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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-Q
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(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended: September 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: 0-24531
COSTAR GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 52-2091509
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
7475 WISCONSIN AVENUE
BETHESDA, MD 20814
(301) 215-8300
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] - No [ ]
As of September 30, 1999, there were 12,861,934 shares outstanding of the
Registrant's Common Stock, par value $.01.
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COSTAR GROUP, INC.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Statements of Operations.........................................................3
Condensed Consolidated Balance Sheets...................................................................4
Condensed Consolidated Statements of Cash Flows.........................................................5
Notes to Condensed Consolidated Financial Statements....................................................6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations.........................................................9
Item 3 - Quantitative and Qualitative Disclosures About Market Risk............................................ 14
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings......................................................................................15
Item 2 - Changes in Securities..................................................................................15
Item 3 - Defaults upon Senior Securities........................................................................15
Item 4 - Submission of Matters to a Vote of Security Holders....................................................15
Item 5 - Other Information......................................................................................15
Item 6 - Exhibits and Reports on Form 8-K.......................................................................15
Signatures.......................................................................................................16
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PART 1 FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
CoStar Group, Inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------------------------ ------------------------------------
1999 1998 1999 1998
------------------------------------ ------------------------------------
Revenues $ 8,021 $ 3,659 $ 21,326 $ 9,752
Cost of revenues 3,616 1,248 9,279 3,120
------------------------------------ ------------------------------------
Gross margin 4,405 2,411 12,047 6,632
Operating expenses:
Selling and marketing 5,335 2,069 13,246 4,661
Software development 289 197 839 459
General and administrative 3,274 1,384 7,924 3,303
------------------------------------ ------------------------------------
8,898 3,650 22,009 8,423
------------------------------------ ------------------------------------
Loss from operations (4,493) (1,239) (9,962) (1,791)
Interest and other income (expense) 1,234 202 1,913 124
------------------------------------ ------------------------------------
Net loss $ (3,259) $ (1,037) $ (8,049) $ (1,667)
==================================== ====================================
Basic and diluted net loss per share $ (0.25) $ (0.12) $ (0.71) $ (0.25)
==================================== ====================================
Weighted average common shares 12,823 8,551 11,331 6,693
==================================== ====================================
See accompanying notes.
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CoStar Group, Inc.
Condensed Consolidated Balance Sheet
(in thousands)
September 30, December 31,
1999 1998
-------------------------------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 99,278 $ 19,667
Accounts receivable, less allowance for doubtful
accounts of $689 and $326 as of
September 30, 1999 and December 31, 1998 2,402 1,245
Prepaid expenses and other current assets 820 326
-------------------------------
Total current assets 102,500 21,238
Property and equipment 7,080 3,385
Accumulated depreciation (2,029) (1,228)
-------------------------------
5,051 2,157
Other assets 24,594 3,955
Deposits 416 192
-------------------------------
Total assets $ 132,561 $ 27,542
===============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,135 $ 801
Accrued wages and commissions 2,738 1,078
Accrued expenses 1,951 812
Deferred revenue 2,654 1,647
-------------------------------
Total current liabilities 9,478 4,338
Stockholders' equity 123,083 23,204
-------------------------------
Total liabilities and stockholders' equity $ 132,561 $ 27,542
===============================
See accompanying notes.
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CoStar Group, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
For the Nine Months
Ended September 30,
---------------------------
1999 1998
---------------------------
Operating activities:
Net loss $ (8,049) $ (1,667)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation 801 291
Amortization 2,678 464
Provision for losses on accounts receivable 363 127
Non cash charges - 63
Changes in operating assets and liabilities 1,358 1,221
---------------------------
Net cash provided by (used in) operating activities (2,849) 499
Investing activities:
Net purchases of property and equipment (3,436) (575)
Other assets (1,285) (312)
Acquisitions (net of acquired cash) (10,230) (7)
---------------------------
Net cash used in investing activities (14,951) (894)
Financing activities:
Payment of line of credit - (1,000)
Payment of subordinated debt to stockholder - (650)
Net proceeds from public offerings 97,411 22,687
Net proceeds from exercise of stock options - 80
---------------------------
Net cash provided by financing activities 97,411 21,117
Net increase in cash and cash equivalents 79,611 20,722
Cash and cash equivalents at beginning of period 19,667 1,069
---------------------------
Cash and cash equivalents at end of period $ 99,278 $ 21,791
===========================
See accompanying notes.
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COSTAR GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
CoStar Group, Inc. (formerly Realty Information Group, Inc.) ("the Company") is
a Delaware corporation and was incorporated in February 1998 to succeed its
predecessors, Realty Information Group L.P. ("RIGLP") and OLD RIG, Inc.
("RIGINC"). RIGLP was an operating entity, while RIGINC was a shell holding
entity. In connection with the Company's Initial Public Offering on July 1, 1998
("the Offering"), RIGLP and RIGINC merged with the Company pursuant to the RIG
Contribution Agreement dated March 5, 1998. The limited partners of RIGLP (other
than RIGINC) and all of the stockholders of RIGINC received 3.03 shares of
Common Stock of the Company per each limited partnership unit or share of common
stock exchanged, for a total of 5,754,017 shares. As a result of the
reorganization of these entities, the Company owned (directly or indirectly) all
of the capital stock of RIGINC and all the equity of RIGLP.
The merger has been accounted for as a reorganization of entities under common
control similar to a pooling of interests. Following the merger each shareholder
of the Company maintained their exact same ownership of the operating entity,
RIGLP, as before the merger. The transfer of assets and liabilities of RIGLP and
RIGINC have been recorded at the historical carrying values. The financial
statements are presented as if the Company was in existence throughout all
periods presented, as one operating entity. All share amounts have been restated
to reflect the conversion of partnership units to common stock of the Company.
On January 1, 1999, RIGLP and RIGINC were merged into a newly formed
corporation, CoStar Realty Information, Inc. a wholly-owned subsidiary of the
Company.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the associated amounts of revenues and expenses during
the reporting period. Actual results could differ from the estimates.
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2. ACQUISITIONS
On August 14, 1998, the Company acquired Houston-based commercial real estate
information provider, C Data Services, Inc. ("CDS"). CDS was acquired in a
transaction in which the former stockholders of CDS received 93,530 shares of
common stock of the Company and approximately $9,000 in cash. The transaction
was structured as a reverse merger with a wholly owned subsidiary of the Company
merging with and into CDS. The transaction was accounted for as a purchase and
the consideration was valued for accounting purposes at approximately $617,000
including acquisition expenses.
On January 8, 1999, the Company acquired all of the common stock of LeaseTrend,
Inc. ("LeaseTrend"), a Cincinnati based provider of commercial real estate
information, for $4,500,000 in cash and 566,671 shares of the Company's common
stock. The transaction was accounted for as a purchase and the consideration was
valued for accounting purposes at approximately $9,200,000 including acquisition
expenses.
On January 22, 1999, the Company acquired all of the common stock of Jamison
Research, Inc. ("Jamison"), an Atlanta based provider of commercial real estate
information, for $5,284,000 in cash and 448,031 shares of the Company's common
stock. The transaction was accounted for as a purchase and the consideration was
valued for accounting purposes at approximately $10,300,000 including
acquisition expenses.
On September 15, 1999, the Company acquired all of the membership interests of
ARES Development Group, LLC ("ARES"), Los Angeles based developers and
distributors of ARES for ACT!, for $250,000 in cash and 33,208 shares of the
Company's common stock. The transaction was accounted for as a purchase and the
consideration was valued for accounting purposes at approximately $1,265,000
including acquisition expenses. In addition, the acquisition agreement provides
for $1,000,000 of additional consideration that may be paid by the Company upon
the achievement of certain operating goals by the members of ARES.
The Company's unaudited pro forma condensed consolidated statements of
operations for the nine months ended September 30, 1999 and 1998, assuming the
acquisition of CDS, LeaseTrend, Jamison and ARES had been consummated as of
January 1 of each period, is summarized as follows:
For the Nine Months
Ended September 30,
1999 1998
--------------------------------
Revenues $ 22,081,000 $ 16,337,000
------------ ------------
Net loss $ (8,466,000) $ (4,116,000)
============ ============
Weighted average shares 11,415,000 7,818,000
============ ============
Basic and diluted net loss per share $ (0.74) $ (0.53)
============ ============
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3. OTHER ASSETS
Other assets consists of intangible assets as follows:
September 30, December 31,
1999 1998
------------- ------------
Capitalized product development costs $ 1,242,000 $ 947,000
Accumulated amortization (551,000) (397,000)
------------ ------------
691,000 550,000
------------ ------------
Building photography 2,519,000 1,529,000
Acquired technology 3,552,000 -
Customer bases 19,379,000 1,792,000
Other intangibles 2,097,000 1,203,000
Accumulated amortization (3,644,000) (1,119,000)
------------ ------------
23,903,000 3,405,000
------------ ------------
Other assets $ 24,594,000 $ 3,955,000
============ ============
4. COMMITMENTS
The Company leases office space and equipment under operating lease agreements
that expire at various dates through the year 2010. Lease agreements provide for
various renewal terms and reimbursement of taxes, maintenance, insurance and
other occupancy expenses applicable to the leased premises or property.
At September 30, 1999 minimum lease payments under operating leases
are as follows:
1999 .............................................. $ 656,000
2000 .............................................. 3,369,000
2001 .............................................. 3,088,000
2002 .............................................. 2,861,000
2003 .............................................. 2,622,000
2004 and thereafter ............................... 15,693,000
-----------
$28,289,000
===========
4. SUBSEQUENT EVENTS
On November 3, 1999, the Company entered into a definitive agreement to acquire
COMPS.COM, Inc. ("COMPS"), which will be effected by the merger of COMPS into a
wholly owned subsidiary of the Company. The merger agreement provides that each
holder of a share of COMPS common stock may elect to receive either $7.50 in
cash or 0.31496 shares of the Company's common stock, but these elections will
be adjusted so that 50.1% of the COMPS shares receive the Company's common stock
and 49.9% of the COMPS shares receive cash. The transaction, which will be
accounted for as a purchase, is valued at approximately $102 million. The merger
is subject to the approval of COMPS stockholders, as well as various
governmental bodies. Therefore, there can be no assurance that the acquisition
of COMPS by the Company will be consummated.
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ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements, which involve risks
and uncertainties. Our actual results could differ materially from those in such
forward-looking statements as a result of certain factors, including those set
forth in the Company's registration statement filed on Form S-1 on March 24,
1999, as amended, and the Company's other filings with the Securities and
Exchange Commission. The following discussion should be read in conjunction with
the Company's filings with the Securities and Exchange Commission and the
unaudited condensed consolidated financial statements included herein.
OVERVIEW
CoStar Group, Inc. is a leading provider of information services to the U.S.
commercial real estate industry. We are creating a digital marketplace where the
members of the commercial real estate and related business community can
continuously interact and facilitate transactions by efficiently exchanging
accurate and standardized information. Our wide array of digital service
offerings includes a leasing marketplace, a selling marketplace, decision
support, tenant information, property marketing, and industry news.
Substantially all of our current services are digitally delivered and a majority
of our clients receive daily service updates over the Internet.
We completed our initial public offering in July 1998 and received net proceeds
of approximately $22.7 million. We primarily used those net proceeds to fund the
geographic and service expansion of our business, including three strategic
acquisitions, and to expand our sales and marketing organization. In May 1999,
we completed a follow-on public offering and received net proceeds of
approximately $97.4 million. We expect to use these proceeds primarily for
development and distribution of new services, expansion of all existing services
across our current markets, geographic expansion in the U.S. and international
markets, strategic acquisitions and working capital and general corporate
purposes.
From 1994 through 1999, we expanded the geographical coverage of our existing
services and developed new services. In addition to internal growth, this
expansion included the acquisitions of Chicago ReSource, Inc. in Chicago in 1996
and New Market Systems, Inc. in San Francisco in 1997. In August of 1998, we
expanded into the Houston region through the acquisition of Houston-based real
estate information provider CDS. In January of 1999, we expanded further into
the Midwest and Florida by acquiring LeaseTrend, and into Atlanta and
Dallas/Fort Worth by acquiring Jamison. In September of 1999, we acquired ARES,
a Los Angeles based developer and distributor of ARES for ACT!.
We consider regions that have had ongoing operations for at least 18 months to
be established, and we currently generate positive cash flow from our operations
in established regions. As of September 30, 1999, the following regions are
those that have been in operation for more than 18 months and that we consider
to be established: Washington, New York, Los Angeles, Chicago, San Francisco,
Philadelphia and Boston. These regions provide us with substantial cash flow
which we reinvest into the business. Since its inception, the development of our
business has required substantial investments for the expansion of services and
the establishment of operating regions, which has resulted in substantial net
losses on an overall basis.
The incremental cost of introducing new services in an established region in the
future may reduce the profitability of a region or cause it to incur losses. We
expect continued development and distribution of new services, expansion of all
existing services across current markets and geographic expansion in the U.S.
and international markets. Therefore, while we expect operations in existing
established regions to remain profitable and provide substantial funding, we
expect our overall expansion plans to generate significant losses and negative
cash flow from operations for at least the next two years.
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THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO
THREE MONTHS ENDED SEPTEMBER 30, 1999
REVENUES. Revenues increased 119% from $3,659,000 for the three months ended
September 30, 1998 to $8,021,000 for the three months ended September 30, 1999.
The increase resulted primarily from growth in the Company's client base in
established regions, expansion of emerging regions entered during 1998 and
revenues from the over twenty newly acquired regions, including Atlanta, Dallas,
Florida, Denver and the Midwest.
GROSS MARGINS. Gross margins increased 83% from $2,411,000 for the three months
ended September 30, 1998 to $4,405,000 for the three months ended September 30,
1999, while gross margin percentages were 66% and 55% of revenue, respectively.
The increase in gross margins resulted principally from significant revenue
growth from established regions. The decline in gross margin percentages
resulted from expansion of services in established regions, an increase in the
number of emerging regions and lower gross margins in the newly acquired
regions. Furthermore, our cost of revenues for the three months ended September
30, 1999 includes purchase price amortization from the LeaseTrend, Jamison, and
ARES acquisitions of approximately $183,000.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses increased 158%
from $2,069,000 for the three months ended September 30, 1998 to $5,335,000 for
the three months ended September 30, 1999. Selling and marketing expenses
increased as a result of the cost of the acquired sales organizations and
purchase price amortization of approximately $424,000 for the Jamison,
LeaseTrend, and ARES acquisitions during the third quarter of 1999. In addition,
continued expansion of the sales organization and marketing efforts required for
growth, particularly in emerging regions, including Phoenix, Houston, Tampa,
Miami, Denver, Dallas and the Midwest, contributed to the increased
expenses.
SOFTWARE DEVELOPMENT. Software development expenses increased 47% from $197,000
for three months ended September 30, 1998 to $289,000 for the three months ended
September 30, 1999 reflecting development costs for the expansion of services
for emerging and established regions and new service initiatives.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 137% from $1,384,000 for the three months ended September 30, 1998 to
$3,274,000 for the three months ended September 30, 1999. General and
administrative expenses increased due to the hiring of new employees to support
the expanding scope of our operations and client base. Additionally, our general
and administrative expenses include approximately $100,000 of purchase price
amortization from the LeaseTrend, Jamison and ARES acquisitions.
INTEREST AND OTHER INCOME (EXPENSE). Interest and other income increased from
$202,000 for the three months ended September 30, 1998 to $1,234,000 for the
three months ended September 30, 1999. This increase was a direct result of
interest earned on the proceeds from the initial and follow-on public offerings.
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NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO
NINE MONTHS ENDED SEPTEMBER 30, 1999
REVENUES. Revenues increased 119% from $9,752,000 for the nine months ended
September 30, 1998 to $21,326,000 for the nine months ended September 30, 1999.
The increase resulted primarily from growth in the Company's client base in
established regions, expansion of emerging regions entered during 1998 and
revenues from over twenty newly acquired regions, including Atlanta, Dallas,
Florida, Denver and the Midwest regions.
GROSS MARGINS. Gross margins increased 82% from $6,632,000 for the nine months
ended September 30, 1998 to $12,047,000 for the nine months ended September 30,
1999, while gross margin percentages were 68% and 56% of revenue, respectively.
The increase in gross margins resulted principally from significant revenue
growth from established regions. The decline in gross margin percentages
resulted from expansion of services in established regions, an increase in the
number of emerging regions and lower gross margins in the newly acquired
regions. Furthermore, our cost of revenues for the nine months ended September
30, 1999 includes purchase price amortization from the LeaseTrend, Jamison and
ARES acquisitions of approximately $502,000.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses increased 184%
from $4,661,000 for the nine months ended September 30, 1998 to $13,246,000 for
the nine months ended September 30, 1999. Selling and marketing expenses
increased as a result of the cost of the acquired sales organizations and
purchase price amortization of approximately $1,197,000 for the Jamison,
LeaseTrend and ARES acquisitions for the nine months ended September 30, 1999.
In addition, continued expansion of the sales organization and marketing efforts
required for growth, particularly in emerging regions, including Phoenix,
Houston, Tampa, Miami, Denver, Dallas and the Midwest, contributed to the
increased expenses.
SOFTWARE DEVELOPMENT. Software development expenses increased 83% from $459,000
for nine months ended September 30, 1998 to $839,000 for the nine months ended
September 30, 1999 reflecting development costs for the expansion of services
for emerging and established regions and new service initiatives.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 140% from $3,303,000 for the nine months ended September 30, 1998 to
$7,924,000 for the nine months ended September 30, 1999. General and
administrative expenses increased due to the hiring of new employees to support
the expanding scope of our operations and client base, as well as the increased
administrative costs of a public company. Additionally, our general and
administrative expenses include approximately $283,000 of purchase price
amortization from the LeaseTrend, Jamison and ARES acquisitions.
INTEREST AND OTHER INCOME (EXPENSE). Interest and other income increased from
$124,000 for the nine months ended September 30, 1998 to $1,913,000 for the nine
months ended September 30, 1999. This increase was a direct result of interest
earned on the proceeds from the initial and follow-on public offerings.
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LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents balance was $99,278,000 at September 30, 1999, an
increase of $79,611,000 from $19,667,000 at December 31, 1998. This increase was
due principally to the $97.4 million in proceeds from the follow-on public
offering, which was offset by cash used for the acquisitions of LeaseTrend and
Jamison in January 1999 and ARES in September 1999, cash used in operating
activities, $3,436,000 in purchases of property and equipment and $1,285,000 in
purchased building photography and capitalized product development costs. During
the third quarter of 1999, we financed our operations and growth through cash
flow from the established regions and the proceeds of the public offerings. Net
cash used in operations for the nine months ended September 30, 1999 was
$2,849,000 compared to net cash provided by operating activities of $499,000 for
the nine months ended September 30, 1998. This was a direct result of increased
expansion in the emerging and acquired regions. Additionally, we received
advance payments from clients on a number of contracts, resulting in the
generation of cash as reflected in deferred revenue balances of $2,654,000 and
$1,647,000 as of September 30, 1999 and December 31, 1998, respectively. We
continue to experience overall operating losses as a result of our recent
expansion into emerging and acquired regions, while established regions continue
to generate substantial cash flow from operations.
Net cash used in investing activities amounted to $14,951,000 for the nine
months ended September 30, 1999, including $10,230,000 (net of acquired cash)
for the acquisition of LeaseTrend, Jamison and ARES. Additional investing
activities included capitalized product development costs, purchased building
photography, and purchase of property and equipment, consisting principally of
computer and office equipment. We currently have no material commitments for
capital expenditures. As a result of our expansion, we have entered into
numerous operating leases for office space throughout the country, including
Company headquarters, and have commitments for rent payments ranging from
$2,436,000 to $3,369,000 annually over the next ten years.
To date, we have grown in part by acquiring other companies, and we may continue
to make acquisitions. Our acquisitions may vary in size and could be material to
our current operations. We expect to use cash, stock, or other means of funding
to make these acquisitions.
On November 3, 1999, the Company entered into a definitive agreement to acquire
COMPS, which will be effected by the merger of COMPS into a wholly owned
subsidiary of the Company. The merger agreement provides that each holder of a
share of COMPS common stock may elect to receive either $7.50 in cash or 0.31496
shares of the Company's common stock, but these elections will be adjusted so
that 50.1% of the COMPS shares receive the Company's common stock and 49.9% of
the COMPS shares receive cash. The transaction, which will be accounted for as a
purchase, is valued at approximately $102 million. The merger is subject to the
approval of COMPS stockholders, as well as various governmental bodies.
Therefore, there can be no assurance that the acquisition of COMPS by the
Company will be consummated.
We expect to incur significantly higher costs, particularly as we introduce new
and upgraded services, expand geographically, and develop the infrastructure to
support the expanding organization and client base. Based on current plans, we
believe that our available cash combined with positive cash flow from our
established regions should be sufficient to fund our operations for at least the
next two years.
Through September 30, 1998, we operated as either a Subchapter S corporation or
a limited partnership, and we were not subject to corporate income taxes. After
September 30, 1998, we became a taxable entity. Although we have experienced
losses to date, future profits, to the extent not offset by the benefits of loss
carryforwards, would result in income tax liabilities. We do not expect to
benefit substantially from tax loss carryforwards generated prior to July 1998.
We do not believe the impact of inflation has significantly affected our
operations.
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IMPACT OF THE YEAR 2000
The Year 2000 issue arises because some computer hardware and software will not
work properly after 1999. That failure occurs because many older systems express
dates in a two-digit format. For example, under this format the year 1999 is
expressed as 99. As a result, these older systems may be unable to distinguish
between the year 1900 and the year 2000. That inability may cause hardware
system failures, software miscalculations, and disruptions of data
transmissions.
Our plans to resolve the Year 2000 issue have involved the following steps:
assessment, remediation, and confirmation through testing. To date, we have
completed our assessment of the issue, we have completed substantially all of
our remediation phase, and we are currently confirming Year 2000 compliance
through testing. In addition, we have undertaken testing as particular aspects
of the remediation phase are completed.
Assessment
Our Year 2000 assessment has included, without limitation:
- - cataloging and evaluating internal hardware and software systems obtained
from third parties;
- - testing the software we have developed ourselves; and
- - contacting our clients, suppliers, and service providers.
Remediation and Testing Efforts
We have identified three areas that require evaluation and remediation: internal
infrastructure, our proprietary software, and impacts from systems of vendors
and our clients.
Internal Infrastructure. We have cataloged and evaluated our hardware to
determine its Year 2000 compliance. Our workstation supplier has informed us
that all workstations we have obtained from it are compliant. We have
successfully completed testing on almost all of those workstations. We have
purchased new, compliant servers to replace older hardware and over 90% of these
servers are operational. We expect the remainder of those servers to be
operational no later than December 15, 1999. In addition, we have recently
completed compliance testing on all of our laptop and desktop computers and
believe that they are all Year 2000 compliant.
We have also tested a significant portion of the software used in our internal
infrastructure and believe that all of the tested software is Year 2000
compliant. We have installed a new, compliant enterprise accounting system. In
addition we have converted approximately 90% of our network server operating
systems to compliant software and expect to convert the remaining servers to
compliant software no later than December 15, 1999. Furthermore, we have
upgraded our entire phone system with a Year 2000 compliant system and have
upgraded significantly all of our voice mail systems with compliant systems.
Proprietary Software and Databases. Our commercial real estate information
systems use extensive proprietary software and databases. We performed Year 2000
compliance measures for much of this software in prior years since various
fields, like tenant lease expirations, required compliance in the early 1990's
to accommodate post-2000 dates. Since that time, we have assessed all our
proprietary commercial real estate information software to identify areas
vulnerable to these problems. This led us to recode common date routines,
functions, and methods so they would interpret both entered and stored dates
with a compliant approach. We believe that our proprietary systems are now
compliant, but we might still encounter additional Year 2000 defects.
We have identified additional potential Year 2000 risks with respect to our
recently acquired LeaseTrend and Jamison subsidiaries. We have upgraded a
significant percentage of their hardware to Year 2000 compliant products and
plan to upgrade all of the remaining hardware no later than December 15, 1999.
In addition, we have converted many of the proprietary databases acquired from
LeaseTrend and Jamison into our centralized CoStar database to
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replace the products we acquired from those subsidiaries, and we continue to
convert the customers of LeaseTrend and Jamison to CoStar products in the normal
course of our business.
Client and Vendor Issues. Our assessment has also revealed that some of our
clients use hardware and software that is not Year 2000 compliant. As a result,
our clients' systems may not support the use of our software. We have notified
our clients of this potential issue. Where we have uncovered such problems, we
have attempted to ensure compatibility by coding our own alternatives or
replacements. Despite these efforts, our clients' success in continuing to
install and use our services depends significantly on their own compliance
efforts, which we do not control. To date, we have not been notified by any
significant clients with respect to material problems arising from such clients'
failure to have compliant computer equipment and software.
Third party Year 2000 compliance problems may also affect us by interrupting
services which we need to conduct our business. For example, most of our data
updates are delivered via the Internet. If Year 2000 problems result in
disruption of the Internet as a delivery system, we believe we could use
alternative delivery systems, which would mitigate to some extent the impact of
this disruption. We also rely on telecommunications providers for communication
services and distribution of our product data updates. Any compliance problems
by these providers could lead to extended loss of their services and significant
unanticipated expenses to remedy the situation.
Compliance Costs
Our incremental costs expended to date in connection with Year 2000 compliance
have not been significant, as we have undertaken most of our activities in the
normal course of business. We estimate, however, that during 1999 we have spent
approximately $900,000 in connection with Year 2000 compliance, and we do not
expect to make significant Year 2000 expenditures in the future. A large part of
these costs results from upgrading LeaseTrend and Jamison equipment and
software, much of which was planned independently of the Year 2000 issue.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not have significant exposure to market risks associated with
the changes in interest rates related to its cash equivalent securities held as
of September 30, 1999.
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PART II. OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
The Company currently and from time to time is involved in litigation incidental
to the conduct of its business. The Company is not a party to any lawsuit or
proceeding that, in the opinion of management of the Company, is likely to have
a material adverse effect on the Company's financial position or results of
operations.
ITEM 2 CHANGE IN SECURITIES
In connection with the acquisition of ARES, on September 15, 1999 the Company
issued an aggregate of 33,208 shares of common stock, par value $.01 per share,
of the Company to Terry McKiernan and Michael Griffin, the sole members of ARES.
Such shares comprised part of the consideration for the acquisition for ARES and
were issued in reliance on the exemption from registration under Section 4(2) of
the Securities Act of 1933, as amended.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of the Company's stockholders was held on July 13, 1999. The
following people were elected to the Board of Directors of the Company for a
one-year term: Michael Klein, Andrew Florance, Warren Haber, David Bonderman,
John Simon and Josiah Low III. The vote was as follows: For, 10,585,585
shares; and withheld, 595 shares.
An amendment to the Company's Amended and Restated Certificate of Incorporation
was approved upon the following vote: For, 10,563,499 shares; withheld, 20,571
shares; and abstain, 2,110 shares.
The appointment of Ernst & Young LLP as independent auditors of the Company for
the fiscal year ending December 31, 1999 was approved upon the following vote:
For 10,583,095 shares; withheld, 485 shares; and abstain 2,600 shares.
ITEM 5 OTHER INFORMATION
On November 4, 1999, the Company announced that it had entered into a definitive
merger agreement to acquire COMPS.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
A current report on Form 8-K was filed by the Company on September 24, 1999 with
respect to the acquisition of ARES by the Company.
EXHIBIT NUMBER: EXHIBIT DESCRIPTION:
10.1 CoStar Group, Inc. 1998 Stock Incentive Plan, as amended.
10.2 Office Lease dated August 12, 1999 between CoStar Realty
Information, Inc. and Newlands Building Ventures, LLC
27 Financial Data Schedule
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COSTAR GROUP, INC.
Date: November 12, 1999 By: /s/ Frank A. Carchedi
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Frank A. Carchedi
Chief Financial Officer
(Principal Financial and Accounting Officer
and Duly Authorized Officer)
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