1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-------------------
FORM 10-Q
-------------------
(Mark One)
[X][ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended: March 31,June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ________ to ________
Commission file number: 0-24531
REALTY INFORMATIONCOSTAR GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 52-2091509
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
7475 WISCONSIN AVENUE
BETHESDA, MD 20814
(301) 215-8300
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] - No [ ]
As of April 30,July 31, 1999, there were 9,785,72912,812,160 shares outstanding of the
Registrant's Common Stock, par value $.01.
2
REALTY INFORMATIONCOSTAR GROUP, INC.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Statements of Operations..................3
Condensed Consolidated Balance Sheets............................4
Condensed Consolidated Statements of Cash Flows..................5
Notes to Condensed Consolidated Financial Statements.............6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations....................9
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings...............................................14
Item 2 - Changes in Securities...........................................14
Item 3 - Defaults upon Senior Securities.................................14
Item 4 - Submission of Matters to a Vote of Security Holders.............14
Item 5 - Other Information...............................................14
Item 6 - Exhibits and Reports on Form 8-K................................14
Signatures...............................................................15
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Statements of Operations...................................................................3
Condensed Consolidated Balance Sheets.............................................................................4
Condensed Consolidated Statements of Cash Flows...................................................................5
Notes to Condensed Consolidated Financial Statements..............................................................6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations.....................................................................9
Item 3 - Quantitative and Qualitative Disclosures About Market
Risk.............................................................................................................14
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings................................................................................................15
Item 2 - Changes in Securities............................................................................................15
Item 3 - Defaults upon Senior Securities..................................................................................15
Item 4 - Submission of Matters to a Vote of Security Holders..............................................................15
Item 5 - Other Information................................................................................................15
Item 6 - Exhibits and Reports on Form 8-K.................................................................................15
Signatures.................................................................................................................16
2
3
PART 1 FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
Realty InformationCoStar Group, Inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
For the Three Months For the Six Months
Ended March 31,
--------------------June 30, Ended June 30,
---------------------------- ----------------------------
1999 1998 --------------------1999 1998
---------------------------- ----------------------------
Revenues $ 6,1277,178 $ 2,8393,254 $ 13,305 $ 6,093
Cost of revenues 2,594 904
--------------------3,068 968 5,662 1,872
---------------------------- ----------------------------
Gross margin 3,533 1,9354,110 2,286 7,643 4,221
Operating expenses:
Selling and marketing 3,500 1,2644,411 1,328 7,911 2,592
Software development 240 118309 144 550 262
General and administrative 2,019 899
--------------------
5,759 2,281
--------------------2,632 1,020 4,650 1,919
---------------------------- ----------------------------
7,352 2,492 13,111 4,773
---------------------------- ----------------------------
Loss from operations (2,226) (346)(3,242) (206) (5,468) (552)
Interest and other income (expense) 62 (38)
--------------------616 (40) 678 (78)
---------------------------- ----------------------------
Net loss $ (2,164)(2,626) $ (384)
====================(246) $ (4,790) $ (630)
============================ ============================
Basic and diluted net loss per share $ (0.22)(0.23) $ (0.07)
====================(0.04) $ (0.45) $ (0.11)
============================ ============================
Weighted average common shares 9,624 5,754
====================11,510 5,764 10,572 5,759
============================ ============================
See accompanying notes.
3
4
Realty InformationCoStar Group, Inc.
Condensed Consolidated Balance Sheet
(in thousands)
March 31,June 30, December 31,
1999 1998
--------------------------------------------------------------------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 10,051102,424 $ 19,667
Accounts receivable, less allowance for doubtful
accounts of $424$600 and $326 as of
March 31,June 30, 1999 and December 31, 1998 2,6832,153 1,245
Prepaid expenses and other current assets 513487 326
---------------------------------------------------------------------
Total current assets 13,247105,064 21,238
Property and equipment 4,6085,792 3,385
Accumulated depreciation (1,434)(1,708) (1,228)
---------------------------------
3,174------------------------------------
4,084 2,157
Capitalized product development costs, net of accumulated
amortization of $1,333$1,630 and $990 as of
March 31,June 30, 1999 and December 31, 1998 4,7754,718 1,857
Other assets 19,50318,921 2,098
Deposits 189210 192
---------------------------------------------------------------------
Total assets $ 40,888132,997 $ 27,542
=====================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,3401,641 $ 801
Accrued wages and commissions 1,7361,755 1,078
Accrued expenses 9721,239 812
Deferred revenue 3,3123,033 1,647
Line of credit 3,000 -
---------------------------------------------------------------------
Total current liabilities 10,3607,668 4,338
Stockholders' equity 30,528125,329 23,204
---------------------------------------------------------------------
Total liabilities and stockholders' equity $ 40,888132,997 $ 27,542
=====================================================================
See accompanying notes.
4
5
Realty InformationCoStar Group, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
For the ThreeSix Months
Ended March 31,
--------------------------June 30,
-------------------------------
1999 1998
---------------------------------------------------------
Operating activities:
Net loss $ (2,164)(4,790) $ (384)(630)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation 206 93480 191
Amortization 845 1371,732 284
Provision for losses on accounts receivable 98 47274 78
Non cash charges 4 49 9
Changes in operating assets and liabilities (313) 125
--------------------------411 483
-------------------------------
Net cash provided by (used in) operating activities (1,324) 22(1,884) 415
Investing activities:
Net purchases of property and equipment (889) (130)(2,100) (249)
Capitalization of product development costs (410) (95)(677) (223)
Acquisitions (net of acquired cash) (9,993) -
---------------------------------------------------------
Net cash used in investing activities (11,292) (225)(12,770) (472)
Financing activities:
ProceedsNet proceeds from line of credit 3,000exercised stock options - --------------------------80
Net proceeds from public offering 97,411 -
-------------------------------
Net cash provided by financing activities 3,000 -97,411 80
Net increase (decrease) in cash and cash equivalents (9,616) (203)82,757 23
Cash and cash equivalents at beginning of period 19,667 1,069
---------------------------------------------------------
Cash and cash equivalents at end of period $ 10,051102,424 $ 866
==========================1,092
===============================
See accompanying notes.
5
6
REALTY INFORMATIONCOSTAR GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
CoStar Group, Inc. (formerly Realty Information Group, Inc.) ("the Company") is
a Delaware corporation and was incorporated in February 1998 to succeed its
predecessors, Realty Information Group L.P. ("RIGLP") and OLD RIG, Inc.
("RIGINC"). RIGLP iswas an operating entity, while RIGINC iswas a shell holding
entity. In connection with the Company's Initial Public Offering on July 1,
1998 ("the Offering"), RIGLP and RIGINC merged with the Company pursuant to the
RIG Contribution Agreement dated March 5, 1998. The limited partners of RIGLP
(other than RIGINC) and all of the stockholders of RIGINC received 3.03 shares
of Common Stock of the Company per each limited partnership unit or share of
common stock exchanged, for a total of 5,754,017 shares. As a result of the
reorganization of these entities, the Company ownsowned (directly or indirectly)
all of the capital stock of RIGINC and all the equity of RIGLP.
The merger has been accounted for as a reorganization of entities under common
control similar to a pooling of interests. Following the merger each
shareholder of the Company maintainsmaintained their exact same ownership of the
operating entity, RIGLP, as before the merger. The transfer of assets and
liabilities of RIGLP and RIGINC have been recorded at the historical carrying
values. The financial statements are presented as if the Company was in
existence throughout all periods presented, as one operating entity. All share
amounts have been restated to reflect the conversion of partnership units to
common stock of the Company. On January 1, 1999, RIGLP and RIGINC were merged
into a newly formed corporation, CoStar Realty Information, Inc. a wholly ownedwholly-owned
subsidiary of the Company.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the associated amounts of revenues and expenses during
the reporting period. Actual results could differ from the estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the Accounting Standards Executive Committee of the AICPA issued
Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1, which has been
adopted prospectively as of January 1, 1999, requires the capitalization of
certain costs incurred in connection with developing or obtaining internal use
software. Prior to the adoption of SOP 98-1, the Company expensed all internal
use software related costs as incurred. There was no material impact on the
Statement of Operations for the quarter ended March 31, 1999.
In April 1998, the Accounting Standards Executive Committee of the AICPA issued
Statement of Position 98-5, Reporting the Costs of Start-up Activities ("SOP
98-5").CASH AND CASH EQUIVALENTS
The Company adopted the provisionsconsiders all highly liquid investments purchased with original
maturity dates of SOP 98-5 as90 days or less to be cash equivalents. Cash equivalents
consist of January 1, 1999.
There was no material impact on the Statement of Operations for the quarter
ended March 31, 1999.money market fund investments and short-term commercial paper.
6
7
2. ACQUISITIONS
On January 8, 1999, the Company acquired all of the common stock of LeaseTrend,
Inc. ("LeaseTrend"), a Cincinnati based provider of commercial real estate
information, for $4,500,000 in cash and 566,671 shares of the Company's Common
Stock. The transaction was accounted for as a purchase and the consideration was
valued for accounting purposes at approximately $9,200,000 including acquisition
expenses.
On January 22, 1999, the Company acquired all of the common stock of Jamison
Research, Inc. ("Jamison"), an Atlanta based provider of commercial real estate
information, for $5,284,000 in cash and 448,031 shares of the Company's common
stock. The transaction was accounted for as a purchase and the consideration was
valued for accounting purposes at approximately $10,300,000 including
acquisition expenses.
The Company adjusted the historical carrying value of certain acquired assets
and liabilities of LeaseTrend and Jamison to fair market value as discussed
below. Working capital and property and equipment accounts of LeaseTrend and
Jamison arewere recorded at book value, and represent an increase in amounts
allocated to the accounts shown below of approximately $600,000 and $400,000,
respectively. The approximate allocation of purchase price to capitalized
product development costs and intangible assets (including amounts previously
capitalized by LeaseTrend and Jamison) is as follows:
Estimated
LeaseTrend Jamison Totals Life
----------------- ---------------- ----------------- -------------- ------------- --------------- -----------
Capitalized product development
Developed software products $ 200,000 $ 200,000 $ 400,000 2 years
Proprietary databases 1,100,000 1,300,000 2,400,000 5 years
Other assets
Customer base 8,100,000 8,800,000 16,900,000 10 years
Other intangible assets 400,000 400,000 800,000 2 years
----------------- ---------------- ------------------------------- ------------- ---------------
$9,800,000 $ 10,700,000$10,700,000 $ 20,500,000
================= ================ =============================== ============= ===============
Capitalized product development includes those developed software products and
proprietary databases which are expected to produce revenues currently, until
their conversion by the Company into products with a format consistent with the
Company's products. This effort is expected to take up to 2 years.years from the date
of acquisition. The underlying proprietary databases are expected to continue
in use beyond the conversion period.
The Company's unaudited pro forma consolidated condensed statement of
operations for the threesix months ended March 31,June 30, 1999 and 1998, assuming the
acquisition of LeaseTrend and Jamison was effected at the beginning of the
period, is summarized as follows:
For the ThreeSix Months
Ended March 31,
---------------------------------------------June 30,
1999 1998
-----------------------------------------------------------------------------------
Revenues $ 6,439,000 $4,730,000
=================13,617,000 $ 9,981,000
============== ============
Net loss $ (2,308,000) $(932,000)
=================(4,934,000) $(2,057,000)
============== ============
Weighted average shares 9,786,000 6,769,000
=================10,652,000 6,773,000
============== ============
Basic and diluted net loss per share $ (.24)(.46) $ (.14)
=================(.30)
============== ============
7
8
3. LINE OF CREDIT
In October 1998, the Company renewed its line of credit agreement with Silicon
Valley East (a Division of Silicon Valley Bank). The new line provides for a
total of $5,000,000 in borrowing bearing an interest rate at the bank's prime
rate plus 1%, and has a one-year term. On February 2, 1999, the Company
borrowed $3,000,000 against this line of credit. The proceeds from this
borrowing were repaid on May 13, 1999.
4. PUBLIC OFFERING
On May 10, 1999, the Company completed a public offering of its common stock in
which a total of 3,019,495 shares were issued (including 269,495 shares issued
in connection with the underwriters' over-allotment option) at $34.50 per
share. The total net proceeds to the Company were approximately $97.4 million,
after deducting underwriting discounts and commissions and estimated offering
expenses.
8
9
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements, which involve risks
and uncertainties. Our actual results could differ materially from those in
such forward-looking statements as a result of certain factors, including those
set forth in the Company's registration statement filed on Form S-1 on March
24, 1999, and the Company's other filings with the Securities and Exchange
Commission. The following discussion should be read in conjunction with the
Company's filings with the Securities and Exchange Commission and the unaudited
condensed consolidated financial statements included herein.
OVERVIEW
Realty InformationCoStar Group, Inc. is the nation's largest digitala leading provider of information services to the U.S.
commercial real estate information and analysis.industry. We are creating a digital marketplace where
the members of the commercial real estate and related business community can
continuously interact and facilitate transactions by efficiently exchanging
accurate and standardized information. Our wide array of digital service
offerings includes a leasing marketplace, a selling marketplace, decision
support, tenant information, property marketing, and industry news.
Substantially all of our current services are digitally delivered and a
majority of our clients receive daily service updates over the Internet.
We completed our initial public offering in July 1998 and received net proceeds
of approximately $22.7 million. We primarily used those net proceeds to fund
the geographic and service expansion of our business, including three strategic
acquisitions, and to expand our sales and marketing organization. In May 1999,
we completed a follow-on public offering and received net proceeds of
approximately $97.4 million. We expect to use these proceeds primarily for
development and distribution of new services, expansion of all existing
services across our current markets, geographic expansion in the U.S. and
international markets, strategic acquisitions and working capital and general
corporate purposes.
From 1994 through 1998, we expanded the geographical coverage of our existing
services and developed new services. In addition to internal growth, this
expansion included the acquisitions of Chicago ReSource, Inc. in Chicago in
1996 and New Market Systems, Inc. in San Francisco in 1997. In August of 1998,
we expanded into the Houston region through the acquisition of Houston-based
real estate information provider C Data Services, Inc. In January of 1999, we
expanded further by acquiring LeaseTrend and Jamison.
We consider regions that have had ongoing operations for at least 18 months to
be established, and we currently generate positive cash flow from our
operations in each established region. As of March 31,June 30, 1999, the following
regions are those that have been in operation for more than 18 months and that
we consider to be established: Washington (includes Baltimore), Chicago, New
York (includes Northern New Jersey, Long Island, Westchester, and Connecticut),
Los Angeles (includes Orange County), San Francisco, and Philadelphia. These
regions provide us with substantial cash flow which we reinvest into the
business. Since its inception, the development of our business has required
substantial investments for the expansion of services and the establishment of
operating regions, which has resulted in substantial net losses on an overall
basis.
The incremental cost of introducing new services in an established region in
the future may reduce the profitability of a region or cause it to incur
losses. We expect continued development and distribution of new services,
expansion of all existing services across current markets and geographic
expansion in the U.S. and international markets. Therefore, while we expect
operations in existing established regions to remain profitable and provide
substantial funding, we expect our overall expansion plans to generate
significant losses and negative cash flow from operations for at least the next
two years.
9
10
THREE MONTHS ENDED MARCH 31,JUNE 30, 1998 COMPARED TO
THREE MONTHS ENDED MARCH 31,JUNE 30, 1999
REVENUES. Revenues increased 116%121% from $2,839,000$3,254,000 for the three months ended
March 31,June 30, 1998 to $6,127,000$7,178,000 for the three months ended March 31,June 30, 1999. ThisThe
increase in revenue resulted principallyprimarily from growth in ourthe Company's client base in
established regions, of the country, the expansion of emerging regions (Boston,
Sacramento, Houston, Phoenix, and San Diego)entered during 1998 and
revenues from the over twenty newly acquired regions including Atlanta, Dallas,
Midwest,Florida, Denver and Florida regions.the Midwest.
GROSS MARGINS. Gross marginsMargins increased 83%80% from $1,935,000$2,286,000 for the three months
ended March 31,June 30, 1998 to $3,533,000$4,110,000 for the three months ended March 31,June 30, 1999,
while gross margin percentages were 68%70% and 58%,57% of revenue, respectively. TheThis
increase in
gross margins resulted principally from significant revenue growth while thefrom established
regions. The decline in gross margin percentages resulted from expansion of
services in established regions, an increase in the number of emerging regions
and lower gross margin
percentagesmargins in the newly acquired regions. Furthermore, our cost of
revenues for the three months ended March 31,June 30, 1999 includes purchase price
amortization from the LeaseTrend and Jamison acquisitions of approximately
$138,000.$170,000.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses increased 177%232%
from $1,264,000$1,328,000 for the three months ended March 31,June 30, 1998 to $3,500,000$4,411,000 for the
three months ended March 31,June 30, 1999. Selling and marketing expenses increased as a
result of the cost of the acquired sales organizations and purchase price
amortization of approximately $353,000$420,000 for the Jamison and LeaseTrend
acquisitions during the firstsecond quarter of 1999. In addition, continued
expansion of the sales organization and marketing efforts required for growth,
particularly in emerging regions, including Boston, Sacramento, San Diego,
Phoenix, Houston, Tampa,
Miami, Denver and Denver,the Midwest, of which only Boston was in operation during the
firstsecond quarter of 1998, contributed to the increased expenses.
SOFTWARE DEVELOPMENT. Software development expenses increased 103%115% from
$118,000$144,000 for three months ended March 31,June 30, 1998 to $240,000$309,000 for the three months
ended March 31,June 30, 1999 reflecting development costs for the expansion of services
for emerging and established regions and new service initiatives.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 125%158% from $899,000$1,020,000 for the three months ended March 31,June 30, 1998 to
$2,019,000$2,632,000 for the three months ended March 31,June 30, 1999. General and administrative
expenses increased due to the hiring of new employees to support the expanding
scope of our operation and client base, as well as the increased administrative
costs of a public company. Additionally, our general and administrative
expenses include approximately $83,000$100,000 of purchase price amortization from the
LeaseTrend and Jamison acquisitions.
INTEREST AND OTHER INCOME (EXPENSE). Interest and other income increased from
an expense of $38,000$40,000 for the three months ended March 31,June 30, 1998 to income of
$62,000$616,000 for the three months ended March 31,June 30, 1999. This was a direct result of
interest earned on the proceeds from the initial and follow-on public
offering proceeds.offerings.
10
11
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO
SIX MONTHS ENDED JUNE 30, 1999
REVENUES. Revenues increased 118% from $6,093,000 for the six months ended June
30, 1998 to $13,305,000 for the six months ended June 30, 1999. The increase
resulted primarily from growth in the Company's client base in established
regions, expansion of emerging regions entered during 1998 and revenues from
over twenty newly acquired regions including Atlanta, Dallas, Florida, Denver
and the Midwest regions.
GROSS MARGINS. Gross Margins increased 81% from $4,221,000 for the six months
ended June 30, 1998 to $7,643,000 for the six months ended June 30, 1999, while
gross margin percentages were 69% and 57% of revenue, respectively. This
increase resulted principally from significant revenue growth from established
regions. The decline in gross margin percentages resulted from expansion of
services in established regions, an increase in the number of emerging regions
and lower gross margins in the newly acquired regions. Furthermore, our cost of
revenues for the six months ended June 30, 1999 includes purchase price
amortization from the LeaseTrend and Jamison acquisitions of approximately
$308,000.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses increased 205%
from $2,592,000 for the six months ended June 30, 1998 to $7,911,000 for the
six months ended June 30, 1999. Selling and marketing expenses increased as a
result of the cost of the acquired sales organizations and purchase price
amortization of approximately $773,000 for the Jamison and LeaseTrend
acquisitions for the six months ended June 30, 1999. In addition, continued
expansion of the sales organization and marketing efforts required for growth,
particularly in emerging regions, including Boston, Phoenix, Houston, Tampa,
Miami, Denver and the Midwest, of which only Boston was in operation during the
six months ended June 30, 1998, contributed to the increased expenses.
SOFTWARE DEVELOPMENT. Software development expenses increased 110% from
$262,000 for six months ended June 30, 1998 to $550,000 for the six months
ended June 30, 1999 reflecting development costs for the expansion of services
for emerging and established regions and new service initiatives.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 142% from $1,919,000 for the six months ended June 30, 1998 to
$4,650,000 for the six months ended June 30, 1999. General and administrative
expenses increased due to the hiring of new employees to support the expanding
scope of our operation and client base, as well as the increased administrative
costs of a public company. Additionally, our general and administrative
expenses include approximately $183,000 of purchase price amortization from the
LeaseTrend and Jamison acquisitions.
INTEREST AND OTHER INCOME (EXPENSE). Interest and other income increased from
an expense of $78,000 for the six months ended June 30, 1998 to income of
$678,000 for the six months ended June 30, 1999. This was a direct result of
interest earned on the proceeds from the initial and follow-on public
offerings.
11
12
LIQUIDITY AND CAPITAL RESOURCES
Our cash balance was $10,051,000$102,424,000 at March 31,June 30, 1999, a decreasean increase of $9,616,000$82,757,000
from $19,667,000 at December 31, 1998,1998. This increase was due principally to the
$97.4 million in proceeds from the follow-on public offering, which was offset
by acquisitions of JamisonLeaseTrend and LeaseTrendJamison in January 1999.1999, cash used in
operating activities, $2,100,000 million in purchases of property and equipment
and $677,000 in capitalized product development costs. During the firstsecond
quarter of 1999, we financed our operations and growth through cash flow from
the established regions short-term credit lines and the proceeds of the Initial Public
Offering.public offerings. Net cash used
in operations for the threesix months ended March 31,June 30, 1999 was $1,324,000$1,884,000 compared to
net cash provided by operating activities of $22,000$415,000 for the threesix months ended
1998. This was a direct result of increased expansion in the emerging and
acquired regions. Additionally, we received advance payments from clients on a
number of contracts, resulting in the generation of cash as reflected in
deferred revenue balances of $1,647,000 and $3,312,000$3,033,000 as of December 31, 1998
and March 31,June 30, 1999, respectively. We continuedcontinue to experience overall operating
losses as a result of our recent expansion into emerging and acquired regions,
while established regions continue to generate substantial cash flow from
operations.
Net cash used in investing activities amounted to $11,292,000$12,770,000 for the threesix
months ended March 31,June 30, 1999, including $9,993,000 (net of acquired cash) for the
acquisition of LeaseTrend and Jamison. Additional investing activities included
capitalized product development costs, consisting principally of building
photography, and fixed-asset purchases,purchase of property and equipment, consisting principally of
computer and office equipment. We currently have no material commitments for
capital expenditures.
Effective October 5, 1998, we renewed our line of credit and increased the
amount of the facility from $1,000,000 to $5,000,000. On February 2, 1999 we
borrowed $3,000,000 against this line of credit. The proceeds from this
borrowing were repaid on May 13, 1999.
On May 10, 1999, the Company completed a public offering of its common stock in
which a total of 3,019,495 shares were issued (including 269,495 shares issued
in connection with the underwriters' over-allotment option) at $34.50 per
share. The total net proceeds to the Company were approximately $97.4 million,
after deducting underwriting discounts and commissions and estimated offering
expenses.
To date, we have grown in part by acquiring other companies, and we may
continue to make acquisitions. Our acquisitions may vary in size and could be
material to our current operations. We expect to use cash, stock, or other
means of funding to make these acquisitions.
We expect to incur significantly higher costs, particularly as we introduce new
and upgraded services, expand geographically, and develop the infrastructure to
support the expanding organization and client base. Based on current plans, we
believe that our available cash combined with our line of credit and positive
cash flow from our established regions should be sufficient to fund our
operations for at least the next two years.
Through June 30, 1998, we operated as either a Subchapter S corporation or a
limited partnership, and we were not subject to corporate income taxes. After
June 30, 1998, we became a taxable entity. Although we have experienced losses
to date, future profits, to the extent not offset by the benefits of loss
carryforwards, would result in income tax liabilities. We do not expect to
benefit substantially from tax loss carryforwards generated prior to July 1998.
We do not believe the impact of inflation has significantly affected our
operations.
1112
1213
IMPACT OF THE YEAR 2000
We believe that we may be affected by computer problems associated with the
Year 2000. The Year 2000 issue arises because some computer hardware and
software will not work properly after 1999. That failure occurs because many
older systems express dates in a two-digit format. For example, under this
format the year 1999 is expressed as 99. As a result, these older systems may
be unable to distinguish between the year 1900 and the year 2000. That
inability may cause hardware system failures, software miscalculations, and
disruptions of data transmissions.
Our plans to resolve the Year 2000 issue involve the following steps:
assessment, remediation, and confirmation through testing. To date, we have
completed our preliminary assessment of the issue and approximately 60%75% of the
remediation phase. We have undertaken testing as particular aspects of the
remediation phase are completed.
Assessment
Our Year 2000 assessment has included:
- - cataloging and evaluating internal hardware and software systems obtained
from third parties;
- - testing the software we have developed ourselves; and
- - contacting our clients, suppliers, and service providers.
Remediation and Testing Efforts
We have identified three areas that require evaluation and remediation:
internal infrastructure, our proprietary software, and impacts from systems of
vendors and our clients.
Internal Infrastructure. We are currently cataloging and evaluating our
hardware to determine its Year 2000 compliance. Our workstation supplier has
informed us that all workstations we have obtained from it are compliant. We
have successfully completed testing on 20%approximately 80% of those workstations.
We have purchased new, compliant servers to replace older hardware and most of
these servers are operational. We expect the remainder of those servers to be
operational by June 1999. Wewithin the next three months. In addition, we have scheduledrecently
completed compliance testing on most of our laptops for compliance testing
by June 1999.and believe that they are
Year 2000 compliant.
We are also in the process of making the software used in our internal
infrastructure Year 2000 compliant. We have already installed a new, compliant
enterprise accounting system. We expect to convert allIn addition we have converted approximately 75%
of our network server operating systems to compliant software and expect to
replaceconvert the remaining servers to compliant software within the next three
months. Furthermore, we have replaced most of our non-compliant phone and
voice mail systems with compliant systems by August 1999.systems.
Proprietary Software and Databases. Our commercial real estate information
systems use extensive proprietary software and databases. We performed Year
2000 compliance measures for much of this software in prior years since various
fields, like tenant lease expirations, required compliance in the early 1990's
to accommodate post-2000 dates. Since that time, we have assessed all our
proprietary commercial real estate information software to identify areas
vulnerable to these problems. This led us to recode common date routines,
functions, and methods so they would interpret both entered and stored dates
with a compliant approach. We believe that our proprietary systems are now
compliant, but we might still encounter additional Year 2000 defects. In
addition, we are upgrading our older internal software applications with newer
systems to provide greater assurance of Year 2000 compliance.
We have identified additional potential Year 2000 risks with respect to our
recently acquired LeaseTrend and Jamison subsidiaries. We believe that a
significant percentage of their hardware and internal proprietary software are
non-compliant. We are currently upgrading these computer systems and are
converting the acquired databases into our centralized system to replace the
non-compliant products we acquired used by those subsidiaries. We plan to
complete this process in the next severalthree months in the normal course of business.
1213
1314
Client and Vendor Issues. Our assessment has also revealed that some of our
clients use hardware and software that is not Year 2000 compliant. As a result,
our clients' systems may not support the use of our software. We have notified
our clients of this potential issue. Where we have uncovered such problems, we
have attempted to ensure compatibility by coding our own alternatives or
replacements. Despite these efforts, our clients' success in continuing to
install and use our services depends significantly on their own compliance
efforts, which we do not control. If necessary, we will develop in the next
severalthree months a contingency plan to address problems arising from our clients'
failure to have compliant computer equipment and software.
Third party Year 2000 compliance problems may also affect us by interrupting
services which we need to conduct our business. For example, most of our data
updates are delivered via the Internet. If Year 2000 problems result in
disruption of the Internet as a delivery system, we believe we could use
alternative delivery systems, which would mitigate to some extent the impact of
this disruption. We also rely on telecommunications providers for communication
services and distribution of our product data updates. Any compliance problems
by these providers could lead to extended loss of their services and
significant unanticipated expenses to remedy the situation.
Compliance Costs
Our incremental costs expended to date in connection with Year 2000 compliance
have not been significant, as we have undertaken most of our activities in the
normal course of business. We estimate, however, that during the remainder of
1999 we will spend $1,000,000have spent
approximately $700,000 in connection with Year 2000 compliance. In addition we
estimate that we will spend approximately $300,000 in connection with Year 2000
compliance during the remainder of 1999. A large part of this cost will resultthese costs results
from upgrading LeaseTrend and Jamison equipment and software, much of which was
planned independently of the Year 2000 issue.
13ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not have significant exposure to market risks associated with
the changes in interest rates related to its cash equivalent securities held as
of June 30, 1999.
14
1415
PART II. OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
NoneFrom time to time, the Company has been involved in lawsuits incidental to its
business. The Company is not currently subject to, and none of our properties
is subject to, any material legal proceedings.
ITEM 2 CHANGE IN SECURITIES
On January 8, 1999, we acquired LeaseTrend Inc., through a transaction in which
Blue Chip Capitol Fund Limited Partnership, Keith D. Sant, and trusts
established by Fred A. Heitzman III and Gregory Benkert (the shareholders of
LeaseTrend) received 566,671 shares of Common Stock and $4,500,000 in cash. The
shares were purchased for investment purposes. The issuance of these shares was
effected in reliance on the exemption from registration under Section 4(2) of
the Securities Act.
On January 22, 1999, we acquired Jamison Research, Inc., in a transaction in
which Henry D. Jamison IV, Leslie Lees Jamison, The Church of the Apostles of
Atlanta and David P. Evemy (the shareholders of Jamison Research and their
assignees) received 448,031 shares of Common Stock and $5,284,000 in cash. These
shares were purchased for investment purposes. The issuance of these shares was
effected in reliance on the exemption from registration under Section 4(2) of
the Securities Act.
No underwriters were involved in either of the foregoing sales of securities.None
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 OTHER INFORMATION
NoneOn August 2, 1999, the Company changed its name from Realty Information Group,
Inc. to CoStar Group, Inc.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
AAn amended report on Form 8-K was filed with the SEC on January 22,April 7, 1999 reporting, under
Item 2, the acquisition of LeaseTrend, Inc. An amendment to that report filed
with the SEC on March 26, 1999 providedproviding
financial statements and financial information required under Item 7.
A report on Form 8-K was filed7 with
the SEC on February 2, 1999 reporting, under
Item 2,respect to the acquisition of Jamison Research, Inc.
An amendment to that report
filed with the SEC on April 7, 1999 provided financial statements and financial
information required under Item 7.
EXHIBIT NUMBER: EXHIBIT DESCRIPTION:
3.1 Certificate of Amendment of Restated Certificate of Incorporation
27 Financial Data Schedule
14
15
1516
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.
REALTY INFORMATIONCOSTAR GROUP, INC.
Date: May 14,August 11, 1999 By: /s/ Frank A. Carchedi
---------------------
Frank A. Carchedi
Chief Financial Officer
(Principal Financial and Accounting Officer
and Duly Authorized Officer)
1516