e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2006
OR
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o |
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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)
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Delaware
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52-2091509 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
2 Bethesda Metro Center, 10th Floor
Bethesda, Maryland 20814
(Address of principal executive offices) (zip code)
(301) 215-8300
(Registrants telephone number, including area code)
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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Securities Exchange Act of 1934).
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
As of May 1, 2006 there were 18,769,849 shares of the registrants common stock outstanding.
COSTAR GROUP, INC.
TABLE OF CONTENTS
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PART I |
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FINANCIAL INFORMATION |
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Item 1. |
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Condensed Consolidated Statements of Operations |
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3 |
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Condensed Consolidated Balance Sheets |
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4 |
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Condensed Consolidated Statements of Cash Flows |
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5 |
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Notes to Condensed Consolidated Financial Statements |
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6 |
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Item 2. |
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Management's Discussion and Analysis of Financial Condition and Results of Operations |
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13 |
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Item 3. |
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Quantitative and Qualitative Disclosures About Market Risk |
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22 |
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Item 4. |
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Controls and Procedures |
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23 |
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PART II |
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OTHER INFORMATION |
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Item 1. |
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Legal Proceedings |
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23 |
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Item 1A. |
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Risk Factors |
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23 |
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Item 2. |
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Unregistered Sales of Equity Securities and Use of Proceeds |
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23 |
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Item 3. |
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Defaults upon Senior Securities |
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24 |
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Item 4. |
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Submission of Matters to a Vote of Security Holders |
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24 |
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Item 5. |
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Other Information |
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24 |
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Item 6. |
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Exhibits |
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24 |
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Signatures |
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26 |
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2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
COSTAR GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
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Three Months Ended |
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March 31, |
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2006 |
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2005 |
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Revenues |
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$ |
37,274 |
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$ |
31,343 |
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Cost of revenues |
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12,926 |
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10,490 |
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Gross margin |
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24,348 |
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20,853 |
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Operating expenses: |
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Selling and marketing |
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10,925 |
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9,493 |
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Software development |
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2,898 |
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2,332 |
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General and administrative |
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7,569 |
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6,896 |
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Purchase amortization |
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1,108 |
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1,118 |
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22,500 |
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19,839 |
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Income from operations |
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1,848 |
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1,014 |
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Other income, net |
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1,426 |
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604 |
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Income before income taxes |
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3,274 |
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1,618 |
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Income tax expense, net |
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1,414 |
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644 |
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Net income |
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$ |
1,860 |
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$ |
974 |
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Net income per share basic |
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$ |
0.10 |
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$ |
0.05 |
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Net income per share diluted |
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$ |
0.10 |
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$ |
0.05 |
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Weighted average outstanding shares basic |
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18,692 |
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18,318 |
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Weighted average outstanding shares diluted |
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19,269 |
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18,861 |
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See accompanying notes.
3
COSTAR GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
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March 31, |
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December 31, |
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2006 |
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2005 |
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(unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
45,093 |
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$ |
28,065 |
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Short-term investments |
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97,161 |
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106,120 |
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Accounts receivable, less allowance for doubtful accounts of
approximately $1,651 and $1,602 as of March 31, 2006 and
December 31, 2005 |
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7,375 |
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5,673 |
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Deferred income taxes, net |
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4,475 |
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4,475 |
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Prepaid expenses and other current assets |
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3,376 |
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2,205 |
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Total current assets |
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157,480 |
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146,538 |
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Deferred income taxes |
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17,183 |
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18,690 |
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Property and equipment, net |
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14,179 |
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15,144 |
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Goodwill, net |
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43,708 |
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43,563 |
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Intangibles and other assets, net |
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22,306 |
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22,847 |
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Deposits |
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1,081 |
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1,277 |
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Total assets |
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$ |
255,937 |
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$ |
248,059 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable and accrued expenses |
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$ |
15,758 |
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$ |
14,399 |
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Deferred revenue |
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9,209 |
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7,638 |
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Total current liabilities |
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24,967 |
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22,037 |
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Deferred income taxes |
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1,090 |
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1,226 |
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Total stockholders equity |
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229,880 |
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224,796 |
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Total liabilities and stockholders equity |
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$ |
255,937 |
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$ |
248,059 |
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See accompanying notes.
4
COSTAR GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
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Three Months Ended |
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March 31, |
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2006 |
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2005 |
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Operating activities: |
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Net income |
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$ |
1,860 |
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$ |
974 |
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Adjustments to reconcile net income to net cash provided by operating
activities: |
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Depreciation |
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1,354 |
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1,510 |
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Amortization |
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1,459 |
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1,665 |
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Stock based compensation expense related to stock options and
restricted stock |
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998 |
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14 |
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Income tax expense, net |
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1,108 |
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644 |
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Provision for losses on accounts receivable |
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295 |
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146 |
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Changes in operating assets and liabilities, net of acquisitions |
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(276 |
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(2,618 |
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Net cash provided by operating activities |
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6,798 |
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2,335 |
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Investing activities: |
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Purchases of short-term investments |
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(25,461 |
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(60,287 |
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Sales of short-term investments |
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34,272 |
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54,103 |
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Purchases of property and equipment and other assets |
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(1,225 |
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(2,442 |
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Acquisitions, net of cash acquired |
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(4,162 |
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Net cash provided by (used in) investing activities |
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7,586 |
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(12,788 |
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Financing activities: |
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Proceeds from exercise of stock options |
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2,629 |
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204 |
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Net cash provided by financing activities |
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2,629 |
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204 |
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Effect of foreign currency exchange rates on cash and cash equivalents |
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15 |
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(43 |
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Net increase (decrease) in cash and cash equivalents |
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17,028 |
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(10,292 |
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Cash and cash equivalents at the beginning of period |
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28,065 |
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36,807 |
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Cash and cash equivalents at the end of period |
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$ |
45,093 |
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$ |
26,515 |
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See accompanying notes.
5
COSTAR GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CoStar Group, Inc. (the Company) has created a comprehensive, proprietary database of
commercial real estate information for metropolitan areas throughout the United States and the
United Kingdom. Based on its unique database, the Company provides information services to the
commercial real estate and related business community and operates within one business segment. The
information services are typically distributed to its clients under subscription-based license
agreements, which have a minimum term of one year and renew automatically.
2. |
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Basis of Presentation
The consolidated financial statements include the accounts of the Company and its wholly owned
subsidiaries. All significant intercompany balances and transactions have been eliminated in
consolidation.
Interim Financial Statements
The accompanying unaudited condensed consolidated financial statements of the Company have
been prepared in accordance with accounting principles generally accepted in the United States for
interim financial information. In the opinion of the Companys management, the financial statements
reflect all adjustments necessary to present fairly the Companys financial position at March 31,
2006, and the results of its operations and its cash flows for the three months ended March 31,
2006 and 2005. These adjustments are of a normal recurring nature.
Certain notes and other information have been condensed or omitted from the interim financial
statements presented in this Quarterly Report on Form 10-Q. Therefore, these financial statements
should be read in conjunction with the Companys Annual Report on Form 10-K for the year ended
December 31, 2005.
The results of operations for the three months ended March 31, 2006 are not necessarily
indicative of future financial results.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. Actual results could differ
from those estimates.
Reclassifications
Certain previously reported amounts have been reclassified to conform to the Companys current
presentation.
Foreign Currency Translation
The Companys functional currency in its foreign locations is the local currency. Assets and
liabilities are translated into U.S. dollars as of the balance sheet date. Revenues, expenses,
gains and losses are translated at the average exchange rates in effect during each period. Gains
and losses resulting from translation are included in accumulated other comprehensive income
(loss). Net gains or losses resulting from foreign currency exchange transactions are included in
the consolidated statements of operations. The Company had an increase (decrease) in comprehensive
income (loss) of approximately $220,000 and ($575,000), from translation of its foreign
6
COSTAR GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. |
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
Foreign
Currency Translation (continued)
subsidiaries assets and liabilities into U.S. dollars, for the three months ended March 31, 2006
and 2005, respectively. There were no material gains or losses from foreign currency exchange
transactions for the three months ended March 31, 2006 and 2005.
Comprehensive Income
During the three months ended March 31, 2006 and 2005, total comprehensive income was
approximately $1.9 million and $568,000, respectively. As of March 31, 2006, accumulated
comprehensive income (loss) included foreign currency translation adjustments of approximately $1.9
million and an unrealized loss on short-term investments of approximately $516,000.
Net Income Per Share
Net income per share is computed by dividing net income by the weighted average number of
common shares outstanding during the period on a basic and diluted basis. The Companys
potentially dilutive securities include stock options. Diluted net income per share considers the
impact of potentially dilutive securities except in periods in which there is a net loss as the
inclusion of the potentially dilutive common shares would have an anti-dilutive effect.
The following table sets forth the calculation of basic and diluted net income per share (in
thousands except per share amounts):
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Three Months Ended |
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March 31, |
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2006 |
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2005 |
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Numerator: |
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Net income |
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$ |
1,860 |
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$ |
974 |
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Denominator: |
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Denominator for basic net income per share
weighted-average outstanding shares |
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18,692 |
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18,318 |
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Effect of dilutive securities: |
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Stock options |
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577 |
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543 |
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Denominator for diluted net income per share
weighted-average outstanding shares |
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19,269 |
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18,861 |
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Net income per share basic |
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$ |
0.10 |
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$ |
0.05 |
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Net income per share diluted |
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$ |
0.10 |
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$ |
0.05 |
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Stock-Based Compensation
On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123R
Share Based Payment (SFAS 123R), which addresses the accounting for share-based payment
transactions in which the Company receives employee services in exchange for equity instruments.
The statement eliminates the Companys ability to account for share-based compensation transactions
as prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB No. 25), and generally requires that such transactions
7
COSTAR GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. |
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
Stock-Based Compensation (continued)
be accounted for using a fair-value based method and recognized as
compensation expense in the consolidated
statement of operations.
In June 1998, the Companys
Board of Directors adopted the 1998 Stock Incentive Plan (the
1998 Plan)
prior to consummation of the Companys
initial public offering. The 1998 Plan provides for the grant of stock and stock options to officers, directors and employees
of the Company and its subsidiaries. The Company has reserved 3,750,000 shares of common stock for issuance under
the 1998 Plan. Options granted under the 1998 Plan may be incentive or non-qualified stock options. The exercise price for an incentive
stock option may not be less than the fair market value of the
Companys
common stock on the date of grant. The vesting period of the options and restricted stock grants is determined by the Board of
Directors and is generally four years. Upon the occurrence of a Change of Control, as defined in the 1998 Plan, all outstanding
unexercisable options and restricted stock grants under the 1998 Plan immediately become exercisable. Options are not exercisable
after the ten-year anniversary of the date of grant and may terminate earlier. The 1998 Plan will terminate in May 2008,
unless terminated sooner by the Board of Directors or extended by the Board of Directors and Stockholders of the
Company, but will continue to govern unexercised and unexpired stock-based awards under the 1998 Plan.
Under
the fair-value recognition provisions of SFAS 123R, stock-based compensation cost is
estimated at the grant date based on the fair value of the awards expected to vest and recognized
as expense ratably over the requisite service period of the award.
The Company adopted SFAS 123R using the modified prospective method, which requires the
application of the accounting standard as of January 1, 2006. In accordance with the modified
prospective method, the consolidated financial statements for prior periods have not been restated
to reflect, and do not include, the impact of SFAS 123R. SFAS 123R requires forfeitures to be
estimated at the time of grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. In the pro forma information required under APB No. 25 for
the periods prior to 2006, the Company accounted for forfeitures as they occurred. Upon adoption of SFAS
123R, the Company recorded a charge of approximately $35,000 representing the cumulative effect of
a change in accounting principle as a result of this change in accounting policy. This amount was
recorded in general and administrative expenses in the accompanying condensed consolidated
statements of operations.
The impact of the adoption
of SFAS 123R on our results of operations for the three months ended
March 31, 2006, compared to if we had continued to account for
stock-based compensation under APB No. 25 for our stock option
grants for the three months ended March 31, 2006 was as follows (in thousands, except per share data):
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Three Months Ended |
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March
31, 2006 |
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Income from operations |
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$ |
(792 |
) |
Income before taxes |
|
$ |
(792 |
) |
Net income |
|
$ |
(450 |
) |
Basic earnings per share |
|
$ |
(0.02 |
) |
Diluted earnings per share |
|
$ |
(0.02 |
) |
As a result of adopting SFAS 123R, there were no excess tax benefits for the three months
ended March 31, 2006 and no amounts were classified as an operating cash outflow and a financing
cash inflow in the condensed consolidated statement of cash flows.
8
COSTAR GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. |
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
Stock-Based Compensation (continued)
The stock based compensation, including expense for stock options and restricted stock, in our
results of operations for the three months ended March 31, 2006 and March 31, 2005 was as follows
(in thousands):
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Three
Months Ended March 31, |
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|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
Cost of revenues |
|
$ |
28 |
|
|
$ |
|
|
Selling and marketing |
|
|
320 |
|
|
|
|
|
Software development |
|
|
43 |
|
|
|
|
|
General and administrative |
|
|
607 |
|
|
|
14 |
|
|
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Total |
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$ |
998 |
|
|
$ |
14 |
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|
Net cash proceeds from the exercise of stock options were $2.6 million for the three months
ended March 31, 2006. The income tax benefit realized from stock option exercises is $0 for the
three months ended March 31, 2006.
Prior to the adoption of SFAS 123R, the Company provided the disclosures required under
APB No. 25. Employee stock-based compensation expense recognized
under SFAS 123R was not reflected in our results of operations for the three-month period ended March 31, 2005. Previously reported
amounts have not been restated in the Companys financial statements.
The following
table illustrates the pro forma effect on operating results and per share information had
the Company accounted for stock-based compensation in accordance with SFAS 123R for the three
months ended March 31, 2005, (in millions, except per share amounts):
|
|
|
|
|
|
|
Three
Months Ended March 31, 2005 |
Net income, as reported |
|
$ |
974 |
|
|
Add: stock-based employee compensation expense included in reported net
income, net of taxes |
|
|
9 |
|
|
Deduct: total stock-based employee compensation expense determined under
fair value based method for all awards, net of taxes |
|
|
(1,137 |
) |
|
|
|
|
|
|
Pro forma net income (loss) |
|
$ |
(154 |
) |
|
|
|
|
|
|
Net income (loss) per share: |
|
|
|
|
|
Basic as reported |
|
$ |
0.05 |
|
|
|
|
|
|
|
Basic pro forma |
|
$ |
(0.01 |
) |
|
|
|
|
|
|
Diluted as reported |
|
$ |
0.05 |
|
|
|
|
|
|
|
Diluted pro forma |
|
$ |
(0.01 |
) |
|
|
|
|
|
|
9
COSTAR GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. |
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
Stock-Based Compensation (continued)
The Company estimates the fair value of each option granted on the date of grant using the
Black-Scholes option-pricing model, using the assumptions noted in the following table. There were
no options granted in the first quarter of 2006.
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March
31, 2005 |
|
Dividend yield |
|
|
0 |
% |
Expected volatility |
|
|
64 |
% |
Risk-free interest rate |
|
|
4.4 |
% |
Expected life (in years) |
|
|
5 |
|
Weighted average grant date fair value |
|
$ |
26.65 |
|
The assumptions above
and the estimation of expected forfeitures are based on multiple
factors, including historical employee behavior patterns of exercising options and post employment
termination behavior, expected future employee option exercise patterns, and the historical
volatility of the Companys stock price.
The following table presents stock option activity for the three months ended March 31,
2006: (in thousands, except share and contract life data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
Remaining |
|
|
Aggregate |
|
|
|
Number of Shares |
|
|
Exercise Price |
|
|
Contract Life |
|
|
Intrinsic Value |
|
Outstanding at December 31, 2005 |
|
|
1,473,897 |
|
|
$ |
29.76 |
|
|
|
6.3 |
|
|
$ |
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(102,563 |
) |
|
|
25.35 |
|
|
|
|
|
|
|
|
|
Expired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canceled |
|
|
(12,563 |
) |
|
|
36.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2006 |
|
|
1,358,771 |
|
|
$ |
30.02 |
|
|
|
6.1 |
|
|
$ |
29,707 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2006 |
|
|
932,891 |
|
|
$ |
27.41 |
|
|
|
5.3 |
|
|
$ |
22,841 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate
intrinsic value is calculated as the difference between the aggregate of
the exercise prices of
the underlying awards and the quoted price of the common stock at
March 31, 2006 multiplied by the 932,000 options that had an
exercise price less than the quoted price on that date. The aggregate intrinsic value of
options exercised was $2.7 million and $198,000 for the three months ended March 31, 2006 and 2005,
respectively, determined as of the date of option exercise. At March 31, 2006, there was $5.8
million of unrecognized compensation cost related to share-based payments, net of forfeitures,
which is expected to be recognized over a weighted-average-period of 1.9 years.
10
COSTAR GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. |
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
Stock-Based Compensation (continued)
The number of shares available for future stock option and restricted stock grants to
employees and directors under the Companys existing stock incentive plan was 436,117 at March 31,
2006. No shares of restricted stock or options were granted during the three months ended March 31, 2006.
The following table summarizes our nonvested stock option activity for the three months ended
March 31, 2006: (in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
|
Grant Date |
|
|
|
Number of Shares |
|
|
Fair Value |
|
Nonvested stock options at December 31, 2005 |
|
|
513,443 |
|
|
$ |
24.81 |
|
Granted |
|
|
|
|
|
|
|
|
Vested |
|
|
(75,000 |
) |
|
|
20.51 |
|
Canceled |
|
|
(12,563 |
) |
|
|
25.94 |
|
|
|
|
|
|
|
|
Nonvested stock options at March 31, 2006 |
|
|
425,880 |
|
|
$ |
25.61 |
|
|
|
|
|
|
|
|
On January 20, 2005, the Company acquired the assets of National Research Bureau (NRB), a
leading provider of property information to the shopping center industry, from Claritas, Inc. for
approximately $4.1 million in cash. NRB has over 45 years of experience as a leading provider of
information to the retail real estate industry, principally through its Shopping Center Directory
and Shopping Center Directory on CD-ROM.
The acquisition has been accounted for using purchase accounting. The purchase price was
primarily allocated to acquired database technology, customer bases, and goodwill. The acquired
database technology is being amortized on a straight-line basis over 5 years. The customer base,
which consists of one distinct intangible asset composed of acquired customer contracts and the
related customer relationships, is being amortized on a 125% declining balance method over 10
years. Goodwill is not amortized, but is subject to annual impairment tests. The results of
operations of NRB have been consolidated with those of the Company since the date of acquisition
and are not considered material to the consolidated financial statements of the Company.
Accordingly, pro forma financial information has not been presented for the acquisition.
Goodwill consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
$ |
54,931 |
|
|
$ |
54,786 |
|
Accumulated amortization |
|
|
(11,223 |
) |
|
|
(11,223 |
) |
|
|
|
|
|
|
|
Goodwill, net |
|
$ |
43,708 |
|
|
$ |
43,563 |
|
|
|
|
|
|
|
|
11
COSTAR GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. |
|
INTANGIBLES AND OTHER ASSETS |
Intangibles and other assets consist of the following (in thousands except amortization period
data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
Amortization |
|
|
|
March 31, |
|
|
December 31, |
|
|
Period |
|
|
|
2006 |
|
|
2005 |
|
|
(in years) |
|
|
|
(unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Building photography |
|
$ |
6,759 |
|
|
$ |
5,922 |
|
|
|
5 |
|
Accumulated amortization |
|
|
(4,950 |
) |
|
|
(4,853 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Building photography, net |
|
|
1,809 |
|
|
|
1,069 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired database technology |
|
|
20,645 |
|
|
|
20,626 |
|
|
|
4 |
|
Accumulated amortization |
|
|
(19,273 |
) |
|
|
(19,096 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired database technology, net |
|
|
1,372 |
|
|
|
1,530 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired customer base |
|
|
43,429 |
|
|
|
43,324 |
|
|
|
10 |
|
Accumulated amortization |
|
|
(25,927 |
) |
|
|
(24,804 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired customer base, net |
|
|
17,502 |
|
|
|
18,520 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired tradename |
|
|
4,198 |
|
|
|
4,198 |
|
|
|
10 |
|
Accumulated amortization |
|
|
(2,575 |
) |
|
|
(2,470 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired tradename, net |
|
|
1,623 |
|
|
|
1,728 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles and other assets, net |
|
$ |
22,306 |
|
|
$ |
22,847 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The income tax provisions for the three months ended March 31, 2006, and March 31, 2005,
reflect a 43.2% and 39.8% effective rate, respectively. The increase in the effective rate for the
three months ended March 31, 2006, is primarily attributable to the implementation of SFAS 123R,
which does not permit a deferred tax asset to be recognized for compensation deductions
attributable to incentive stock options. The Company establishes a valuation allowance with respect
to deferred tax assets associated with future tax benefits that the Company is not certain it will
be able to realize. As of March 31, 2006, the Company continues to maintain a valuation allowance
of approximately $687,000 for certain state net operating loss carryforwards.
7. |
|
COMMITMENTS AND CONTINGENCIES |
Currently, and from time to time, the Company is involved in litigation incidental to the
conduct of its business. The Company is not a party to any lawsuit or proceeding that, in the
opinion of management, is likely to have a material adverse effect on its financial position or
results of operations.
12
COSTAR GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Effective July 21, 2005, the Company closed its research center in Mason, Ohio (the Mason
Operations). The closing of the Mason Operations resulted in a one-time pre-tax charge of
approximately $2.2 million recorded in the third quarter of 2005. The third quarter restructuring
charge included amounts for wages, severance, occupancy and other costs. Below is a summary of the
expense recorded and the activity related to restructuring. The estimates have been made based upon
managements best estimate of amounts and timing of certain events included in the restructuring
plan that will occur in the future. It is possible that the actual outcome of certain events may
differ from estimates. Changes will be made to the restructuring accrual at the point that the
differences become determinable.
Restructuring expenses (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual balance as |
|
|
|
|
|
|
Accrual balance as |
|
|
|
of December 31, |
|
|
2006 charges |
|
|
of March 31, |
|
|
|
2005 |
|
|
utilized |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Occupancy |
|
$ |
973 |
|
|
$ |
115 |
|
|
$ |
858 |
|
Wages, severance, and other costs |
|
|
64 |
|
|
|
59 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
Total restructuring charge |
|
$ |
1,037 |
|
|
$ |
174 |
|
|
$ |
863 |
|
|
|
|
|
|
|
|
|
|
|
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following Managements Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements, including statements about our beliefs and
expectations. See Cautionary Statement Concerning Forward-Looking Statements at the end of this
Item 2. for additional factors relating to such statements, and see Risk Factors in Item 1A. of
Part II of this report for a discussion of certain risk factors applicable to our business,
financial condition and results of operations.
The following discussion should be read in conjunction with our Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other filings with the Securities
and Exchange Commission and the condensed consolidated financial statements and related notes
included in this Quarterly Report on Form 10-Q.
Overview
CoStar is the leading provider of information services to the commercial real estate industry
in the United States and the United Kingdom based on the fact that we offer the most comprehensive
commercial real estate database available, have the largest research department in the industry,
provide more information services than any of our competitors and believe we generate more revenues
than any of our competitors. We have created a standardized information platform where the members
of the commercial real estate and related business community can continuously interact and
facilitate transactions by efficiently exchanging accurate and standardized commercial real estate
information. Our integrated suite of online service offerings includes information about space
available for lease, comparable sales information, tenant information, information about properties
for sale, information for clients web sites, information about industry professionals and their
business relationships, analytic information, data integration, property marketing and industry
news.
13
We completed our initial public offering in July 1998 and received net proceeds of
approximately $22.7 million. We used those net proceeds to fund the geographic and service
expansion of our business, including three strategic acquisitions, and to expand our sales and
marketing organization. In May 1999, we completed a follow-on public offering and received net
proceeds of approximately $97.4 million. We used a portion of those net proceeds to fund the
acquisitions of COMPS.COM, Inc. (Comps) and Property Intelligence plc (Property Intelligence).
In November 2003, we completed an additional follow-on public offering and received net proceeds of
approximately $53.5 million. We expect to use the remainder of the proceeds from these public
offerings for development and distribution of new services, expansion of existing services across
our current markets, geographic expansion in the U.S. and international markets, strategic
acquisitions, working capital and general corporate purposes.
From 1994 through the beginning of 2003, we expanded the geographical coverage of our existing
information services and developed new information services. In addition to internal growth, this
expansion included the acquisitions of Chicago ReSource, Inc. in Chicago in 1996 and New Market
Systems, Inc. in San Francisco in 1997. In August 1998, we expanded into the Houston region through
the acquisition of Houston-based real estate information provider C Data Services, Inc. In January
1999, we expanded further into the Midwest and Florida by acquiring LeaseTrend, Inc. and into
Atlanta and Dallas/Fort Worth by acquiring Jamison Research, Inc. In February 2000, we acquired
Comps, a San Diego-based provider of commercial real estate information. In November 2000, we
acquired First Image Technologies, Inc. (First Image). In September 2002, we expanded further
into Portland, Oregon through the acquisition of certain assets of Napier Realty Advisors d/b/a
REAL-NET (REAL-NET). In January 2003, we established a base in the United Kingdom with our
acquisition of London-based Property Intelligence. In May 2004, we expanded into Tennessee through
the acquisition of Peer Market Research, Inc. (PeerMark), and in June 2004, we extended our
coverage of the United Kingdom through the acquisition of Scottish Property Network (SPN). In
September 2004, we strengthened our position in Denver, Colorado through the acquisition of
substantially all of the assets of RealComp, Inc., a local comparable sales information provider.
In January 2005, we acquired National Research Bureau (NRB), a leading provider of U.S. shopping
center information. The most recent acquisition is discussed later in this section.
During the first
quarter of 2006, we implemented the following new critical accounting policy
related to our stock-based compensation. Beginning on January 1, 2006, we began accounting for
stock based compensation under the provisions of SFAS No. 123R, Share-Based Payment (SFAS
123R), which requires the recognition of the fair value of stock based compensation. Under the
fair value recognition provisions of SFAS 123R, stock-based compensation cost is estimated at the
grant date based on the fair value of the awards expected to vest and recognized as expense ratably
over the requisite service period of the award. We have used the Black-Scholes valuation model to
estimate fair value of our stock-based awards, which requires us to
make various judgmental assumptions
including estimating stock price volatility, forfeiture rates, and expected life. Our computation
of expected volatility is based on historical volatility.
In addition, we consider many factors when estimating expected forfeitures and expected life,
including types of awards, employee class, and historical experience. If any of the assumptions
used in the Black-Scholes valuation model change significantly, stock-based compensation expense
may differ materially in the future from that recorded in the current period.
The Company adopted SFAS 123R using the modified prospective method, which requires the application of
the accounting standard under SFAS 123R as of January 1, 2006. In accordance with the modified prospective method,
the consolidated financial statements for prior periods have not been restated to reflect, and do not include, the impact of
SFAS 123R. SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates. In the pro forma information required under APB No. 25 for the
periods prior to 2006, the Company accounted for forfeitures as they occurred. Upon adoption of SFAS 123R, the
Company recorded a charge of approximately $35,000 representing the cumulative effect of a change in accounting principle
as a result of this change in accounting policy. This amount was recorded in general and administrative expenses
in the accompanying condensed consolidated statements of operations.
In 2005, we issued restricted stock instead of stock options to our senior officers and
employees, and as a result we recorded additional compensation expense in our consolidated
statement of operations. We plan to continue the use of alternative stock-based compensation for
our senior officers, directors and employees, which may include, among other things, restricted
stock grants that typically will require us to record additional compensation expense
14
on our consolidated statement of operations and reduce our net income.
We
currently expect to incur approximately $5.0 to $6.0 million in total
equity compensation expense in 2006.
Our current expansion plan began in 2004 and included entering 21 new metropolitan markets
throughout the United States as well as expanding the geographical boundaries of many of our
existing U.S. and U.K. markets during 2005 and 2006. As of February 21, 2006, our expansion into
the 21 new markets was complete. In addition, in January 2005, we acquired NRB and announced the
launch of a major expansion effort into real estate information for retail properties. Our current
retail expansion plan has caused, and will continue to cause, our cost structure to escalate in
advance of the revenues that we expect to generate from these new markets and services, which may
reduce our earnings growth.
In addition to our current planned retail expansion, we may continue further geographic
expansion in the United States, we may seek additional international geographic expansion or we may
seek to expand our services. Any future significant expansion could reduce our profitability and
significantly increase our capital expenditures. Therefore, while we expect current service
offerings in existing markets to remain generally profitable and provide substantial funding for
our overall business, it is possible that further overall expansion could cause us to generate
losses and negative cash flow from operations in the future.
We expect 2006 revenue to grow over 2005 revenue as a result of further penetration of our
services in our potential customer base across our platform, successful cross selling of our
services to our existing customer base, and continued geographic expansion. We expect EBITDA, which
is our net-income before interest, income taxes, depreciation and amortization, for our existing
core platform to continue to grow principally due to growth in revenue and we expect overall 2006
EBITDA to increase from 2005 EBITDA including stock option
compensation expense related to the 2006 adoption of SFAS 123R. We reconcile EBITDA with our net income in a table set forth below under the heading Non-GAAP
Financial Measure.
Our subscription-based information services, consisting primarily of CoStar Property
Professional, CoStar Tenant, CoStar COMPS Professional and FOCUS services, currently generate
approximately 96% of our total revenues. Our contracts for our subscription-based information
services typically have a minimum term of one year and renew automatically. Upon renewal, many of
the subscription contract rates may increase in accordance with contract provisions or as a result
of contract renegotiations. To encourage clients to use our services regularly, we generally charge
a fixed monthly amount for our subscription-based services rather than fees based on actual system
usage. Contract rates are based on the number of sites, number of users, organization size, the
clients business focus and the number of services to which a client subscribes. Our subscription
clients generally pay contract fees on a monthly basis, but in some cases may pay us on a quarterly
or annual basis. We recognize this revenue on a straight-line basis over the life of the contract.
Annual and quarterly advance payments result in deferred revenue, substantially reducing the
working capital requirements generated by accounts receivable.
For the three months ended March 31, 2006 and 2005, our contract renewal rates were
approximately 94%.
Application of Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity with Generally
Accepted Accounting Principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities
at the date of the financial statements and revenues and expenses during the period reported. The
following accounting policies involve a critical accounting estimate because they are
particularly dependent on estimates and assumptions made by management about matters that are
highly uncertain at the time the accounting estimates are made. In addition, while we have used our
best estimates based on facts and circumstances available to us at the time, different estimates
reasonably could have been used in the current period. Changes in the accounting estimates we use
are reasonably likely to occur from period to period, which may have a material impact on the
presentation of our financial condition and results of operations. We review these estimates and
assumptions periodically and reflect the effects of revisions in the period that they are
determined to be necessary.
15
Valuation of long-lived and intangible assets and goodwill
We assess the impairment of long-lived assets, identifiable intangibles and goodwill whenever
events or changes in circumstances indicate that the carrying value may not be recoverable. Factors
we consider important that could trigger an impairment review include the following:
|
|
|
Significant underperformance relative to historical or projected future operating results; |
|
|
|
|
Significant changes in the manner of our use of the acquired assets or the strategy for our overall business; |
|
|
|
|
Significant negative industry or economic trends; or |
|
|
|
|
Significant decline in our market capitalization relative to net book value for a sustained period. |
When we determine that the carrying value of long-lived and identifiable intangible assets may
not be recovered based upon the existence of one or more of the above indicators, we measure any
impairment based on a projected discounted cash flow method using a discount rate determined by our
management to be commensurate with the risk inherent in our current business model.
Goodwill and identifiable intangible assets not subject to amortization are tested annually on
October 1st of each year for impairment, and are tested for impairment more frequently
based upon the existence of one or more of the above indicators. We measure any impairment loss to
the extent that the carrying amount of the asset exceeds its fair value.
Accounting for income taxes
As part of the process of preparing our consolidated financial statements, we are required to
estimate our income taxes in each of the jurisdictions in which we operate. This process requires
us to estimate our actual current tax exposure and assess the temporary differences resulting from
differing treatment of items, such as deferred revenue or deductibility of certain intangible
assets, for tax and accounting purposes. These differences result in deferred tax assets and
liabilities, which are included within our consolidated balance sheet. We must then also assess the
likelihood that our deferred tax assets will be recovered from future taxable income, and to the
extent we believe that it is more likely than not that some portion or all of our deferred tax
assets will not be realized, we must establish a valuation allowance. To the extent we establish a
valuation allowance or change the allowance in a period, we must reflect the corresponding increase
or decrease within the tax provision in the statement of operations.
As of March 31, 2006, we continued to maintain a valuation allowance of approximately,
$687,000 for certain net operating loss carryforwards. At March 31, 2006, we had net operating
loss carryforwards for federal income tax purposes of approximately $63.0 million, which expire, if
unused, from the year 2013 through the year 2023. Our decision to maintain only a minimal
valuation allowance on our deferred tax asset was based on our expectation that we will recognize
taxable income from operations in the future, which will enable us to use our net operating loss
carryforwards. We believe our expectation that we will recognize taxable income in the future is
supported by our increase in net earnings over the last three years, our revenue growth, our
renewal rates with our existing customers, and our business model, which permits some control over
future costs. We will continue to evaluate our expectation of future taxable income during each
quarter. If we are unable to conclude that it is more likely than not that we will realize the
future tax benefits associated with our deferred tax assets, then we may be required to establish a
valuation allowance against some or all of the deferred tax assets.
For the foreseeable future, we expect to record income tax expense on our results from
operations at an effective rate of approximately 42.5% to 43.5%. For at least the next two years,
however, we expect the majority of our taxable income to be offset by our net operating loss
carryforwards. As a result, we expect our cash payments for taxes to be limited primarily to
federal alternative minimum taxes and to state income taxes in certain states.
In determining the quarterly annual provision for income taxes, the Company uses an estimated
annual effective tax rate based on expected annual income by jurisdiction, statutory tax rates,
permanent timing difference, and tax planning opportunities available in the various jurisdictions
in which the Company operates.
16
Non-GAAP Financial Measure
We prepare and publicly release quarterly unaudited financial statements prepared in
accordance with GAAP. We also disclose and discuss certain non-GAAP financial measures in our
public releases. Currently, the non-GAAP financial measure that we disclose is EBITDA, which is our
net income before interest, income taxes, depreciation and amortization. We disclose EBITDA in our
earnings releases, investor conference calls and filings with the Securities and Exchange
Commission. The non-GAAP financial measure that we use may not be comparable to similarly titled
measures reported by other companies. Also, in the future, we may disclose different non-GAAP
financial measures in order to help our investors more meaningfully evaluate and compare our future
results of operations to our previously reported results of operations.
We view EBITDA as an operating performance measure and as such we believe that the GAAP
financial measure most directly comparable to it is net income. In calculating EBITDA we exclude
from net income the financial items that we believe should be separately identified to provide
additional analysis of the financial components of the day-to-day operation of our business. We
have outlined below the type and scope of these exclusions and the material limitations on the use
of these non-GAAP financial measures as a result of these exclusions. EBITDA is not a measurement
of financial performance under GAAP and should not be considered as a measure of liquidity, as an
alternative to net income or as an indicator of any other measure of performance derived in
accordance with GAAP. Investors and potential investors in our securities should not rely on EBITDA
as a substitute for any GAAP financial measure, including net income. In addition, we urge
investors and potential investors in our securities to carefully review the reconciliation of
EBITDA to net income set forth below, in our earnings releases and in other filings with the
Securities and Exchange Commission and to carefully review the GAAP financial information included
as part of our Quarterly Reports on Form 10-Q and our Annual Reports on Form 10-K that are filed
with the Securities and Exchange Commission, as well as our quarterly earnings releases, and
compare the GAAP financial information with our EBITDA.
EBITDA is used by management to internally measure our operating and management performance
and by investors as a supplemental financial measure to evaluate the performance of our business.
We believe that EBITDA, when viewed with our GAAP results and the accompanying reconciliation, provides
additional information that is useful to gain an understanding of the factors and trends affecting
our business. We have spent more than 18 years building our database of commercial real estate
information and expanding our markets and services partially through acquisitions of complementary
businesses. Due to the expansion of our information services, which included acquisitions, our net
income has included significant charges for purchase amortization, depreciation and other
amortization. EBITDA excludes these charges and provides meaningful information about the operating
performance of our business, apart from charges for purchase amortization, depreciation and other
amortization. We believe the disclosure of EBITDA helps investors meaningfully evaluate and compare
our performance from quarter to quarter and from year to year. We also believe EBITDA is a measure
of our ongoing operating performance because the isolation of non-cash charges, such as
amortization and depreciation, and non-operating items, such as interest and income taxes, provides
additional information about our cost structure, and, over time, helps track our operating
progress. In addition, investors, securities analysts and others have regularly relied on EBITDA to
provide a financial measure by which to compare our operating performance against that of other
companies in our industry.
Set forth below are descriptions of the financial items that have been excluded from our net
income to calculate EBITDA and the material limitations associated with using this non-GAAP
financial measure as compared to net income:
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|
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Purchase amortization in cost of revenues may be useful for investors to consider
because it represents the use of our acquired database technology, which is one of the
sources of information for our database of commercial real estate information. We do not
believe these charges reflect the current and ongoing cash charges related to our operating
cost structure. |
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Purchase amortization in operating expenses may be useful for investors to consider
because it represents the estimated attrition of our acquired customer base and the
diminishing value of any acquired tradenames. We do not believe these charges necessarily
reflect the current and ongoing cash charges related to our operating cost structure. |
17
|
|
|
Depreciation and other amortization may be useful for investors to consider because they
generally represent the wear and tear on our property and equipment used in our operations.
We do not believe these charges necessarily reflect the current and ongoing cash charges
related to our operating cost structure. |
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The amount of net interest income we generate may be useful for investors to consider
and may result in current cash inflows or outflows. However, we do not consider the amount
of net interest income to be a representative of the day-to-day operating performance of
our business. |
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Income tax expense (benefit) may be useful for investors to consider because it
generally represents the taxes which may be payable for the period and the change in
deferred income taxes during the period and may reduce the amount of funds otherwise
available for use in our business. However, we do not consider the amount of income tax
expense (benefit) to be a representative component of the day-to-day operating performance
of our business. |
Management compensates for the above-described limitations of using non-GAAP measures by only
using a non-GAAP measure to supplement our GAAP results and to provide additional information that
is useful to gain an understanding of the factors and trends affecting our business.
The following table shows our EBITDA reconciled to our net income and our cash flows from
operating, investing and financing activities for the indicated periods (in thousands of dollars):
|
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|
|
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|
|
|
|
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|
Three Months Ended |
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|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,860 |
|
|
$ |
974 |
|
Purchase amortization in cost of revenues |
|
|
256 |
|
|
|
476 |
|
Purchase amortization in operating expenses |
|
|
1,108 |
|
|
|
1,118 |
|
Depreciation and other amortization |
|
|
1,449 |
|
|
|
1,581 |
|
Interest income, net |
|
|
(1,426 |
) |
|
|
(604 |
) |
Income tax expense, net |
|
|
1,414 |
|
|
|
644 |
|
|
|
|
|
|
|
|
EBITDA |
|
$ |
4,661 |
|
|
$ |
4,189 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by (used in) |
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
6,798 |
|
|
$ |
2,335 |
|
Investing activities |
|
|
7,586 |
|
|
|
(12,788 |
) |
Financing activities |
|
|
2,629 |
|
|
|
204 |
|
Comparison of Three Months Ended March 31, 2006 and Three Months Ended March 31, 2005
Revenues. Revenues increased from $31.3 million in the first quarter of 2005 to $37.3 million
in the first quarter of 2006. This increase in revenue is due to further penetration of our
subscription-based information services, as well as the successful cross-selling into our customer
base across our service platform in existing markets combined with continued high renewal rates.
Our subscription-based information services, consisting primarily of CoStar Property Professional,
CoStar Tenant, CoStar COMPS Professional and FOCUS services, currently generate 96% of our total
revenues.
Gross Margin. Gross margin increased from $20.9 million in the first quarter of 2005 to $24.3
million in the first quarter of 2006. Gross margin percentage decreased from 66.5% to 65.3%. The
increase in the gross margin amount resulted principally from internal revenue growth from our
subscription-based information services. The increase in cost of revenues from $10.5 million for
the first quarter of 2005 to $12.9 million for the first quarter of 2006 principally resulted from
increased research department hiring, training, compensation and other operating costs and
18
the addition of offshore resources for our retail expansion, as well as research costs
associated with further service enhancements to our existing platform.
Selling and Marketing Expenses. Selling and marketing expenses increased from $9.5 million in
the first quarter of 2005 to $10.9 million in the first quarter of 2006 and decreased as a
percentage of revenues from 30.3% in the first quarter of 2005 to 29.3% in the first quarter of
2006. The increase in the amount of selling and marketing expenses is primarily due to increased
sales commissions and growth in the sales force as well as costs associated with sales and
marketing efforts for our current expansion plan. Additionally, stock based compensation expense
included in selling and marketing expenses for the first quarter of 2005 was $0 compared to
$320,000 for the first quarter of 2006.
Software Development Expenses. Software development expenses increased from $2.3 million in
the first quarter of 2005 to $2.9 million in the first quarter of 2006 and increased as a
percentage of revenues from 7.4% in the first quarter in 2005 to 7.8% in the first quarter of 2006.
The majority of the increase in software and development expense was due to the hiring of new
employees to support our continued focus on enhancements to our existing services, development of
new services and development costs for our internal information systems.
General and Administrative Expenses. General and administrative expenses increased from $6.9
million in the first quarter of 2005 to $7.6 million in the first quarter of 2006 and decreased as
a percentage of revenues from 22.0% in the first quarter of 2005 to 20.3% in the first quarter of
2006. The increase is primarily due to an increase in stock based compensation from $14,000 in the
first quarter of 2005 to $607,000 in the first quarter of 2006.
Purchase Amortization. Purchase amortization remained stable at $1.1 million in the first
quarter of 2005 and 2006.
Other Income, Net. Other income increased from $604,000 in the first quarter of 2005 to $1.4
million in the first quarter of 2006. This increase was primarily due to higher interest income as
a result of higher total cash, cash equivalents and short-term investment balances and increased
interest rates for the first quarter of 2006 as compared to the first quarter of 2005.
Income Tax Expense. Income tax expense increased from $644,000 in the first quarter of 2005
to $1.4 million in the first quarter of 2006. The increase in income tax expense is a result of
our increased profitability.
Recent Acquisitions
National Research Bureau. On January 20, 2005, the Company acquired the assets of NRB, a
leading provider of property information to the shopping center industry, from Claritas Inc. for
approximately $4.1 million in cash.
Accounting Treatment. The acquisition has been accounted for using purchase accounting. The
purchase price for the acquisition was allocated primarily to acquired database technology,
customer base and goodwill. The acquired database technology for the acquisition is being
amortized on a straight-line basis over 5 years. The customer base for the acquisition, which
consists of one distinct intangible asset composed of acquired customer contracts and the related
customer relationships, is being amortized on a 125% declining balance method over 10 years.
Goodwill will not be amortized, but is subject to annual impairment tests. The results of
operations of NRB have been consolidated with our results since the date of acquisition. The
operating results of NRB are not considered material to our consolidated financial statements, and
accordingly, pro forma financial information has not been presented for the acquisition.
Liquidity and Capital Resources
Our principal sources of liquidity are cash, cash equivalents and short-term investments.
Total cash, cash equivalents and short-term investments increased $8.1 million from $134.2 million
at December 31, 2005 to $142.3 million at March 31,
2006. The increase in cash, cash equivalents and short-term
investments during the three
months ended March 31, 2006 was from our cash flow from
operations of approximately $6.8 million and proceeds from the
exercise of stock options of approximately $2.6 million, partially
offset by purchases of property and equipment and other assets.
19
Net cash provided by operating activities for the three months ended March 31, 2006 was $6.8
million compared to $2.3 million for the three months ended March 31, 2005. This $4.5 million
increase in net cash provided by operating activities was principally due to changes in working
capital and the increase in net income from $974,000 in the three months ended March 31, 2005 to
$1.9 million in the three months ended March 31, 2006.
Additionally, net income for the three months ended March 31, 2006, included non-cash charges for
stock based compensation expense of approximately $998,000 and a
non-cash increase in income tax expense
for 2006, resulting in an increase in net cash from operating activities over the first quarter of
2005.
Prior to adopting SFAS 123R, the Company presented all tax benefits resulting from the
exercise of stock options as operating cash flows in the condensed consolidated statement of cash
flows. SFAS 123R requires cash flows resulting from excess tax benefits to be classified as part
of cash flows from financing activates. Excess tax benefits represent tax benefits related to
exercised options in excess of the associated deferred tax asset for such options. As a result of
adopting SFAS 123R, there were no excess tax benefits for the three months ended March 31, 2006 and
no amounts were classified as an operating cash outflow and a financing cash inflow in the
condensed consolidated statement of cash flows.
Net cash provided by investing activities was $7.6 million for the three months ended March
31, 2006, compared to $12.8 million used for the three months ended March 31, 2005. This $20.4
million increase in net cash provided by investing activities was principally due to increases in
net sales and purchases of short-term investments offset by decreases in
purchases of property and
equipment and acquisitions.
Net cash provided by financing activities was $2.6 million for the three months ended March
31, 2006, compared to $204,000 for the three months ended March 31, 2005. This $2.4 million
increase in net cash provided by financing activities was the result of an increase in proceeds
from exercises of stock options in 2006 compared to 2005.
During the three months ended March 31, 2006, we incurred capital expenditures of
approximately $1.2 million. Additionally, we expect to incur approximately $3.0 to $4.0 million
of capital expenditures in the second quarter of 2006 and continue to expect to incur approximately
$12.0 to $15.0 million of capital expenditures for the year ended December 31, 2006. We also
expect to incur $2.5 to $3.5 million of pre-tax incremental expense during the second quarter of
2006 for costs associated with the introduction and promotion of our retail information services,
including costs incurred in connection with the seasonally occurring International Council of
Shopping Centers (ICSC) tradeshow.
To date, we have grown in part by acquiring other companies and we may continue to make
acquisitions. Our acquisitions may vary in size and could be material to our current operations.
We expect to use cash, stock, debt or other means of funding to make these acquisitions.
Based on current plans, we believe that our available cash combined with positive cash flow
provided by operating activities should be sufficient to fund our operations for at least the next
12 months.
For the foreseeable future, we expect to record income tax expense on our results from
operations at an effective rate of approximately 42.5% to 43.5%. For
at least the next two
years, however, we expect the majority of our taxable income to be absorbed by our net operating
loss carryforwards. As a result, we expect our cash payments for taxes to be limited primarily to
payments of federal alternative minimum taxes and state income taxes in certain states.
Recent Accounting Pronouncements
We initially adopted the Emerging Issues Task Force (EITF) consensus on Issue No. 03-1, The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments on July 1,
2004, and the Financial Accounting Standards Board Staff Position (FSP) EITF Issue No. 03-1-1,
Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments on September 30, 2004. The consensus on
Issue No. 03-1 applies to investments in marketable debt and equity securities, as well as
investments in equity securities accounted for under the cost method. It provides guidance for
determining when an investment is considered impaired, whether the impairment is other than
20
temporary, and the measurement of an impairment loss. The guidance also includes accounting
considerations subsequent to the recognition of an other-than-temporary impairment and requires
certain disclosures about unrealized losses that have not been recognized as other-than-temporary
impairments. FSP EITF Issue No. 03-1-1 delays the effective date of paragraphs 10-20 of EITF Issue
No. 03-1, which provide guidance for determining whether the impairment is other than temporary,
the measurement of an impairment loss, and accounting considerations subsequent to the recognition
of an other-than-temporary impairment. Application of these paragraphs is deferred pending issuance
of proposed FSP EITF Issue No. 03-1-a. The adoption of EITF Issue No. 03-1 and FSP EITF Issue No.
03-1-1 did not have a material impact on our financial position or results of operations. On
November 3, 2005 the Financial Accounting Standards Board (FASB) issued FSP EITF Issue No. 03-1-a
(renamed as FSP FAS 115-1 and FAS 124-1, The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments), which provides guidance effective for fiscal periods
beginning after December 15, 2005. The Company is currently evaluating the effect that the adoption
of FAS 115-1 will have on its consolidated results of operations and financial condition but does
not expect it to have a material impact.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary AssetsAn Amendment
of APB Opinion No. 29, Accounting for Nonmonetary Transactions (SFAS 153). SFAS 153 eliminates
the exception from fair value measurement for nonmonetary exchanges of similar productive assets in
paragraph 21(b) of APB Opinion No. 29, Accounting for Nonmonetary Transactions, and replaces it
with an exception for exchanges that do not have commercial substance. SFAS 153 specifies that a
nonmonetary exchange has commercial substance if the future cash flows of the entity are expected
to change significantly as a result of the exchange. SFAS 153 is effective for the fiscal periods
beginning after June 15, 2005 and we were required to adopt it beginning January 1, 2006. The
adoption of SFAS 153 did not have a material impact on our consolidated results of operations and
financial condition.
In March 2005, the FASB issued FIN No. 47, Accounting for Conditional Asset Retirement
Obligations an interpretation of FASB Statement No. 143 Accounting for Asset Retirement
Obligations (SFAS 143) (FIN 47). FIN 47 clarifies that the term conditional asset
retirement obligation as used in SFAS 143, refers to a legal obligation to perform an asset
retirement activity in which the timing and (or) method of settlement are conditional on a future
event that may or may not be within the control of the entity. Accordingly, an entity is required
to recognize a liability for the fair value of a conditional asset retirement obligation if the
fair value of the liability can be reasonably estimated. Any uncertainty about the amount and/or
timing of future settlement should be factored into the measurement of the liability when
sufficient information exists. The liability for the conditional asset retirement obligation should
be recognized when incurred. FIN 47 also clarifies when an entity would have sufficient information
to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective for
fiscal periods beginning after December 15, 2005. The adoption of FIN 47 did not have a material
impact on our consolidated financial statements.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Correctionsa
replacement of APB Opinion No. 20 and FASB Statement No. 3 (SFAS 154). SFAS 154 replaces APB
Opinion No. 20, Accounting Changes and SFAS No. 3, Reporting Accounting Changes in Interim
Financial Statements, and changes the requirements for accounting for and reporting a change in
accounting principle. SFAS 154 requires restatement of prior period financial statements, unless
impracticable, for voluntary changes in accounting principle. The retroactive application of a
change in accounting principle should be limited to the direct effect of the change. Changes in
depreciation, amortization or depletion methods should be accounted for prospectively as a change
in accounting estimate. Corrections of accounting errors will be accounted for under the guidance
contained in APB Opinion No. 20. The effective date of this new pronouncement is for fiscal years
beginning after December 15, 2005 and prospective application is required. The adoption of SFAS
154 did not have a material impact on our consolidated financial statements.
Cautionary Statement Concerning Forward-Looking Statements
We have made forward-looking statements in this Report and make forward looking statements in
our press releases and conference calls that are subject to risks and uncertainties.
Forward-looking statements include information that is not purely historic fact and include,
without limitation, statements concerning our financial outlook for 2006 and beyond, our possible
or assumed future results of operations generally, and other statements and information regarding
assumptions about our revenues, EBITDA, fully diluted net income, taxable income, cash
21
flow from operating activities, available cash, operating costs, amortization expense,
intangible asset recovery, net income per share, diluted net income per share, weighted-average
outstanding shares, capital and other expenditures, effective tax rate, equity compensation
charges, future taxable income, purchase amortization, financing plans, geographic expansion,
capital structure, contractual obligations, legal proceedings and claims, our database, database
growth, services and facilities, employee relations, future economic performance, managements
plans, goals and objectives for future operations and growth and markets for our stock. The
sections of this Report which contain forward-looking statements include the Financial Statements
and Related Notes, Managements Discussion and Analysis of Financial Condition and Results of
Operations, Quantitative and Qualitative Disclosures About Market Risk, Legal Proceedings and
Risk Factors.
Our forward-looking statements are also identified by words such as believes, expects,
thinks, anticipates, intends, estimates or similar expressions. You should understand that
these forward-looking statements are estimates reflecting our judgment, beliefs and expectations,
not guarantees of future performance. They are subject to a number of assumptions, risks and
uncertainties that could cause actual results to differ materially from those expressed or implied
in the forward-looking statements. The following important factors, in addition to those discussed
or referred to under the heading Risk Factors in Item 1A. of Part II of this report, and other
unforeseen events or circumstances, could affect our future results and could cause those results
or other outcomes to differ materially from those expressed or implied in our forward-looking
statements: general economic conditions; customer retention; competition; our ability to identify
and integrate acquisitions; our ability to continue to expand successfully; our ability to
effectively penetrate the market for retail real estate information and gain acceptance in that
market; our ability to control costs; litigation; changes in accounting policies or practices;
changes or consolidations within the commercial real estate industry; release of new and upgraded
services by us or our competitors; data quality; development of our sales force; employee
retention; technical problems with our services; managerial execution; changes in relationships
with real estate brokers and other strategic partners; foreign currency fluctuations; legal and
regulatory issues; changes in accounting policies or practices; and successful adoption of and
training on our services.
Accordingly, you should not place undue reliance on forward-looking statements, which speak
only as of, and are based on information available to us on, the date of this Report. All
subsequent written and oral forward-looking statements attributable to us or any person acting on
our behalf are expressly qualified in their entirety by the cautionary statements contained or
referred to in this section. We do not undertake any obligation to update any such statements or
release publicly any revisions to these forward-looking statements to reflect events or
circumstances after the date of this Report or to reflect the occurrence of unanticipated events.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We provide information services to the commercial real estate and related business community
in the United States and the United Kingdom. Our functional currency for our operations in the
United Kingdom is the local currency. As such, fluctuations in the British Pound may have an impact
on our business, results of operations and financial condition. We currently do not use financial
instruments to hedge our exposure to exchange rate fluctuations with respect to our foreign
subsidiaries. We may seek to enter hedging transactions in the future to reduce our exposure to
exchange rate fluctuations, but we may be unable to enter into hedging transactions successfully,
on acceptable terms or at all. As of March 31, 2006, accumulated other comprehensive income
included a gain from foreign currency translation adjustments of approximately $1.9 million.
We do not have material exposure to market risks associated with changes in interest rates
related to cash equivalent securities held as of March 31, 2006.
We have a substantial amount of intangible assets. Although, as of March 31, 2006, we believe
our intangible assets will be recoverable, changes in the economy, the business in which we operate
and our own relative performance could change the assumptions used to evaluate intangible asset
recoverability. In the event that we determine that an asset has been impaired, we would recognize
an impairment charge for the excess amount by which the carrying amount of the impaired asset
exceeds the fair value of the asset. We continue to monitor these assumptions and their effect on
the estimated recoverability of our intangible assets.
22
Item 4. Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed in our reports filed or submitted under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the SECs rules and forms,
and that such information is accumulated and communicated to our management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions
regarding required disclosure. In designing and evaluating the disclosure controls and procedures,
management recognized that any controls and procedures, no matter how well designed and operated,
can provide only reasonable assurance of achieving the desired control objectives, and management
is required to apply its judgment in evaluating the cost-benefit relationship of possible controls
and procedures.
As of March 31, 2006, we carried out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive Officer and our Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure controls and
procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures were effective and were operating at the
reasonable assurance level.
There have been no changes in our internal control over financial reporting during our most
recent fiscal quarter that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Currently, and from time to time, we are involved in litigation incidental to the conduct of
our business. We are not a party to any lawsuit or proceeding that, in the opinion of our
management, is likely to have a material adverse effect on our financial position or results of
operations.
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider
the factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the
year ended December 31, 2005, which could materially affect our business, financial condition or
future results. The risks described in our Annual Report on Form 10-K are not the only risks facing
our Company. Additional risks and uncertainties not currently known to us or that we currently deem
to be immaterial also may materially adversely affect our business, financial condition and/or
results of operations.
Item 2. Unregistered Sales of Equity in Securities and Use of Proceeds
The following table is a summary of our repurchases of common stock during each of the three months
in the quarter ended March 31, 2006:
23
ISSUER PURCHASES OF EQUITY SECURITIES
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Total Number of |
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Maximum Number of |
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Total |
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Shares Purchased as |
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Shares that May Yet |
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Number of |
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Part of Publicly |
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Be Purchased Under |
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|
Shares |
|
|
Average Price Paid |
|
|
Announced Plans or |
|
|
the Plans or |
|
Month |
|
Purchased |
|
|
per Share |
|
|
Programs |
|
|
Programs |
|
January 1 through 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 1 through 28,
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 1 through 31, 2006 |
|
|
8,648 |
(1) |
|
$ |
54.87 |
|
|
|
|
|
|
|
|
|
Total |
|
|
8,648 |
(1) |
|
$ |
54.87 |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The number of shares purchased includes (a) 2,648 shares of common stock tendered by employees
to the Company to satisfy the employees tax withholding obligations arising as a result of vesting
of restricted stock grants under the Companys 1998 Stock Incentive Plan, as amended, which shares
were purchased by the Company based on their fair market value on the vesting date, and (b) 6,000
shares of common stock tendered by an employee to the Company for payment of exercise prices in
connection with exercises of various stock option grants. None of these share purchases were part
of a publicly announced program to purchase common stock of the Company. |
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits
3.1 |
|
Restated Certificate of Incorporation (Incorporated by reference to Exhibit 3.1 to the
Registration Statement on Form S-1 of the Registrant (Reg. No. 333-47953) filed with the
Commission on March 13, 1998 (the 1998 Form S-1) |
|
3.2 |
|
Certificate of Amendment of Restated Certificate of Incorporation (Incorporated by reference
to Exhibit 3.1 to the Registrants Report on Form 10-Q for the period ending June 30, 1999) |
|
3.3 |
|
Amended and Restated By-Laws (Incorporated by reference to Exhibit 3.2 to the 1998 Form S-1) |
|
10.1 |
|
Confidential Separation Agreement and General Release between David Schaffel and CoStar
Realty Information, Inc., effective as of May 6, 2005 (filed herewith) |
|
31.1 |
|
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 (filed herewith) |
|
31.2 |
|
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 (filed herewith) |
|
32.1 |
|
Certification of Principal Executive Officer pursuant to 18 U.S.C. Sec. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith) |
24
32.2 |
|
Certification of Principal Financial Officer pursuant to 18 U.S.C. Sec. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith) |
25
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: May 9, 2006 |
By: |
/s/ Frank A. Carchedi
|
|
|
|
Frank A. Carchedi |
|
|
|
Chief Financial Officer
(Principal Financial and Accounting
Officer and Duly Authorized Officer) |
|
|
26