to accept or recognize only two digit entries in the date code field.
These systems may recognize a date using "00" as the year 1900 rather than the
year 2000. As a result, these computer systems and/or software programs may need
to be upgraded to comply with such year 2000 requirements or risk system failure
or miscalculations causing disruptions of normal business activities.
STATE OF READINESS. We have made an assessment of the year 2000 readiness
------------------
of our information technology systems, including the hardware and software that
operate our Web site and our non-information technology systems. We are in the
process ofhave
completed a year 2000 simulation to test our information technology systems'
readiness which we expect to complete by the end of September 1999.readiness. Based on the results of our year 2000 simulation test, we intend to revisehave
revised our proprietary software as necessary to improve our year 2000
compliance. We believe that substantially all of our applications, databases and
infrastructure are year 2000 compliant. We have been informed by many of our
vendors of material hardware and software components of our information
technology systems that substantially all of the products we use are currently
year 2000 compliant. We will requesthave received assurances from substantially all vendors
of the material hardware and software components of our information technology
systems to provide assurances of theirthat these components are year 2000 compliance. We plan to complete this process during the third quarter of 1999.compliant. We are currently
assessing our material non-information technology systems and will seekhave received
assurances of year 2000 compliance from all critical providers of these systems.
Until such testing is complete and all such vendors and providers are contacted,have furnished
us their assurances of year 2000 compliance, we will not be able to completely
evaluate whether our information technology systems or non-information
technology systems will need to be revised or replaced. If our efforts to
address year 2000 risks are not successful, or if suppliers or other third
12
parties with whom we conduct business do not successfully address such risks, it
could have a material adverse effect on our business.
COSTS. We have identified approximately $400,000 in capital equipment and
-----
software that required upgrading or replacement for year 2000 compliance. We
expended $360,000 prior to JuneAs of September 30, 1999, and stillwe have an outstanding balance
of $40,000upgraded or replaced
approximately $390,000 in capital equipment and software in order to replace.achieve
year 2000 compliance. We anticipate spending an additional $20,000 to complete
remaining upgrades and replacements. These costs have been included in our
operating capital budget. Included in the $360,000 expended
prior to June 30, 1999 is $36,000 pertaining to capital equipment associated
with the acquisition of Inside Prospects. We will spendhave spent $175,000 with an outside consultant to
review our year 2000 project plans and assist with formalizing our contingency
plans. We expect to completeThese plans will continually be reviewed and updated through the review and
contingency plans by the end of the thirdfourth
quarter of 1999.
RISKS. We are not currently aware of any year 2000 compliance problems
-----
relating to our proprietary software or our information technology or non-
information technology systems that would have a material adverse effect on our
business. We may discover year 2000 compliance problems in our proprietary
software that will require substantial revisions. In addition, third-party
software, hardware or services incorporated into our material information
technology and non-information technology systems may need to be revised or
replaced, all of which could be time consuming and expensive. Our failure to fix
our proprietary software or to fix or replace third-party
13
software, hardware or services on a timely basis could result in lost revenues,
increased operating costs, the loss of customers and other business
interruptions, any of which could have a material adverse effect on our
business. Moreover, the failure to adequately address year 2000 compliance
issues in our proprietary software and our information technology and non-informationnon-
information technology systems could result in claims of mismanagement,
misrepresentation or breach of contract and related litigation, which could be
costly and time-consuming to defend.
In addition, governmental agencies, utility companies, Internet access
companies, third-party service providers and others outside our control may not
be year 2000 compliant. The failure by such entities to be year 2000 compliant
could result in a systemic failure beyond our control, such as a prolonged
Internet, telecommunications or electrical failure, which could prevent us from
delivering our Web site, decrease the use of the Internet or prevent users from
accessing our Web site, which could have a material adverse effect on our
business.
CONTINGENCY PLAN. In the event that year 2000-related problems materialize,
----------------
we have the ability to revert to a set of manual methods previously utilized in
the collection and distribution of data if necessary. We also maintain
relationships with several suppliers of services and products to mitigate the
risks associated with suppliers who are not year 2000 compliant.
RISKS AND UNCERTAINTIES
Any investment in our common stock involves a high degree of risk. You
should consider carefully the following information about these risks, together
with the other information contained in this quarterly report, before you decide
to buy our common stock. If any of the following risks actually occur, our
business would likely suffer. In such case, the trading price of our common
stock could decline, and you may lose all or part of the money you paid to buy
our common stock.
WE MAY NOT ACHIEVE FUTURE PROFITABILITY DUE TO CONTINUED OPERATING LOSSES
-------------------------------------------------------------------------
AND NEGATIVE CASH FLOWS. We have incurred significant net losses since our
- -----------------------
inception. As of JuneSeptember 30, 1999, we had an accumulated deficit of $15.6$18.8
million. We have incurred substantial costs to expand into new markets, develop
new products and create, introduce and enhance our Web site. We expect operating
losses and negative cash flows to continue for the foreseeable future as we
continue to incur significant expenses. As a result, we will need to generate
significant revenues to achieve profitability. Even if we do become profitable,
we cannot assure you that we can sustain or increase profitability on a
quarterly or annual basis. If revenues grow more slowly than we anticipate, or
if operating expenses exceed our expectations or cannot be adjusted in response
to slower revenue growth, our business will be materially adversely affected.
Please see "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and our financial statements for detailed information
related to our uncertain profitability.
13
WE HAVE ONLY BEEN OPERATING ON THE INTERNET SINCE 1998 AND CANNOT ASSURE
------------------------------------------------------------------------
YOU THAT OUR INTERNET PRODUCTS WILL ACHIEVE MARKET ACCEPTANCE. We only recently
- -------------------------------------------------------------
began offering our services on the Internet. During the first sixnine months of
1999, approximately 24%31% of revenues were a result of services and products
ordered or delivered on the Internet. In addition, for the sixnine months ended
JuneSeptember 30, 1999, approximately 12%10% of revenues were derived from Internet-relatedInternet-
related transactions such as file transfer protocol (FTP) downloading, resulting
in total Internet-related revenues of 36%41% of net revenues for the first sixnine
months of 1999. We intend to continue to increase our reliance on the Internet
for delivery of our services and products. As a result, our future profitability
will increasingly rely upon the use of our information services and transaction
support products on the Internet. Our ability to obtain market acceptance for
our Internet products will depend on the following factors:
. our ability to transition our customers from the use of our services
and products on CD-ROM to the use of these services and products on
the Internet in a timely and efficient manner;
. our customers' acceptance of, and their ability to adapt to the use
of, our existing and future services and products on the Internet;
and
. our ability to anticipate and adapt to the changing Internet market.
If our Internet-based information services or transaction support products
are not received favorably by our current customers, it may negatively affect
their use of our other products or cause new customers to choose a competitive
service over ours.
IF WE DO NOT SUCCESSFULLY DEVELOP NEW AND ENHANCED SERVICES AND PRODUCTS,
------------------------------------------------------------------------
OUR REVENUES COULD DECREASE. We will not be financially successful if we are
- ---------------------------
unable to meet the increasingly sophisticated needs of our customers through
timely developments and new and enhanced versions of our services and products.
Our planned
14
development and enhancement efforts have inherent risks. We may experience
financial or technical difficulties that could prevent us from introducing new
or enhanced information services or transaction support products. Furthermore,
these new or enhanced services and products may contain problems that are
discovered after the products are introduced. We may need to significantly
modify the design of these products to correct problems. Our business could be
materially adversely affected if we experience difficulties in introducing new
or enhanced services and products or if these services or products are not
received favorably by our customers. Finally, development and enhancement of our
services and products will require significant additional expenses and could
strain our management, financial and operational resources. The lack of market
acceptance of our services or products or our inability to generate satisfactory
revenues from such development or enhancements to offset their costs could have
a material adverse effect on our business.
THERE IS NO ASSURANCE THAT RECENTLY ANNOUNCED MERGER WILL BE COMPLETED. On
November 4, 1999, we announced the proposed merger with CoStar Group, Inc. The
proposed merger with CoStar Group, Inc. is subject to the satisfaction of a
number of conditions, including without limitation, stockholder and regulatory
approval, the effectiveness of a Registration Statement, the accuracy of
representations and warranties, and the meeting of certain conditions and
covenants of both parties at the respective closings. In addition, the merger
agreement permits us to consider unsolicited acquisitions proposals and we may
terminate the merger agreement in the event we accept a superior proposal and
pay CoStar Group, Inc. a fee. There can be no assurance that all of the
conditions to the obligations of the parties under the merger agreement will be
satisfied, that the merger agreement will not be terminated or that the merger
or any other merger will be consummated.
FLUCTUATIONS IN OUR OPERATING RESULTS MAY NEGATIVELY AFFECT OUR STOCK
---------------------------------------------------------------------
PRICE. Our quarterly operating results have fluctuated significantly and are
- -----
expected to continue to fluctuate in the future due to a variety of factors,
many of which are outside of our control. It is possible that in some future
periods our results of operations may be below the expectations of public market
analysts and investors. In this event, the price of our common stock is likely
to fall. Quarterly operating results may vary due to risks discussed in this
Risks and Uncertainties section. Due to all of these risks, you should not rely
on quarter-to-quarter comparisons of our results of operations as an indication
of our future performance.
IF WE DO NOT EXPAND OUR GEOGRAPHIC COVERAGE, OUR SERVICES AND PRODUCTS
----------------------------------------------------------------------
COULD BECOME LESS DESIRABLE. We believe our success is highly dependent on our
- ---------------------------
ability to increase the geographic coverage of our database. Currently our
proprietary database contains comprehensive sales comparable records in 3645 of
the 74 largest markets in the U.S. If we are not able to expand the geographic
coverage of our database into other markets, our business could be materially
adversely affected. We also plan to expand into selected international markets.
We expect this geographic expansion effort to impose additional burdens on our
research, sales and administrative resources.
IF WE CANNOT MAINTAIN THE INTEGRITY AND RELIABILITY OF OUR PROPRIETARY
----------------------------------------------------------------------
DATABASE, WE MAY NOT BE SUCCESSFUL. We cannot assure you that the information
- ----------------------------------
in our database will be comprehensive, accurate or timely, particularly as we
grow. Our success is highly dependent on our customers' confidence in the
comprehensiveness, accuracy and timeliness of our proprietary database of
commercial real estate transactions and the software used to access our
database. We expect the task of establishing and maintaining such
comprehensiveness, accuracy and timeliness during the growth of our business to
require substantial effort and expense.
14
CYCLICAL ECONOMIC SWINGS IN THE REAL ESTATE MARKET COULD DECREASE DEMAND
------------------------------------------------------------------------
FOR OUR SERVICES AND PRODUCTS. The real estate industry traditionally has been
- -----------------------------
subject to cyclical economic swings which could materially adversely affect our
business. Our business is dependent on the real estate industry and related
industries that supply goods or services to, or invest in, the real estate
industry. Changes in the real estate market may affect demand for our services
and products. These cyclical economic swings may be caused by various factors,
such as changes in interest rates and changes in economic conditions.
When interest rates are high or general economic conditions are weak, there
may be less sales activity in commercial real estate and on the part of mortgage
brokers and lenders. These cyclical economic swings could materially adversely
affect our business.
CONSOLIDATION OF THE REAL ESTATE INDUSTRY COULD NEGATIVELY IMPACT OUR
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BUSINESS. The real estate industry is undergoing a period of consolidation,
- --------
motivated in part by a desire to reduce expenses. Such consolidation poses a
number of risks and could materially adversely affect our business. These risks
include:
. a decrease in our client base;
. reduction in the size of our target market;
15
. creation of competitors with sufficiently greater bargaining power
which could cause price erosion;
. creation of competitors with access or rights to, or ownership of,
sources that provide the data we need for our proprietary database;
and
. reduction in the number of sources from whom we obtain data for our
proprietary database.
IF WE ARE NOT ABLE TO SUCCESSFULLY DEVELOP OUR "COMPS.COM" BRAND NAME, IT
------------------------------------------------------------------------
COULD MATERIALLY ADVERSELY AFFECT OUR BUSINESS. We believe that establishing
- ----------------------------------------------
and maintaining our brand name is critical to attracting and expanding our
target Internet audience. The importance of developing our brand name will
increase due to the growing number of Internet services. In order to build our
brand name, we must succeed in our marketing efforts, provide high-quality
services and products and increase the number of visitors to our Web site. If
our marketing efforts are not successful or if we cannot increase awareness of
our brand name, we will not be able to attract and retain Internet users and our
business would be materially adversely affected.
IF WE ARE UNABLE TO CONTINUE TO DEVELOP OUR DIRECT SALES FORCE, IT COULD
------------------------------------------------------------------------
MATERIALLY ADVERSELY AFFECT OUR BUSINESS. In order to support our growth, we
- ----------------------------------------
need to substantially increase the size of our direct sales force. Our ability
to increase our direct sales force involves a number of risks, including:
. the competition we face from other companies in hiring and retaining
sales personnel;
. our ability to integrate and motivate additional sales and sales
support personnel;
. our ability to manage a multi-location sales organization; and
. the length of time it takes new sales personnel to become productive.
There would be a material adverse effect on our business if we do not
continue to develop and maintain an effective direct sales force.
INTENSE COMPETITION MAY RENDER OUR SERVICES AND PRODUCTS UNCOMPETITIVE OR
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OBSOLETE. The market for our Internet-related and non-Internet-related
- --------
information services and transaction support products is competitive. We cannot
assure you that our competitors will not develop services or products that are
equal or superior to ours or that achieve greater market acceptance. We
anticipate that the number of direct and indirect competitors will increase in
the future and could result in price reductions, reduced margins, greater
operating losses or loss of market share, any of which would materially
adversely affect our business.
IF WE FAIL TO BE YEAR 2000 COMPLIANT, IT COULD HARM OUR BUSINESS. We have
----------------------------------------------------------------
not fully completed tests to assure that our information technology systems will
function properly in the year 2000. Our computer systems and software programs
may need to be upgraded in order to comply with year 2000 requirements, or we
risk system failure or miscalculations causing disruptions of normal business
activities. We estimate expenses to achieve year 15
2000 readiness will be
$400,000, $360,000$410,000, $390,000 of which was expended prior to JuneSeptember 30, 1999. Until our
testing is complete, we will not be able to completely evaluate whether our
information technology systems or non-information technology systems will need
to be revised or replaced. If our efforts to address year 2000 risks are not
successful, or if suppliers or other third parties with whom we conduct business
do not successfully address such risks, it could have a material adverse effect
on our business. Please see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Impact of the Year 2000" for detailed
information on our state of readiness, potential risks and contingency plans
regarding the year 2000 issue.
IF WE DO NOT EFFECTIVELY MANAGE OUR GROWTH, IT COULD HAVE A MATERIAL
--------------------------------------------------------------------
ADVERSE EFFECT ON OUR BUSINESS. We have experienced growth in our business,
- ------------------------------
which we expect to continue. Such growth has placed, and will continue to place,
a significant strain on our management systems and resources. We will also need
to continue to improve our operational and financial systems and managerial
controls and procedures. We will need to continue to expand, train and manage
our workforce. We expect that our workforce will continue to increase for the
foreseeable future. We will have to maintain close coordination among our
technical, accounting, finance, marketing, sales and research departments. If we
fail to effectively manage our growth and address the above concerns, it could
have a material adverse effect on our business. If we do not successfully
integrate acquired businesses with our business, it could have a material
adverse effect on our business. Since October 1993, we have acquired eighteleven
businesses and three product lines. We may not be able to integrate our recent
or any future acquisitions successfully with our existing operations without
substantial costs, delays or other problems. As we integrate acquired businesses
or product lines, we could have difficulty in assimilating personnel and
operations. In addition, the key personnel of acquired companies may decide not
to work for us. We could also have difficulty in assimilating the acquired
products, services or technologies into our operations. These difficulties could
disrupt our ongoing business, distract our management and employees, increase
our expenses and materially adversely affect our results of operations due to
accounting requirements such as amortization of goodwill or other purchased
intangibles.
16
IF WE ACQUIRE OTHER COMPANIES BY ISSUING EQUITY SECURITIES, YOU MAY
-------------------------------------------------------------------
EXPERIENCE DILUTION OF YOUR EQUITY INTEREST. We may acquire other companies by
- -------------------------------------------
issuing equity securities. As a result, you may experience dilution of your
ownership interest and the newly issued securities may have rights superior to
those of the common stock.
IF WE ARE UNABLE TO RETAIN KEY PERSONNEL OR ATTRACT NEW PERSONNEL, IT COULD
---------------------------------------------------------------------------
HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS. The loss of the services of any
- ----------------------------------------------
of our key personnel or our inability to successfully attract and retain
qualified personnel in the future would have a material adverse effect on our
business. Our future success depends on the continued service of our key
personnel including Christopher A. Crane, our President and Chief Executive
Officer, Emmett R. De Moss, our Vice President and the Chairman of our REALBID
division, Karen Goodrum, our Vice President of Finance and Administration, Chief
Financial Officer and Secretary, Walter W. Papciak, our Executive Vice President
of Sales, Marketing and Product Development,Production, and Michael Arabe, our Senior Vice President
of Sales. On November 8, 1999, Messrs. DeMoss and Papciak terminated their
employment with us. Mr. Crane is the only key person for whom we maintain life
insurance. The policy on Mr. Crane has a face value of $2,000,000. Our future
success also depends on our ability to attract, retain, integrate and motivate
highly skilled researchers and other employees. Competition for researchers and
other employees in our industry is intense, particularly in the San Diego area,
where our headquarters are located.
INCREASED USAGE COULD STRAIN OUR SYSTEMS AND CAUSE SYSTEMS MALFUNCTIONS
-----------------------------------------------------------------------
WHICH COULD MATERIALLY ADVERSELY AFFECT OUR BUSINESS. The performance of our
- ----------------------------------------------------
Web site is critical to our reputation, our ability to attract customers and
market acceptance of our Web site. All of our communications and network
infrastructure is hosted at our headquarters in San Diego. We have, in the past,
experienced system failures, including network, software and hardware failures,
that have interrupted or increased the response time of our online services.
Although, to date, none of our systems failures have been material to our
results of operations, in the future, the capacity of our software and hardware
could be strained by an increase in the use of our products on the Internet as
we migrate our customers to the Internet. Our ability to provide uninterrupted,
secure online services depends on our ability to protect our facilities and
equipment against damage from fire, earthquakes, power loss, water damage,
telecommunications failures, vandalism, computer viruses, hacker attacks and
other malicious acts, and similar unexpected material adverse events. Customers
may become dissatisfied if a system failure interrupts our ability to provide
access to our Web site. Because our insurance policies have low coverage limits,
our insurance may not adequately compensate us for any losses that may occur due
to system failures or interruptions.
16
ANY PROBLEMS WITH THE INTEGRITY OF THE INTERNET'S INFRASTRUCTURE OR WITH
------------------------------------------------------------------------
THIRD PARTY SERVICE PROVIDERS COULD HAVE A MATERIALLY ADVERSE EFFECT ON OUR
- ---------------------------------------------------------------------------
BUSINESS. Our customers also depend on Internet service providers, online
- --------
service providers and other Web site operators for access to our Web site. Each
of them has experienced significant outages in the past, and could experience
outages, delays and other difficulties due to system failures unrelated to our
systems. Moreover, the Internet infrastructure may not be able to support
continued growth in its use. Any of these problems could materially adversely
affect our business.
IF WE DO NOT ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS, IT COULD HARM OUR
-------------------------------------------------------------------------
BUSINESS OR COMPETITIVE POSITION. It may be difficult to protect our
- --------------------------------
proprietary rights. We regard our database of commercial real estate
transactions and the software used to operate our Web site, as well as our
various trademarks and copyrights, as proprietary. We will continue to attempt
to protect them under a combination of copyright, trade secret and trademark
laws, as well as by contractual restrictions on employees and third parties.
Despite these precautions, it may be possible for unauthorized parties to copy
our services or otherwise obtain and use information that we regard as
proprietary. Existing trade secrets and copyright laws provide only limited
protection. Other license and distribution agreements that we intend to use
include provisions protecting against unauthorized use, copying, transfer and
disclosure, which may be unenforceable under the laws of some jurisdictions.
Furthermore, we may be required to negotiate limits on these provisions from
time to time. In addition, the laws of some foreign countries do not protect our
proprietary rights to the same extent as do the laws of the U.S. The steps we
take may not be adequate to deter misappropriation of proprietary information.
We also may not be able to detect unauthorized use and take appropriate steps to
enforce our intellectual property rights. Significant and protracted litigation
may be necessary to protect our intellectual property rights, to determine the
scope of the proprietary rights of others or to defend against claims of
infringement.
VARIOUS PARTIES MAY ACCUSE US OF INFRINGING ON THEIR INTELLECTUAL PROPERTY
--------------------------------------------------------------------------
RIGHTS, AND ANY RELATED LITIGATION COULD HARM OUR BUSINESS REGARDLESS OF ITS
- ----------------------------------------------------------------------------
MERIT. Third parties may assert claims against us alleging infringement,
- -----
misappropriations or other violations of proprietary rights, whether or not such
claims have merit. Such claims can be time consuming and expensive to defend and
could require us to cease the use and sale of allegedly infringing services and
products, incur significant litigation costs and expenses, develop or acquire
non-infringingnon-
17
infringing technology or obtain licenses to the alleged infringing technology.
We may not be able to develop or acquire alternative technologies or obtain such
licenses on commercially acceptable terms.
WE COULD BE HELD LIABLE FOR PROVIDING INACCURATE OR INCOMPLETE INFORMATION,
--------------------------------------------------------------------------
WHICH COULD HARM OUR BUSINESS. If our services or products yield inaccurate or
- -----------------------------
incomplete information which has a material adverse impact on a customer, the
customer might bring a claim for damages against us, even if we are not
responsible for such failure. The limitations of liability set forth in customer
contracts may not be enforceable and may not otherwise protect us from liability
for damages. The successful assertion of one or more large claims against us
that exceed available insurance coverages, or changes in our insurance policies,
such as premium increases or the imposition of large deductibles or co-insurance
requirements could materially adversely affect our business.
IF INTERNET USAGE DOES NOT CONTINUE TO GROW, IT COULD HAVE A MATERIAL
---------------------------------------------------------------------
ADVERSE EFFECT ON OUR BUSINESS. The Internet is relatively new and rapidly
- ------------------------------
evolving. Our business would be materially adversely affected if Internet usage
does not continue to grow.
WE MAY NOT BE ABLE TO ADAPT TO THE RAPID TECHNOLOGICAL CHANGES TO THE
---------------------------------------------------------------------
INTERNET AND INTERNET PRODUCTS. To be successful, we must adapt to the rapid
- ------------------------------
technological changes to the Internet and Internet products by continually
enhancing our Web site and introducing and integrating new services and products
to capitalize on the technological advances in the Internet. This process is
costly and we cannot assure you that we will be able to successfully integrate
our services and products with the Internet's technological advances. The
collection, storage, management and dissemination of commercial real estate
information from a centralized database on the Internet is a recent and evolving
development. Our market is characterized by rapidly changing technologies,
evolving industry standards, increasingly sophisticated customer needs and
frequent new product introductions. These factors are exacerbated by the rapid
technological change experienced by the computer and software industries. We
could incur substantial costs if we need to modify our services or
infrastructure in order to adapt to these changes. If we incurred significant
costs without adequate results or we were unable to adapt to rapid technological
changes, it could have a material adverse effect on our business.
17
ADOPTION OF NEW LAWS AND GOVERNMENT REGULATIONS RELATING TO THE INTERNET
------------------------------------------------------------------------
COULD HARM OUR BUSINESS. Our business could be materially adversely affected by
- -----------------------
the adoption or modification of laws or regulations in the U.S. or abroad
relating to the Internet. Laws and regulations directly applicable to Internet
communications and commerce are becoming more prevalent. Such legislation could
dampen the growth in use of the Internet generally and decrease the acceptance
of the Internet as a communications and commercial medium. The governments of
states or foreign countries might attempt to regulate our transmissions or levy
sales or other taxes relating to our activities. The laws governing the
Internet, however, remain largely unsettled, even in areas where there has been
some legislative action. It may take years to determine whether and how existing
laws such as those governing intellectual property, privacy, libel and taxation
apply to the Internet and Internet commerce. In addition, the growth and
development of the market for Internet commerce may prompt calls for more
stringent consumer protection laws, both in the U.S. and abroad, that may impose
additional burdens on companies conducting business over the Internet. The
growth and development of the market for Internet commerce may also prompt calls
for widening access on the Internet to public records, including records
concerning the commercial real estate industry.
INTERNET SECURITY CONCERNS COULD HINDER INTERNET COMMERCE AND MATERIALLY
------------------------------------------------------------------------
ADVERSELY AFFECT OUR BUSINESS. We may be required to expend significant capital
- -----------------------------
and other resources to protect against security breaches on our Web site or to
alleviate problems caused by such breaches. If any compromise of our security
were to occur, it could damage our reputation and expose us to a risk of loss,
litigation and possible liability. A significant barrier to online commerce and
communications is the need for secure transmission of confidential information
over public networks. Concerns over the security of transactions conducted on
the Internet and other online services, as well as user's desires for privacy,
may also inhibit the growth of the Internet and other online services,
especially as a means of conducting commercial transactions. Our services
involve the storage and transmission of proprietary information, such as credit
card numbers and other confidential information. We cannot assure you that our
security measures will prevent security breaches or that our failure to prevent
such security breaches will not have a material adverse effect on our business.
Credit card companies and others are in the process of developing anti-theft and
anti-fraud protections, and we are continually monitoring this problem. However,
at the present time, the real or perceived risk of theft and fraud could have a
material adverse effect on us. We cannot assure you that advances in computer
capabilities, new discoveries in the field of cryptography or other events or
developments will not result in a compromise or breach of the algorithms used by
us to protect customer transaction data. A party who is able to circumvent our
security measures could misappropriate confidential information or cause
interruptions in our operations.
18
WE MAY BE SUBJECT TO LEGAL LIABILITY FOR DISPLAYING OR DISTRIBUTING
-------------------------------------------------------------------
INFORMATION ON THE INTERNET. Because content on our Web site is distributed to
- ---------------------------
others, we may be subject to claims for defamation, negligence or copyright or
trademark infringement or claims based on other theories. These types of claims
have been brought, sometimes successfully, against Internet services in the
past. We could also be subject to claims based upon the content that is
accessible from our Web site through links to other web sites or information on
our Web site supplied by third parties. Our insurance may not adequately protect
us against these types of claims. Even to the extent such claims do not result
in liability to us, we could incur significant costs in investigating and
defending against such claims. Our potential liability for information carried
on or disseminated through our Web site could require us to implement measures
to reduce our exposure to such liability, which may require the expenditure of
substantial resources and limit the attractiveness of our service to users.
OUR FEE ARRANGEMENTS IN VARIOUS INDUSTRIES COULD LEAD TO ADDITIONAL
-------------------------------------------------------------------
REGULATION AND RELATED LIABILITIES. We also enter into agreements with
- ----------------------------------
customers under which we are entitled to receive fees related to the support of
commercial real estate transactions through our Web site using REALBID or other
transaction support products that we offer. We plan to increase our reliance on
this aspect of our business. Such arrangements may expose us to additional legal
risks and uncertainties, including regulation by local, state, federal and
foreign authorities in the real estate, financing, and insurance industries, as
well as other industries which our business could impact. The application of
such regulation to our industry is currently uncertain. However, it could lead
to additional potential liabilities to property buyers, even if we are not
selling such properties. In addition, we could, for example, be required to
register for a license, pay fees, assume environmental, property-related or
other similar responsibilities. The indemnification provided to us in our
agreements with these parties, if available, may not be adequate to address such
potential regulatory expansion.
18
THE NUMBER OF SHARES ELIGIBLE FOR PUBLIC SALE COULD CAUSE OUR STOCK PRICE
-------------------------------------------------------------------------
TO DECLINE. The market price of our common stock could decline as a result of
- ----------
sales of a large number of shares of our common stock in the market or the
perception that such sales could occur. Such sales also might make it more
difficult for us to sell equity securities in the future at a price that we deem
appropriate.
THE LIQUIDITY OF OUR STOCK IS UNCERTAIN, AND IT COULD BE DIFFICULT TO SELL
--------------------------------------------------------------------------
YOUR SHARES. We only recently completed our initial public offering. Prior to
- -----------
that offering, there was no public market for our common stock. We cannot
predict if an active trading market in our common stock will develop or how
liquid that market might become.
THE MARKET PRICE OF OUR STOCK MAY BE MATERIALLY ADVERSELY AFFECTED BY
---------------------------------------------------------------------
MARKET VOLATILITY. The market prices of the securities of Internet-related
- -----------------
companies have been especially volatile and have experienced extreme volume
fluctuations. Volatility in the market price of our stock could lead to claims
against us. If we were the object of such litigation, it could result in
substantial costs and a diversion of our management's attention and resources.
The trading price of our common stock could be subject to wide fluctuations in
response to a number of factors, including:
. our quarterly results of operations;
. changes in earnings estimates by analysts and whether our earnings meet
or exceed such estimates;
. announcements of technological innovations by us or our competitors;
. additions or departures of key personnel;
. other matters discussed elsewhere in this quarterly report and our
other filings with the SEC; and
. other events or factors, which may be beyond our control.
OUR CONTROLLING STOCKHOLDERS MAY MAKE DECISIONS WHICH YOU DO NOT CONSIDER
-------------------------------------------------------------------------
TO BE IN YOUR BEST INTEREST. We anticipate that the executive officers,
- ---------------------------
directors and entities affiliated with them beneficially own approximately 64.2%
of our outstanding common stock. These stockholders will be able to exercise
control over all matters requiring approval by our stockholders, including the
election of directors and approval of significant corporate transactions. This
concentration of ownership may also have the effect of delaying or preventing a
change in control of us.
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD
------------------------------------------------------------------------
DELAY, DEFER OR PREVENT A TENDER OFFER OR TAKEOVER ATTEMPT THAT YOU CONSIDER TO
- -------------------------------------------------------------------------------
BE IN YOUR BEST INTEREST. Anti-takeover provisions of our restated certificate
- ------------------------
of incorporation, our restated bylaws and Delaware law could make it more
difficult for a third party to acquire us. As a result, we could delay, defer or
prevent a takeover attempt or third party acquisition that our stockholders
consider in their best interest, including an attempt that might result in a
premium over the market price for the shares held by our stockholders.
19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we may be involved in litigation relating to claims
arising out of our operations in the usual course of business.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) None
(b) None
19
(c) During the three month period and the sixnine month period ended JuneSeptember 30, 1999, we issued
the following unregistered securities:
(1) See Part I - Item 1 "Liquidity and Capital Resources" for a
description of warrants issued in the second quarter of 1999 to
Silicon Valley Bank in consideration for entering into a loan
agreement.
The above securities were offered and sold by the registrant in reliance
upon exemptions from registration pursuant to Section 4 (2) of the Securities
Act of 1933 as transactions not involving any public offering. No underwriters
were involved in connection with the sales of securities referred to in this
Item 2.
(d) On May 10, 1999, we completed the sale of 4,500,000 shares of common
stock priced at $15.00 per share for an aggregate offering price of $67.5
million in an initial public offering led by an underwriting group consisting of
Volpe Brown Whelan & Company, EVEREN Securities, Inc. and Needham & Company,
Inc. The Registration Statement on Form S-1 filed by us with the SEC in
connection with the offering (File No. 333-72901), as amended, was declared
effective by the Commission on May 4, 1999.
The amount of expenses incurred for the Company's account in connection
with the Offering are as follows:
Underwriting discounts and commissions $4,725,000$ 4,725,000
Other expenses 1,469,330
----------1,503,000
------------
Total offering expenses $6,194,330
==========$ 6,228,000
============
The net proceeds of the offering to us, after deducting the foregoing
expenses, were $61,305,670.$61,272,000. From the effective date of the Registration
Statement through JuneSeptember 30, 1999, the net proceeds have been used for the
following purposes:
Capital expenditures $ 191,5731,623,000
Repayment of indebtedness 3,201,9133,687,000
Acquisition of other business (including
transaction costs) 1,959,946
-----------3,202,000
------------
Total net proceeds used through
JuneSeptember 30, 1999 5,353,4328,512,000
Amount remaining to be used 55,952,238
-----------
$61,305,670
===========52,760,000
------------
$ 61,272,000
============
All of the foregoing payments were direct or indirect payments to persons
other than (1) directors, officers or their associates; (2) persons owning 10%
or more of our common stock; or (3) affiliates of the Company.
20
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
20
ITEMItem 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.1 (1) Inside Prospects Acquisition Agreement (Exhibit 2.1)
2.2 (2) Sendero, Parramore, ARA-D/FW Acquisition Agreements (Exhibit 2.1,
Exhibit 2.2, and Exhibit 2.3)
3.1 (2)(3) Second Restated Certificate of Incorporation (Exhibit 3.2)
3.2 (2)(3) Restated Bylaws (Exhibit 3.4)
10.1 (2) Loan and Security Agreement between us and Silicon Valley
Bank, dated April 9, 1999 (Exhibit 10.50).
10.2 (2) Intellectual Property Security Agreement between us and
Silicon Valley Bank, dated April 9, 1999 (Exhibit 10.51).
10.3 (2) Warrant Subscription Agreement between us, Silicon Valley
Bank and shareholders listed on signature page, dated April
9, 1999 (Exhibit 10.52).
10.4 (2) Warrant Subscription Agreement between us, Silicon Valley
Bank and shareholders listed on signature page, dated
April 9, 1999 (Exhibit 10.53).
10.5 (2) Warrant to Purchase Stock issued April 9, 1999
(Exhibit 10.54).
10.6 (2) Warrant to Purchase Stock issued April 9, 1999
(Exhibit 10.55).
10.7 (2) Amendment No. 1 to Amended and Restated Investor Rights
Agreement between us, Silicon Valley Bank and each of the
individuals and entities listed on Schedule A, dated April 9,
1999 (Exhibit 10.56).
27.1 Financial Data Schedule
- --------------_______________________
(1) Filed as an exhibit (as the exhibit number set forth above in parenthesis)
to Registrant's report on Form 8-K filed with the SEC on June 30, 1999.
(2) Filed as an exhibit (as the exhibit number set forth above in parenthesis)
to Registrant's report on Form 8-K filed with the SEC on September 13,
1999.
(3) Filed as an exhibit (as the exhibit number set forth above in parenthesis)
to Registrant's Registration Statement on Form S-1 (333-72901), as amended,
and incorporated herein by reference.
(b) Reports on Form 8-K
A report on Form 8-K dated June 16, 1999 was filed with the SEC on June 30,
1999 reporting, under Item 2, the acquisition of substantially all of the assets
of Inside Prospects of California by the Company. No financial statements were
included in that report. The Company intends to filefiled an amendment to the Form 8-K
incorporating the required financial statements on August 27, 1999.
A report on Form 8-K dated August 27, 1999 was filed with the SEC on
September 13, 1999 reporting, under Item 2, the acquisition of 1) all of the
outstanding stock of Sendero Investments, Inc., a Texas corporation, 2) all of
the outstanding stock of Parramore, Inc., a Texas corporation, and 3)
substantially all of the assets pertaining to the operations of the Commercial
Brokers Network business of ARA-D/FW, Inc., a Texas corporation. No financial
statements were included in that report. The Company filed an amendment to the
Form 8-K incorporating the required financial statements on November 10, 1999,
within the time period prescribed by the Securities Exchange Act of 1934 and its
related rules and regulations.
21
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.
Dated: August 16,November 15, 1999
COMPS.COM, Inc.
(Registrant)
/s/ Karen Goodrum
-----------------
(Karen Goodrum)
Vice President, Chief Financial Officer
(Principal Financial and Accounting Officer)
22