2008
ANNUAL REPORT
FINANCIAL
HIGHLIGHTS
In thousands, except per share data
2004
2005
2006
2007
2008
Operations
Revenues
Net income
Net income per share- diluted
Weighted average outstanding shares-diluted
$112,085
$24,985
$1.33
18,827
$134,338
$6,457
$0.34
19,007
$158,889
$12,410
$0.65
19,165
$192,805
$15,951
$0.82
19,404
$212,428
$24,623
$1.26
19,550
Balance Sheet
Cash, cash equivalents and shor-term investments
Total assets
Stockholders’ equity
$117,069
$232,691
$210,944
$134,185
$248,059
$224,796
$158,148
$275,437
$250,110
$187,426
$321,843
$281,805
$224,590
$334,384
$303,421
Five Year Revenue Growth ($ in millions)
Comparison of Quarterly EBITDA and Net Income ($ in millions)
250
200
150
100
50
0
'04
'05
'06
'07
'08
20
15
10
5
0
Q1 2007
Q2 2007
Q3 2007
Q4 2007 *
Q1 2008
Q2 2008
Q3 2008
Q4 2008
* Q4 2007 Net Income and EBITDA are net of a one-time Gain on lease settlement of $7.6 million.
Reconciliation of Quarterly EBITDA with 2007-2008 Quarterly Net Income ($ in millions)
2007
2008
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Net income
$1.8
$1.2
$3.3
$9.7
$5.0
$5.4
$6.6
$7.5
Purchase amortization
1.6
1.8
1.8
2.0
Depreciation and other amortization
2.0
2.1
2.3
2.5
1.8
2.5
1.9
1.8
2.5
2.4
1.7
2.3
Interest income, net
(1.9)
(1.9)
(2.1)
(2.2)
(1.9)
(1.3)
(0.9)
(0.8)
Income tax expense, net
1.5
1.0
2.7
4.8
4.1
4.3
5.6
6.0
EBITDA
$5.0
$4.2
$8.0
$16.8
$11.5
$12.8
$15.5
$16.7
Going forward, CoStar’s will remain
focused on building and growing integrated
research, information and marketing
services for commercial real estate clients
throughout the U.S. and U.K.
TO OUR
SHAREHOLDERS
In 2008, CoStar Group continued its track record of
success with another year of strong financial and operational
results that enabled us to achieve the earnings goals we set
two years ago and strengthen our already strong financial
position. Our financial results reflect CoStar Group’s three
core attributes as a company – our industry-leading research,
the value our services provide subscribers, and the underlying
strength of our subscription-based business model.
In 2006, we embarked on the most ambitious expansion
in CoStar’s history to-date, making a substantial investment
to create additional value for our subscribers and investors by
significantly expanding our commercial real estate coverage
in both the U.S. and the U.K. In 2007, we largely completed the
work of adding hundreds of thousands of new properties to
our database, setting the stage in 2008 to focus on leveraging
those investments and generate the substantial earnings
growth we expected.
I’m pleased to report that we delivered on that goal and
exceeded expectations by successfully growing earnings
to their highest levels in our company’s history. Net income
increased 145% to $24.6 million in 2008, compared to $10.1
million for 2007. EBITDA (earnings before interest, taxes,
depreciation and amortization) for the full year in 2008 was
$56.6 million, a 115% increase compared to EBITDA of $26.4
million in 20071. The fact that we successfully executed the
plan we provided to our investors in the midst of a challenging
economic environment I believe clearly demonstrates our
company’s proven ability to create growth opportunities and
increase shareholder value.
Also, by continuing to increase our business margins in the
U.S. and ensuring that our expanded International operations
became profitable as expected, we succeeded in achieving
another important goal in 2008: raising our company-wide
EBITDA earnings margin to 30%. Our focus on earnings growth
has had the added benefit of significantly strengthening our
balance sheet. During 2008, we added more than $37 million
to our cash balance for a total of $225 million in cash, cash
equivalents and investments on hand at the end of the year.
By focusing on earnings growth, effectively managing our
costs and continuing to provide real value to our clients,
CoStar Group ended the year in a very favorable position --
solidly profitable, with no debt and very large cash reserves.
1Excluding 2007’s one-time gain on a lease assignment.
RESEARCH
Need for Research-Verified,
Comprehensive Information
Never Greater
I believe our 2008 results affirm CoStar Group’s unique
qualifications to research commercial real estate markets
and address our subscribers’ most critical business
information needs. And given the current economic
circumstances, I further believe the need for CoStar’s
comprehensive, research-verified information has never
been greater.
Each year, hundreds of thousands of transactions are
completed across the $5 trillion commercial real estate
industry. These transactions often have millions of
dollars at stake and require the confirmation of hundreds
of detailed facts on the properties involved, as well as
on other properties they directly compete against. More
information is needed to analyze current market trends
and conditions that may affect property values. Every day,
brokers, lenders, investors, appraisers, property owners
-- all of those directly involved in making decisions on
where to buy, sell and lease commercial property -- turn
to CoStar for the property-specific information they need.
Better information invariably results in better decisions.
At a time when every real estate transaction is undergoing
rigorous scrutiny, demand for trusted, verified information
is at a premium, and access to CoStar’s information
becomes even more highly prized. Only CoStar offers
the detailed building-by-building information in what
we believe to be the most comprehensive and accurate
database of commercial property in the U.S. and U.K,
providing unmatched insight and clarity.
Having successfully integrated the significant increase in
listings and researched properties during our most recent
expansion, CoStar’s research operations continued to
perform exceedingly well in 2008. At the end of the year
our massive database included detailed information on 3.2
million properties totaling just under 65 billion square feet,
with 8.7 billion square feet of available space and property
listings totaling more than $1 trillion in total value.
Our research organization continually adds to these totals,
expanding the scope of our coverage and maintaining the
accuracy of the information on an on-going basis, far
eclipsing what we believe any single real estate services
firm could cost-effectively accomplish on its own.
By outsourcing the labor-intensive and time-consuming
task of researching the entire commercial property market
to CoStar, these commercial real estate service providers
gain access to higher quality, more comprehensive
information at a lower cost, enabling these real estate
service providers to focus their resources on negotiating
transactions and delivering services to their clients.
Because CoStar’s information services help our customers
improve productivity, lower costs and drive new revenues,
we believe there will be continued strong demand for
our services, and we expect to continue to provide the
comprehensive, high quality information that has set
CoStar apart and won us the business of essentially every
major firm in commercial real estate as their trusted
source of reliable and valuable data.
CoStar’s information helps our
customers improve productivity,
lower costs and drive new revenue.
We believe the extraordinary demonstration of acceptance of
this new service in such a short period of time is a testament
to CoStar Showcase’s overall utility and effectiveness. It also
serves to further expand our company’s focus more directly
than ever into the marketing side of the commercial real
estate business.
For more than two decades, our clients have thought of
CoStar primarily as their research partner. With CoStar
Showcase, we have taken a major step to positioning CoStar
as their marketing partner as well. And the timing could
not have been better. In helping brokers generate leads at
a lower cost than other marketing alternatives, we believe
CoStar Showcase offers real value to listing brokers seeking
added exposure for their properties online, and is exactly
the type of cost-effective lead generation solution they are
looking for.
TECHNOLOGY + INNOVATION
Driving Growth Through
Technology and Innovation
In addition to our dominant position as the largest research
organization in commercial real estate, CoStar also is a
technology leader that stands out by delivering the ability
to access and analyze information for greater insight, and
to gain a sharper competitive edge by marketing property
listings more efficiently and more effectively across our
secure, high-speed network.
information technology group
is continually
CoStar’s
developing and releasing enhancements to our powerful
information services. And last year we made a number of
behind-the-scenes enhancements to make our network even
faster and more reliable, befitting an advanced business
information platform.
One major area of focus for our technology group planned
for 2009 will be an expansion of analytic capabilities using
CoStar’s information. The overwhelming response from our
clients who participated in a series of webinars addressing
changing market conditions clearly showed the demand for
CoStar to expand our role as a data provider and to provide
clients with additional market analysis and insight. In addition
to benefiting from CoStar’s superior research and market
coverage, we believe our core subscribers would greatly
value the ability to conduct more in-depth analysis using
the extensive information we provide. We intend to pursue
that option in the near future and believe it will be very well
received.
The year was also notable in terms of new product
development with the May 2008 launch of CoStar Showcase®.
This new service provides commercial real estate
professionals with a highly effective channel for generating
leads from the tens of thousands of business professionals
who search the Internet every day for available commercial
real estate.
In less than a year in service, annualized sales for CoStar
Showcase reached nearly $3 million at the end of 2008, making
it one of the most successful new services we ever launched
and providing another example of how CoStar continues to
use technology and innovation to expand our service platform
and generate additional growth opportunities.
A technology leader that stands out
by delivering the ability to access and
analyze information for greater insight
and a sharper competitive edge.
A MAJOR GROWTH OPPORTUNITY
Information Remains a
Billion Dollar Business
In closing, I wish to reiterate what I have often stated in
previous discussions with investors: I firmly believe that
providing information and marketing services to the
commercial real estate sector remains a billion dollar
business opportunity. It was before this current recession,
and it will be again when the inevitable upturn follows and
business conditions improve. We intend to keep CoStar
Group at the forefront of this opportunity by continuing to
provide an overwhelming quality advantage and serving
as an indispensable resource for our customers.
Over the past two decades, we have set and achieved
numerous earnings goals. And we remain focused on our
current goal of reaching $100 million in annualized EBITDA
companywide. If, as expected, we see positive GDP growth
return before 2010, I believe CoStar is well positioned to
capture that growth, continuing the track record we’ve
compiled in setting and achieving earnings goals.
Going forward, CoStar Group’s focus will remain on
building and growing integrated research, information
and marketing services for commercial real estate clients
throughout the U.S. and U.K. We see opportunity in the
current environment to capitalize on our existing research
assets to introduce new products and services and expand
our business in key areas, while positioning the company
for accelerated growth in the future.
We believe, we are still in the early stages of penetrating
the total potential market for commercial real estate
information services in the many U.S. and U.K. markets
we added during our most recent expansion. And, as
our financial performance over the past two decades
has consistently demonstrated, once established as the
information provider in a market, we expect to continue
to add new clients and create the opportunity to generate
sustained revenue associated with that market for decades
into the future.
We believe that the opportunity to reach new customers
with our core services in these recently added markets,
together with continued success in selling additional
services to existing customers, presents a compelling
opportunity for significant, long-term revenue growth.
The tremendous growth we’ve seen over the past two
decades has been driven by consistent, predictable
subscription-based revenues and high renewal rates
among our core subscribers. Our proven business model
is based on the extensive economies of scale that exist
in researching commercial real estate and providing
information and marketing services to large numbers of
subscribers across multiple markets.
Having established our research
infrastructure and
proprietary technology to aggregate and confirm property
information on such a large scale, we are able to allocate
our relatively fixed research costs across our extensive
subscriber base. In doing so, CoStar solves a key business
need, providing subscribers with access to comprehensive,
research-verified commercial property and
tenant
information at a fraction of the cost for an individual firm
to produce comparable information, and enabling them to
focus their resources on activities that generate revenue.
We believe the fact that our revenue grew by 10 percent and
that we posted record earnings in 2008 reflects the strong
fundamentals of our business and the value our services
provide to our customers. Our solid financial position
is based on long-term investments that we expect will
continue to generate additional revenue opportunities.
I am confident that we will manage our costs and take
advantage of our strong financial position to invest in
areas that offer the greatest possibility for delivering long-
term value to our customers and shareholders, bringing
additional opportunity to our employees, and additional
growth opportunities for CoStar Group. Thank you.
Andrew C. Florance
Founder, President and Chief Executive Officer
CoStar Group
We are still in the early stages
of penetrating the total potential
market for information services.
American Stock Transfer & Trust Co.
59 Maiden Lane
New York, NY 10038
(800) 937-5449
Independent Auditors:
Ernst & Young LLP
8484 Westpark Drive
McLean, VA 22102
SHAREHOLDER
INFORMATION
Stock Listing:
Symbol: CSGP, NASDAQ® Listed
Investor Relations:
Timothy J. Trainor
Director of Communications
CoStar Group, Inc.
2 Bethesda Metro Center
Bethesda, MD 20814
(301) 280-7695
Transfer Agent and Registrar:
CORPORATE
INFORMATION
Corporate Office:
CoStar Group, Inc.
2 Bethesda Metro Center
Bethesda, MD 20814
(800) 204-5960
Web Site:
www.costar.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2008
Commission file number 0-24531
CoStar Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
52-2091509
(I.R.S. Employer Identification No.)
2 Bethesda Metro Center, 10th Floor
Bethesda, Maryland 20814
(Address of principal executive offices) (zip code)
(301) 215-8300
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, $.01 par value
Name of Each Exchange on Which Registered
NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:134) No ⌧
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes (cid:134) No ⌧
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 of the past 90 days. Yes ⌧ No (cid:134)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. (cid:134)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Securities
Exchange Act of 1934.
Large accelerated filer (cid:134)
Non-accelerated filer (cid:134)
Accelerated filer ⌧
Smaller reporting company (cid:134)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes (cid:134) No ⌧
Based on the closing price of the common stock on June 30, 2008 on the Nasdaq Stock Market®, Nasdaq Global Select Market®, the aggregate
market value of registrant’s common stock held by non-affiliates of the registrant was approximately $460 million.
As of February 17, 2009, there were 19,729,419 shares of the registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement, which is expected to be filed with the Securities and Exchange Commission within 120
days after the end of the registrant’s fiscal year ended December 31, 2008, are incorporated by reference into Part III of this Report.
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
TABLE OF CONTENTS
Business......................................................................................................................................
3
Risk Factors ................................................................................................................................ 13
Unresolved Staff Comments....................................................................................................... 20
Properties .................................................................................................................................... 20
Legal Proceedings....................................................................................................................... 20
Submission of Matters to a Vote of Security Holders ................................................................ 20
Market for the Registrant’s Common Stock, Related Stockholder Matters and Issuer
Purchases of Equity Securities ................................................................................................ 21
Selected Consolidated Financial and Operating Data................................................................. 23
Management’s Discussion and Analysis of Financial Condition and Results of Operations ..... 24
Quantitative and Qualitative Disclosures about Market Risk ..................................................... 36
Financial Statements and Supplementary Data........................................................................... 37
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ..... 37
Controls and Procedures ............................................................................................................. 37
Other Information ....................................................................................................................... 38
Directors, Executive Officers and Corporate Governance.......................................................... 39
Executive Compensation ............................................................................................................ 39
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters................................................................................................................. 39
Certain Relationships and Related Transactions, and Director Independence............................ 39
Principal Accountant Fees and Services ..................................................................................... 39
Exhibits and Financial Statement Schedules .............................................................................. 39
Signatures ................................................................................................................................... 40
Index to Exhibits......................................................................................................................... 41
Index to Consolidated Financial Statements............................................................................... F-1
2
Item 1.
Business
PART I
(In this report, the words “we,” “our,” “us,” “CoStar” or the “Company” refer to CoStar Group, Inc. and its
direct and indirect subsidiaries. This report also refers to our websites, but information contained on those sites is
not part of this report.)
CoStar Group, Inc., a Delaware corporation, is the number one provider of information/marketing services to
the commercial real estate industry in the United States (“U.S.”) and United Kingdom (“U.K.”) 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/marketing services than any of our competitors and believe we
generate more revenues than any of our competitors. CoStar’s integrated suite of services offers customers online
access to the most comprehensive database of commercial real estate information, which has been researched and
verified by our team of researchers, currently covering the U.S., as well as London and other parts of the U.K. and
parts of France. Prior to 2007, CoStar operated within one segment. Due to the increased size, complexity and
funding requirements associated with our international expansion, in 2007 we began to manage our business
geographically in two operating segments, with our primary areas of measurement and decision-making being the
U.S. and International, which includes the U.K. and France.
Since our founding in 1987, CoStar’s strategy has been to provide commercial real estate professionals with
critical knowledge to explore and complete transactions, by offering the most comprehensive, timely and
standardized information on U.S. commercial real estate. As a result of our January 2003 acquisition of Focus
Information Limited (now, CoStar U.K. Limited), June 2004 acquisition of Scottish Property Network, December
2006 acquisition of Grecam S.A.S., and February 2007 acquisition of Property Investment Exchange Limited, we
have extended our offering of comprehensive commercial real estate information to include London and other parts
of the U.K. and parts of France. Information about CoStar’s revenues from, and long-lived assets located in, foreign
countries is included in Notes 2 and 12 to our consolidated financial statements. CoStar’s revenues, net income,
assets and liabilities, broken out by segment are set forth in Note 12 to our consolidated financial statements.
Information about risks attendant to our foreign operations is included in “Item 7A. Quantitative and Qualitative
Disclosures about Market Risk.”
We deliver our content to our U.S. customers via an integrated suite of online service offerings that includes
information about space available for lease, comparable sales information, tenant information, information about
properties for sale, internet marketing services, property information for clients’ websites, information about
industry professionals and their business relationships, analytic information, data integration, and industry news.
We have created and are continually improving a standardized information platform where the commercial real
estate industry and related businesses can continuously interact and easily facilitate transactions due to the efficient
exchange of accurate information we have supplied.
We have a number of assets that provide a unique foundation for our standardized platform, including the most
comprehensive proprietary database in the industry; the largest research department in the industry; proprietary data
collection, information management and quality control systems; a large in-house product development team; a
broad suite of web-based information/marketing services; and a large base of clients. Our database has been
developed and enhanced for more than 21 years by a research department that makes thousands of daily database
updates. In addition to our internal efforts to grow the database, we have obtained and assimilated over 51
proprietary databases.
CoStar intends to continue to grow its standardized platform of commercial real estate information/marketing
services. In 2004, CoStar began research for a 21-market U.S. expansion effort. By the end of the first quarter of
2006, CoStar had successfully launched service in each of those 21 markets. In addition, following our acquisition
of National Research Bureau in January 2005, we launched various research initiatives as part of our expansion into
real estate information for retail properties. We launched the new retail component of our flagship product, CoStar
Property Professional, in May 2006. In July 2006, we announced our intention to commence actively researching
commercial properties in approximately 81 new Core Based Statistical Areas (“CBSAs”) across the U.S. in an effort
to expand the geographical coverage of our service offerings, including our new retail service. In the fourth quarter
3
of 2007, we released our CoStar Property Professional service in the 81 new CBSAs across the U.S. In 2008, we
released CoStar Showcase, an internet marketing service that provides commercial real estate professionals the
opportunity to make their listings accessible to all visitors to our public website, www.CoStar.com.
CoStar also intends to continue to grow and expand the coverage of its service offerings within the U.K. In
December 2006, CoStar’s U.K. Subsidiary, CoStar Limited, acquired Grecam S.A.S., a provider of commercial
property information and market-level surveys, studies and consulting services, located in Paris, France. In
February 2007, CoStar Limited also acquired Property Investment Exchange Limited, a provider of commercial
property information and operator of an online investment property exchange located in London, England. CoStar
intends to integrate its U.K. and French operations more fully with its U.S. operations and eventually to introduce a
consistent international platform of service offerings. Further information about CoStar’s acquisitions is included in
Note 3 to our consolidated financial statements.
Our subscription-based information/marketing services, consisting primarily of CoStar Property Professional,
CoStar Tenant, CoStar COMPS Professional and FOCUS services, currently generate more then 90% of our total
revenues. Our contracts for our subscription-based information/marketing services typically have a minimum term
of one year and renew automatically. Upon renewal, 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 client’s business
focus, geography 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.
Industry Overview
The market for commercial real estate information is vast based on the variety, volume and value of transactions
related to commercial real estate. Each transaction has multiple participants and multiple information requirements,
and in order to facilitate transactions, industry participants must have extensive, accurate and current information.
Members of the commercial real estate and related business community require daily access to current data such as
space availability, properties for sale, rental rates, vacancy rates, tenant movements, sales comparables, supply, new
construction, absorption rates and other important market developments to carry out their businesses effectively.
There is a strong need for an efficient marketplace, where commercial real estate professionals can exchange
information, evaluate opportunities using standardized data and interact with each other on a continuous basis.
A large number of parties involved in the commercial real estate and related business community make use of
the services we provide in order to obtain information they need to conduct their businesses, including:
Sales and leasing brokers
Property owners
Property managers
•
•
•
• Design and construction professionals
• Real estate developers
• Real estate investment trust managers
•
Investment bankers
• Commercial bankers
• Mortgage bankers
• Mortgage brokers
• Retailers
Pension fund managers
• Government agencies
• Mortgage-backed security issuers
• Appraisers
•
• Reporters
• Tenant vendors
• Building services vendors
• Communications providers
•
•
•
Insurance companies’ managers
Institutional advisors
Investors and asset managers
The commercial real estate and related business community generally has operated in an inefficient marketplace
because of the fragmented approach to gathering and exchanging information within the marketplace. Various
organizations, including hundreds of brokerage firms, directory publishers and local research companies, collect
data on specific markets and develop software to analyze the information they have independently gathered. This
highly fragmented methodology has resulted in duplication of effort in the collection and analysis of information,
excessive internal cost and the creation of non-standardized data containing varying degrees of accuracy and
comprehensiveness, resulting in a formidable information gap.
4
The creation of a standardized information platform for commercial real estate requires an infrastructure
including a standardized database, accurate and comprehensive research capabilities, easy to use technology and
intensive participant interaction. By combining its extensive database, approximately 900 researchers and outside
contractors, technological expertise and broad customer base, CoStar believes that it has created such a platform.
The U.S. and global economies have changed adversely over the past year or more, and the commercial real
estate industry has been negatively impacted. The commercial real estate market has seen a reduction in property
sales and leasing activity, lower absorption rates, climbing vacancy rates and decreases in rental rates and sales
prices. The full extent of the impact of our current financial crisis is not yet clear. As our customers continue to
look for ways to reduce spending, we may continue to see reduced demand for our information/marketing services.
However, we believe that even in a weakened economy there is a continuing need for accurate, standardized
commercial real estate information/marketing services. We believe that access to continuously researched verified
commercial real estate information becomes even more valuable in a down market, as industry players assess where
market conditions are heading, how their businesses should adapt, determine what properties are worth, and try to
market their properties, among other things. Moreover, outsourcing the labor-intensive task of conducting basic real
estate research may result in cost savings for our clients.
CoStar’s Comprehensive Database
CoStar has spent more than 21 years building and acquiring a database of commercial real estate information,
which includes information on leasing, sales, comparable sales, tenants, and demand statistics, as well as digital
images.
As of January 30, 2009, our database of real estate information covered the U.S., as well as London, England
and other parts of the U.K. and parts of France, and contained:
• More than 1.1 million sale and lease listings;
• Over 3.2 million total properties;
• Over 8.9 billion square feet of sale and lease listings;
• Over 5.7 million tenants;
• More than 1.3 million sales transactions valued in the aggregate at over $3.1 trillion; and
• Approximately 7.6 million digital attachments, including building photographs, aerial photographs,
plat maps and floor plans.
This highly complex database is comprised of hundreds of data fields, tracking such categories as:
Site and zoning information
• Location
•
• Building characteristics
Space availability
•
• Tax assessments
• Ownership
Sales and lease comparables
•
•
Space requirements
• Number of retail stores
For-sale information
Income and expense histories
• Mortgage and deed information
•
•
• Tenant names
• Lease expirations
• Contact information
• Historical trends
• Demographic information
• Retail sales per square foot
CoStar Research
We have developed a sophisticated data collection organization utilizing a multi-faceted research process. In
2008, our full time researchers and contractors drove millions of miles, conducted hundreds of thousands of on-site
building inspections, and conducted millions of interviews of brokers, owners and tenants.
Research Department. As of January 30, 2009, we have approximately 900 commercial real estate research
professionals and outside contractors performing research. Our research professionals undergo an extensive training
program so that we can maintain consistent research methods and processes throughout our research department.
Our researchers collect and analyze commercial real estate information through millions of phone calls, e-mails,
5
internet updates and faxes each year, in addition to field inspections, public records review, news monitoring and
direct mail. Each researcher is responsible for maintaining the accuracy and reliability of database information. As
part of their update process, researchers develop cooperative relationships with industry professionals that allow
them to gather useful information. Because of the importance commercial real estate professionals place on our data
and our prominent position in the industry, many of these professionals routinely take the initiative and proactively
report available space and transactions to our researchers.
CoStar has an extensive field research effort that includes physical inspection of properties in order to research
new markets, find additional inventory, photograph properties and verify existing information.
CoStar utilizes 147 high-tech field research vehicles in 41 states and the U.K. Of these vehicles, 100 are
custom-designed energy efficient hybrid cars that are equipped with computers, proprietary Global Positioning
System tracking software, high resolution digital cameras and handheld laser instruments to help precisely measure
buildings, geo-code them and position them on digital maps. Some of our researchers also use custom-designed
trucks with the same equipment as well as pneumatic masts that extend up to an elevation of twenty-five feet to
allow for unobstructed building photographs from “birds-eye” views. Each CoStar vehicle uses wireless technology
to track and transmit field data. A typical site inspection consists of photographing the building, measuring the
building, geo-coding the building, capturing “For Sale” or “For Lease” sign information, counting parking spaces,
assessing property condition and construction, and gathering tenant information. Certain researchers canvass
properties, interviewing tenants suite by suite. In addition, many of our field researchers are photographers who take
photographs of commercial real estate properties to add to CoStar’s database of digital images.
Data and Image Providers. We license a small portion of our data and images from public record providers and
third party data sources. Licensing agreements with these entities provide for our use of a variety of commercial real
estate information, including property ownership, tenant information, demographic information, maps and aerial
photographs, all of which enhance various CoStar services. These license agreements generally grant us a non-
exclusive license to use the data and images in the creation and supplementation of our information/marketing
services and include what we believe are standard terms, such as a contract term ranging from one to five years,
automatic renewal of the contract and fixed periodic license fees or a combination of fixed periodic license fees plus
additional fees based upon our usage.
Management and Quality Control Systems. Our research processes include automated and non-automated
controls to ensure the integrity of the data collection process. A large number of automated data quality tests check
for potential errors, including occupancy date conflicts, available square footage greater than building area, typical
floor space greater than land area and expired leases. We also monitor changes to critical fields of information to
ensure all information is kept in compliance with our standard definitions and methodology. Our non-automated
quality control procedures include:
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calling our information sources on recently updated properties to re-verify information;
reviewing calls our researchers made to their industry contacts to ensure data reported to the researcher is
entered correctly into the database;
performing periodic research audits and field checks to determine if we correctly canvassed buildings;
providing training and retraining to our research professionals to ensure accurate data compilation; and
compiling measurable performance metrics for research teams and managers for feedback on data quality.
Finally, one of the most important and effective quality control measures we rely on is feedback provided by the
commercial real estate professionals using our data every day.
Proprietary Technology
As of January 30, 2009, CoStar had a staff of 90 product development, database and network professionals.
CoStar’s information technology professionals focus on developing new services for our customers and delivering
research automation tools that improve the quality of our data and increase the efficiency of our research analysts.
Our information technology team is responsible for developing and maintaining CoStar products, including
CoStar Property Professional, CoStar Property Express, CoStar COMPS, CoStar Tenant, CoStar Showcase, CoStar
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Commercial MLS and CoStar Connect, as well as our international products. In 2006, CoStar released a major
upgrade to its CoStar COMPS service that provides customers with over 100 improvements, including access to for
sale information, aerials and enhanced mapping. In 2007, to better support our retail customers, we added
significant features to CoStar Property Professional including tenant proximity and demographic search capability,
mapping layers, detailed retail tenant information and demographics. In 2008, CoStar released CoStar Showcase, an
internet marketing service that provides commercial real estate professionals the opportunity to make their listings
accessible to all visitors to our public website, www.CoStar.com. CoStar has also begun development of an
international platform, which will allow CoStar to offer CoStar Property Professional in international countries.
Our information technology team is responsible for developing the infrastructure necessary to support CoStar’s
business processes, our comprehensive database of commercial real estate information/marketing services and our
extensive image library. The team implements technologies and systems that introduce efficient workflows and
controls that increase the production capacity of our research teams and improve the quality of our data. Over the
years, the team has developed data collection and quality control mechanisms that we believe are unique to the
commercial real estate industry. The team continues to develop and modify our enterprise information management
system that integrates CoStar sales, research, field research, customer support and accounting information. We use
this system to maintain our commercial real estate research information, manage contacts with the commercial real
estate community, provide research workflow automation and conduct daily automated quality assurance checks. In
addition, our information technology team has also developed fraud-detection technology to detect and prevent
unauthorized access to our services.
Our information technology professionals also maintain the servers and network components necessary to
support CoStar services and research systems. Our encrypted virtual private network provides remote researchers
and salespeople secure access to CoStar applications and network resources. CoStar maintains a comprehensive data
protection policy that provides for use of encrypted data fields and off-site storage of all system backups, among
other protective measures. CoStar’s services are continually monitored in an effort to ensure our customers fast and
reliable access.
Services
Our suite of information/marketing services is branded and marketed to our customers. Our services are derived
from a database of building-specific information and offer customers specialized tools for accessing, analyzing and
using our information. Over time, we expect to enhance our existing information/marketing services and develop
additional services that make use of our comprehensive database to meet the needs of our existing customers as well
as potential new categories of customers.
Our various information/marketing services are described in detail in the following paragraphs as of January 30,
2009:
CoStar Property Professional® CoStar Property Professional, or “CoStar Property,” is the Company’s flagship
service. It provides subscribers a comprehensive inventory of office, industrial, retail and multifamily properties and
land in markets throughout the U.S., including for-lease and for-sale listings, historical data, building photographs,
maps and floor plans. Commercial real estate professionals use CoStar Property to identify available space for lease,
evaluate leasing and sale opportunities, value assets and position properties in the marketplace. Our clients also use
CoStar Property to analyze market conditions by calculating current vacancy rates, absorption rates or average rental
rates, and forecasting future trends based on user selected variables. CoStar Property provides subscribers with
powerful map-based search capabilities as well as a user controlled, password protected extranet (or electronic “file
cabinet”) where brokers may share space surveys and transaction-related documents online, in real time, with team
members. When used together with CoStar Connect, CoStar Property enables subscribers to share space surveys and
transaction-related documents with their clients, accessed through their corporate website. CoStar Property, along
with all of CoStar’s other core information/marketing services, are delivered solely via the internet.
CoStar COMPS Professional® CoStar COMPS Professional, or “COMPS Professional,” provides
comprehensive coverage of comparable sales information in the U.S. commercial real estate industry. It is the
industry’s most comprehensive database of comparable sales transactions and is designed for professionals who
need to research property comparables, identify market trends, expedite the appraisal process and support property
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valuations. COMPS Professional service offers subscribers numerous fields of property information, access to
support documents (e.g., deeds of trust) for new comparables, demographics and the ability to view for-sale
properties alongside sold properties in three formats – plotted on a map, aerial image or in a table.
CoStar Tenant® CoStar Tenant is a detailed online business-to-business prospecting and analytical tool
providing commercial real estate professionals with the most comprehensive commercial real estate-related U.S.
tenant information available. CoStar Tenant profiles tenants occupying space in commercial buildings across the
U.S. and provides updates on lease expirations - one of the service’s key features - as well as occupancy levels,
growth rates and numerous other facts. Delivering this information via the internet allows users to target prospective
clients quickly through a searchable database that identifies only those tenants meeting certain criteria.
CoStar Showcase® CoStar Showcase offers commercial real estate professionals a simple way to get their for
sale and for lease listings in front of a broad internet audience who search on GoogleTM, Yahoo® and Costar.com to
find commercial properties. When customers sign up for CoStar Showcase, their listings become accessible to
visitors to Costar.com, who can search those listings for free. To drive traffic to CoStar Showcase subscriber
listings, CoStar invests in GoogleTM and Yahoo® keyword based pay-per-click advertising to capture the high
volume traffic of users actively searching for commercial properties on those search engines. As part of their CoStar
Showcase subscription, subscribers also receive customized websites for each of their brokers that displays their bio,
photo, contact information and updated listings that they can use to promote their services.
CoStar Property Express® CoStar Property Express provides access, via an annual subscription, to a “light” or
scaled down version of CoStar Property. Commercial real estate professionals use CoStar Property Express to look
up and search for lease and for sale listings in CoStar’s comprehensive national database. CoStar Property Express
provides base building information, photos, floor plans, maps and a limited number of reports.
CoStar Listings Express® CoStar Listings Express provides access via an annual subscription to a listings only
version of CoStar Property Express. Commercial real estate professionals use CoStar Listings Express to look up
and search for lease and for sale listings in CoStar’s comprehensive national database. CoStar Listings Express
provides base building information, photos, floor plans, maps and a limited number of reports on only properties that
are either for lease or for sale. CoStar Listings Express does not provide information on fully leased properties, as
found in CoStar Property Professional and CoStar Property Express.
CoStar COMPS Express® CoStar COMPS Express provides users with immediate, subscription free access
with payment by credit card to the CoStar COMPS Professional system on a report-by-report basis. Subscribers also
use this on-demand service to research comparable sales information outside of their subscription markets.
CoStar Connect® CoStar Connect allows commercial real estate firms to license CoStar’s technology and
information to market their U.S. property listings on their corporate websites. Customers enhance the quality and
depth of their listing information through access to CoStar’s database of content and digital images. The service
automatically updates via the CoStar Property database and manages customers’ online property information,
providing comprehensive listings coverage and significantly reducing the expense of building and maintaining their
websites’ content and functionality.
CoStar Commercial MLS® CoStar Commercial MLS is the industry’s most comprehensive collection of
researched for sale listings. CoStar Commercial MLS draws upon CoStar’s large database of digital images and
includes office, industrial, multifamily and retail properties, as well as shopping centers and raw land. CoStar
Commercial MLS represents an efficient means for sellers to market their properties to a large audience and for
buyers to easily identify target properties.
CoStar Advertising® CoStar Advertising offers property owners a highly targeted and cost effective way to
market a space for lease or a property for sale directly to the individuals looking for that type of space through
interactive advertising. Our advertising model is based on varying levels of exposure, enabling the advertiser to
target as narrowly or broadly as its budget permits. With the CoStar Advertising program, when the advertiser’s
listings appear in a results set, they receive priority positioning and are enhanced to stand out. The advertiser can
also purchase exposure in additional submarkets, or the entire market area so that this ad will appear even when this
listing would not be returned in a results set.
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CoStar Professional Directory® CoStar Professional Directory, a service available exclusively to CoStar
Property Professional subscribers, provides detailed contact information for approximately 1.1 million commercial
real estate professionals, including specific information about an individual’s current and prior activities such as
completed transactions, current landlord representation assignments, sublet listings, major tenants and owners
represented and local and national affiliations. Commercial real estate brokers can input their biographical
information and credentials and upload their photo to create personal profiles. Subscribers use CoStar Professional
Directory to network with their peers, identify and evaluate potential business partners, and maintain accurate
mailing lists of other industry professionals for their direct mail marketing efforts.
CoStar Market Report™ The CoStar Market Report provides in-depth current and historical analytical
information covering office, industrial and retail properties across the U.S. Published quarterly, each market report
includes details such as absorption rates, vacancy rates, rental rates, average sales prices, capitalization rates,
existing inventory and current construction activity. This data is presented using standard definitions and
calculations developed by CoStar, and offers real estate professionals critical and unbiased information necessary to
make intelligent commercial real estate decisions. CoStar Market Reports are available to CoStar Property
Professional subscribers at no additional charge, and are available for purchase by non-subscribers.
Metropolis™ The Metropolis service is a single interface that combines commercial real estate data from
multiple information providers into a comprehensive resource. The Metropolis service allows a user to input a
property address and then view detailed information on that property from multiple information providers, including
CoStar services. This technology offers commercial real estate professionals a simple and convenient solution for
integrating a wealth of third party information and proprietary data, and is currently available for the Southern
California markets.
FOCUS™ CoStar’s U.K. subsidiary, CoStar UK Limited, offers several services, the primary of which is
FOCUS. FOCUS is a digital online service offering information on the U.K. commercial real estate market. This
service seamlessly links data on individual properties and companies across the U.K., including comparable sales,
available space, requirements, tenants, lease deals, planning information, socio-economics and demographics, credit
ratings, photos and maps.
SPN™ SPN provides users online access to a comprehensive database of information for properties located in
Scotland, including available space, comparable sales and lease deals.
Propex™ Propex gives users access to the commercial property investment market. It is used by U.K.
investment agencies and professional investors and is a secure online exchange through which investment deals may
be introduced. It is a primary channel for the distribution of live transaction data and property research data in the
U.K. investment market. Propex also provides private investors with a gateway into the commercial property
investment market. It is a free-access listing website, which provides details of commercial property investments. It
is used by U.K. agencies to sell investments suitable for the private investor.
Shopproperty.co.uk™ Shopproperty is a listing database of available retail units across the U.K. on a free-
access website. Shopproperty.co.uk is the only specialist listing website with fully licensed Goad street-trader plans.
Grecam™ Our French subsidiary, Grecam S.A.S., provides commercial real estate information throughout the
Paris region through its Observatoire Immobilier D’ Entreprise (“OIE”) service offering. The OIE service provides
commercial property availability and transaction information to its subscribers through both an online service and
market reports.
Clients
We draw clients from across the commercial real estate and related business community. Commercial real estate
brokers have traditionally formed the largest portion of CoStar clients, however, we also provide services to owners,
landlords, financial institutions, retailers, vendors, appraisers, investment banks, governmental agencies, and other
parties involved in commercial real estate. The following chart lists U.S. and U.K. clients that are well known or
have the highest annual subscription fees in each of the various categories, each as of January 30, 2009.
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Brokers
Lenders, Investment Bankers
Institutional Advisors, Asset Managers
Owners, Developers
Capmark — U.K.
Deutsche Bank
Wells Fargo
Key Bank
TD Bank
Citibank
AEGON USA Realty Advisors, Inc.
Capmark Financial Group, Inc.
East West Bank
Q10 Bonneville Mortgage Company
CB Richard Ellis
CB Richard Ellis — U.K.
Colliers
Colliers Conrad Ritblat Erdman — U.K. JP Morgan Chase Bank
Cushman & Wakefield
Cushman & Wakefield — U.K.
Weichert Commercial Brokerage
Jones Lang LaSalle
Jones Lang LaSalle — U.K.
Grubb & Ellis
Gerald Eve — U.K.
Drivers Jonas — U.K.
Lambert Smith Hampton — U.K.
Charles Dunn Company, Inc.
Marcus & Millichap
Mohr Partners
Newmark & Company Real Estate
CRESA Partners
Studley
Coldwell Banker Commercial NRT
UGL Equis
FirstService Williams
GVA Advantis
Binswanger
Re/Max
Carter
USI Real Estate Brokerage Services
DAUM Commercial Real Estate
Services
HFF
U.S. Equities Realty
Sperry Van Ness
DTZ — U.K.
Savillis Commercial — U.K.
Atis Real — U.K.
GVA Grimley — U.K.
King Sturge — U.K.
Nationwide Insurance
Café Rio Mexican Grill, Inc.
Merle Norman Cosmetics, Inc.
Massage Envy
7-Eleven
Dollar General Corporation
Walgreens
Town Fair Tire
Rent-A-Center
Spencer Gifts LLC
Hines
LNR Property Corp
Shorenstein Company, LLC
Mack–Cali
Manulife Financial
Land Securities — U.K.
Retailers
Industrial Developments International (IDI)
BlackRock
Prudential
Prudential — U.K.
Metropolitan Life
ING Clarion Partners
Duke Realty Corporation
USAA Real Estate Company
NorthMarq Capital
AEW Capital Management LP
Progressive Casualty Insurance Co.
Appraisers, Accountants
Integra
Deloitte
Deloitte — U.K.
Marvin F. Poer
KPMG
GE Capital
PGP Valuation
Thomson Reuters
Government Agencies
U.S. General Services Administration
County of Los Angeles
Internal Revenue Service
City of Chicago
Cook County Assessor’s Office
U.S. Department of Housing and
Urban Development
Corporation of London — U.K.
Scottish Enterprise — U.K.
Federal Reserve Bank of New York
REITs
Brandywine Realty Trust
Brookfield Properties
Boston Properties
Liberty Property Trust
Kimco Realty Corporation
Vornado Realty Trust
Simon Property Group, Inc.
Property Managers
Transwestern Commercial Services
Lincoln Property Company
PM Realty Group
Navisys Group
Osprey Management Company
Leggat McCall Properties
Asset Plus Corporation
Morlin Asset Management LP
Vendors
Turner Construction Company
Kastle Systems
Comcast Corporation
ADT Security
MWB — U.K.
Cox Communications, Inc.
Clear Channel Outdoor
Verizon Communications, Inc.
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For the years ended December 31, 2006, 2007 and 2008, no single client accounted for more than 5% of our
revenues.
Sales and Marketing
As of January 30, 2009, we had 220 sales, marketing and customer support employees, with the majority of our
direct sales force located in field sales offices. Our sales teams are primarily located in 22 field sales offices
throughout the U.S. and in London, England; Manchester, England; Glasgow, Scotland and Paris, France. Our
inside sales team is located in our Maryland offices. This team prospects for new clients and performs service
demonstrations exclusively by telephone and over the internet to support the direct sales force.
Our local offices typically serve as the platform for our in-market sales, customer support and field research
operations for their respective regions. The sales force is responsible for selling to new prospects, training new and
existing clients, providing ongoing customer support, renewing existing client contracts and identifying cross-selling
opportunities. In addition, the sales force has primary front line responsibility for customer care.
Our sales strategy is to aggressively attract new clients, while providing ongoing incentives for existing clients
to subscribe to additional services. We actively manage client accounts in order to retain clients by providing
frequent service demonstrations as well as company-client contact and communication. We place a premium on
training new and existing client personnel on the use of our services so as to promote maximum client utilization and
satisfaction with our services. Our strategy also involves entering into multi-year, multi-market license agreements
with our larger clients.
We seek to make our services essential to our clients’ businesses. 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 generally based on the number of sites, number of users, organization size,
the client’s business focus, geography 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.
In addition, through CoStar COMPS Express, clients can access our database of commercial real estate information
without a subscription on a pay per use basis.
Our customer service and support staff is charged with ensuring high client satisfaction by providing ongoing
customer support.
Our primary marketing methods include: service demonstrations; face to face networking; web-based
marketing; direct marketing; communication via our corporate website and news services; participation in trade
show and industry events; print advertising in trade magazines and local business journals; client referrals; and
CoStar Advisor™, the Company’s newsletter, which is distributed to our clients and prospects. Web-based
marketing and direct marketing are the most cost-effective means for us to find prospective clients. Our web-based
marketing efforts include paid advertising with major search engines and commercial real estate news sites and our
direct marketing efforts include direct mail, email and telemarketing, and make extensive use of our unique,
proprietary database. Once we have identified a prospective client, our most effective sales method is a service
demonstration. We use various forms of advertising to build brand identity and reinforce the value and benefits of
our services. We also sponsor and attend local association activities and events, and attend and/or exhibit at industry
trade shows and conferences to reinforce our relationships with our core user groups, including industry-leading
events for commercial brokers and retail and financial services institutions.
In May 2008, we released CoStar Showcase®, an internet marketing service that provides commercial real estate
professionals the opportunity to make their listings available to all visitors to our public website, www.CoStar.com,
and allows each visitor to search those property listings for free. CoStar Showcase draws additional traffic to our
website through searches on GoogleTM and Yahoo®. Commercial real estate listings are derived from our
database and are researched and verified by CoStar researchers. CoStar Showcase subscribers need only designate
their listings for inclusion in the free property search tool. In addition, CoStar Showcase customers who have not
subscribed for our other services, serve as leads for additional cross-selling opportunities.
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Competition
The market for information/marketing services generally is competitive and rapidly changing. In the
commercial real estate industry, the principal competitive factors for commercial real estate information/marketing
services and providers are:
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quality and depth of the underlying databases;
ease of use, flexibility, and functionality of the software;
timeliness of the data;
breadth of geographic coverage and services offered;
client service and support;
perception that the service offered is the industry standard;
price;
effectiveness of marketing and sales efforts;
proprietary nature of methodologies, databases and technical resources;
vendor reputation;
brand loyalty among customers; and
capital resources.
We compete directly and indirectly for customers with the following categories of companies:
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online services or websites targeted to commercial real estate brokers, buyers and sellers of commercial
real estate properties, insurance companies, mortgage brokers and lenders, such as LoopNet, Inc., Reed
Business Information Limited, officespace.com, MrOfficeSpace.com, and TenantWise, Inc;
publishers and distributors of information/marketing services, including regional providers and national
print publications, such as Black’s Guide, Property and Portfolio Research, Torto Wheaton Research,
Marshall & Swift, Yale Robbins, Inc., Reis, Inc., Real Capital Analytics, Inc. and The Smith Guide, Inc.;
locally controlled real estate boards, exchanges or associations sponsoring property listing services and the
companies with whom they partner, such as Xceligent, Catalyst, the National Association of Realtors, the
Commercial Association of Realtors Data Services and the Association of Industrial Realtors;
in-house research departments operated by commercial real estate brokers; and
public record providers.
As the commercial real estate information/marketing services marketplace develops, additional competitors
(including companies which could have greater access to data, financial, product development, technical or
marketing resources than we do) may enter the market and competition may intensify. While we believe that we
have successfully differentiated ourselves from existing competitors, competition could materially harm our
business.
Proprietary Rights
To protect our proprietary rights in our methodologies, database, software, trademarks and other intellectual
property, we depend upon a combination of:
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trade secret, copyright, trademark, database protection and other laws;
nondisclosure, noncompetition and other contractual provisions with employees and consultants;
license agreements with customers;
patent protection; and
technical measures.
We seek to protect our software’s source code, our database and our photography as trade secrets and under
copyright law. Although copyright registration is not a prerequisite for copyright protection, we have filed for
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copyright registration for many of our databases, photographs, software and other materials. Under current U.S.
copyright law, the arrangement and selection of data may be protected, but the actual data itself may not be. In
addition, with respect to our U.K. databases, certain database protection laws provide additional protections of these
databases. We license our services under license agreements that grant our clients non-exclusive, non-transferable
licenses. These agreements restrict the disclosure and use of our information and prohibit the unauthorized
reproduction or transfer of the information/marketing services we license.
We also attempt to protect the secrecy of our proprietary database, our trade secrets and our proprietary
information through confidentiality and noncompetition agreements with our employees and consultants. Our
services also include technical measures designed to discourage and detect unauthorized copying of our intellectual
property. We have established an internal antipiracy team that uses fraud-detection technology to continually
monitor our services to detect and prevent unauthorized access, and we actively prosecute individuals and firms that
engage in this unlawful activity.
We have filed trademark applications to register trademarks for a variety of names for CoStar services and other
marks, and have obtained registered trademarks for a variety of our marks, including “CoStar”, “COMPS”, “CoStar
Property”, “CoStar Tenant”, “CoStar Showcase” and “CoStar Group”. Depending upon the jurisdiction, trademarks
are generally valid as long as they are in use and/or their registrations are properly maintained and they have not
been found to become generic. We consider our trademarks in the aggregate to constitute a valuable asset. In
addition, we have filed several patent applications covering certain of our methodologies and software and currently
have one patent in the U.K. which expires in 2021 covering, among other things, certain of our field research
methodologies, and three patents in the U.S. which expire in 2020, 2021 and 2022, covering, among other things,
critical elements of CoStar’s proprietary field research technology and mapping tools. We regard the rights under
our patents as valuable to our business but do not believe that our business is materially dependent on any single
patent.
Employees
As of January 30, 2009, we employed 1,178 employees. None of our employees is represented by a labor union.
We have experienced no work stoppages. We believe that our employee relations are excellent.
Available Information
Our investor relations internet website is http://www.costar.com/investors.aspx. The reports we file with or
furnish to the Securities and Exchange Commission, including our annual report, quarterly reports and current
reports, are available free of charge on our internet website as soon as reasonably practicable after we electronically
file such material with, or furnish it to, the Securities and Exchange Commission. You may review and copy any of
the information we file with the Securities and Exchange Commission at the Commission's Public Reference Room
at 100 F Street, NE, Washington, DC 20549. You may obtain information regarding the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. The Securities and Exchange Commission maintains an
internet site that contains reports, proxy and information statements, and other information regarding issuers that file
electronically with the Commission at http://www.sec.gov.
Item 1A. Risk Factors
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 2009 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
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, acquisitions, contract renewal rate, capital structure, contractual obligations, legal
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proceedings and claims, our database, database growth, services and facilities, employee relations, future economic
performance, our ability to liquidate or realize our long-term investments, management’s plans, goals and objectives
for future operations, and growth and markets for our stock. Sections of this Report which contain forward-looking
statements include “Business,” “Risk Factors,” “Properties,” “Legal Proceedings,” “Management’s Discussion and
Analysis of Financial Condition and Results of Operations,” “Quantitative and Qualitative Disclosures About
Market Risk,” “Controls and Procedures” and the Financial Statements and related Notes.
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,” 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; commercial real
estate market conditions; changes or consolidations within the commercial real estate industry; customer retention;
our ability to attract new clients; our ability to sell additional services to existing clients; competition; foreign
currency fluctuations; our ability to identify, acquire and integrate acquisition candidates; our ability to obtain any
required financing on favorable terms; global credit market conditions affecting investments; our ability to integrate
our U.S. and international product offerings; 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; 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; legal and
regulatory issues; 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.
Risk Factors
A downturn or consolidation in the commercial real estate industry may decrease customer demand for our
services. The continuing decline in the commercial real estate industry’s leasing activity, rental rates and absorption
rates and the on-going downturn in the commercial real estate market’s for sale activity may affect our ability to
generate revenues and may lead to more cancellations by our current or future customers, both of which could cause
our revenues or our revenue growth rate to decline and reduce our profitability. A depressed commercial real estate
market has a negative
impact on our core customer base, which could decrease demand for our
information/marketing services. Also, companies in this industry are consolidating, often in order to reduce
expenses. Consolidation, or other cost-cutting measures by our customers, may lead to more cancellations of our
information/marketing services by our customers, reduce the number of our existing clients, reduce the size of our
target market or increase our clients’ bargaining power, all of which could cause our revenues or our revenue growth
to decline and reduce our profitability.
Negative general economic conditions could increase our expenses and reduce our revenues. Our business and
the commercial real estate industry are particularly affected by negative trends in the general economy. The success
of our business depends on a number of factors relating to general global, national, regional and local economic
conditions, including perceived and actual economic conditions, recessions, inflation, deflation, exchange rates,
interest rates, taxation policies, availability of credit, employment levels, and wage and salary levels. Negative
general economic conditions could adversely affect our business by reducing our revenues and profitability.
Further, continuing bank failures and freezing of the credit markets generally, other adverse national and global
economic events, as well as any significant terrorist attack, are likely to have a further dampening effect on the
economy in general, which could negatively affect our financial performance and our stock price. Market
14
disruptions may also contribute to extreme price and volume fluctuations in the stock market that may affect our
stock price for reasons unrelated to our operating performance. In addition, a significant increase in inflation could
increase our expenses more rapidly than expected, the effect of which may not be offset by corresponding increases
in revenue. Conversely, deflation resulting in a decline of prices could reduce our revenues. In the current economic
environment, it is difficult to predict whether we will experience significant inflation or deflation in the near future.
A significant increase in either could have an adverse effect on our results of operations. As a result of current
economic conditions, we have recently seen an increase in customer cancellations, reductions of services and
failures to timely pay amounts due us. If we experience greater cancellations and more reductions of services and
failures to timely pay and we do not acquire new clients or sell new services to our existing clients, our revenues
may decline and our financial position would be adversely affected.
Our revenues and financial position will be adversely affected if we are not able to attract and retain clients.
Our success and revenues depend on attracting and retaining subscribers to our information/marketing services. Our
subscription-based information/marketing services generate the largest portion of our revenues. However, we may
be unable to attract new clients, and our existing clients may decide not to add, not to renew or to cancel
subscription services. In addition, in order to increase our revenue, we must continue to attract new customers,
continue to keep our cancellation rate low and continue to sell new services to our existing customers. We may not
be able to continue to grow our customer base, keep the cancellation rate for customers and services low or sell new
services to existing customers as a result of several factors, including without limitation: economic pressures, a
decision that customers have no need for our services; a decision to use alternative services; customers’ and
potential customers’ pricing and budgetary constraints; consolidation in the real estate and/or financial services
industries; data quality; technical problems; or competitive pressures. If clients decide to cancel services or not to
renew their subscription agreements, and we do not sell new services to our existing clients or attract new clients,
then our renewal rate, revenues and our revenue growth rate may decline.
If we are unable to hire qualified persons for, or retain and continue to develop, our sales force, or if our sales
force is unproductive, our revenues could be adversely affected. In order to support revenue growth, we need to
continue to develop, train and retain our sales force. Our ability to build and develop a strong sales force may be
affected by a number of factors, including: our ability to attract, integrate and motivate sales personnel; our ability to
effectively train our sales force; the ability of our sales force to sell an increased number of services; our ability to
manage effectively an outbound telesales group; the length of time it takes new sales personnel to become
productive; the competition we face from other companies in hiring and retaining sales personnel; and our ability to
effectively manage a multi-location sales organization. If we are unable to hire qualified sales personnel and develop
and retain the members of our sales force, including sales force management, or if our sales force is unproductive,
our revenues or growth rate could decline and our expenses could increase.
Fluctuating foreign currencies may negatively impact our business, results of operations and financial position.
Due to our acquisitions of CoStar UK Limited (formerly FOCUS Information Limited), SPN, Grecam S.A.S. and
Propex, a portion of our business is denominated in the British Pound and Euro and as a result, fluctuations in
foreign currencies may have an impact on our business, results of operations and financial position.
Recently, foreign currency exchange rates have fluctuated greatly and may continue to fluctuate. Significant foreign
currency exchange rate fluctuations may negatively impact our international revenue, which in turn affects our
consolidated revenue. Currencies may be affected by internal factors, general economic conditions and external
developments in other countries, all of which can have an adverse impact on a country’s currency. Currently, we are
not party to any hedging transactions intended to reduce our exposure to exchange rate fluctuations. We may seek to
enter into hedging transactions in the future, but we may be unable to enter into these transactions successfully, on
acceptable terms or at all. We cannot predict whether we will incur foreign exchange losses in the future. Further,
significant foreign exchange fluctuations resulting in a decline in the British Pound or Euro may decrease the value
of our foreign assets, as well as decrease our revenues and earnings from our foreign subsidiaries, which would
reduce our profitability and adversely affect our financial position.
If we are unable to sustain our revenue growth or our operating costs are higher than expected, our
profitability may be reduced and our operating results may fluctuate significantly. We may not be able to accurately
forecast our revenue growth rate. Many of our expenses, particularly personnel costs and occupancy costs, are
relatively fixed. As a result, we may not be able to adjust spending quickly enough to offset any unexpected increase
in expenses or revenue shortfall. We may experience higher than expected operating costs, including increased
15
personnel costs, occupancy costs, selling and marketing costs, investments in geographic expansion, acquisition
costs, communications costs, travel costs, software development costs, professional fees and other costs. If operating
costs exceed our expectations and cannot be adjusted accordingly, our profitability may be reduced and our results
of operations and financial position will be adversely affected. Additionally, we may not be able to sustain our
historic revenue growth rates and our percentage revenue growth rates may decline. Our revenue and operating
profit growth depend on continued increased demand for our services. Our sales are affected by, among other
things, general economic and commercial real estate conditions. Reduced demand, whether due to changes in
customer preference, a further weakening of the U.S. or global economies or other reasons, may result in decreased
revenue and growth, adversely affecting our operating results.
Competition could render our services uncompetitive. The market for information systems and services in
general is highly competitive and rapidly changing. Competition in this market may increase further as a result of
current recessionary economic conditions, as customer bases and customer spending decrease and service providers
are competing for fewer customer resources. Our existing competitors, or future competitors, may have greater
name recognition, larger customer bases, better technology or data, lower prices, easier access to data, greater user
traffic or greater financial, technical or marketing resources than we have. Our competitors may be able to undertake
more effective marketing campaigns, obtain more data, adopt more aggressive pricing policies, make more attractive
offers to potential employees, subscribers, distribution partners and content providers or may be able to respond
more quickly to new or emerging technologies or changes in user requirements. If we are unable to retain customers
or obtain new customers, our revenues and revenue growth could decline. Increased competition could result in
lower revenues and higher expenses, which would reduce our profitability.
Litigation or government investigations in which we become involved may significantly increase our expenses
and adversely affect our stock price. Currently and from time to time, we are a party to various lawsuits. Any
lawsuits, threatened lawsuits or government investigations in which we are involved could cost us a significant
amount of time and money to defend, could result in negative publicity, and could adversely affect our stock price.
In addition, if any claims are determined against us or if a settlement requires us to pay a large monetary amount,
our profitability could be significantly reduced and our financial position could be adversely affected. We cannot
make assurances that we will have any or sufficient insurance to cover any litigation claims.
We may be subject to legal liability for collecting displaying or distributing information. Because the content in
our database is collected from various sources and distributed to others, we may be subject to claims for breach of
contract, defamation, negligence, unfair competition or copyright or trademark infringement or claims based on
other theories. We could also be subject to claims based upon the content that is accessible from our website through
links to other websites or information on our website supplied by third parties. Even if these claims do not result in
liability to us, we could incur significant costs in investigating and defending against any claims. Our potential
liability for information distributed by us to others could require us to implement measures to reduce our exposure to
such liability, which may require us to expend substantial resources and limit the attractiveness of our
information/marketing services to users.
An impairment in carrying value of goodwill could negatively impact our consolidated results of operations and
net worth. Goodwill and identifiable intangible assets not subject to amortization are tested annually by each
reporting unit on October 1st of each year for impairment and are tested for impairment more frequently based upon
the existence of one or more indicators. We consider our operating segments, U.S. and International, as our
reporting units under Statement of Financial Accounting Standards (“SFAS”) No. 142 for consideration of potential
impairment of 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. The existence
of one or more of the following indicators could cause us to test for impairment prior to the annual assessment.
• Significant underperformance relative to historical or projected future operating results;
• Significant changes in the manner of our use of 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.
These types of events or indicators and the resulting impairment analysis could result in goodwill impairment
charges in the future, which would reduce our profitability. Impairment charges could negatively affect our financial
16
results in the periods of such charges, which may reduce our profitability. As of December 31, 2008, we had $54.3
million of goodwill, $31.5 million in our U.S. segment and $22.8 million in our International segment.
Our stock price may be negatively affected by fluctuations in our financial results. Our operating results,
revenues and expenses may fluctuate as a result of changes in general economic conditions and also for many other
reasons, many of which are outside of our control, such as: cancellations or non-renewals of our services;
competition; our ability to control expenses; loss of clients or revenues; technical problems with our services;
changes or consolidation in the real estate industry; our investments in geographic expansion and to increase
coverage in existing markets; interest rate fluctuations; the timing and success of new service introductions and
enhancements; successful execution of our expansion plans; data quality; the development of our sales force;
managerial execution; employee retention; foreign currency and exchange rate fluctuations; inflation; successful
adoption of and training on our services; litigation; acquisitions of other companies or assets; sales, brand
enhancement and marketing promotional activities; client support activities; changes in client budgets; or our
investments in other corporate resources. In addition, changes in accounting policies or practices may affect our
level of net income. Fluctuations in our financial results, revenues and expenses may cause the market price of our
common stock to decline.
Market volatility may have an adverse effect on our stock price. The trading price of our common stock has
fluctuated widely in the past, and we expect that it will continue to fluctuate in the future. The price could fluctuate
widely based on numerous factors, including: economic factors; quarter-to-quarter variations in our operating
results; changes in analysts’ estimates of our earnings; announcements by us or our competitors of technological
innovations or new services; general conditions in the commercial real estate industry; developments or disputes
concerning copyrights or proprietary rights or other legal proceedings; and regulatory developments. In addition, in
recent years, the stock market in general, and the shares of internet-related and other technology companies in
particular, have experienced extreme price fluctuations. This volatility has had a substantial effect on the market
prices of securities issued by many companies for reasons unrelated to the operating performance of the specific
companies and may have the same effect on the market price of our common stock.
International operations expose us to additional business risks, which may reduce our profitability. Our
international operations and expansion subject us to additional business risks, including: currency exchange rate
fluctuations; adapting to the differing business practices and laws in foreign countries; difficulties in managing
foreign operations; limited protection for intellectual property rights in some countries; difficulty in collecting
accounts receivable and longer collection periods; costs of enforcing contractual obligations; impact of recessions in
economies outside the U.S.; and potentially adverse tax consequences. In addition, international expansion imposes
additional burdens on our executive and administrative personnel, systems development, research and sales
departments, and general managerial resources. If we are not able to manage our international operations
successfully, we may incur higher expenses and our profitability may be reduced. Finally, the investment required
for additional international expansion could exceed the profit generated from such expansion, which would reduce
our profitability and adversely affect our financial position.
Negative conditions in the global credit markets may affect the liquidity of a portion of our long-term
investments. Currently our long-term investments include mostly AAA rated auction rate securities (“ARS”), which
are primarily student loan securities supported by guarantees from the Federal Family Education Loan Program
(“FFELP”) of the U.S. Department of Education. Recent negative conditions in the global credit markets have
prevented some investors from liquidating their holdings of auction rate securities because the amount of securities
submitted for sale has exceeded the amount of purchase orders for such securities. As of December 31, 2008, we
held $33.1 million par value of ARS all of which failed to settle at auctions. When an auction fails for ARS in which
we have invested, we may be unable to liquidate some or all of these securities at par. In the event we need or desire
to immediately access these funds, we will not be able to do so until a future auction on these investments is
successful, a buyer is found outside the auction process or an alternative action is determined. If a buyer is found but
is unwilling to purchase the investments at par, we may incur a loss, which would reduce our profitability and
adversely affect our financial position.
Our ARS investments are not currently trading and therefore do not currently have a readily determinable
market value. Accordingly, the estimated fair value of the ARS no longer approximates par value. We have used a
discounted cash flow model to determine the estimated fair value of our investment in ARS as of December 31,
17
2008. The assumptions used in preparing the discounted cash flow model include estimates for interest rates, credit
spreads, timing and amount of cash flows, liquidity risk premiums, expected holding periods and default risk of the
ARS. Based on this assessment of fair value, as of December 31, 2008, we determined there was a decline in the
fair value of our ARS investments of approximately $3.7 million. The decline was deemed to be a temporary
impairment and recorded as an unrealized loss in other comprehensive income in stockholders’ equity. If the
issuers of these ARS are unable to successfully close future auctions and their credit ratings deteriorate, we may be
required to record additional unrealized losses in other comprehensive income or an other-than-temporary
impairment charge to earnings on these investments, which would reduce our profitability and adversely affect our
financial position.
If we are unable to enforce or defend our ownership and use of intellectual property, our business, competitive
position and operating results could be harmed. The success of our business depends in large part on the intellectual
property involved in our methodologies, database, services and software. We rely on a combination of trade secret,
patent, copyright and other laws, nondisclosure and noncompetition provisions, license agreements and other
contractual provisions and technical measures to protect our intellectual property rights. However, current law may
not provide for adequate protection of our databases and the actual data. In addition, legal standards relating to the
validity, enforceability and scope of protection of proprietary rights in internet related businesses are uncertain and
evolving, and we cannot assure you of the future viability or value of any of our proprietary rights. Our business
could be significantly harmed if we are not able to protect our content and our other intellectual property. The same
would be true if a court found that our services infringe other persons’ intellectual property rights. Any intellectual
property lawsuits or threatened lawsuits in which we are involved, either as a plaintiff or as a defendant, could cost
us a significant amount of time and money and distract management’s attention from operating our business. In
addition, if we do not prevail on any intellectual property claims, this could result in a change to our methodology or
information/marketing services and could reduce our profitability.
Our current or future geographic expansion plans may not result in increased revenues, which may negatively
impact our business, results of operations and financial position. Expanding into new markets and investing
resources towards increasing the depth of our coverage within existing markets imposes additional burdens on our
research, systems development, sales, marketing and general managerial resources. During 2009, we plan to
continue to increase the depth of our coverage in the U.S. and U.K. If we are unable to manage our expansion
efforts effectively, if our expansion efforts take longer than planned or if our costs for these efforts exceed our
expectations, our financial position could be adversely affected. In addition, if we incur significant costs to improve
data quality within existing markets, or are not successful in marketing and selling our services in these markets or
in new markets, our expansion may have a material adverse effect on our financial position by increasing our
expenses without increasing our revenues, adversely affecting our profitability.
Our continuing expansion into the retail real estate sector may not be completed successfully or may not result
in increased revenues, which may negatively impact our business, results of operations and financial position.
Expanding into the retail real estate sector imposed and continues to impose additional burdens on our research,
systems development, sales, marketing and general managerial resources. During the next year, we expect to
continue to expand the number of retail properties contained within our database. If we are unable to manage this
expansion effectively, if this expansion effort takes longer than planned or if our costs for this effort exceed our
expectations, our financial position could be adversely affected. In addition, if we incur significant costs to expand
our retail sector services and we are not successful in marketing and selling these expanded services, or customers
fail to accept these new services, our expansion may have a material adverse effect on our financial position by
increasing our expenses without increasing our revenues, adversely affecting our profitability.
We may not be able to successfully introduce new or upgraded information/marketing services, which could
decrease our revenues and our profitability. Our future business and financial success will depend on our ability to
continue to introduce new and upgraded services into the marketplace. To be successful, we must adapt to rapid
technological changes by continually enhancing our information/marketing services. Developing new services and
upgrades to services imposes heavy burdens on our systems department, management and researchers. This process
is costly, and we cannot assure you that we will be able to successfully develop and enhance our services. In
addition, successfully launching and selling a new service puts pressure on our sales and marketing resources. If we
are unable to develop new or upgraded services, then our customers may choose a competitive service over ours and
our revenues may decline and our profitability may be reduced. In addition, if we incur significant costs in
18
developing new or upgraded services, are not successful in marketing and selling these new services or upgrades, or
our customers fail to accept these new services, it could have a material adverse effect on our results of operations
by decreasing our revenues or our revenue growth rate and reducing our profitability.
Technical problems that affect either our customers’ ability to access our services, or the software, internal
applications and systems underlying our services, could lead to reduced demand for our information/marketing
services, lower revenues and increased costs. Our business increasingly depends upon the satisfactory performance,
reliability and availability of our website, the internet and our service providers. Problems with our website, the
internet or the services provided by our local exchange carriers or internet service providers could result in slower
connections for our customers or interfere with our customers’ access to our information/marketing services. If we
experience technical problems in distributing our services, we could experience reduced demand for our
information/marketing services. In addition, the software, internal applications and systems underlying our services
are complex and may not be efficient or error-free. Our careful development and testing may not be sufficient to
ensure that we will not encounter technical problems when we attempt to enhance our software, internal applications
and systems. Any inefficiencies, errors or technical problems with our software, internal applications and systems
could reduce the quality of our services or interfere with our customers’ access to our information/marketing
services, which could reduce the demand for our services, lower our revenues and increase our costs.
If we are not able to obtain and maintain accurate, comprehensive or reliable data, we could experience
reduced demand for our information/marketing services. Our success depends on our clients’ confidence in the
comprehensiveness, accuracy and reliability of the data we provide. The task of establishing and maintaining
accurate and reliable data is challenging. If our data, including the data we obtain from third parties, is not current,
accurate, comprehensive or reliable, we could experience reduced demand for our services or legal claims by our
customers, which could result in lower revenues and higher expenses. Our U.S. researchers use integrated internal
research processes to update our database. Any inefficiencies, errors, or technical problems with this application
could reduce the quality of our data, which could result in reduced demand for our services, lower revenues and
higher costs.
If we are not able to successfully identify, finance and/or integrate acquisitions, our business operations and
financial position could be adversely affected. We have expanded our markets and services in part through
acquisitions of complementary businesses, services, databases and technologies, and expect to continue to do so in
the future. Our strategy to acquire complementary companies or assets depends on our ability to identify, and the
availability of, suitable acquisition candidates. In addition, acquisitions involve numerous risks, including managing
the integration of personnel and products; managing geographically remote operations, such as SPN in Scotland,
Grecam S.A.S. in France, CoStar U.K. Limited and Propex in the U.K.; the diversion of management’s attention
from other business concerns; the inherent risks in entering markets and sectors in which we have either limited or
no direct experience; and the potential loss of key employees or clients of the acquired companies. We may not
successfully integrate any acquired businesses or assets and may not achieve anticipated benefits of any acquisition.
Acquisitions could result in dilutive issuances of equity securities, the incurrence of debt, one-time write-offs of
goodwill and substantial amortization expenses of other intangible assets. Obtaining credit in the current economic
environment may be difficult and cost prohibitive. We may be unable to obtain financing on favorable terms, or at
all, if necessary to finance future acquisitions making it impossible or more costly to acquire complementary
businesses. If we are able to obtain financing, the terms may be onerous and more restrictive than we are willing to
accept.
Temporary or permanent outages of our computers, software or telecommunications equipment could lead to
reduced demand for our information/marketing services, lower revenues and increased costs. Our operations depend
on our ability to protect our database, computers and software, telecommunications equipment and facilities against
damage from potential dangers such as fire, power loss, security breaches, computer viruses and telecommunications
failures. Any temporary or permanent loss of one or more of these systems or facilities from an accident, equipment
malfunction or some other cause could harm our business. If we experience a failure that prevents us from delivering
our information/marketing services to clients, we could experience reduced demand for our information/marketing
services, lower revenues and increased costs.
Changes in accounting and reporting policies or practices may affect our financial results or presentation of
results, which may affect our stock price. Changes in accounting and reporting policies or practices could reduce our
19
net income, which reductions may be independent of changes in our operations. These reductions in reported net
income could cause our stock price to decline. For example, in the first quarter of 2006, we adopted the provisions
of SFAS 123R, which required us to expense the value of granted stock options. We recorded $2.9 million in
compensation charges for stock options in 2006.
Our business depends on retaining and attracting highly capable management and operating personnel. Our
success depends in large part on our ability to retain and attract management and operating personnel, including our
President and Chief Executive Officer, Andrew Florance, and our other officers and key employees. Our business
requires highly skilled technical, sales, management, web development, marketing and research personnel, who are
in high demand and are often subject to competing offers. To retain and attract key personnel, we use various
measures, including employment agreements, awards under a stock incentive plan and incentive bonuses for key
executive officers. These measures may not be enough to retain and attract the personnel we need or to offset the
impact on our business of the loss of the services of Mr. Florance or other key officers or employees.
Item 1B.
Unresolved Staff Comments
None.
Item 2.
Properties
Our corporate headquarters is located in Bethesda, Maryland, where we occupy approximately 60,000 square
feet of office space. Our main lease for our Bethesda, Maryland headquarters expires on March 31, 2010. This
facility is used primarily by our U.S. segment.
In addition to our Bethesda, Maryland facility, our research operations are principally run out of leased spaces
in San Diego, California; Columbia, Maryland; White Marsh, Maryland; London, England; Glasgow, Scotland; and
Paris, France. Additionally, we lease office space in a variety of other metropolitan areas, which generally house our
field sales offices. These locations include, without limitation, the following: New York; Los Angeles; Chicago; San
Francisco; Boston; Manchester, England; Orange County, California; Philadelphia; Houston; Atlanta; Phoenix;
Detroit; Pittsburgh; Iselin, New Jersey; Fort Lauderdale; Denver; Dallas; Kansas City; Cleveland; Cincinnati;
Tustin, California; Indianapolis; and St. Louis.
We believe these facilities are suitable and appropriately support our business needs.
Item 3.
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 based on consultations with legal
counsel, is likely to have a material adverse effect on our financial position or results of operations.
Item 4.
Submission of Matters to a Vote of Security Holders
We did not submit any matters to a vote of our security holders during the quarter ended December 31, 2008.
20
PART II
Item 5.
Market for the Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases
of Equity Securities
Price Range of Common Stock. Our common stock is traded on the Nasdaq Global Select Market® under the
symbol “CSGP.” The following table sets forth, for the periods indicated, the high and low daily closing prices per
share of our common stock, as reported by the Nasdaq Global Select Market®.
Year Ended December 31, 2007
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year Ended December 31, 2008
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
$ 52.15
$ 55.71
$ 58.49
$ 61.65
$ 45.31
$ 51.36
$ 56.70
$ 45.20
$ 43.44
$ 44.95
$ 50.70
$ 44.48
$ 36.55
$ 44.39
$ 43.57
$ 27.00
As of February 1, 2009, there were approximately 260 holders of record of our common stock.
Dividend Policy. We have never declared or paid any dividends on our common stock. Any future
determination to pay dividends will be at the discretion of our Board of Directors, subject to applicable limitations
under Delaware law, and will be dependent upon our results of operations, financial position and other factors
deemed relevant by our Board of Directors. We do not anticipate paying any dividends on our common stock during
the foreseeable future, but intend to retain any earnings for future growth of our business.
Recent Issues of Unregistered Securities. We did not issue any unregistered securities during the quarter ended
December 31, 2008.
Issuer Purchases of Equity Securities. The following table is a summary of our repurchases of common stock
during each of the three months in the quarter ended December 31, 2008:
ISSUER PURCHASES OF EQUITY SECURITIES
Total
Number of
Shares
Purchased
⎯
⎯
4,220 (1)
4,220
Average Price Paid
per Share
⎯
⎯
$29.37
$29.37
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
⎯
⎯
⎯
⎯
Maximum Number of
Shares that May Yet Be
Purchased Under the
Plans or Programs
⎯
⎯
⎯
⎯
Month, 2008
October 1 through 31
November 1 through 30
December 1 through 31
Total
(1) The number of shares purchased consists of 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
Company’s 1998 Stock Incentive Plan, as amended, and the Company’s 2007 Stock Incentive Plan, as amended,
which shares were purchased by the Company based on their fair market value on the vesting date. None of these
share purchases were part of a publicly announced program to purchase common stock of the Company.
21
Stock Price Performance Graph
The stock performance graph below shows how an initial investment of $100 in our common stock would have
compared to:
• An equal investment in the Standards & Poor's Stock 500 (“S&P 500”) Index.
• An equal investment in the S&P 500 Application Software Index.
The comparison covers the period beginning December 31, 2003, and ending on December 31, 2008, and
assumes the reinvestment of any dividends. You should note that this performance is historical and is not necessarily
indicative of future price performance.
COMPARISON OF CUMULATIVE FIVE YEAR TOTAL
CoStar Group, Inc.
S&P 500 Index
S&P 500 Application Software Index
400
350
300
250
200
150
100
S
R
A
L
L
O
D
Company / Index
CoStar Group, Inc.
S&P 500 Index
S&P 500 Application Software Index
12/31/03 12/31/04 12/31/05 12/31/06
128.44
110.74 103.53
134.70
110.88 116.33
130.15
111.63 123.57
100
100
100
12/31/07
113.31
142.10
144.57
12/31/08
78.99
89.53
79.03
22
Item 6.
Selected Consolidated Financial and Operating Data
Selected Consolidated Financial and Operating Data
(in thousands, except per share data and other operating data)
The following table provides selected consolidated financial and other operating data for the five years ended
December 31, 2008. The consolidated statement of operations data shown below for each of the three years ended
December 31, 2006, 2007, and 2008 and the consolidated balance sheet data as of December 31, 2007 and 2008 are
derived from audited consolidated financial statements that are included in this report. The consolidated statement of
operations data for each of the years ended December 31, 2004 and 2005 and the consolidated balance sheet data as
of December 31, 2004, 2005, and 2006 shown below are derived from audited consolidated financial statements for
those years that are not included in this report.
Year Ended December 31,
Consolidated Statement of Operations Data:
Revenues.................................................................. $
Cost of revenues ......................................................
Gross margin............................................................
Operating expenses ..................................................
Income from operations ...........................................
Interest and other income, net..................................
Income before income taxes ....................................
Income tax (benefit) expense , net ...........................
Net income .............................................................. $
Net income per share − basic ................................... $
Net income per share − diluted ................................ $
Weighted average shares outstanding − basic..........
Weighted average shares outstanding − diluted .......
2004
112,085 $
35,384
76,701
69,955
6,746
1,314
8,060
(16,925)
24,985 $
1.38 $
2005
134,338
44,286
90,052
82,710
7,342
3,455
10,797
4,340
6,457
0.35
1.33 $
0.34
18,165
18,827
18,453
19,007
$
$
$
$
2006
158,889
56,136
102,753
88,672
14,081
6,845
20,926
8,516
12,410
0.66
2007
192,805
76,704
116,101
98,249
17,852
8,045
25,897
9,946
15,951
0.84
$
$
$
2008
212,428
73,408
139,020
99,232
39,788
4,914
44,702
20,079
24,623
1.27
$
$
$
0.65
$
0.82
$
1.26
18,751
19,165
19,044
19,404
19,372
19,550
Consolidated Balance Sheet Data:
Cash, cash equivalents, short-term and long-term
investments .......................................................... $
Working capital .......................................................
Total assets ..............................................................
Total liabilities.........................................................
Stockholders’ equity ................................................
2004
2005
2006
2007
2008
As of December 31,
$
117,069 $
107,875
232,691
21,747
210,944
134,185
124,501
248,059
23,263
224,796
158,148
154,606
275,437
25,327
250,110
$
187,426 $
167,441
321,843
40,038
281,805
224,590
183,347
334,384
30,963
303,421
Other Operating Data:
Number of subscription client sites..........................
Millions of properties in database............................
2004
9,489
1.6
2005
11,464
1.8
2006
13,257
2.1
2007
14,467
2.7
2008
15,920
3.2
As of December 31,
23
Item 7.
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,” including statements about our beliefs and expectations. There are many
risks and uncertainties that could cause actual results to differ materially from those discussed in the forward-
looking statements. Potential factors that could cause actual results to differ materially from those discussed in any
forward-looking statements include, but are not limited to, those stated above in Item 1A. under the headings “Risk
Factors ⎯ Cautionary Statement Concerning Forward-Looking Statements” and “⎯Risk Factors,” as well as those
described from time to time in our filings with the Securities and Exchange Commission.
All forward-looking statements are based on information available to us on the date of this filing and we assume
no obligation to update such statements. 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 consolidated financial statements and related notes in this Annual
Report on Form 10-K.
Overview
CoStar Group, Inc. (“CoStar”) is the number one provider of information/marketing services to the commercial
real estate industry in the U.S. and the U.K. 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/marketing
services than any of our competitors and believe we generate more revenues than any of our competitors. We have
created a standardized information/marketing 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, internet marketing services, information for clients' websites, information about industry
professionals and their business relationships, analytic information, data integration, and industry news. Our service
offerings span all commercial property types – office, industrial, retail, land, mixed-use, hospitality and multifamily.
Since 1994, we have expanded the geographical coverage of our existing information/marketing services and
developed new information/marketing 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.COM, Inc., a San Diego-based provider of commercial real estate information. In
November 2000, we acquired First Image Technologies, Inc., a California-based provider of commercial real estate
software. In September 2002, we expanded further into Portland, Oregon through the acquisition of certain assets of
Napier Realty Advisors (doing business as REAL-NET). In January 2003, we established a base in the U.K. with
our acquisition of London-based FOCUS Information Limited. In May 2004, we expanded into Tennessee through
the acquisition of Peer Market Research, Inc., and in September 2004, we extended our coverage of the U.K.
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, a Connecticut-based leading provider of
U.S. shopping center information. In December 2006, our U.K. subsidiary, CoStar Limited, acquired Grecam S.A.S.
(“Grecam”), a provider of commercial property information and market-level surveys, studies and consulting
services located in Paris, France. In February 2007, CoStar Limited also acquired Property Investment Exchange
Limited (“Propex”), a provider of commercial property information and operator of an electronic platform that
facilitates the exchange of investment property located in London, England. In April 2008, we acquired the assets of
First CLS, Inc. (doing business as the Dorey Companies and DoreyPRO), an Atlanta-based provider of local
commercial real estate information. The more recent acquisitions are discussed later in this section under the
heading “Recent Acquisitions.”
24
In 2004, we began our expansion into 21 new metropolitan markets throughout the U.S., as well as expanding
the geographical coverage of many of our existing U.S. and U.K. markets. We completed our expansion into the 21
new markets in the first quarter of 2006. In early 2005, in conjunction with the acquisition of National Research
Bureau, we launched a major effort to expand our coverage of retail real estate information. The new retail
component of our flagship product, CoStar Property Professional, was unveiled in May 2006 at the International
Council of Shopping Centers’ convention in Las Vegas.
During the second half of 2006, to expand the geographical coverage of our service offerings we began actively
researching commercial properties in 81 new Core Based Statistical Areas (“CBSAs”) in the U.S., increased our
U.S. field research fleet by adding 89 vehicles and hired researchers to staff these vehicles. In March 2007, we
signed a long-term lease for a new research facility in White Marsh, Maryland, in support of our expanded research
efforts and hired and trained additional researchers and other personnel. We released our CoStar Property
Professional service in the 81 new CBSAs across the U.S. in the fourth quarter of 2007.
In connection with our acquisitions of Propex and Grecam, we intend to expand the coverage of our service
offerings within the U.K. and integrate our international operations more fully with those of the U.S. We have
gained operational efficiencies as a result of consolidating a majority of our U.K. research operations in one location
in Glasgow and combining the majority of our remaining U.K. operations in one central location in London.
We intend to eventually introduce a consistent international platform of service offerings. In 2007, we
introduced the “CoStar Group” as the brand encompassing our international operations. We believe that our recent
U.S. and international expansion and integration efforts have created a platform for earnings. In fact, our results for
2008 reflect growth in earnings as a result of these investments in our business.
Our financial reporting currency is the U.S. Dollar. Changes in exchange rates can significantly affect our
reported results and consolidated trends. We believe that our increasing diversification beyond the U.S. economy
through our international businesses benefits our shareholders over the long term. We also believe it is important to
evaluate our operating results before and after the effect of currency changes, as it may provide a more accurate
comparison of our results of operations over historical periods. Currency volatilities may continue, which may
significantly impact (either positively or negatively) our reported financial results and consolidated trends and
comparisons.
We expect to continue to develop and distribute new services, expand existing services within our current
platform, consider strategic acquisitions and expand and develop our sales and marketing organization. For instance,
in May 2008, we released CoStar Showcase®, an internet marketing service that provides commercial real estate
professionals the opportunity to make their listings accessible to all visitors to our public website, www.CoStar.com.
In addition, in April 2008, as described above we acquired the online commercial real estate information assets of
First CLS, Inc. (doing business as the Dorey Companies and DoreyPRO). Any future expansion could reduce our
profitability and increase our capital expenditures. Therefore, while we expect current service offerings to remain
profitable, driving overall earnings throughout 2009 and providing substantial cash flow for our business, it is
possible that any new investments could cause us to generate losses and negative cash flow from operations in the
future.
Current general economic conditions in the U.S. and the world are negatively affecting business operations for
our clients and are resulting in more business consolidations and, in certain circumstances, failures. As a result of the
economic conditions, we have recently seen an uptick in customer cancellations, reductions of services and failures
to pay amounts due us. If cancellations, reductions of services and failures to pay continue to rise, and we are
unable to offset the resulting decrease in revenue by increasing sales to new or existing customers, our revenues will
be adversely affected and our revenue may decline. Additionally, current conditions may cause customers to reduce
expenses, when reducing expenses, customers may be forced to purchase fewer services or cancel all services. We
compete against many other commercial real estate information/marketing service providers for business. If
customers choose to cancel our services for cost-cutting or other reasons, our revenue could decline. The extent and
duration of any future continued weakening of the economy is unknown and there can be no assurance that any of
the governmental or private sector initiatives designed to strengthen the economy will be successful. Because of the
current uncertainties in the economic environment, we may not be able to accurately forecast our revenue.
25
However, we continue to believe that the company is positioned to generate continued, sustained earnings through
the end of 2009.
We currently issue restricted stock and stock options to our officers, directors and employees, and as a result we
record additional compensation expense in our consolidated statements of operations. We plan to continue the use of
alternative stock-based compensation for our officers, directors and employees, which may include, among other
things, restricted stock or stock option grants that typically will require us to record additional compensation
expense in our consolidated statements of operations and reduce our net income. We incurred approximately
$4.9 million in total equity compensation expense in 2008.
Our subscription-based information/marketing services, consisting primarily of CoStar Property Professional,
CoStar Tenant, CoStar COMPS Professional, and FOCUS services currently generate more than 90% of our total
revenues. CoStar Property Professional, CoStar Tenant, and CoStar COMPS Professional are generally sold as a
suite of similar services and comprise our primary service offering in our U.S. operating segment. FOCUS is our
primary service offering in our International operating segment. Our contracts for our subscription-based
information/marketing 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 generally based on
the number of sites, number of users, organization size, the client’s business focus, geography 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 year ended December 31, 2007, our contract renewal rate was over 90%. For the year ended December
31, 2008, our contract renewal rate was approximately 89%. As discussed above, our contract renewal rate may
continue to decline if continuing negative economic conditions lead to business failures and/or consolidations and
further reductions in customer spending and decreases in the customer base.
Application of Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity with generally accepted
accounting principles (“GAAP”) in the United States of America 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.
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. Judgments made by management
relate to the expected useful lives of long-lived assets and our ability to realize any undiscounted cash flows of the
carrying amounts of such assets. The accuracy of these judgments may be adversely affected by several factors,
including the factors listed below:
• 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.
26
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 test for impairment.
Goodwill and identifiable intangible assets not subject to amortization are tested annually by each reporting unit
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 consider our operating segments, U.S. and International, as our
reporting units under Statement of Financial Accounting Standards (“SFAS”) No. 142 for consideration of potential
impairment of goodwill.
The goodwill impairment test is a two-step process. The first step is to determine the fair value of each
reporting unit. We estimate the fair value of each reporting unit based on a projected discounted cash flow model
that includes significant assumptions and estimates including our future financial performance and a weighted
average cost of capital. The fair value of each reporting unit is compared to the carrying amount of the reporting
unit. If the carrying value of the reporting unit exceeds the fair value, then the second step of the process is
performed to measure the impairment loss. We measure impairment loss based on a projected discounted cash flow
method using a discount rate determined by our management to be commensurate with the risk in our current
business model.
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 sheets. 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 statements of
operations.
Non-GAAP Financial Measures
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 (loss) before interest, income taxes,
depreciation and amortization. We disclose EBITDA on a consolidated and an operating segment basis in our
earnings releases, investor conference calls and filings with the Securities and Exchange Commission. The non-
GAAP financial measures 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 (loss). In calculating EBITDA, we exclude from net income
(loss) 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 (loss) 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 (loss). In addition, we urge investors and
potential investors in our securities to carefully review the reconciliation of EBITDA to net income (loss) 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
27
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 that, when viewed with
our GAAP results and the accompanying reconciliation, we believe provides additional information that is useful to
gain an understanding of the factors and trends affecting our business. We have spent more than 21 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/marketing services, which
included acquisitions, our net income (loss) 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 (loss) to
calculate EBITDA and the material limitations associated with using this non-GAAP financial measure as compared
to net income (loss):
• 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 necessarily reflect the current and
ongoing cash charges related to our operating cost structure.
• 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 trade
names. We do not believe these charges necessarily reflect the current and ongoing cash charges related to
our operating cost structure.
• 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.
• 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 component of the day-to-day operating performance of our business.
•
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 using a non-
GAAP measure only 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.
28
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):
Year Ended December 31,
2006
Net income........................................................................................ $ 12,410
1,205
Purchase amortization in cost of revenues........................................
4,183
Purchase amortization in operating expenses ...................................
6,421
Depreciation and other amortization.................................................
(6,845)
Interest income, net...........................................................................
Income tax expense, net....................................................................
8,516
EBITDA ........................................................................................... $ 25,890
2007
$ 15,951
2,170
5,063
8,914
(8,045)
9,946
$ 33,999
2008
$ 24,623
2,284
4,880
9,637
(4,914)
20,079
$ 56,589
Cash flows provided by (used in)
Operating activities ....................................................................... $ 32,587
Investing activities ........................................................................ $ (28,329)
5,582
Financing activities ....................................................................... $
$ 51,732
$ (40,331)
8,161
$
$ 40,908
$ 52,430
$ 11,475
Consolidated Results of Operations
The following table provides our selected consolidated results of operations for the indicated periods (in
thousands of dollars and as a percentage of total revenue):
Revenues................................................. $ 158,889
Cost of revenues ..................................... 56,136
Gross margin .......................................... 102,753
Operating expenses:
Selling and marketing ......................... 41,774
Software development......................... 12,008
General and administrative ................. 30,707
Gain on lease settlement, net...............
⎯
4,183
Purchase amortization .........................
Total operating expenses ........................ 88,672
Income from operations.......................... 14,081
6,845
Interest and other income, net.................
Income before income taxes ................... 20,926
Income tax expense, net..........................
8,516
Net income ............................................. $ 12,410
2006
Year Ended December 31,
2007
2008
100.0 % $ 192,805
76,704
35.3
116,101
64.7
100.0 % $ 212,428
73,408
39.8
139,020
60.2
100.0 %
34.6
65.4
51,777
26.3
12,453
7.6
36,569
19.3
(7,613)
0.0
5,063
2.6
98,249
55.8
17,852
8.9
8,045
4.3
25,897
13.2
5.4
9,946
7.8 % $ 15,951
41,705
26.9
12,759
6.5
39,888
19.0
(3.9)
⎯
4,880
2.6
99,232
51.0
39,788
9.3
4,914
4.2
44,702
13.4
5.2
20,079
8.3 % $ 24,623
19.6
6.0
18.8
0.0
2.3
46.7
18.7
2.3
21.0
9.5
11.6 %
Comparison of Year Ended December 31, 2008 and Year Ended December 31, 2007
Revenues. Revenues grew to $212.4 million in 2008, from $192.8 million in 2007. This increase in revenue was
due to further penetration of our subscription-based information/marketing services, and successful cross-selling of
our services to our customers in existing markets, combined with continued high renewal rates. Our subscription-
based information services consist primarily of CoStar Property Professional, CoStar Tenant, CoStar COMPS
Professional, FOCUS services and Propex services. As of December 31, 2008, our subscription-based
information/marketing services represented more than 90% of our total revenues.
29
Gross Margin. Gross margin increased to $139.0 million in 2008, from $116.1 million in 2007. The gross
margin percentage increased to 65.4% in 2008, from 60.2% in 2007. The increase in the gross margin resulted
principally from revenue growth from our subscription-based information/marketing services and a decrease in cost
of revenues. Cost of revenues decreased to $73.4 million for the year ended December 31, 2008, from $76.7 million
for the year ended December 31, 2007 principally due to expansion costs that were incurred in 2007 that were not
incurred in 2008.
Selling and Marketing Expenses. Selling and marketing expenses decreased to $41.7 million in 2008, from
$51.8 million in 2007, and decreased as a percentage of revenues to 19.6% in 2008, from 26.9% in 2007. The
decrease was principally due to a reduction in personnel costs of approximately $5.4 million primarily due to the
fact that the sales force sold services with a smaller average price point in 2008, which resulted in lower average
contract values compared to 2007. Additionally, there was a decrease in marketing initiatives of approximately $2.3
million in 2008.
Software Development Expenses. Software development expenses slightly increased to $12.8 million in 2008,
from $12.5 million in 2007, and slightly decreased as a percentage of revenues to 6.0% in 2008, from 6.5% in 2007.
The decrease in the percentage was primarily due to increased revenues in 2008.
General and Administrative Expenses. General and administrative expenses increased to $39.9 million in 2008,
from $36.6 million in 2007, and decreased slightly as a percentage of revenues to 18.8% in 2008, from 19.0% in
2007. The increase in the amount of general and administrative expenses was principally a result of an increase of
approximately $2.5 million in legal fees and an increase of $1.6 million in bad debt expense.
Gain on Lease Settlement, Net. On September 14, 2007, CoStar U.K Limited, a wholly owned U.K. subsidiary
of CoStar, entered into an agreement with Trafigura Limited to assign to Trafigura our leasehold interest in our
office space located in London. The lease assignment was effective on December 19, 2007. As a result, CoStar U.K.
Limited was paid $7.6 million, net of expenses, for the assignment of the lease. There were no gains on lease
settlements in 2008.
Purchase Amortization. Purchase amortization slightly decreased to $4.9 million in 2008, from $5.1 million in
2007, and slightly decreased as a percentage of revenues to 2.3% in 2008, from 2.6% in 2007.
Interest and Other Income, Net. Interest and other income, net decreased to $4.9 million in 2008, from $8.0
million in 2007. Although, cash and cash equivalents, short-term and long-term investments were higher in 2008
than in 2007, our interest and other income decreased due to lower average interest rates in 2008 compared to 2007.
Income Tax Expense, Net. Income tax expense, net increased to $20.1 million in 2008, from $9.9 million in
2007. This increase was primarily due to higher income before income taxes for 2008 due to our growth and
profitability, in addition to a higher effective tax rate in 2008. The effective tax rate was lower in 2007 due to the
gain on lease settlement in the U.K. that was completed in December 2007. The lease settlement resulted in income
in the U.K., which reduced the overall effective tax rate.
Comparison of Business Segment Results for Year Ended December 31, 2008 and Year Ended December 31,
2007
Due to the increased size, complexity and funding requirements associated with our international expansion, in
2007 we began to manage our business geographically in two operating segments, with our primary areas of
measurement and decision-making being the U.S. and International, which includes the U.K. and France.
Management relies on an internal management reporting process that provides segment revenue and EBITDA,
which is our net income before interest, income taxes, depreciation and amortization. Management believes that
segment EBITDA is an appropriate measure for evaluating the operational performance of our segments. EBITDA
is used by management to internally measure our operating and management performance and to evaluate the
performance of our business. However, this measure should be considered in addition to, not as a substitute for or
superior to, income from operations or other measures of financial performance prepared in accordance with GAAP.
30
Segment Revenues. CoStar Property Professional, CoStar Tenant, and CoStar COMPS Professional are
generally sold as a suite of similar services and comprise our primary service offering in our U.S. operating segment.
U.S. revenues increased to $190.1 million from $170.3 million for the years ended December 31, 2008 and 2007,
respectively. This increase in U.S. revenue is due to further penetration of our U.S. subscription-based
information/marketing services and the successful cross-selling of our service to our customers, combined with a
continued high renewal rate. FOCUS is our primary service offering in our International operating segment.
International revenues slightly decreased to $22.4 million from $22.5 million for the years ended December 31,
2008 and 2007, respectively. This decrease is due to foreign currency fluctuations. In their functional currency,
International revenues increased 7.2% for the year ended December 31, 2008 compared to the year ended December
31, 2007.
Segment EBITDA. U.S. EBITDA increased to $58.8 million from $32.9 million for the years ended December
31, 2008 and 2007, respectively. The increase in U.S. EBITDA was due to increased revenues, and lower sales and
marketing personnel costs, partially offset by an increase in legal fees and bad debt expense. International EBITDA
decreased to a loss of $2.2 million from $1.1 million earnings for the years ended December 31, 2008 and 2007,
respectively. This decrease is primarily due to gain on lease settlement of $7.6 million in 2007 that did not occur in
2008. International EBITDA also includes a corporate allocation of approximately $1.1 million and $2.6 million for
the years ended December 31, 2008 and 2007, respectively. The corporate allocation represents costs incurred for
U.S. employees involved in international management and expansion activities.
Comparison of Year Ended December 31, 2007 and Year Ended December 31, 2006
Revenues. Revenues grew 21.3% to $192.8 million in 2007, from $158.9 million in 2006. This increase in
revenue has resulted from continued penetration of our subscription-based information services, the successful
cross-selling of additional products and services to our existing customer base combined with a continued high
renewal rate, and additional revenues from acquired companies, including Grecam, acquired in December 2006, and
Propex, acquired in February 2007. Our subscription-based information services consist primarily of CoStar
Property Professional, CoStar Tenant, CoStar COMPS Professional, FOCUS services and Propex services. As of
December 31, 2007, our subscription-based information services represented approximately 95% of our total
revenues.
Gross Margin. Gross margin increased to $116.1 million in 2007, from $102.8 million in 2006. The gross
margin percentage decreased to 60.2% in 2007, from 64.7% in 2006. The increase in the gross margin amount
resulted principally from revenue growth from our subscription-based information services, partially offset by an
increase in cost of revenues. The decrease in gross margin percentage was principally due to an increase in the cost
of revenues to $76.7 million for 2007, from $56.1 million for 2006. The increase in cost of revenues resulted from
increased research department hiring, training, compensation and other operating costs, principally in connection
with our retail and 81 new CBSA expansions, and our international expansion, as well as increased cost structures
associated with the acquisitions of Grecam and Propex.
Selling and Marketing Expenses. Selling and marketing expenses increased to $51.8 million in 2007, from
$41.8 million in 2006, and increased as a percentage of revenues to 26.9% in 2007, from 26.3% in 2006. The
increase in the amount of selling and marketing expenses is primarily due to increased growth in the sales force,
increased marketing efforts, as well as increased cost structures associated with the acquisition of Propex.
Software Development Expenses. Software development expenses increased to $12.5 million in 2007, from
$12.0 million in 2006, and decreased as a percentage of revenues to 6.5% in 2007, from 7.6% in 2006. The increase
in the amount of software development expenses was primarily due to increased costs associated with the continued
development of an international platform. The decrease in the percentage was primarily due to our continued efforts
to control and leverage our costs.
General and Administrative Expenses. General and administrative expenses increased to $36.6 million in 2007,
from $30.7 million in 2006, and decreased slightly as a percentage of revenues to 19.0% in 2007, from 19.3% in
2006. The increase primarily includes increases in personnel expenses, cost structures associated with the
acquisition of Propex and equity compensation.
31
Gain on Lease Settlement, Net. On September 14, 2007, CoStar U.K. Limited, a wholly owned U.K. subsidiary
of CoStar, entered into an agreement with Trafigura Limited to assign to Trafigura our leasehold interest in our
office space located in London. The lease assignment was effective on December 19, 2007. As a result, CoStar U.K.
Limited was paid $7.6 million, net of expenses, for the assignment of the lease. There were no gains on lease
settlements in 2006.
Purchase Amortization. Purchase amortization increased to $5.1 million in 2007, from $4.2 million in 2006, and
remained consistent as a percentage of revenues at 2.6% in 2007 and 2006. This increase in the amount was due to
the acquisitions of Grecam and Propex.
Interest and Other Income, Net. Interest and other income, net increased to $8.0 million in 2007, from $6.8
million in 2006. This increase was primarily due to higher interest income as a result of higher total short-term
investment balances for 2007 and increased interest rates for 2007 as compared to 2006.
Income Tax Expense, Net. Income tax expense, net increased to $9.9 million in 2007, from $8.5 million in 2006.
This increase was due to higher income before income taxes for 2007, partially offset by a lower effective tax rate.
The effective tax rate was lower in 2007 due to the gain on lease settlement in the U.K. that was completed in
December 2007. The lease settlement resulted in income in the U.K., which reduced the overall effective tax rate.
Comparison of Business Segment Results for Year Ended December 31, 2007 and Year Ended December 31,
2006
Due to the increased size, complexity and funding requirements associated with our international expansion, in
2007 we began to manage our business geographically in two operating segments, with our primary areas of
measurement and decision-making being the U.S. and International, which includes the U.K. and France.
Management relies on an internal management reporting process that provides revenue and segment EBITDA,
which is our net income before interest, income taxes, depreciation and amortization. Management believes that
segment EBITDA is an appropriate measure for evaluating the operational performance of our segments. EBITDA
is used by management to internally measure our operating and management performance and to evaluate the
performance of our business. However, this measure should be considered in addition to, not as a substitute for or
superior to, income from operations or other measures of financial performance prepared in accordance with GAAP.
Segment Revenues. U.S. revenues increased to $170.3 million from $146.1 million for the years ended
December 31, 2007 and 2006, respectively. This increase in U.S. revenue is due to further penetration of our U.S.
subscription-based information services and the successful cross-selling into our customer base across our service
platform in existing markets, combined with a continued high renewal rate. International revenues increased to
$22.5 million from $12.8 million for the years ended December 31, 2007 and 2006, respectively. This increase in
international revenue is principally a result of a combination of further penetration of our subscription-based
information services in the U.K. and the acquisitions of Grecam and Propex.
Segment EBITDA. U.S. EBITDA increased to $32.9 million from $26.2 million for the years ended December
31, 2007 and 2006, respectively. The increase in U.S. EBITDA was due to increased revenues, partially offset by
increased research costs and growth in our sales force as a result of our expansion. International EBITDA increased
to $1.1 million from a loss of $315,000 for the years ended December 31, 2007 and 2006, respectively. This increase
is primarily due to the assignment of our lease to Trafigura, offset by our increased investment in international
expansion. International EBITDA also includes a corporate allocation of approximately $2.6 million and $1.0
million for the years ended December 31, 2007 and 2006, respectively. The corporate allocation represents costs
incurred for U.S. employees involved in international management and expansion activities.
32
Consolidated Quarterly Results of Operations
The following tables summarize our consolidated results of operations on a quarterly basis for the indicated
periods (in thousands, except per share amounts, and as a percentage of total revenues):
Mar. 31
Revenues .......................... $ 44,831
17,826
Cost of revenues ...............
27,005
Gross margin ....................
25,569
Operating expenses ..........
Income from operations ...
1,436
Interest and other income,
net.................................
1,862
Income before income
Jun. 30
$ 47,794
19,318
28,476
28,230
246
2007
Sep. 30
$ 49,340
19,551
29,789
25,952
3,837
2008
Dec. 31
$ 50,840
20,009
30,831
18,498
12,333
Mar. 31
$ 52,264
19,721
32,543
25,313
7,230
Jun. 30
$ 53,478
18,341
35,137
26,627
8,510
Sep. 30
$ 53,757
17,613
36,144
24,864
11,280
Dec. 31
$ 52,929
17,733
35,196
22,428
12,768
1,891
2,072
2,220
1,938
1,243
951
782
taxes .............................
Income tax expense, net ...
Net income ...................... $
3,298
1,484
1,814
$
2,137
962
1,175
Net income per share −
basic .............................
$
0.10
$
0.06
Net income per share −
diluted ..........................
$
0.09
$
0.06
$
$
$
2007
5,909
2,659
3,250
0.17
0.17
14,553
4,841
9,712
0.51
0.50
$
$
$
$
$
$
9,168
4,126
5,042
0.26
0.26
$
$
$
9,753
4,318
5,435
12,231
5,586
$ 6,645
0.28
$
0.34
0.28
$
0.34
13,550
6,049
7,501
0.39
0.38
$
$
$
Mar. 31
100.0%
39.8
60.2
57.0
3.2
Jun. 30
100.0%
40.4
59.6
59.1
0.5
Sep. 30
100.0%
39.6
60.4
52.6
7.8
Dec. 31
100.0%
39.4
60.6
36.4
24.2
Mar. 31
100.0%
37.7
62.3
48.5
13.8
4.1
7.3
3.3
4.0%
4.0
4.5
2.0
2.5%
4.2
4.4
3.7
12.0
5.4
6.6%
28.6
9.5
19.1%
17.5
7.9
9.6%
18.2
8.0
10.2%
22.8
10.4
12.4%
2008
Jun. 30
100.0%
Sep. 30
100.0%
34.3
65.7
49.8
15.9
2.3
32.8
67.2
46.2
21.0
1.8
Dec. 31
100.0%
33.5
66.5
42.4
24.1
1.5
25.6
11.4
14.2%
Revenues ..........................
Cost of revenues ...............
Gross margin ....................
Operating expenses ..........
Income from operations ...
Interest and other income,
net.................................
Income before income
taxes .............................
Income tax expense, net ...
Net income .......................
Recent Acquisitions
Propex. On February 16, 2007, CoStar Limited acquired Property Investment Exchange Limited (“Propex”), a
provider of web-based commercial property information and operator of an electronic platform that facilitates the
exchange of investment property in the U.K. Propex’s suite of electronic platforms and listing websites give users
access to the U.K. commercial property investment and leasing markets. CoStar Limited acquired all outstanding
capital stock of Propex for approximately $22.0 million, consisting of cash, deferred consideration and 21,526
shares of CoStar common stock.
First CLS, Inc. On April 1, 2008, we acquired certain assets of First CLS, Inc. (doing business as the Dorey
Companies and DoreyPRO), an Atlanta-based provider of local commercial real estate information for $3.0 million
in initial cash consideration and deferred consideration payable within approximately six months of the one-year
anniversary of closing.
Accounting Treatment. These acquisitions were accounted for using purchase accounting. The purchase price
for the Propex acquisition was primarily allocated to acquired customer base, trade names, and goodwill. The
purchase price for the First CLS, Inc. acquisition was primarily allocated to acquired customer base. The acquired
customer base for the acquisitions, which consists of one distinct intangible asset for each acquisition and is
composed of acquired customer contracts and the related customer relationships, is being amortized on a 125%
declining balance method over ten years. The Propex acquired trade name is being amortized on a straight-line basis
33
over three years. We recorded goodwill of approximately $15.0 million for the Propex acquisition and $1.1 million
for the First CLS, Inc. acquisition. Goodwill is not amortized, but is subject to annual impairment tests. The results
of operations of Propex and First CLS, Inc. have been consolidated with those of the Company since the respective
dates of the acquisitions and are not considered material to our consolidated financial statements. Accordingly, pro
forma financial information has not been presented for either 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 were $195.3 million at December 31, 2008 compared to $187.4 million at
December 31, 2007. The increase in cash, cash equivalents and short-term investments for the year ended December
31, 2008 was primarily due to net cash from operating activities of approximately $40.9 million partially offset by
the reclassification of approximately $33.1 million par value auction rate securities (“ARS”) from short-term
investments to long-term investments in the first quarter of 2008.
Net cash provided by operating activities for the year ended December 31, 2008 was $40.9 million compared to
$51.7 million for the year ended December 31, 2007. The $10.8 million decrease in net cash provided by operating
activities is primarily due to approximately $3.3 million decreased cash receipts on accounts receivable due to
increased balances and declining economic conditions and increased payments for accounts payable and accrued
expenses of approximately $9.8 million which included the $2.9 million payment of deferred consideration for the
Propex acquisition, approximately $400,000 in payments for a Propex data agreement, and payment of
approximately $1.4 million in value added taxes related to the lease settlement.
Net cash provided by investing activities was $52.4 million for the year ended December 31, 2008, compared to
net cash used in investing activities of $40.3 million for the year ended December 31, 2007. This $92.7 million
increase in net cash provided by investing activities was primarily due to the decision to invest in money market
funds and U.S. treasuries instead of short-term investment instruments, which resulted in a net sale of investments of
approximately $59.1 million in the year ended December 31, 2008 compared to a net purchase of investments of
approximately $9.3 million in the year ended December 31, 2007. In addition, we used $3.0 million in cash as
initial consideration for the purchase of First CLS, Inc. in the year ended December 31, 2008, as compared to $16.7
million in cash consideration used for the acquisition of Propex in the year ended December 31, 2007. We also
purchased approximately $10.6 million less in property, equipment and other assets during the year ended December
31, 2008 compared to the year ended December 30, 2007.
Net cash provided by financing activities was $11.5 million for the year ended December 31, 2008 compared to
$8.2 million for the year ended December 31, 2007. The higher net cash provided by financing activities in 2008
compared to 2007 is due to an increase in excess tax benefits from stock options partially offset by a decrease in
proceeds from the exercise of stock options.
Contractual Obligations. The following table summarizes our principal contractual obligations at December 31,
2008 and the effect such obligations are expected to have on our liquidity and cash flows in future periods (in
thousands):
Operating leases............................................................
Purchase obligations(1) .................................................
Total contractual principal cash obligations..................
Total
$ 23,596
2,971
$ 26,567
2009
$
8,264
2,242
$ 10,506
2012-2013
2010-2011
$
10,041 $
294
10,335 $
4,276 $
290
4,566 $
$
2014 and
thereafter
1,015
145
1,160
(1)Amounts do not include (i) contracts with initial terms of twelve months or less, or (ii) multi-year contracts that may be
terminated by a third party or us.
During 2008, we incurred capital expenditures of approximately $3.7 million. We expect to make capital
expenditures in 2009 of approximately $4.0 million to $7.0 million.
34
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. In April 2008, we paid $3.0 million in initial cash consideration
and made a commitment for deferred consideration payable within approximately six months of the one-year
anniversary of closing for the online commercial real estate information assets of First CLS, Inc., an Atlanta-based
provider of local commercial real estate information.
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.
As of December 31, 2008, we had $33.1 million of long-term investments in student loan ARS, which failed to
settle at auctions. The majority of these investments are of high credit quality with AAA credit ratings and are
primarily securities supported by guarantees from the Federal Family Education Loan Program (“FFELP”) of the
U.S. Department of Education. While we continue to earn interest on these investments, the investments are not
liquid in the short term. In the event we need to immediately access these funds, we may have to sell these
securities at an amount below par value. Based on our ability to access our cash, cash equivalents and other short-
term investments and our expected operating cash flows, we do not anticipate having to sell these investments below
par value in order to operate our business in the foreseeable future.
As of December 31, 2008, we had utilized all of our U.S. net operating loss carryforwards for federal income
tax purposes. As a result, we expect our cash payments for taxes to be approximately $20.0 million to $23.0 million
in 2009.
Inflation may affect the way we operate in the U.S. and abroad. In general, we believe that over time we are
able to increase the prices of our services to counteract the majority of the inflationary effects of increasing costs.
We do not believe the impact of inflation has significantly affected our operations, and we do not anticipate that
inflation will have a material impact on our operations in 2009.
Recent Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48
“Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”), which
became effective for our company as of January 1, 2007. FIN 48 addresses the determination of how tax benefits
claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN 48, we
must recognize the tax benefit from an uncertain tax position only if it is more-likely-than-not that the tax position
will be sustained upon examination by the taxing authorities, based on the technical merits of the position. The tax
benefits recognized in the financial statements from such a position are measured based on the largest benefit that
has a greater than fifty percent likelihood of being realized upon ultimate resolution. Our reassessment of our tax
positions in accordance with FIN 48 did not have a material impact on our results of operations and financial
position.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which
defines fair value, establishes a framework for measuring fair value in accordance with GAAP and expands
disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements under
GAAP and is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued
FASB Staff Position (“FSP”) 157-2, “Partial Deferral of the Effective Date of Statement 157”, (“FSP 157-2”),
which delays the effective date of SFAS 157 to January 1, 2009 for all non-financial assets and non-financial
liabilities, except those that are recognized or disclosed at fair value in the consolidated financial statements on a
recurring basis (at least annually). Effective January 1, 2008, we adopted the portion of SFAS 157 that was not
deferred under FSP 157-2. The adoption of SFAS 157 did not have a material impact on our results of operations
and financial position. In October 2008, the FASB issued FSP 157-3, “Determining the Fair Value of a Financial
Asset in a Market That Is Not Active” (“FSP 157-3”), which clarifies the application of SFAS 157 to markets that are
not active and provides an example illustrating key considerations for determining the fair value of financial assets
when their markets are not active. FSP 157-3 was effective upon issuance, including prior periods for which
financial statements had not been issued. The adoption of this standard did not have an impact on our results of
operations or financial position.
35
In February 2007, the FASB issued SFAS No. 159, “Fair Value Option for Financial Assets and Financial
Liabilities — Including an amendment of FASB Statement No. 115” (“SFAS 159”), which permits entities to choose
to measure many financial instruments and certain other items at fair value that are not currently required to be
measured at fair value. SFAS 159 is effective for fiscal years beginning on or after December 31, 2007. We adopted
SFAS 159 on January 1, 2008 and have not elected to apply the fair value option to any of our financial
instruments. The adoption of SFAS 159 did not have a material impact on our results of operations and financial
position.
In December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business Combinations” (“SFAS
141R”), which will change the accounting for any business combination we enter into with an acquisition date after
December 31, 2008. Under SFAS 141R, an acquiring entity will be required to recognize all the assets acquired and
liabilities assumed in a transaction at the acquisition date fair value with limited exceptions. SFAS 141R will change
the accounting treatment and disclosure for certain specific items in a business combination. SFAS 141R will have
an impact on accounting for business combinations once adopted, but its effect will depend upon the specifics of any
business combination with an acquisition date subsequent to December 31, 2008.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial
Statements—An Amendment of ARB No. 51” (“SFAS 160”), which establishes new accounting and reporting
standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 is
effective for fiscal years beginning on or after December 15, 2008. The adoption of SFAS 160 is not expected to
have a material impact on our results of operations or financial position.
In April 2008, the FASB issued FSP SFAS No. 142-3, “Determination of the Useful Life of Intangible Assets”
(“FSP 142-3”), which is effective for all fiscal years and interim periods beginning after December 15, 2008. Early
adoption of FSP 142-3 is not permitted. FSP 142-3 requires additional footnote disclosures about the impact of our
ability or intent to renew or extend agreements related to existing intangibles or expected future cash flows from
those intangibles, how we account for costs incurred to renew or extend such agreements, the time until the next
renewal or extension period by asset class, and the amount of renewal or extension costs capitalized, if any. For any
intangibles acquired after December 31, 2008, FSP 142-3 requires that we consider our experience regarding
renewal and extensions of similar arrangements in determining the useful life. If we do not have experience with
similar arrangements, FSP 142-3 requires that we use the assumptions of a market participant putting the intangible
to its highest and best use in determining the useful life. The adoption of FSP 142-3 will impact intangibles acquired
after December 31, 2008, and its effect will depend on the specifics of the intangible acquired.
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles”
(“SFAS 162”), which identifies the sources of accounting principles and the framework for selecting the principles
to be used in the preparation of financial statements. SFAS 162 is effective as of November 17, 2008. The adoption
of SFAS 162 did not have a material impact on our results of operations or financial position.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We provide information/marketing services to the commercial real estate and related business community in the
U.S., U.K. and France. Our functional currency for our operations in the U.K. and France is the local currency. As
such, fluctuations in the British Pound and Euro may have an impact on our business, results of operations and
financial position. For the year ended December 31, 2008, revenue denominated in foreign currencies was
approximately 11% of total revenue. For the year ended December 31, 2008, our revenue would have decreased by
approximately $2.2 million if the U.S. dollar exchange rate used strengthened by 10%. In addition, we have assets
and liabilities denominated in foreign currencies. A 10% strengthening of the U.S. dollar exchange rate against all
currencies with which we have exposure at December 31, 2008 would have resulted in a decrease of approximately
$340,000 in the carrying amount of net assets. For the year ended December 31, 2008, our revenue would have
increased by approximately $2.2 million if the U.S. dollar exchange rate used weakened by 10%. In addition, we
have assets and liabilities denominated in foreign currencies. A 10% weakening of the U.S. dollar exchange rate
against all currencies with which we have exposure at December 31, 2008 would have resulted in a increase of
approximately $340,000 in the carrying amount of net assets. 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
36
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 December 31, 2008, accumulated other
comprehensive income (loss) included a loss from foreign currency translation adjustments of approximately $8.5
million.
We do not have material exposure to market risks associated with changes in interest rates related to cash
equivalent securities held as of December 31, 2008. As of December 31, 2008, we had $195.3 million of cash, cash
equivalents and short-term investments. If there is an increase or decrease in interest rates, there will be a
corresponding increase or decrease in the amount of interest earned on our cash, cash equivalents and short-term
investments. Based on our ability to access our cash, cash equivalents and short-term investments, and our expected
operating cash flows, we do not believe that increases or decreases in interest rates will impact our ability to operate
our business in the foreseeable future.
Included within our long-term investments are investments in mostly AAA rated student loan ARS. These
securities are primarily securities supported by guarantees from the FFELP of the U.S. Department of Education.
As of December 31, 2008, auctions for $33.1 million of our investments in auction rate securities failed. As a result,
we may not be able to sell these investments at par value until a future auction on these investments is successful. In
the event we need to immediately liquidate these investments, we may have to locate a buyer outside the auction
process, who may be unwilling to purchase the investments at par, resulting in a loss. Based on an assessment of
fair value of these investments in ARS as of December 31, 2008, we determined that there was a decline in the fair
value of our ARS investments of approximately $3.7 million, which was deemed to be a temporary impairment and
recorded as an unrealized loss in other comprehensive income in stockholders’ equity. If the issuers are unable to
successfully close future auctions and their credit ratings deteriorate, we may be required to adjust the carrying value
of these investments as a temporary impairment and recognize a greater unrealized loss in other comprehensive
income or as an other-than-temporary impairment charge to earnings. Based on our ability to access our cash, cash
equivalents and short-term investments, and our expected operating cash flows, we do not anticipate having to sell
these securities below par value in order to operate our business in the foreseeable future. See Note 2 to the
consolidated financial statements for further discussion.
We have approximately $70.7 million in intangible assets as of December 31, 2008. As of December 31, 2008,
we believe our intangible assets will be recoverable, however, 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 equal to the amount by which the carrying amount of the assets exceeds the fair value of the asset. We
continue to monitor these assumptions and their effect on the estimated recoverability of our intangible assets.
Item 8.
Financial Statements and Supplementary Data
Financial Statements meeting the requirements of Regulation S-X are set forth beginning at page F-1.
Supplementary data is set forth in “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” under the caption “Consolidated Results of Operations.”
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. 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 Securities and Exchange Commission’s 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
37
objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible
controls and procedures.
As of December 31, 2008, 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.
Management’s Report on Internal Control over Financial Reporting
Management of CoStar is responsible for establishing and maintaining adequate internal control over financial
reporting and for the assessment of the effectiveness of internal control over financial reporting. As defined by the
Securities and Exchange Commission, internal control over financial reporting is a process designed by, or
supervised by, the Company’s principal executive and principal financial officers, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements in accordance with
generally accepted accounting principles.
The Company’s internal control over financial reporting is supported by written policies and procedures, that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the Company’s assets; (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the Company are being made only in accordance with authorizations of the Company’s
management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls
may become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In connection with the preparation of the Company's annual financial statements, management of the
Company has undertaken an assessment of the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2008 based on criteria established in Internal Control – Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (“the COSO Framework”).
Management's assessment included an evaluation of the design of the Company's internal control over financial
reporting and testing of the operational effectiveness of the Company's internal control over financial reporting.
Based on this assessment, management did not identify any material weakness in the Company's internal
control, and management has concluded that the Company's internal control over financial reporting was effective
as of December 31, 2008.
Ernst & Young, LLP, the independent registered public accounting firm that audited the Company's financial
statements included in this report, has issued an attestation report on the effectiveness of internal control over
financial reporting, a copy of which is included in this Annual Report on Form 10-K.
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.
Item 9B. Other Information.
None.
38
Item 10.
Directors, Executive Officers and Corporate Governance
PART III
The information required by this Item is incorporated by reference to our Proxy Statement for our 2009 annual
meeting of stockholders.
Item 11.
Executive Compensation
The information required by this Item is incorporated by reference to our Proxy Statement for our 2009 annual
meeting of stockholders.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The information required by this Item is incorporated by reference to our Proxy Statement for our 2009 annual
meeting of stockholders.
Item 13.
Certain Relationships and Related Transactions, and Director Independence
The information required by this Item is incorporated by reference to our Proxy Statement for our 2009 annual
meeting of stockholders.
Item 14.
Principal Accountant Fees and Services
The information required by this Item is incorporated by reference to our Proxy Statement for our 2009 annual
meeting of stockholders.
Item 15.
Exhibits and Financial Statement Schedules
PART IV
(a)(1) The following financial statements are filed as a part of this report: CoStar Group, Inc. Consolidated
Financial Statements.
(a)(2) All schedules are omitted because they are not applicable or not required or because the required
information is incorporated herein by reference or included in the financial statements or related notes included
elsewhere in this report.
(a)(3) The documents required to be filed as exhibits to this Report under Item 601 of Regulation S-K are listed
in the Exhibit Index included elsewhere in this report, which list is incorporated herein by reference.
39
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Act of 1934, as amended, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Bethesda,
State of Maryland, on the 23rd day of February 2009.
COSTAR GROUP, INC.
By:
/S/ Andrew C. Florance
Andrew C. Florance
President and Chief Executive Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature appears below
constitutes and appoints Andrew C. Florance and Brian J. Radecki, and each of them individually, as their true and
lawful attorneys-in-fact and agents, with full power of substitution, for him and in his name, place and stead, in any
and all capacities, to sign any and all amendments to this report, and to file the same, with all exhibits thereto and to
all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-
in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could
do in person, herein by ratifying and confirming all that said attorneys-in-fact and agents or any of them, or his or
their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1934, as amended, this report has been signed by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Capacity
Date
/S/ Michael R. Klein
Michael R. Klein
/S/ Andrew C. Florance
Andrew C. Florance
/S/ Brian J. Radecki
Brian J. Radecki
/S/ David Bonderman
David Bonderman
/S/ Warren H. Haber
Warren H. Haber
/S/ Josiah O. Low, III
Josiah O. Low, III
/S/ Christopher Nassetta
Christopher Nassetta
/S/ Michael Glosserman
Michael Glosserman
Chairman of the Board
February 23, 2009
Chief Executive Officer and
President and a Director
(Principal Executive Officer)
February 23, 2009
Chief Financial Officer
February 23, 2009
(Principal Financial and Accounting Officer)
February 23, 2009
February 23, 2009
February 23, 2009
February 23, 2009
February 23, 2009
Director
Director
Director
Director
Director
40
INDEX TO EXHIBITS
Exhibit
No.
2.1
Description
Offer Document by CoStar Limited for the share capital of Focus Information Limited (Incorporated by
reference to Exhibit 2.1 to Amendment No. 2 to the Registration Statement on Form S-3 of the
Registrant (Reg. No. 333-106769) filed with the Commission on August 14, 2003).
3.1
Restated Certificate of Incorporation (Incorporated by reference to Exhibit 3.1 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 Registrant’s Report on Form 10-Q for the quarter ended June 30, 1999).
3.3
4.1
Amended and Restated By-Laws (filed herewith).
Specimen Common Stock Certificate (Incorporated by reference to Exhibit 4.1 to the Registrant’s Report
on Form 10-K for the year ended December 31, 1999).
*10.1
CoStar Group, Inc. 1998 Stock Incentive Plan, as amended (Incorporated by reference to Exhibit 10.1 to
the Registrant’s Report on Form 10-Q for the quarter ended September 30, 2005).
*10.2
*10.3
CoStar Group, Inc. 2007 Stock Incentive Plan, as amended (filed herewith).
CoStar Group, Inc. 2007 Stock Incentive Plan French Sub-Plan (Incorporated by reference to Exhibit
10.3 to the Registrant’s Report on Form 10-K for the year ended December 31, 2007).
*10.4
*10.5
*10.6
*10.7
Form of Stock Option Agreement between the Registrant and certain of its officers, directors and
employees (Incorporated by reference to Exhibit 10.8 to the Registrant’s Report on Form 10-K for the
year ended December 31, 2004).
Form of Stock Option Agreement between the Registrant and Andrew C. Florance (Incorporated by
reference to Exhibit 10.8.1 to the Registrant’s Report on Form 10-K for the year ended December 31,
2004).
Form of Restricted Stock Agreement between the Registrant and certain of its officers, directors and
employees (Incorporated by reference to Exhibit 10.9 to the Registrant’s Report on Form 10-K for the
year ended December 31, 2004).
Form of 2007 Plan Restricted Stock Grant Agreement between the Registrant and certain of its officers,
directors and employees (Incorporated by reference to Exhibit 99.1 to the Registrant’s Report on Form 8-
K filed June 22, 2007).
*10.8
Form of 2007 Plan Incentive Stock Option Grant Agreement between the Registrant and certain of its
officers and employees (filed herewith).
*10.9
Form of 2007 Plan Incentive Stock Option Grant Agreement between the Registrant and Andrew C.
Florance (filed herewith).
*10.10 Form of 2007 Plan Nonqualified Stock Option Grant Agreement between the Registrant and certain of
its officers and employees (filed herewith).
*10.11 Form of 2007 Plan Nonqualified Stock Option Grant Agreement between the Registrant and certain of
its directors (filed herewith).
*10.12 Form of 2007 Plan Nonqualified Stock Option Grant Agreement between the Registrant and Andrew C.
Florance (filed herewith).
*10.13 Form of 2007 Plan French Sub-Plan Restricted Stock Agreement between the Registrant and certain of
its employees (Incorporated by reference to Exhibit 10.10 to the Registrant’s Report on Form 10-K for
the year ended December 31, 2007).
*10.14 CoStar Group, Inc. Employee Stock Purchase Plan (Incorporated by reference to Exhibit 10.1 to the
Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006).
*10.15 Employment Agreement for Andrew C. Florance (Incorporated by reference to Exhibit 10.2 to
Amendment No. 1 to the Registration Statement on Form S-1 of the Registrant (Reg. No. 333-47953)
filed with the Commission on April 27, 1998).
41
INDEX TO EXHIBITS ⎯ (Continued)
Exhibit
No.
Description
*10.16 First Amendment to Andrew C. Florance Employment Agreement, effective January 1, 2009 (filed
herewith).
*10.17 Executive Service Contract dated February 16, 2007, between Property Investment Exchange Limited
and Paul Marples (Incorporated by reference to Exhibit 10.14 to the Registrant’s Report on Form 10-K
for the year ended December 31, 2007).
*10.18 Form of Indemnification Agreement between the Registrant and each of its officers and directors
(Incorporated by reference to Exhibit 10.1 to the Registrant’s Report on Form 10-Q for the quarter
ended March 31, 2004).
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
21.1
23.1
31.1
Office Lease, dated August 12, 1999, between CoStar Realty Information, Inc. and Newlands Building
Ventures, LLC (Incorporated by reference to Exhibit 10.2 to the Registrant’s Report on Form 10-Q for
the quarter ended September 30, 1999).
Office Sublease, dated June 14, 2002, between CoStar Realty Information, Inc., CoStar Group, Inc. and
Gateway, Inc. (Incorporated by reference to Exhibit 10.2 to the Registrant’s Report on Form 10-Q for
the quarter ended June 30, 2002).
Exercise of option to extend lease term and sublease amendment, dated February 22, 2007 between
Gateway, Inc. and CoStar Realty Information, Inc. and CoStar Group, Inc. (Incorporated by reference
to Exhibit 10.11 to the Registrant’s Report on Form 10-K for the year ended December 31, 2006).
Addendum No. 3 to Office Lease, dated as of May 12, 2004, between Newlands Building Venture,
LLC, and CoStar Realty Information, Inc. (Incorporated by reference to Exhibit 10.1 to the Registrant’s
Report on Form 10-Q for the quarter ended June 30, 2004).
Office Lease, dated as of February 23, 2005, between CoStar Realty Information, Inc. and Crestpointe
III, LLC. (Incorporated by reference to Exhibit 10.13 to the Registrant’s Report on Form 10-K for the
year ended December 31, 2004).
Office Lease Agreement, dated March 16, 2007, between Corporate Place I Business Trust and CoStar
Group, Inc. (Incorporated by reference to Exhibit 10.2 to the Registrant’s Report on Form 10-Q for the
quarter ended March 31, 2007).
Agreement for Lease among Nokia UK Limited, Focus Information Limited and CoStar Group, Inc.,
dated November 23, 2007 (Incorporated by reference to Exhibit 10.22 to the Registrant’s Report on
Form 10-K for the year ended December 31, 2007).
Contract for Sale and Purchase between Focus Information Limited and Trafigura Limited, dated
September 14, 2007 (Incorporated by reference to Exhibit 10.1 to the Registrant’s Report on Form 10-Q
for the quarter ended September 30, 2007).
Subsidiaries of the Registrant (filed herewith).
Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm (filed herewith).
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).
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).
* Management Contract or Compensatory Plan or Arrangement.
42
COSTAR GROUP, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Registered Public Accounting Firm..........................................................................
Consolidated Statements of Operations for the years ended December 31, 2006, 2007 and 2008 .................
Consolidated Balance Sheets as of December 31, 2007 and 2008 ..................................................................
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2006, 2007 and 2008
Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2007 and 2008 ................
Notes to Consolidated Financial Statements ...................................................................................................
F-2
F-4
F-5
F-6
F-7
F-8
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of CoStar Group, Inc.
We have audited the accompanying consolidated balance sheets of CoStar Group, Inc. as of December 31, 2008
and 2007, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the
three years in the period ended December 31, 2008. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated
financial position of CoStar Group, Inc. at December 31, 2008 and 2007, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended December 31, 2008, in conformity with
U.S. generally accepted accounting principles.
As also discussed in Note 9 to the consolidated financial statements, under the heading Income Taxes, the
Company adopted FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes- an interpretation of
FASB Statement No. 109” effective January 1, 2007.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), CoStar's internal control over financial reporting as of December 31, 2008, based on criteria
established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated February 19, 2009 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
McLean, Virginia
February 19, 2009
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of CoStar Group, Inc.
We have audited CoStar Group, Inc.’s (“CoStar”) internal control over financial reporting as of December 31,
2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (the COSO criteria). CoStar’s management is responsible
for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting included in the accompanying Management’s Report on Internal Control
over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material respects. Our audit
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In our opinion, CoStar maintained, in all material respects, effective internal control over financial reporting as
of December 31, 2008, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated balance sheets as of December 31, 2008 and 2007 and the related consolidated
statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended
December 31, 2008 of CoStar Group, Inc. and our report dated February 19, 2009 expressed an unqualified opinion
thereon.
/s/ Ernst & Young LLP
McLean, Virginia
February 19, 2009
F-3
COSTAR GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Year Ended December 31,
2006
2007
2008
Revenues............................................................................................ $ 158,889
56,136
Cost of revenues ................................................................................
102,753
Gross margin .....................................................................................
$ 192,805
76,704
116,101
$
212,428
73,408
139,020
Operating expenses:
Selling and marketing ....................................................................
Software development....................................................................
General and administrative ............................................................
Gain on lease settlement, net..........................................................
Purchase amortization ....................................................................
Income from operations.....................................................................
Interest and other income, net............................................................
Income before income taxes ..............................................................
Income tax expense, net.....................................................................
Net income......................................................................................... $ 12,410
41,774
12,008
30,707
⎯
4,183
88,672
14,081
6,845
20,926
8,516
51,777
12,453
36,569
(7,613)
5,063
98,249
17,852
8,045
25,897
9,946
$ 15,951
$
41,705
12,759
39,888
⎯
4,880
99,232
39,788
4,914
44,702
20,079
24,623
Net income per share ⎯ basic ........................................................... $ 0.66
Net income per share ⎯ diluted ........................................................ $ 0.65
$
$
0.84
$
0.82
$
1.27
1.26
Weighted average outstanding shares ⎯ basic..................................
Weighted average outstanding shares ⎯ diluted...............................
18,751
19,165
19,044
19,404
19,372
19,550
See accompanying notes.
F-4
COSTAR GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands except per share data)
ASSETS
Current assets:
Cash and cash equivalents.......................................................................................... $
Short-term investments ..............................................................................................
Accounts receivable, less allowance for doubtful accounts of approximately
$2,959 and $3,213 as of December 31, 2007 and 2008, respectively.....................
Deferred income taxes, net.........................................................................................
Prepaid expenses and other current assets..................................................................
Total current assets ........................................................................................................
Long-term investments ..................................................................................................
Deferred income taxes, net ............................................................................................
Property and equipment, net ..........................................................................................
Goodwill ........................................................................................................................
Intangibles and other assets, net ....................................................................................
Deposits and other assets ...............................................................................................
Total assets .................................................................................................................... $
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable ....................................................................................................... $
Accrued wages and commissions...............................................................................
Accrued expenses.......................................................................................................
Income taxes payable .................................................................................................
Deferred revenue........................................................................................................
Deferred rent ..............................................................................................................
Total current liabilities...................................................................................................
Deferred income taxes, net ............................................................................................
Income taxes payable.....................................................................................................
Commitments and Contingencies ..................................................................................
Stockholders’ equity:
Preferred stock, $0.01 par value; 2,000 shares authorized; none outstanding............
Common stock, $0.01 par value; 30,000 shares authorized; 19,474 and 19,733
issued and outstanding as of December 31, 2007 and 2008, respectively ..............
Additional paid-in capital...........................................................................................
Accumulated other comprehensive income (loss)......................................................
Accumulated deficit ...................................................................................................
Total stockholders’ equity ...............................................................................
Total liabilities and stockholders’ equity....................................................................... $
See accompanying notes
F-5
December 31,
2007
2008
57,785
129,641
$
159,982
35,268
$
$
10,875
2,716
4,661
205,678
⎯
2,233
24,045
61,854
25,711
2,322
321,843
3,299
7,489
15,505
191
10,374
1,379
38,237
1,801
⎯
⎯
⎯
12,294
2,036
2,903
212,483
29,340
3,392
16,876
54,328
16,421
1,544
334,384
1,636
7,217
7,754
1,907
9,442
1,180
29,136
132
1,695
⎯
⎯
195
317,570
5,626
(41,586)
281,805
321,843
$
197
333,983
(13,796)
(16,963)
303,421
334,384
COSTAR GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
Comprehensive
Income
Common Stock
Amount
$ 187
⎯
Shares
18,674
⎯
12,410
Additional
Paid-In
Capital
Unearned
Compensation
$
295,920 $
⎯
$
(2,712)
⎯
Balance at December 31, 2005
Net income
Foreign currency translation
adjustment
Net unrealized gain on short-
term investments
Comprehensive income
$
Exercise of stock options
Swaps of shares for exercise
Restricted stock grants
Restricted stock grants
surrendered
Stock compensation expense,
net of forfeitures
Employee Stock Purchase
Plan (ESPP)
Impact upon adoption of
SFAS 123R
Balance at December 31, 2006
FIN 48 Adjustment
Balance at January 1, 2007
Net income
Foreign currency translation
adjustment
Net unrealized gain on short-
term investments
Comprehensive income
Exercise of stock options
Restricted stock grants
Restricted stock grants
surrendered
Consideration for Propex
Stock compensation expense,
net of forfeitures
ESPP
Excess tax benefit for
2,950
222
15,582
⎯
⎯
⎯
⎯
270
(20)
165
3
(1)
2
(12) ⎯
⎯
⎯
4
⎯
⎯
19,081
⎯
19,081
15,951 ⎯
⎯
191
⎯
191
⎯
873 ⎯
⎯
233 ⎯
⎯
$
17,057
289
131
3
1
(58) ⎯
⎯
22
⎯
9
⎯
⎯
⎯
⎯
6,566
(938)
34
(234)
4,094
206
(2,712)
302,936
26
302,962
⎯
⎯
⎯
8,127
(1)
(635)
1,010
5,440
407
exercised stock options
Balance at December 31, 2007
Net income
Foreign currency translation
adjustment
Net unrealized loss on short-
term investments
Comprehensive income
$
Exercise of stock options
Restricted stock grants
Restricted stock grants
surrendered
Stock compensation expense,
net of forfeitures
ESPP
Excess tax benefit for
exercised stock options
Balance at December 31, 2008
⎯
⎯
19,474
24,623 ⎯
195
⎯
260
317,570
⎯
(14,061) ⎯
⎯
(5,361) ⎯
5,201
⎯
198
102
2
1
(49)
(1)
⎯
8
⎯
⎯
⎯
⎯
⎯
⎯
6,555
⎯
(695)
4,907
329
5,317
19,733
$ 197
$
333,983 $
Accumulated
Other
Comprehensive
Income (Loss)
1,348
⎯
2,950
222
⎯
⎯
⎯
⎯
⎯
⎯
⎯
4,520
⎯
4,520
⎯
873
233
⎯
⎯
⎯
⎯
⎯
⎯
⎯
5,626
⎯
(14,061)
(5,361)
⎯
⎯
⎯
⎯
⎯
⎯
Accumulated
Deficit
Total
Stockholders’
Equity
$
(69,947)
12,410
$
224,796
12,410
⎯
⎯
⎯
⎯
⎯
⎯
⎯
⎯
⎯
(57,537)
⎯
(57,537)
15,951
⎯
⎯
⎯
⎯
⎯
⎯
⎯
⎯
⎯
(41,586)
24,623
⎯
⎯
⎯
⎯
⎯
⎯
⎯
⎯
2,950
222
6,569
(939)
36
(234)
4,094
206
⎯
250,110
26
250,136
15,951
873
233
8,130
⎯
(635)
1,010
5,440
407
260
281,805
24,623
(14,061)
(5,361)
6,557
1
(696)
4,907
329
5,317
$
(13,796)
$
(16,963)
$
303,421
⎯
⎯
⎯
⎯
⎯
⎯
⎯
⎯
2,712
⎯
⎯
⎯
⎯
⎯
⎯
⎯
⎯
⎯
⎯
⎯
⎯
⎯
⎯
⎯
⎯
⎯
⎯
⎯
⎯
⎯
⎯
⎯
⎯
See accompanying notes.
F-6
COSTAR GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
2007
2008
2006
12,410
$
15,951
$
24,623
Operating activities:
Net income......................................................................................... $
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation ...............................................................................
Amortization...............................................................................
Deferred income tax expense, net...............................................
Provision for losses on accounts receivable ...............................
Excess tax benefit from stock options ........................................
Stock-based compensation expense............................................
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable....................................................................
Interest receivable.......................................................................
Prepaid expenses and other current assets ..................................
Deposits......................................................................................
Accounts payable and accrued expenses ....................................
Deferred revenue ........................................................................
Net cash provided by operating activities ......................................
5,734
6,076
7,658
1,813
⎯
4,155
(5,080)
(164)
(1,205)
(246)
688
748
32,587
7,778
8,369
9,946
2,464
⎯
5,440
(2,944)
(67)
(755)
(670)
6,721
(501)
51,732
Investing activities:
Purchases of short-term investments ..........................................
Sales of short-term investments..................................................
Purchases of property and equipment and other assets...............
Acquisitions, net of cash acquired..............................................
Net cash (used in) provided by investing activities........................
(108,876)
95,393
(12,959)
(1,887)
(28,329)
(116,609)
107,286
(14,271)
(16,737)
(40,331)
Financing activities:
Excess tax benefit from stock options ........................................
Proceeds from transactions in stock based plans ........................
Net cash provided by financing activities ......................................
⎯
5,582
5,582
⎯
8,161
8,161
8,360
8,441
2,148
4,042
(5,317)
4,940
(6,196)
533
1,464
652
(3,044)
262
40,908
(4,839)
63,949
(3,656)
(3,024)
52,430
5,317
6,158
11,475
Effect of foreign currency exchange rates on cash and cash
equivalents .....................................................................................
Net increase in cash and cash equivalents .........................................
Cash and cash equivalents at beginning of year ................................
Cash and cash equivalents at end of year .......................................... $
254
10,094
28,065
38,159
$
64
19,626
38,159
57,785
$
(2,616)
102,197
57,785
159,982
See accompanying notes.
F-7
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008
1. ORGANIZATION
CoStar Group, Inc. (the “Company”) has created a comprehensive, proprietary database of commercial real
estate information covering the United States, as well as parts of the United Kingdom and France. Based on its
unique database, the Company provides information/marketing services to the commercial real estate and related
business community and operates within
International. The Company’s
information/marketing services are typically distributed to its clients under subscription-based license agreements,
which typically have a minimum term of one year and renew automatically.
two segments, U.S. and
2. 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. Accounting policies
are consistent for each operating segment.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”)
in the United States of America requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Reclassifications
Certain previously reported amounts have been reclassified to conform to the Company’s current presentation.
Revenue Recognition
The Company primarily derives revenues from providing access to its proprietary database of commercial real
estate information. The Company generally charges a fixed monthly amount for its subscription-based services.
Subscription contract rates are based on the number of sites, number of users, organization size, the client’s business
focus and the number of services to which a client subscribes. Subscription-based license agreements typically have
a minimum term of one year and renew automatically.
Revenues from subscription-based services are recognized on a straight-line basis over the term of the
agreement. Deferred revenue results from advance cash receipts from customers or amounts billed in advance to
customers from the sales of subscription licenses and is recognized over the term of the license agreement.
Cost of Revenues
Cost of revenues principally consists of salaries and related expenses for the Company’s researchers who collect
and analyze the commercial real estate data that is the basis for the Company’s information/marketing services.
Additionally, cost of revenues includes the cost of data from third party data sources, which is expensed as incurred,
and the amortization of database technology.
Significant Customers
No single customer accounted for more than 5% of the Company’s revenues for each of the years ended
December 31, 2006, 2007 and 2008.
F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ⎯ (CONTINUED)
COSTAR GROUP, INC.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ⎯ (CONTINUED)
Foreign Currency Translation
The Company’s 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. Net gains or losses resulting from foreign currency exchange transactions
are included in the consolidated statements of operations. There were no material gains or losses from foreign
currency exchange transactions for the years ended December 31, 2008 and 2007.
Comprehensive Income
The components of accumulated other comprehensive income were as follows (in thousands):
Foreign currency translation adjustment ..................................................... $
Accumulated net unrealized gain (loss) on investments, net of tax.............
Total accumulated other comprehensive income (loss)............................... $
Advertising Costs
Year Ended December 31,
2008
2007
(8,521)
5,540
(5,275)
86
(13,796)
5,626
$
$
The Company expenses advertising costs as incurred. Advertising expense were approximately $4.0 million,
$2.3 million and $2.8 million for the years ended December 31, 2006, 2007 and 2008, respectively.
Income Taxes
The Company provides for income taxes under the provisions of Statement of Financial Accounting Standards
No. 109 “Accounting for Income Taxes” (“SFAS No. 109”). Deferred income taxes result from temporary
differences between the tax basis of assets and liabilities and the basis reported in the Company’s consolidated
financial statements. Deferred tax liabilities and assets are determined based on the difference between the financial
statement and the tax basis of assets and liabilities using enacted rates expected to be in effect during the year in
which the differences reverse. Valuation allowances are provided against assets, including net operating losses, if it
is anticipated that some or all of the asset may not be realized through future taxable earnings or implementation of
tax planning strategies.
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 Company’s potentially dilutive securities include
stock options and restricted stock. 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 potential common shares would have an anti-
dilutive effect.
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 generally requires that
equity instruments issued in such transactions be accounted for using a fair-value based method and the fair value of
such equity instruments be recognized as expense in the consolidated statements of operations.
F-9
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ⎯ (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ⎯ (CONTINUED)
Stock-Based Compensation ⎯ (Continued)
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 recognizes compensation costs for awards with graded vesting on a
straight-line basis.
The Company adopted SFAS 123R using the modified prospective method, which requires the application of
the accounting standard as of January 1, 2006. 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. Upon adoption of
SFAS 123R, the Company recorded a charge of approximately $35,000 representing the cumulative effect of a
change in accounting principle. This amount was recorded in general and administrative expenses in the
consolidated statements of operations for the year ended December 31, 2006.
The impact of the adoption of SFAS 123R on the Company's results of operations for the year ended December
31, 2006, was as follows (in thousands, except per share data):
Income from operations ............................................................................................................... $
Income before taxes ..................................................................................................................... $
Net income ................................................................................................................................... $
Basic earnings per share............................................................................................................... $
Diluted earnings per share............................................................................................................ $
(2,860)
(2,860)
(1,784)
(0.10)
(0.09)
SFAS 123R requires cash flows resulting from excess tax benefits to be classified as part of cash flows from
financing activities. Excess tax benefits represent tax benefits related to exercised options in excess of the associated
deferred tax asset for such options. There were no excess tax benefits as a result of adopting SFAS 123R for the year
ended December 31, 2006, and no amounts were classified as an operating cash outflow or a financing cash inflow
in the accompanying consolidated statement of cash flows. Net cash proceeds from the exercise of stock options
were approximately $6.6 million; $8.1 million and $6.6 million for the years ended December 31, 2006, 2007 and
2008, respectively. There were approximately $5.3 million of excess tax benefits realized from stock option
exercises for the year ended December 31, 2008.
Stock-based compensation expense for stock options, restricted stock and the employee stock purchase plan
included in the Company's results of operations for the years ended December 31, was as follows (in thousands):
2006
Cost of revenues................................................................................................... $ 317
1,263
Selling and marketing ..........................................................................................
202
Software development..........................................................................................
2,373
General and administrative ..................................................................................
Total ............................................................................................................... $ 4,155
Year Ended December 31,
2008
2007
$ 547
$ 926
400
1,118
423
340
3,570
3,056
$ 4,940
$ 5,440
F-10
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ⎯ (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ⎯ (CONTINUED)
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of three months or
less to be cash equivalents. Cash equivalents consist of money market fund investments and U.S. Government
Securities. As of December 31, 2007 and 2008, cash of $754,000 and $518,000, respectively, was held to support
letters of credit for security deposits.
Investments
The Company accounts for investments in accordance with Statement of Financial Accounting Standards No.
115“Accounting for Certain Investments in Debt and Equity Securities” (“SFAS No. 115”), The Company
determines the appropriate classification of investments at the time of purchase and reevaluates such designation as
of each balance sheet date. The Company considers all of its investments to be available-for-sale. Short-term
investments consist of commercial paper, government/federal notes and bonds and corporate obligations with
maturities greater than 90 days at the time of purchase. Available-for-sale short-term investments with contractual
maturities beyond one year are classified as current in the Company’s consolidated balance sheets because they
represent the investment of cash that is available for current operations. Long-term investments consist of auction
rate securities. Investments are carried at fair market value.
Concentration of Credit Risk and Financial Instruments
The Company performs ongoing credit evaluations of its customers’ financial condition and generally does not
require that its customers’ obligations to the Company be secured. The Company maintains reserves for credit
losses, and such losses have been within management’s expectations. The large size and widespread nature of the
Company’s customer base and lack of dependence on individual customers mitigate the risk of nonpayment of the
Company’s accounts receivable. The carrying amount of the accounts receivable approximates the net realizable
value. The carrying value of the Company’s financial instruments including cash and cash equivalents, short-term
investments, long-term investments, accounts receivable, accounts payable, and accrued expenses approximates fair
value.
Allowance for Doubtful Accounts
The allowance for doubtful accounts is based on the Company’s assessment of the collectability of customer
accounts. The Company regularly reviews the allowance by considering factors such as historical experience, the
aging of the balances, and current economic conditions that may affect a customer’s ability to pay.
Property and Equipment
Property and equipment are stated at cost. All repairs and maintenance costs are expensed as incurred.
Depreciation and amortization are calculated on a straight-line basis over the following estimated useful lives of the
assets:
Leasehold improvements
Furniture and office equipment
Research vehicles
Computer hardware and software
Shorter of lease term or useful life
Five to seven years
Five years
Two to five years
Internal use software costs are capitalized in accordance with Statement of Position No. 98-1, “Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use” (“SOP 98-1”). Qualifying costs incurred
during the application development stage, which consist primarily of outside services and purchased software
license costs, are capitalized and amortized over the estimated useful life of the asset. All other costs are expensed as
incurred.
F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ⎯ (CONTINUED)
COSTAR GROUP, INC.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ⎯ (CONTINUED)
Goodwill, Intangibles and Other Assets
Goodwill represents the excess of costs over the fair value of assets of businesses acquired. Goodwill and
intangible assets subject to amortization that arose from acquisitions prior to July 1, 2001, have been amortized on a
straight-line basis over their estimated useful lives in accordance with Accounting Principles Board Opinion No. 17,
“Intangible Assets” (“APB 17”). The Company adopted the provisions of Statement of Financial Accounting
Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), as of January 1, 2002. Goodwill and
intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are
not amortized, but instead tested for impairment at least annually by reporting unit in accordance with the provisions
of SFAS No. 142. The goodwill impairment test is a two-step process. The first step is to determine the fair value of
each reporting unit. The estimate of the fair value of each reporting unit is based on a projected discounted cash
flow model that includes significant assumptions and estimates including our future financial performance and a
weighted average cost of capital. The fair value of each reporting unit is compared to the carrying amount of the
reporting unit. If the carrying value of the reporting unit exceeds the fair value, then the second step of the process is
performed to measure the impairment loss. The impairment loss is measured based on a projected discounted cash
flow method using a discount rate determined by our management to be commensurate with the risk in our current
business model.
SFAS No. 142 also requires that intangible assets with estimable useful lives that arose from acquisitions on or
after July 1, 2001, be amortized over their respective estimated useful lives using a method of amortization that
reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise used up, and
reviewed for impairment in accordance with Statement of Financial Accounting Standards No. 144 (“SFAS 144”),
“Accounting for Impairment or Disposal of Long-Lived Assets”.
Acquired database technology, customer base and trade names and other are related to the Company’s
acquisitions (See Notes 3 and 6). Acquired database technology and trade names and other are amortized on a
straight-line basis over periods ranging from two to ten years. The acquired intangible asset characterized as
customer base consists of one distinct intangible asset composed of acquired customer contracts and the related
customer relationships. Acquired customer bases that arose from acquisitions prior to July 1, 2001 are amortized on
a straight-line basis principally over a period of ten years. Acquired customer bases that arose from acquisitions on
or after July 1, 2001 are amortized on a 125% declining balance method over ten years. The cost of capitalized
building photography is amortized on a straight-line basis over five years.
Long-Lived Assets
In accordance with SFAS 144, long-lived assets, such as property, plant, and equipment, and purchased
intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to estimate undiscounted future cash flows expected to
be generated by the asset or asset group. If the carrying amount of an asset exceeds its estimated future cash flows,
an impairment charge is recognized by the amount for which the carrying amount of the asset exceeds the fair value
of the asset.
Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the
carrying amount or fair value less costs to sell, and would no longer be depreciated. The assets and liabilities of a
disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections
of the balance sheet.
Goodwill and intangible assets not subject to amortization are tested annually for impairment by reporting unit,
and are tested for impairment more frequently if events and circumstances indicate that the asset might be impaired.
The Company’s operating segments, U.S. and International, are the reporting units tested for potential impairment
under SFAS No. 142. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s
fair value.
F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ⎯ (CONTINUED)
COSTAR GROUP, INC.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ⎯ (CONTINUED)
Recent Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48
“Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”), which
became effective for the Company as of January 1, 2007. FIN 48 addresses the determination of how tax benefits
claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN 48, the
Company must recognize the tax benefit from an uncertain tax position only if it is more-likely-than-not that the tax
position will be sustained upon examination by the taxing authorities, based on the technical merits of the position.
The tax benefits recognized in the financial statements from such a position are measured based on the largest
benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. The Company’s
reassessment of its tax positions in accordance with FIN 48 did not have a material impact on its results of
operations and financial position.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which
defines fair value, establishes a framework for measuring fair value in accordance with GAAP and expands
disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements under
GAAP and is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued
FASB Staff Position (“FSP”) 157-2, “Partial Deferral of the Effective Date of Statement 157” (“FSP 157-2”), which
delays the effective date of SFAS 157 to January 1, 2009 for all non-financial assets and non-financial liabilities,
except those that are recognized or disclosed at fair value in the consolidated financial statements on a recurring
basis (at least annually). Effective January 1, 2008, the Company adopted the portion of SFAS 157 that was not
deferred under FSP 157-2. The adoption of SFAS 157 did not have a material impact on the Company’s results of
operations or financial position. In October 2008, the FASB issued FSP 157-3, “Determining the Fair Value of a
Financial Asset in a Market That Is Not Active” (“FSP 157-3”), which clarifies the application of SFAS 157 to
markets that are not active and provides an example illustrating key considerations for determining the fair value of
financial assets when their markets are not active. FSP 157-3 was effective upon issuance, including prior periods
for which financial statements had not been issued. The adoption of this standard did not have an impact on the
Company’s results of operations or financial position.
In February 2007, the FASB issued SFAS No. 159, “Fair Value Option for Financial Assets and Financial
Liabilities — Including an amendment of FASB Statement No. 115” (“SFAS 159”), which permits entities to choose
to measure many financial instruments and certain other items at fair value that are not currently required to be
measured at fair value. SFAS 159 is effective for fiscal years beginning on or after December 31, 2007. The
Company adopted SFAS 159 on January 1, 2008 and has elected not to apply the fair value option to any of its
financial instruments. The adoption of SFAS 159 did not have a material impact on the Company’s results of
operations or financial position.
In December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business Combinations” (“SFAS 141R”),
which will change the accounting for any business combination the Company enters into with an acquisition date
after December 31, 2008. Under SFAS 141R, an acquiring entity will be required to recognize all the assets acquired
and liabilities assumed in a transaction at the acquisition date fair value with limited exceptions. SFAS 141R will
change the accounting treatment and disclosure for certain specific items in a business combination. SFAS 141R
will have an impact on accounting for business combinations once adopted, but its effect will depend upon the
specifics of any business combination with an acquisition date subsequent to December 31, 2008.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial
Statements—An Amendment of ARB No. 51” (“SFAS 160”), which establishes new accounting and reporting
standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 is
effective for fiscal years beginning on or after December 15, 2008. The adoption of SFAS 160 is not expected to
have a material impact on the Company’s results of operations or financial position.
F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ⎯ (CONTINUED)
COSTAR GROUP, INC.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ⎯ (CONTINUED)
Recent Accounting Pronouncements ⎯ (Continued)
In April 2008, the FASB issued FSP SFAS No. 142-3, “Determination of the Useful Life of Intangible Assets”
(“FSP 142-3”), which is effective for all fiscal years and interim periods beginning after December 15, 2008. Early
adoption of FSP 142-3 is not permitted. FSP 142-3 requires additional footnote disclosures about the impact of the
Company’s ability or intent to renew or extend agreements related to existing intangibles or expected future cash
flows from those intangibles, how the Company accounts for costs incurred to renew or extend such agreements, the
time until the next renewal or extension period by asset class, and the amount of renewal or extension costs
capitalized, if any. For any intangibles acquired after December 31, 2008, FSP 142-3 requires that the Company
consider its experience regarding renewal and extensions of similar arrangements in determining the useful life of
such intangibles. If the Company does not have experience with similar arrangements, FSP 142-3 requires that the
Company use the assumptions of a market participant putting the intangible to its highest and best use in
determining the useful life. The adoption of FSP 142-3 will impact intangibles acquired after December 31, 2008,
and its effect will depend on the specifics of the intangible acquired.
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles”
(“SFAS 162”), which identifies the sources of accounting principles and the framework for selecting the principles
to be used in the preparation of financial statements. SFAS 162 is effective as of November 17, 2008. The adoption
of SFAS 162 did not have a material impact on the Company’s results of operations or financial position.
3. ACQUISITIONS
On February 16, 2007, CoStar Limited, a wholly owned U.K. subsidiary of CoStar, acquired all of the
outstanding capital stock of Property Investment Exchange Limited (“PropexTM”) for approximately $22.0 million,
consisting of cash, deferred consideration and 21,526 shares of CoStar common stock. Propex provides web-based
commercial property information and operates an electronic platform that facilitates the exchange of investment
property in the U.K. Propex’s suite of electronic platforms and listing websites give users access to the U.K.
commercial property investment and leasing markets.
On April 1, 2008, the Company acquired certain assets of First CLS, Inc. (doing business as the Dorey
Companies and DoreyPRO), an Atlanta-based provider of local commercial real estate information for $3.0 million
in initial cash consideration and deferred consideration payable within approximately six months of the one-year
anniversary of closing.
These acquisitions were accounted for using the purchase method of accounting. The purchase price of the
Propex acquisition was primarily allocated to customer base, trade name, and goodwill. The purchase price of the
First CLS, Inc. acquisition was primarily allocated to acquired customer base. The acquired customer base for the
acquisitions, which consists of one distinct intangible asset for each acquisition and is composed of acquired
customer contracts and the related customer relationships, is being amortized on a 125% declining balance method
over ten years. The Propex acquired trade name is amortized on a straight-line basis over three years. We recorded
goodwill of approximately $15.0 million for the Propex acquisition and $1.1 million for the First CLS, Inc.
acquisition. Goodwill is not amortized, but is subject to annual impairment tests. The results of operations of Propex
and First CLS, Inc. have been consolidated with those of the Company since the date of the acquisition and are not
considered material to our consolidated financial statements. Accordingly, pro forma financial information has not
been presented for either acquisition.
F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ⎯ (CONTINUED)
COSTAR GROUP, INC.
4. INVESTMENTS
The Company accounts for investments in accordance with Statement of Financial Accounting Standards No.
115“Accounting for Certain Investments in Debt and Equity Securities” (“SFAS No. 115”). The Company
determines the appropriate classification of investments at the time of purchase and reevaluates such designation as
of each balance sheet date. The Company considers all of its investments to be available-for-sale. Short-term
investments consist of commercial paper, government/federal notes and bonds and corporate obligations with
maturities greater than 90 days at the time of purchase. Available-for-sale short-term investments with contractual
maturities beyond one year are classified as current in the Company’s consolidated balance sheets because they
represent the investment of cash that is available for current operations. Long-term investments consist of auction
rate securities. Investments are carried at fair market value.
Scheduled maturities of investments classified as available-for-sale as of December 31, 2008 are as follows (in
thousands):
Maturity
Due in:
Fair Value
2009..............................................................................................................................................$
2010-2013 ....................................................................................................................................
2014-2018 ....................................................................................................................................
2019 and thereafter......................................................................................................................
Securities with multiple maturities ...................................................................................................
Investments....................................................................................................................................... $
5,226
26,881
917
31,131
64,155
453
64,608
The realized gains on the Company’s investments for the years ended December 31, 2007 and 2008 was
approximately $24,000 and $329,000, respectively. The realized losses on the Company’s investments for the years
ended December 31, 2007 and 2008 was approximately $232,000 and $489,000, respectively.
Unrealized holding gains and losses, net of the related tax effect, on available-for-sale securities are excluded
from earnings and are reported as a separate component of other comprehensive income in stockholders’ equity until
realized. Realized gains and losses from the sale of available-for-sale securities are determined on a specific-
identification basis. A decline in market value of any available-for-sale security below cost that is deemed to be
other than temporary results in a reduction in carrying amount to fair value. The impairment is charged to earnings
and a new cost basis for the security is established. Dividend and interest income are recognized when earned.
The unrealized losses on the Company’s investments as of December 31, 2007 and 2008 were generated
primarily from increases in interest rates. The losses are considered temporary, as the contractual terms of these
investments do not permit the issuer to settle the security at a price less than the amortized cost of the investment.
Because the Company has the ability to hold these investments until a recovery of fair value, which may be
maturity, it does not consider these investments to be other-than-temporarily impaired as of December 31, 2007 and
2008.
F-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ⎯ (CONTINUED)
COSTAR GROUP, INC.
4. INVESTMENTS ⎯ (CONTINUED)
The components of the investments in an unrealized loss position for more than twelve months consists of the
following (in thousands):
Federal debt securities .....................................................$
Corporate debt securities .................................................
$
December 31,
2007
2008
Aggregate
Fair
Value
1,592
13,886
15,478
Gross
Unrealized
Losses
Aggregate
Fair
Value
$
$
(15) $
(49)
(64) $
⎯ $
22,136
22,136 $
Gross
Unrealized
Losses
⎯
(1,494)
(1,494)
The components of the investments in an unrealized loss position for less than twelve months consists of the
following (in thousands):
December 31,
2007
2008
Aggregate
Fair
Value
Auction rate securities .....................................................$ ⎯
531
Federal debt securities .....................................................
21,234
Corporate debt securities .................................................
21,765
$
Gross
Unrealized
Losses
$ ⎯
Aggregate
Fair
Value
Gross
Unrealized
Losses
$ 29,340 $ (3,710)
(1)
19
(366)
6,976
(4,077)
36,335 $
(1)
(148)
(149) $
$
The gross unrealized gains as of December 31, 2007 and 2008 were approximately $330,000 and $128,000,
respectively.
5. FAIR VALUE
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which defines
fair value, establishes a framework for measuring fair value in accordance with GAAP and expands disclosures
about fair value measurements. The Company adopted the provisions of SFAS 157 as of January 1, 2008 for
financial instruments. Although the adoption of SFAS 157 did not materially impact its financial position, results of
operations, or cash flow, the Company is now required to provide additional disclosures as part of its financial
statements.
F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ⎯ (CONTINUED)
COSTAR GROUP, INC.
5. FAIR VALUE ⎯ (CONTINUED)
SFAS 157 establishes a three-tier fair value hierarchy, which categorizes the inputs used in measuring fair
value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2,
defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and
Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to
develop its own assumptions.
In accordance with SFAS 157, the following table represents the Company's fair value hierarchy for its financial
assets (cash, cash equivalents and investments) measured at fair value on a recurring basis as of December 31, 2008
(in thousands):
Cash ................................................................................................ $
29,297
Money market funds ....................................................................... 130,685
Corporate debt securities.................................................................
Government-sponsored enterprise obligations................................
Auction rate securities.....................................................................
⎯
⎯
⎯
$
Total ........................................................................................... $ 159,982 $
Level 1
Level 2
Level 3
⎯ $
⎯
Total
⎯ $ 29,297
130,685
⎯
35,132
35,132
⎯
136
136
⎯
⎯ 29,340
29,340
$ 224,590
$ 29,340
35,268
The Company’s Level 2 assets consist of corporate debt securities and government-sponsored enterprise
obligations, which do not have directly observable quoted prices in active markets. The Company’s corporate debt
securities are valued using matrix pricing, which is an acceptable practical expedient under SFAS 157 for inputs.
The Company’s Level 3 assets consist of variable rate debt instruments with an auction-reset feature, Auction
Rate Securities (“ARS”), whose underlying assets are primarily student loan securities supported by guarantees from
the FFELP of the U.S. Department of Education.
The following table presents the Company’s Level 3 assets measured at fair value on a recurring basis using
significant unobservable inputs as defined in SFAS 157, as of December 31, 2008 (in thousands):
Auction
Rate
Securities
Balance at December 31, 2007..................................................................................................................$
Unrealized loss included in other comprehensive income ...................................................................
Settlements...........................................................................................................................................
Balance at December 31, 2008..................................................................................................................$
53,975
(3,710)
(20,925)
29,340
ARS are variable rate debt instruments whose interest rates are reset approximately every 28 days. The
underlying securities have contractual maturities greater than twenty years. The ARS are recorded at fair
value. Typically, the carrying value of ARS approximates fair value due to frequent resetting of the interest rates.
As of December 31, 2008, the Company held ARS with $33.1 million par value, all of which failed to settle at
auctions. The majority of these investments are of high credit quality with AAA credit ratings and are primarily
student loan securities supported by guarantees from the FFELP of the U.S. Department of Education. The
Company may not be able to liquidate and fully recover the carrying value of the ARS in the near term. As a result,
these securities are classified as long-term investments in the Company’s consolidated balance sheet as of December
31, 2008.
F-17
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ⎯ (CONTINUED)
5. FAIR VALUE ⎯ (CONTINUED)
While the Company continues to earn interest on its ARS investments at the maximum contractual rate, these
investments are not currently trading and therefore do not currently have a readily determinable market value.
Accordingly, the estimated fair value of the ARS no longer approximates par value. The Company has used a
discounted cash flow model to determine the estimated fair value of its investment in ARS as of December 31, 2008.
The assumptions used in preparing the discounted cash flow model include estimates for interest rates, credit
spreads, timing and amount of cash flows, liquidity risk premiums, expected holding periods, and default risk.
Based on this assessment of fair value, as of December 31, 2008, the Company determined there was a decline in the
fair value of its ARS investments of approximately $3.7 million. The decline was deemed to be a temporary
impairment and recorded as an unrealized loss in other comprehensive income in stockholders’ equity. In addition,
while a majority of the ARS are currently rated AAA, if the issuers are unable to successfully close future auctions
and their credit ratings deteriorate, the Company may be required to record additional unrealized losses in other
comprehensive income or an other-than-temporary impairment charge to earnings on these investments.
6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
December 31,
2007
2008
Leasehold improvements ............................................................................................... $
Furniture, office equipment and research vehicles.........................................................
Computer hardware and software ..................................................................................
8,357
19,874
27,735
55,966
Accumulated depreciation and amortization ..................................................................
(31,921)
Property and equipment, net .......................................................................................... $ 24,045
$
$
7,808
19,305
27,938
55,051
(38,175)
16,876
7. GOODWILL
The changes in the carrying amount of goodwill by operating segment consist of the following (in thousands):
United States
Goodwill, December 31, 2006 ..............................................$
Acquisitions .....................................................................
Effect of foreign currency translation ..............................
Goodwill, December 31, 2007 ..............................................
Acquisitions .....................................................................
Effect of foreign currency translation ..............................
Goodwill, December 31, 2008 ..............................................$
30,428
⎯
⎯
30,428
1,119
⎯
31,547
International
16,069
$
14,806
551
31,426
⎯
(8,645)
22,781
$
Total
46,497
14,806
551
61,854
1,119
(8,645)
54,328
$
$
The Company recorded goodwill of approximately $15.0 million for the Propex acquisition in February 2007.
The Company recorded goodwill of approximately $1.1 million in connection with the First CLS, Inc. acquisition in
April 2008. The decrease in goodwill in 2008 is related to foreign currency fluctuations.
During the fourth quarters of 2007 and 2008, the Company completed the annual impairment test of goodwill
and concluded that goodwill was not impaired.
F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ⎯ (CONTINUED)
COSTAR GROUP, INC.
8. INTANGIBLES AND OTHER ASSETS
Intangibles and other assets consist of the following (in thousands, except amortization period data):
December 31,
2007
2008
Weighted-Average
Amortization
Period (in years)
Building photography.......................................... $
Accumulated amortization ..................................
Building photography, net...................................
10,799
(6,708)
4,091
$
11,011
(7,711)
3,300
Acquired database technology.............................
Accumulated amortization ..................................
Acquired database technology, net......................
Acquired customer base ......................................
Accumulated amortization ..................................
Acquired customer base, net ...............................
Acquired trade names and other..........................
Accumulated amortization ..................................
Acquired trade names and other, net
21,390
(20,573)
817
50,891
(34,374)
16,517
9,089
(4,803)
4,286
20,711
(20,361)
350
48,198
(37,192)
11,006
7,744
(5,979)
1,765
Intangibles and other assets, net .......................... $
25,711
$
16,421
5
4
10
6
Amortization expense for intangibles and other assets was approximately $6.1 million for the year ended
December 31, 2006 and $8.4 million for the years ended December 31, 2007 and 2008, respectively.
In the aggregate, amortization for intangibles and other assets existing as of December 31, 2008 for future
periods is expected to be approximately $5.4 million, $2.4 million, $1.9 million, $1.1 million and $1.0 million for
the years ending December 31, 2009, 2010, 2011, 2012 and 2013, respectively.
F-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ⎯ (CONTINUED)
COSTAR GROUP, INC.
9. INCOME TAXES
The components of the provision (benefit) for income taxes attributable to operations consist of the following
(in thousands):
Current:
Year Ended December 31,
2007
2006
2008
Federal ................................................................................... $
State .......................................................................................
Total current...............................................................................
Deferred:
Federal ...................................................................................
State .......................................................................................
Foreign...................................................................................
Total deferred.............................................................................
Total provision for income taxes................................................ $
414
220
634
7,497
1,077
(692)
7,882
8,516
$
$
574
821
1,395
9,716
72
(1,237)
8,551
9,946
$
$
18,289
3,842
22,131
(408)
(52)
(1,592)
(2,052)
20,079
The components of deferred tax assets and liabilities consists of the following (in thousands):
December 31,
2007
2008
Deferred tax assets:
Reserve for bad debts ................................................................................................. $
Accrued compensation ...............................................................................................
Stock compensation ...................................................................................................
Net operating losses ...................................................................................................
Restructuring reserve .................................................................................................
Alternative minimum tax credits................................................................................
Capital loss carryovers ...............................................................................................
Unrealized loss on securities ......................................................................................
Other liabilities...........................................................................................................
Total deferred tax assets ...................................................................................
799
1,286
1,603
3,177
45
1,393
⎯
⎯
1,001
9,304
$
Deferred tax liabilities:
Prepaids......................................................................................................................
Depreciation ...............................................................................................................
Identified intangibles associated with purchase accounting.......................................
Total deferred tax liabilities..............................................................................
(739)
(427)
(4,927)
(6,093)
Net deferred tax asset .................................................................................................
Valuation allowance...................................................................................................
Net deferred taxes ...................................................................................................... $
3,211
(63)
3,148
$
928
2,144
2,115
3,077
⎯
⎯
345
2,088
1,401
12,098
(522)
(626)
(2,607)
(3,755)
8,343
(3,047)
5,296
The net long-term deferred tax liability shown on the balance sheet includes deferred tax liabilities and assets
related to the international operations of the Company.
F-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ⎯ (CONTINUED)
COSTAR GROUP, INC.
9. INCOME TAXES ⎯ (CONTINUED)
For the years ended December 31, 2007 and 2008, a valuation allowance has been established for certain
deferred tax assets due to the uncertainty of realization. The Company’s change in valuation allowance was a
decrease of approximately $274,000 for the year ended December 31, 2007 and an increase of approximately $3.0
million for the year ended December 31, 2008. The increase for the year ended December 31, 2008 is due to an
increase in the valuation allowance required for the deferred tax assets for international loss carryforwards, capital
loss carryforwards, and unrealized losses on securities. The increase in the valuation allowance for the deferred tax
asset for unrealized losses has been recorded as an adjustment to other comprehensive income. The valuation
allowance for the year ended December 31, 2007 was primarily attributable to deferred tax assets for state net
operating loss carryforwards.
For the year ended December 31, 2008, the Company had income of approximately $52.7 million subject to
applicable U.S. federal and state income tax laws and a loss of approximately $8.0 million subject to applicable
international tax laws.
The Company’s provision for income taxes resulted in effective tax rates that varied from the statutory federal
income tax rate as follows (in thousands):
Year Ended December 31,
2007
2006
2008
Expected federal income tax provision at statutory rate................ $
State income taxes, net of federal benefit......................................
Foreign income taxes, net effect ...................................................
Stock compensation .....................................................................
(Decrease) increase in valuation allowance ..................................
Other adjustments .........................................................................
Income tax expense, net ................................................................ $
7,115
1,014
119
528
(267)
7
8,516
$
$
8,805
841
156
146
(274)
272
9,946
$
$
15,646
2,505
497
87
1,023
321
20,079
The Company paid approximately $858,000, $1.1 million, and $13.4 million in income taxes for the years
ended December 31, 2006, 2007 and 2008, respectively.
The Company has net operating loss carryforwards for international income tax purposes of approximately
$10.1 million, which do not expire.
The Company adopted FIN 48 on January 1, 2007. As a result of the implementation of FIN 48, the Company
recognized no material adjustment in the liability for unrecognized income tax benefits. At the adoption date of
January 1, 2007, the Company had $217,000 of unrecognized tax benefits, all of which would favorably affect the
effective tax rate if recognized in future periods, and $52,000 of accrued penalties and $47,000 of accrued interest.
The Company’s continuing practice is to recognize interest and penalties related to income tax matters in income tax
expense.
The following tables summarize the activity related to the Company’s unrecognized tax benefits (in thousands):
Unrecognized tax benefit as of January 1, 2007.............................................................................. $
Increase for current year tax positions ......................................................................................
Increase for prior year tax positions ..........................................................................................
Expiration of the statute of limitation for assessment of taxes...................................................
Unrecognized tax benefit as of December 31, 2007........................................................................ $
217
44
(6)
(22)
233
F-21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ⎯ (CONTINUED)
COSTAR GROUP, INC.
9. INCOME TAXES ⎯ (CONTINUED)
Unrecognized tax benefit as of December 31, 2007........................................................................ $
Increase for current year tax positions .......................................................................................
Increase for prior year tax positions...........................................................................................
Expiration of the statute of limitation for assessment of taxes...................................................
Unrecognized tax benefit as of December 31, 2008........................................................................ $
233
1,451
(9)
(117)
1,558
Approximately $142,000 and $233,000 of the unrecognized tax benefit as of December 31, 2008, and 2007,
respectively, would favorably affect the annual effective tax rate, if recognized in future periods. During 2008, the
Company recognized approximately $145,000 of interest and $9,000 of penalties, and had total accruals of
approximately $173,000 for interest and $34,000 for penalties as of December 31, 2008. During 2007, the Company
recognized approximately $36,000 of interest and $11,000 of penalties, and had total accruals of approximately
$74,000 for interest and $57,000 for penalties as of December 31, 2007. The Company does not anticipate the
amount of the unrecognized tax benefits to change significantly over the next twelve months.
The Company’s federal and state income tax returns for tax years 2005 through 2007 remain open to
examination. The Company’s U.K. income tax returns for tax years 2002 through 2007 remain open to examination.
10. GAIN ON LEASE SETTLEMENT, NET
On September 14, 2007, CoStar Limited, a wholly owned U.K. subsidiary of CoStar, entered into an agreement
with Trafigura Limited to assign to Trafigura the leasehold interest in the office space located in London. The lease
assignment was completed on December 19, 2007. As a result, CoStar U.K. was paid approximately $7.6 million,
net of expenses, for the assignment of the lease. The expenses associated with the lease settlement included legal,
moving and the disposal of assets.
11. COMMITMENTS AND CONTINGENCIES
The Company leases office facilities and office equipment under various noncancelable-operating leases. The
leases contain various renewal options. Rent expense for the years ended December 31, 2006, 2007 and 2008 was
approximately $7.0 million, $8.1 million and $8.0 million, respectively.
Future minimum lease payments as of December 31, 2008 are as follows (in thousands):
2009....................................................................................................................................................... $
2010.......................................................................................................................................................
2011.......................................................................................................................................................
2012.......................................................................................................................................................
2013.......................................................................................................................................................
2014 and thereafter................................................................................................................................
$
8,264
5,652
4,389
3,221
1,055
1,015
23,596
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.
F-22
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
12. SEGMENT REPORTING
Due to the increased size, complexity, and funding requirements associated with the Company’s international
expansion, in 2007 the Company began to manage the business geographically in two operating segments, with the
primary areas of measurement and decision-making being the U.S. and International, which includes the U.K. and
France. The Company’s subscription-based information/marketing services, consisting primarily of CoStar Property
Professional®, CoStar Tenant®, CoStar COMPS Professional®, and FOCUSTM services, currently generate more than
90% of the Company’s total revenues. CoStar Property Professional, CoStar Tenant, and CoStar COMPS
Professional are generally sold as a suite of similar services and comprise the Company’s primary service offering in
the U.S. operating segment. FOCUS is the Company’s primary service offering in the International operating
segment. Management relies on an internal management reporting process that provides revenue and segment
EBITDA, which is the Company’s net income before interest, income taxes, depreciation and amortization.
Management believes that segment EBITDA is an appropriate measure for evaluating the operational performance
of our segments. EBITDA is used by management to internally measure operating and management performance
and to evaluate the performance of the business. However, this measure should be considered in addition to, not as a
substitute for or superior to, income from operations or other measures of financial performance prepared in
accordance with GAAP.
Summarized information by segment was as follows (in thousands):
Year Ended December 31,
2007
2006
2008
Revenues
United States ...................................................................................$ 146,073
12,816
International ....................................................................................
Total revenues ...............................................................................$ 158,889
$ 170,298
22,507
$ 192,805
$ 190,075
22,353
$ 212,428
EBITDA
United States ...................................................................................$
International ....................................................................................
Total EBITDA...............................................................................$
26,205
(315)
25,890
Reconciliation of EBITDA to net income
EBITDA ..........................................................................................$
Purchase amortization in cost of revenues ......................................
Purchase amortization in operating expenses..................................
Depreciation and other amortization ...............................................
Interest income, net .........................................................................
Income tax expense, net ..................................................................
Net income ....................................................................................$
25,890
(1,205)
(4,183)
(6,421)
6,845
(8,516)
12,410
$
$
$
$
32,872
1,127
33,999
33,999
(2,170)
(5,063)
(8,914)
8,045
(9,946)
15,951
$
$
$
$
58,813
(2,224)
56,589
56,589
(2,284)
(4,880)
(9,637)
4,914
(20,079)
24,623
International EBITDA includes a corporate allocation of approximately $1.0 million, $2.6 million and $1.1
million for the years ended December 31, 2006, 2007 and 2008, respectively.
F-23
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
12. SEGMENT REPORTING — (CONTINUED)
Summarized information by segment consists of the following (in thousands):
December 31,
2007
2008
Property and equipment, net
United States .......................................................................................................... $
International ...........................................................................................................
Total property and equipment, net ....................................................................... $
Goodwill
United States .......................................................................................................... $
International ...........................................................................................................
Total goodwill..................................................................................................... $
18,162
5,883
24,045
30,428
31,426
61,854
Assets
United States .......................................................................................................... $
International ...........................................................................................................
Total segment assets............................................................................................. $
308,373
72,659
381,032
Reconciliation of segment assets to total assets
Total segment assets............................................................................................... $
Investment in subsidiaries ......................................................................................
Intercompany receivables.......................................................................................
Total assets ........................................................................................................... $
381,032
(18,343)
(40,846)
321,843
Liabilities
United States .......................................................................................................... $
International ...........................................................................................................
Total segment liabilities ....................................................................................... $
21,581
61,025
82,606
Reconciliation of segment liabilities to total liabilities
Total segment liabilities ......................................................................................... $
Intercompany payables...........................................................................................
Total liabilities ..................................................................................................... $
82,606
(42,568)
40,038
$
$
$
$
$
$
$
$
$
$
$
$
13,927
2,949
16,876
31,547
22,781
54,328
353,084
43,474
396,558
396,558
(18,343)
(43,831)
334,384
24,180
40,053
64,233
64,233
(33,270)
30,963
F-24
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ⎯ (CONTINUED)
13. STOCKHOLDERS’ EQUITY
Preferred Stock
The Company has 2,000,000 shares of preferred stock, $0.01 par value, authorized for issuance. The Board of
Directors may issue the preferred stock from time to time as shares of one or more classes or series.
Common Stock
The Company has 30,000,000 shares of common stock, $0.01 par value, authorized for issuance. Dividends
may be declared and paid on the common stock, subject in all cases to the rights and preferences of the holders of
preferred stock and authorization by the Board of Directors. In the event of liquidation or winding up of the
Company and after the payment of all preferential amounts required to be paid to the holders of any series of
preferred stock, any remaining funds shall be distributed among the holders of the issued and outstanding common
stock.
14. NET INCOME PER SHARE
The following table sets forth the calculation of basic and diluted net income per share (in thousands except per
share data):
Numerator:
Year Ended December 31,
2007
2008
2006
Net income................................................................................... $
12,410
$ 15,951
$
24,623
Denominator:
Denominator for basic net income per share ⎯ weighted-
average outstanding shares.......................................................
18,751
19,044
19,372
Effect of dilutive securities:
Stock options and restricted stock................................................
Denominator for diluted net income per share ⎯ weighted-
414
360
178
average outstanding shares.......................................................
19,165
19,404
19,550
Net income per share ⎯ basic.......................................................... $
Net income per share ⎯ diluted....................................................... $
0.66
0.65
$
$
0.84
0.82
$
$
1.27
1.26
Stock options to purchase approximately 86,900, 80,400 and 250,200 shares were outstanding as of December
31, 2006, 2007 and 2008, respectively, but were not included in the computation of diluted earnings per share
because the exercise price of the stock options was greater than the average share price of the common shares and,
therefore, the effect would have been anti-dilutive.
F-25
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ⎯ (CONTINUED)
15. EMPLOYEE BENEFIT PLANS
Stock Incentive Plans
In June 1998, the Company’s Board of Directors adopted the 1998 Stock Incentive Plan (as amended, the “1998
Plan”) prior to consummation of the Company’s initial public offering. In April 2007, the Company’s Board of
Directors adopted the CoStar Group, Inc. 2007 Stock Incentive Plan (as amended, the “2007 Plan”), subject to
stockholder approval, which was obtained on June 7, 2007. All shares of common stock that were authorized for
issuance under the 1998 Plan that, as of June 7, 2007, remained available for issuance under the 1998 Plan
(excluding shares subject to outstanding awards) were rolled into the 2007 Plan and, as of that date, no shares of
common stock were available under the 1998 Plan. The 1998 Plan continues to govern unexercised and unexpired
awards issued under the 1998 Plan prior to June 7, 2007. The 1998 Plan provides for the grant of stock and stock
options to officers, directors and employees of the Company and its subsidiaries. Stock options granted under the
1998 Plan might be incentive or non-qualified. The exercise price for an incentive stock option may not be less than
the fair market value of the Company’s 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 three to 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.
The 2007 Plan provides for the grant of stock options, restricted stock, restricted stock units, and stock
appreciation rights to officers, employees, directors and consultants of the Company and its subsidiaries. Stock
options granted under the 2007 Plan may be non-qualified or may qualify as incentive stock options. Except in
limited circumstances related to a merger or other acquisition, the exercise price for an option may not be less than
the fair market value of the Company’s common stock on the date of grant. The vesting period for each grant of
options, restricted stock, restricted stock units and stock appreciation rights under the 2007 Plan is determined by the
Board of Directors and is generally three to four years, subject to minimum vesting periods for restricted stock and
restricted stock units of at least one year. The Company has reserved the following shares of common stock for
issuance under the 2007 Plan: (a) 1,000,000 shares of common stock, plus (b) 121,875 shares of common stock that
were authorized for issuance under the 1998 Plan that, as of June 7, 2007, remained available for issuance under the
1998 Plan (not including any Shares that were subject as of such date to outstanding awards under the 1998 Plan),
and (c) any shares of common stock subject to outstanding awards under the 1998 Plan as of June 7, 2007 that on or
after such date cease for any reason to be subject to such awards (other than by reason of exercise or settlement of
the awards to the extent they are exercised for or settled in vested and nonforfeitable shares). Unless terminated
sooner, the 2007 Plan will terminate in April 2017, but will continue to govern unexercised and unexpired awards
issued under the 2007 Plan prior to that date. Approximately 1.1 million and 880,000 shares were available for
future grant under the 2007 Plan as of December 31, 2007 and 2008, respectively.
F-26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ⎯ (CONTINUED)
COSTAR GROUP, INC.
15. EMPLOYEE BENEFIT PLANS ⎯ (CONTINUED)
Stock Incentive Plans ⎯ (Continued)
Option activity was as follows:
Number of
Shares
Range of
Exercise Price
Weighted-
Average
Remaining
Contract
Life (in
years)
Weighted-
Average
Exercise
Price
Aggregate
Intrinsic
Value
(in thousands)
Outstanding at December 31, 2005 .. 1,473,897
Granted .......................................
Exercised ....................................
Canceled or expired....................
Outstanding at December 31, 2006 .. 1,274,477
Granted .......................................
Exercised ....................................
Canceled or expired....................
96,900
$ 9.00 - $52.13
$51.92
(269,755) $ 9.00 - $45.18
(26,565) $18.28 - $45.18
$ 9.00 - $52.13
7,000 $48.25 - $54.12
(288,757) $ 9.00 - $45.18
(24,875) $21.28 - $51.92
Outstanding at December 31, 2007 ..
Granted .......................................
Exercised ....................................
Canceled or expired....................
967,845
$16.20 - $54.12
93,900 $43.99 - $55.07
(198,434) $17.77 - $45.18
(47,725) $39.00 - $52.13
$29.76
$51.92
$24.35
$37.85
$32.23
$50.77
$28.16
$44.82
$33.25
$45.76
$33.05
$46.36
Outstanding at December 31, 2008 ..
815,586
$16.20 - $55.07
$33.98
4.77
$ 3,692
Exercisable at December 31, 2006 ...
929,324
$ 9.00 - $52.13
$28.93
Exercisable at December 31, 2007 ...
826,782
$16.20 - $52.13
$31.07
Exercisable at December 31, 2008 ...
701,975
$16.20 - $54.12
$31.84
4.10
$ 3,692
The aggregate intrinsic value is calculated as the difference between (i) the closing price of the common stock at
December 31, 2006, 2007 and 2008 and (ii) the exercise prices of the underlying awards, multiplied by the shares
underlying options as of December 31, 2006, 2007 and 2008, that had an exercise price less than the closing price on
that date. Options to purchase 269,755, 288,757, and 198,434 shares were exercised for the years ended December
31, 2006, 2007, and 2008, respectively. The aggregate intrinsic value of options exercised, determined as of the date
of option exercise, was $7.4 million, $7.5 million and $3.4 million, respectively.
At December 31, 2008, there was $10.5 million of unrecognized compensation cost related to stock-based
payments, net of forfeitures, which is expected to be recognized over a weighted-average-period of 1.9 years.
The weighted-average grant date fair value of each option granted during the years ended December 2006, 2007
and 2008 was $33.45, $32.70 and $27.81, respectively.
F-27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ⎯ (CONTINUED)
COSTAR GROUP, INC.
15. EMPLOYEE BENEFIT PLANS ⎯ (CONTINUED)
Stock Incentive Plans ⎯ (Continued)
The Company estimated 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:
Year Ended December 31,
2007
2008
2006
Dividend yield..................................................................................
Expected volatility ...........................................................................
Risk-free interest rate .......................................................................
Expected life (in years) ....................................................................
0%
61%
4.7%
5
0%
61%
4.7%
5
0%
59%
3.0%
5
The assumptions above and the estimation of expected forfeitures are based on multiple facts, 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 Company’s stock price.
The following table summarizes information regarding options outstanding at December 31, 2008:
Options Outstanding
Options Exercisable
Range of
Exercise Price
$16.20 - $18.06
$18.12 - $22.87
$23.06 - $28.15
$29.00 - $30.75
$32.00 - $39.00
$39.53 - $43.99
$44.06 - $45.18
$46.81 - $51.92
$54.12 - $54.12
$55.07 - $55.07
$16.20 - $55.07
Number of
Shares
99,617
102,828
118,171
95,275
89,932
135,938
85,625
70,200
3,000
15,000
815,586
Weighted-Average
Remaining
Contractual Life
(in years)
2.76
3.44
3.45
3.19
4.59
6.91
5.76
7.64
8.42
9.67
4.77
Weighted-
Average
Exercise Price
$17.94
$20.78
$27.04
$30.33
$38.75
$42.49
$44.83
$51.49
$54.12
$55.07
$33.98
Number of
Shares
99,617
102,828
118,171
95,275
89,932
63,063
85,625
46,464
1,000
0
701,975
Weighted-
Average
Exercise Price
$17.94
$20.78
$27.04
$30.33
$38.75
$40.79
$44.83
$51.48
$54.12
$ 0.00
$31.84
The following table presents unvested restricted stock awards activity for the year ended December 31, 2008:
Unvested restricted stock at December 31, 2007 .........................................
Granted...................................................................................................
Vested.....................................................................................................
Canceled.................................................................................................
Unvested restricted stock at December 31, 2008 .........................................
Number
of
Shares
258,588
102,177
(54,009)
(33,403)
273,353
Weighted-Average
Grant Date
Fair Value per Share
$48.55
$48.76
$46.49
$47.86
$49.12
F-28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ⎯ (CONTINUED)
COSTAR GROUP, INC.
15. EMPLOYEE BENEFIT PLANS ⎯ (CONTINUED)
Employee 401(k) Plan
The Company maintains a 401(k) Plan (the “401(k)”) as a defined contribution retirement plan for all eligible
employees. The 401(k) provides for tax-deferred contributions of employees’ salaries, limited to a maximum annual
amount as established by the Internal Revenue Service. In 2006, 2007 and 2008, the Company matched 100% of
employee contributions up to a maximum of 6% of total compensation. Amounts contributed to the 401(k) by the
Company to match employee contributions for the years ended December 31, 2006, 2007 and 2008 were
approximately $2.0 million, $2.3 million and $2.6 million, respectively. The Company paid administrative expenses
in connection with the 401(k) plan of approximately $25,000, $22,000 and $28,000 for the years ended December
31, 2006, 2007 and 2008, respectively.
Employee Pension Plan
The Company maintains a company personal pension plan for all eligible employees in the Company’s London,
England office. The plan is a defined contribution plan. Employees are eligible to contribute a portion of their
salaries, subject to a maximum annual amount as established by the Inland Revenue. The Company contributes a
match subject to the percentage of the employees’ contribution. Amounts contributed to the plan by the Company to
match employee contributions for the years ended December 31, 2006, 2007 and 2008 were approximately
$193,000, $281,000 and $265,000, respectively.
Employee Stock Purchase Plan
As of August 1, 2006, the Company introduced an Employee Stock Purchase Plan (“ESPP”), pursuant to which
eligible employees participating in the plan authorize the Company to withhold from the employees’ compensation
and use the withheld amounts to purchase shares of the Company's common stock at 90% of the market price.
Participating employees are able to purchase common stock under this plan during the offering period. The offering
period begins the second Saturday before each of the Company’s regular pay dates and ends on each of the
Company’s regular pay dates. There were 86,308 and 78,840 shares available for purchase under the plan as of
December 31, 2007 and 2008, respectively and approximately 9,000 and 7,400 shares of the Company’s common
stock were purchased during 2007 and 2008, respectively.
F-29
SUBSIDIARIES OF THE REGISTRANT
EXHIBIT 21.1
a) CoStar Realty Information, Inc., a Delaware corporation
b) CoStar Limited, a U.K. company
c) CoStar U.K. Limited, a U.K. company
d) Property Investment Exchange Limited, a U.K. company
e) Grecam S.A.S., a Societée par Actions Simplifiée
Consent of Independent Registered Public Accounting Firm
EXHIBIT 23.1
We consent to the incorporation by reference in the following Registration Statements of CoStar Group, Inc. on
Form S-8 Nos. 333-82599, 333-92165, 333-45770, 333-69548, 333-135709 and 333-143968 of our reports dated
February 19, 2009 with respect to the consolidated financial statements of CoStar Group, Inc. and the effectiveness
of internal control over financial reporting of CoStar Group, Inc., included in this Annual Report (Form 10-K) for
the year ended December 31, 2008.
/s/ Ernst & Young LLP
McLean, Virginia
February 19, 2009
EXHIBIT 31.1
CERTIFICATION
I, Andrew C. Florance, certify that:
1. I have reviewed this annual report on Form 10-K of CoStar Group, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report,
fairly present in all material respects the financial condition, results of operations and cash flows of the registrant
as of, and for, the periods presented in this annual report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13(a)-15(f) and 15(d)-15(f)) for the registrant and we have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this report based on such evaluation; and
d) Disclosed in this annual report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
Date: February 23, 2009
By:
/S/ Andrew C. Florance
Andrew C. Florance
Chief Executive Officer
(Principal Executive Officer and
Duly Authorized Officer)
EXHIBIT 31.2
CERTIFICATION
I, Brian J. Radecki, certify that:
1. I have reviewed this annual report on Form 10-K of CoStar Group, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report,
fairly present in all material respects the financial condition, results of operations and cash flows of the registrant
as of, and for, the periods presented in this annual report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13(a)-15(f) and 15(d)-15(f)) for the registrant and we have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this report based on such evaluation; and
d) Disclosed in this annual report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
Date: February 23, 2009
By:
/S/ Brian J. Radecki
Brian J. Radecki
Chief Financial Officer
(Principal Financial and Accounting
Officer and Duly Authorized Officer)
EXHIBIT 32.1
CoStar Group, Inc.
2 Bethesda Metro Center, 10th floor
Bethesda, MD 20814
February 23, 2009
Securities and Exchange Commission
450 5th Street, NW
Washington, DC 20549
Re: Certification Of Principal Executive Officer Pursuant To 18 U.S.C. Sec. 1350
Dear Ladies and Gentlemen:
In connection with the accompanying Annual Report on Form 10-K of CoStar Group, Inc., for the year ended
December 31, 2008, I, Andrew C. Florance, Chief Executive Officer of CoStar Group, Inc., hereby certify pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1) such Annual Report on Form 10-K of CoStar Group, Inc., for the year ended December 31, 2008, fully
complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C 78m or
78o (d)); and
2) the information contained in such Annual Report on Form 10-K of CoStar Group, Inc., for the year ended
December 31, 2008, fairly presents, in all material respects, the financial condition and results of operations of
CoStar Group, Inc.
By:
/S/ Andrew C. Florance
Andrew C. Florance
Chief Executive Officer
(Principal Executive Officer and
Duly Authorized Officer)
A signed original of this written statement required by Section 906, or other document authenticating,
acknowledging or otherwise adopting the signature that appears in typed form within the electronic version of this
written statement required by Section 906, has been provided to CoStar Group, Inc. and will be retained by CoStar
Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
In accordance with Item 601 of Regulation S-K, this certification is being “furnished” as Exhibit 32.1 to CoStar
Group, Inc.’s annual report and shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange
Act of 1934 (the “Exchange Act”) or otherwise subject to the liabilities of that section, nor shall it be deemed
incorporated by reference in any filing under the Securities Act of 1933 or the Exchange Act, except as expressly set
forth by specific reference in such a filing.
EXHIBIT 32.2
CoStar Group, Inc.
2 Bethesda Metro Center, 10th floor
Bethesda, MD 20814
February 23, 2009
Securities and Exchange Commission
450 5th Street, NW
Washington, DC 20549
Re: Certification Of Principal Financial Officer Pursuant To 18 U.S.C. Sec. 1350
Dear Ladies and Gentlemen:
In connection with the accompanying Annual Report on Form 10-K of CoStar Group, Inc., for the year ended
December 31, 2008, I, Brian J. Radecki, Chief Financial Officer of CoStar Group, Inc., hereby certify pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1) such Annual Report on Form 10-K of CoStar Group, Inc., for the year ended December 31, 2008, fully
complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or
78o (d)); and
2) the information contained in such Annual Report on Form 10-K of CoStar Group, Inc., for the year ended
December 31, 2008, fairly presents, in all material respects, the financial condition and results of operations of
CoStar Group, Inc.
By:
/S/ Brian J. Radecki
Brian J. Radecki
Chief Financial Officer
(Principal Financial and Accounting
Officer and Duly Authorized Officer)
A signed original of this written statement required by Section 906, or other document authenticating,
acknowledging or otherwise adopting the signature that appears in typed form within the electronic version of this
written statement required by Section 906, has been provided to CoStar Group, Inc. and will be retained by CoStar
Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
In accordance with Item 601 of Regulation S-K, this certification is being “furnished” as Exhibit 32.2 to CoStar
Group, Inc.’s annual report and shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange
Act of 1934 (the “Exchange Act”) or otherwise subject to the liabilities of that section, nor shall it be deemed
incorporated by reference in any filing under the Securities Act of 1933 or the Exchange Act, except as expressly set
forth by specific reference in such a filing.
Michael R. Klein
Andrew C. Florance*
David Bonderman
Michael J. Glosserman
Warren H. Haber
Josiah O. Low, III
Christopher J. Nassetta
Brian J. Radecki*
Jonathan Coleman
Simon Durkin
Craig S. Farrington
Daniel Kimball
Jennifer L. Kitchen*
Paul Marples*
Frank Simuro
John Stanfill*
Dean L. Violagis
MANAGEMENT
TEAM
Andrew C. Florance*
President & Chief Executive Officer
Brian J. Radecki*
Chief Financial Officer
John Stanfill*
Senior Vice President, Sales & Customer Service
Jennifer L. Kitchen*
Senior Vice President, Research
Paul Marples*
Managing Director, CoStar UK Limited
Jonathan Coleman
General Counsel & Secretary
Simon Durkin
Director of Research, CoStar UK Limited
Craig S. Farrington
Vice President, Research
Frank Simuro
Chief Information Officer
Daniel Kimball
Vice President, Marketing
Dean L. Violagis
Vice President, Research
BOARD OF
DIRECTORS
Michael R. Klein
Chairman of the Board, CoStar Group, Inc.
and Chairman of the Board of
The Sunlight Foundation
Andrew C. Florance*
President & Chief Executive Officer,
CoStar Group, Inc.
David Bonderman
Founding Partner, TPG Capital, L.P.
Michael J. Glosserman
Managing Partner
The JBG Companies
Warren H. Haber
Chairman of the Board & Chief
Executive Officer, Founders Equity Inc.
Josiah O. Low, III
Senior Advisor, Catterton Partners L.P.
Christopher J. Nassetta
President & Chief Executive Officer,
Hilton Hotels Corporation
This report contains “forward-looking statements,”
including, without limitation, statements regarding
CoStar’s expectations, beliefs, intentions or strategies
regarding the future. These statements are subject to
many risks and uncertainties that could cause actual
results to differ materially from these statements.
Please review the section entitled “Risk Factors” in
the enclosed Form 10-K for potential factors that could
cause actual results to differ materially from these
forward-looking statements. All
forward-looking
statements are based on information available to
CoStar on the date of this report, and we assume no
obligation to update such statements.
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COSTAR GROUP, INC
2 Bethesda Metro Center
Bethesda, MD 20814
1.800.811.4798
www.costar.com
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