COSTAR GROUP
2010
ANNUAL
REPORT
SHAREHOLDER INFORMATION
Stock Listing
Symbol: CSGP,
NASDAQ Listed
Independent Auditors
Ernst & Young LLP
8484 Westpark Drive
McLean, VA 22102
Transfer Agent
and Registrar
American Stock Transfer &
Trust Company, LLC
6201 15th Avenue
Brooklyn, NY 11219
CORPORATE INFORMATION
Corporate Offi ce
CoStar Group, Inc.
1331 L Street, NW
Washington, DC 20005
1-800-811-4798
www.costar.com
Investor Relations
Brian J. Radecki
Chief Financial Offi cer
(202) 336-6920
Timothy J. Trainor
Communications Director
(202) 336-6975
ABOUT COSTAR
CoStar Group (Nasdaq: CSGP) is commercial real estate’s
leading provider of information, analytic and marketing
services. Founded in 1987, CoStar conducts expansive,
ongoing research to produce and maintain the largest and
most comprehensive database of commercial real estate
information. Our suite of online services enables clients to
analyze, interpret and gain unmatched insight on
commercial property values, market conditions and current
availabilities. Headquartered in Washington, DC, CoStar
maintains offi ces throughout the U.S. and in Europe with a
staff of approximately 1,500 worldwide, including the
industry’s largest professional research organization.
For more information, visit http://www.costar.com.
©2011 CoStar Group, Inc.
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2010 Financial highlights
OperatiOns
Revenues
Net income
Net income per share (diluted)
Weighted average outstanding shares (diluted)
Balance sheet
Cash, cash equivalents and investments
Total assets
Stockholders’ equity
$ IN ThOusANDs, ExCEpT pEr shArE DATA
2006
$158,889
$12,410
$0.65
19,165
2006
$158,148
$275,437
$250,110
2007
$192,805
$15,951
$0.82
19,404
2007
$187,426
$321,843
$281,805
2008
$212,428
$24,623
$1.26
19,550
2008
$224,590
$334,384
$303,421
2009
$209,659
$18,693
$0.94
19,925
2009
$255,698
$404,579
$359,006
2010
$226,260
$13,289
$0.64
20,707
2010
$239,316
$439,648
$381,502
Five Year revenue Growth
comparison oF quarterlY eBitDa + net income
EBITDA
NET INCOME
250
200
150
100
18
16
14
12
10
8
6
4
2
0
2009
2010
‘06
‘07
‘08
‘09
‘10
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
$ IN MIllIONs
$ IN MIllIONs
reconciliation oF quarterlY eBitDa with 2009-2010 quarterlY net income
2009
2010
q1
q2
q3
q4
q1
q2
q3
q4
$6.1
1.4
2.2
(0.4)
5.1
$14.4
$4.6
1.2
2.2
(0.3)
3.9
$11.6
$4.3
1.5
2.1
(0.2)
2.9
$10.6
$3.6
1.6
2.3
(0.2)
2.6
$9.9
$2.9
1.2
2.4
(0.2)
2.5
$8.8
$3.3
0.8
2.5
(0.2)
1.4
$7.8
$3.4
0.9
2.4
(0.2)
2.9
$9.4
$3.8
0.9
2.5
(0.2)
3.4
$10.4
Net income
Purchase amortization
Depreciation and other amortization
Interest income, net
Income tax expense, net
EBITDA
$ IN MIllIONs
new cOrpOrate headquarters
1331 l street, nw, washingtOn, dc
expanding
boundaries
of success
Perhaps the single event that had the biggest impact on our business in
2010 was the notable and welcome improvement in market conditions as
commercial real estate made a clear transition toward a recovery phase.
cOstar grOup FOunder + ceO
andrew
florance
Listening to our customers and responding
to their ever-changing information needs
have always been the driving forces behind
CoStar Group’s remarkable success.
There’s no question that our service will
continue to grow and evolve to keep pace
with a commercial real estate industry
that’s becoming more interconnected
and sophisticated by the day.
COsTAr GrOup 2010 AnnuAL RepoRT
5
tO Our sharehOlders
As we begin our 24th year, I find it both astounding
and instructive to look back and consider the
enormous changes our business has experienced
since CoStar Group first began providing information
services to the commercial real estate industry.
When we first started, “state of the art” meant sending our
clients listing updates on CD-ROMs. Today, CoStar provides
the most dynamic and advanced online research and
analytics platform in the industry.
There’s no question that our service will continue to
grow and evolve to keep pace with a commercial real
estate industry that’s becoming more interconnected
and sophisticated by the day.
From our beginning as an innovative start-up providing
brokers with a more effective and efficient way to market and
find space in a handful of major U.S. markets, we have grown
rapidly. Today, we are the largest research organization in
commercial real estate, with the largest, most complete and
most accurate database offering thousands more properties,
transactions, tenants, and sale and lease listings than
competitive services.
CoStar is now an essential resource for brokers, as well as
owners, investors, banks and lenders, appraisers, vendors,
and government agencies—the full spectrum of commercial
real estate. Simply stated, CoStar Group is now the leading
provider of digitized information for one of the largest asset
classes in the global economy, valued at an estimated
$11 trillion in the U.S.
Reflecting on these and many other changes serves as
a powerful reminder that listening to our customers and
responding to their ever-changing information needs have
always been the driving forces behind CoStar Group’s
remarkable success.
Each year, participants in this massive and data-intensive
asset class conduct millions of highly valued leasing, sales,
and financing transactions that require enormous amounts
of information and analysis.
Our decision to grow CoStar’s business by expanding market
coverage and producing property-level detail through our
ongoing research has enabled us to address our subscribers’
most critical business information needs and develop a
highly successful business model. More than ever, we’re
focused on providing advanced tools and applied research
that uses CoStar’s digital information resources to speed
transactions, reduce costs, and manage risks.
It’s my firm belief that CoStar has succeeded because of
our innovation and unrelenting pursuit of this goal.
BOstOn OFFice:
under One rOOF
Combining PPR, Resolve
Technology and CoStar under
one roof in a spectacular,
full-floor office setting was a
momentous event, bringing
together the people and
resources developing the
industry’s next generation of
advanced analytic products and
risk management resources.
new YOrk citY OFFice:
Further expansiOn
The opening of our New York
office was CoStar’s third major
office unveiling of the year, after
Boston and Washington, DC.
The central location combined
two offices and provided a
spacious new venue for
metro-area business.
total numBer oF inDiviDual suBscriBers
millions oF properties in DataBase
89,000
88,000
87,000
86,000
85,000
84,000
83,000
82,000
81,000
80,000
2009
2010
4.5
4.5
4.0
4.0
3.5
3.5
3.0
3.0
2.5
2.5
2.0
2.0
1.5
1.5
1.0
1.0
0.5
0.5
0
0
GROWTH IN TOTAL COSTAR SUBSCRIBER SITES PER YEAR
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
TOTAl NuMBEr OF INDIVIDuAl COsTAr suBsCrIBErs QuArTErlY
TOTAl NuMBEr OF prOpErTIEs IN COsTAr’s DATABAsE [IN MIllIONs] pEr YEAr
CoStar Group had one of its most successful years in
2010, with strong organic sales growth, a large increase in
subscribers, and high customer renewal rates. The strong
improvements in these key metrics of our business reflected
the impact of improving market conditions in commercial
real estate. During 2010, the national office vacancy and
availability rates began to decline in the U.S. for the first time
in three years, signaling the onset of market recovery.
In this improving environment, we generated consecutive
record levels of revenue each quarter during 2010,
culminating in $58.2 million in revenue in the fourth quarter
of 2010. For the full year of 2010, CoStar generated $226.3
million in total revenue, an increase of $16.6 million or
approximately 8% over 2009.
We experienced very strong growth in net subscribers across
multiple product areas and regions, adding more than 2,600
subscribers during the year.
There is no stronger indication
of the overall value and utility
of CoStar’s services than the
exceptionally high renewal rates
we achieved in 2010.
Another important benchmark of success was our ability to
retain customers and drive usage through the recession and
into the current recovery. At year-end 2010, the 12-month
trailing renewal rate for subscription-based services
exceeded 90%, increasing from approximately 85% in the
fourth quarter of 2009. This is the highest renewal rate level
for CoStar since the second quarter of 2008.
I believe there is no stronger indication of the overall value
and utility of CoStar’s services than the exceptionally high
renewal rates we achieved in 2010. Approximately 94% of the
Company’s total revenue was subscription-based at the end
of the fourth quarter of 2010.
COsTAr GrOup 2010 AnnuAL RepoRT
7
We are especially proud of generating strong earnings, totaling
$13.3 million in net income, during a year in which the industry
was emerging from one of the worst economic downturns
in history.
CoStar closed out the year with an exceptionally strong
balance sheet. At the end of the fourth quarter of 2010, the
Company had $239.3 million in cash, cash equivalents, and
investments on hand, with no long-term debt. Following
the successful sale and leaseback of our headquarters in
February 2011, the Company had more than $320 million
in cash and investments on hand.
Throughout the year, CoStar took advantage of our strong
financial position to invest in our business ahead of the
economic recovery. These investments included growing our
sales force and research organization to capture the revenue
opportunities expected to accompany increased leasing and
sales activity.
Other notable 2010 accomplishments that we believe position
the Company for future high-margin revenue growth include:
•
•
•
•
The successful launch of Showcase in the U.K., CoStar’s
innovative, online lead-generation service, continued to
expand and capture market share in 2010. With nearly
12,000 brokers in the U.K. and U.S. using the service to
market their listings online as of the end of the year,
Showcase has become one of our fastest-growing services.
The addition of key personnel to our expanded analytics
service and commencing development of a discounted cash
flow (DCF) forecasting and valuation solution among other
applied research products.
The introduction of the first comprehensive repeat-
sales index for commercial real estate, providing a more
comprehensive and accurate economic index for analyzing
sale price movements for commercial property. Drawing on
what we believe to be the largest and most comprehensive
comparable sales database in commercial real estate,
the new CoStar Commercial Repeat Sales Index (CCRSI)
includes national indices tracking sales of general and
investment-grade properties, as well as more than two
dozen sub-indices, taking advantage of the unique breadth
of CoStar’s property and comparable sales data.
The continued expansion of our proprietary database to
unprecedented levels. At the end of the fourth quarter of
2010, CoStar’s research organization tracked more than 3.9
million properties in the United States, United Kingdom, and
France, having a total combined size of 75.5 billion rentable
square feet, an astounding number that serves as the main
source of value for CoStar in the marketplace.
estaBlishing new FOundatiOns
FOr lOng term grOwth
cOmmercial real estate
enters recOverY phase
We purchased an office building at 1331 L Street, NW in
Washington, DC, in February of 2010 for $41.25 million or $243
per square foot and relocated our corporate headquarters. One
year later, we sold the building for a sizable gain and signed
a long-term lease with the new owner, an affiliate of Munich-
based GLL Real Estate Partners GmbH.
At a sale price of $596 per square foot, we believe the purchase
and sale represents the greatest appreciation from a single
building bought and sold in the United States during the past
five years.
Our spacious and efficient offices in Washington are
exceptionally well suited to our work, and the building is fully
capable of accommodating our growth for years to come. Being
closer to the center of the Washington region’s transportation
hub benefits our employees and also improves our ability to
recruit from the entire Washington metro workforce.
As an incentive to move our headquarters to Washington,
DC, the City offered CoStar a generous relocation package
potentially worth more than $6 million in property tax
abatements over a 10-year period.
We also took advantage of sharply lower rental rates
available in the market to secure long-term leases for
several of our major offices, including those in London,
New York, and Boston, where we successfully integrated
our affiliates Property & Portfolio Research and Resolve
Technology with our local CoStar team under one roof.
Q1
Perhaps the single event that had the biggest impact on our
business in 2010 was the notable and welcome improvement
in market conditions as commercial real estate made a clear
transition toward a recovery phase.
With this important turning point, the national office vacancy
and availability rates declined for the first time in three
years. Both office leasing activity and absorption also staged
impressive come-backs, capped by a very impressive 21
million square feet of positive net absorption in the fourth
quarter of 2010.
While a strong stock market rally and impressive office
employment growth triggered leasing and sales activity
during the year, construction levels for all types of
commercial property remained extremely low. Construction
began on just one million square feet of office space in the
entire U.S. in the fourth quarter of 2010. That’s the smallest
amount of new office construction in decades.
Given the almost complete shutdown in new supply, and current
job growth forecasts calling for six million jobs to be created in
the next two years, the prospects for a faster-than-expected
recovery in the office market appear strong. In fact, the market
may be poised for a long and significant growth phase.
Historically, CoStar’s sales growth and renewal rates have
been closely correlated to two key industry indicators—the
national vacancy and availability rates. This certainly was
the case in 2010. We saw a strong and positive impact on our
business as conditions improved throughout the year.
Year-over-Year chanGe in costar’s investment GraDe repeat sale inDex
0.25
0.15
0.05
-0.05
-0.15
-0.25
-0.35
1 YEAR LATER:
COSTAR SELLS
HQ
FEB. 2010:
COSTAR BUYS
HQ
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Q1
pErCENT ChANGE IN AVErAGE VAluE
COsTAr GrOup 2010 AnnuAL RepoRT
9
With commercial real estate now clearly at the beginning stages of an
upward cycle, we believe this is an opportune time to aggressively
invest in our business.
cOstar superBlY pOsitiOned tO prOvide
higher-Order inFOrmatiOn services
With commercial real estate now clearly at the beginning
of an upward cycle, we believe this is an opportune time to
aggressively invest in our business. In 2011, we intend to
use our strong cash position to pursue companies in the
commercial real estate software and information space that
offer high potential to create significant value for both our
clients and shareholders.
As we’ve demonstrated in the past with PPR, Resolve
Technology, and many other companies, we look for
acquisitions available at reasonable valuations that offer a
strong strategic fit. Our goal is to leverage our proprietary
data and technology by adding innovative products and
services that have the potential to capture significant market
share and continue the acceleration of our revenue growth.
We also plan to invest more aggressively in software
development, as we see numerous opportunities to drive
additional revenue and earnings growth by making selective
upgrades to our U.S. and International product offerings.
We are taking significant steps to ensure our information
and analytics operate on multiple platforms and remain an
essential resource for commercial real estate professionals.
The opportunity we see before us remains vast and still
largely untapped. We continue to add new users and
generate sustained revenue growth across all the markets
we’ve added over the past two decades. We are increasingly
able to leverage our relatively fixed cost structure over a
growing subscriber base, while using our data in new and
more advanced applications to support the key information
and business needs of our clients.
Guiding all of our software development is the directive
to provide these capabilities and integrate our customers’
proprietary data with CoStar’s extensive information to yield
far greater insight and much faster decision-support.
It’s my belief CoStar is superbly positioned to provide
these higher-order information services, a role that in my
estimation no other company has the resources, capabilities
and expertise to accomplish. I am confident that CoStar will
be one of the innovative information providers that meets the
growing information needs of an increasingly complex and
dynamic commercial real estate industry.
In our view, 2011 will be a year of exceptional innovation
and growth. I look forward to reporting our progress to you
throughout the coming year.
Andrew C. Florance
Founder and Chief Executive Officer
CoStar Group, Inc.
Developing new and enhanced software and analytic
capabilities has been and will remain a major focus
for CoStar’s technology group. CoStar Group CEO,
Andrew Florance, provided additional insight
on the company’s technology and software
development plans.
hOw dOes sOFtware develOpment
Fit intO cOstar’s grOwth strategY?
We plan to invest more aggressively in software development
and technology to ensure our information and analytics
operate on multiple platforms and remain an essential
resource for commercial real estate professionals. We see
numerous opportunities to drive additional revenue and
earnings growth by making selective upgrades to our U.S.
and International service offerings, and we also have several
exciting new initiatives in advanced planning stages. These
initiatives include new, advanced analytical tools for CoStar
and PPR, as well as developing segment-specific versions
of our information services.
For example, we’re developing customized versions of our
flagship service, CoStar Property, designed to support the
specialized commercial real estate information needs of specific
verticals, such as banks, appraisers, and property owners.
Essentially, we will develop customized interfaces for major
types of users, moving from a “one-size-fits-all” version of
our service to versions that more specifically and efficiently
address the information needs of key market segments.
I am confident that offering customized versions will lead
to increased penetration, subscriber growth, and stronger
usage. We also have a new version of our core product
in advanced development that will operate in the mobile
environment, including the Apple iPad™ and likely other
devices that will enable subscribers to take CoStar
wherever they go.
We fully recognize the need and importance of constant
innovation, and believe these investments in our software
and our business will greatly enhance the utility and overall
value that CoStar provides our clients.
cOstar ipad applicatiOn cOming in 2011
CoStarGo is a revolutionary new commercial real estate information
service that will provide mobile users with complete access to their
property, listing, sales comp, tenant and analytic data. CoStarGo delivers
information that’s accessible, visual and actionable—from anywhere.
View current availability, photos and floor plans for a building, scan
the tenant stack, or tap to access essential building analytics.
COsTAr GrOup 2010 AnnuAL RepoRT
11
ceO questiOn + answer
Technology +
innoVaTion
where dO YOu see OppOrtunitY
FOr creating additiOnal value
in sOFtware develOpment?
what dOes this mean FOr
the industrY at-large and an
individual user in particular?
Currently, our clients extract and analyze data from many
different sources, from commercially available providers
such as CoStar, as well as their own proprietary information.
They then take this information and move it at significant
expense through different software environments and
across different technology platforms to accomplish their
business objectives.
When you look at the full spectrum of events associated with
real estate assets, you see that people need information at
different stages of the cycle. These data events can include
acquisitions and dispositions, development or redevelopment
opportunities, financing and asset valuation, leasing space,
raising equity, portfolio allocation, fund re-investment, and
many other related activities.
I believe CoStar is exceptionally well positioned to provide
our clients with more of the vital information streams they
use in their day-to-day business, and also to provide a more
effective way to integrate external and internal information
more seamlessly using smarter, more advanced applications
to increase efficiency and reduce costs.
For each new event or stage in the real estate “life cycle,”
the user essentially starts the process over, rebuilding
models and researching or updating the information they
need. Not only is this manual integration effort a hugely
time-consuming process, it also introduces the opportunity
for errors.
Think about how we use information today. Most of us turn to
a data source to look up or confirm a specific value or analyze
a specific set of data. You have to initiate the process and
then take the information and combine or integrate it with
other pieces of information, and process it into some type of
output. It’s a very reactive process.
A more fully integrated and completely seamless information
source can apply analytics and information in ways that make
the information much more proactive. With that capability,
our software can provide a trigger that alerts the user to
a data point, such as a recent change in rental rates or
vacancy, or reveals a market anomaly that may yield a better
investment or leasing decision, and provide a way to use
information more proactively.
If we can provide more seamless and integrated technology
that our customers can use to proactively manage and
update the information processes they use in their day-
to-day businesses, I believe we can produce a 5% or 15%
increase in efficiency, reduce error rates, and provide more
accurate results using the information updated each day by
our research team. In that way, I believe we can offer our
clients an even more valuable service that will become even
more integral to their businesses.
cOstar’s new headquarters
efficienT +
responsible
cOstar’s leed® gOld headquarters
The state-of-the-art, 10-story structure provides a remarkably efficient and functional
workspace capable of accommodating our Company’s growth for years to come.
Designed by Smith Group, CoStar’s headquarters is one of the first LEED® Gold Core and
Shell office buildings in Washington, DC, and one of the few such buildings in the nation.
CoStar intends to apply for LEED® Platinum certification for its built– out space.
Building OperatiOn
interiOr Build-Out
100% OF THE BUILDING’S ExPECTED ANNUAL ELECTRICITY CONSUMPTION
FOR THE NExT TWO YEARS HAS BEEN OFFSET WITH PURCHASED RENEWABLE
ENERGY CREDITS.
SMART BUILDING SYSTEM (SBS) TECHNOLOGY WILL BE INSTALLED TO
MONITOR AND MAINTAIN OPERATIONS. SBS USES INTELLIGENT AUTOMATION
TO ANALYZE ENERGY CONSUMPTION WHILE IMPROVING COMFORT LEVELS.
A HEAVILY LANDSCAPED GREEN-ROOF GARDEN WILL BE INSTALLED TO
CAPTURE RAIN RUN-OFF AND MINIMIZE HEAT GAIN.
cOmpanY initiatives
THE HEADqUARTERS BUILDING IS LOCATED WITHIN WALKING DISTANCE OF
MORE THAN 16 COMMUNITY SERVICES AND WITHIN ONE-qUARTER MILE OF
THREE METRO (PUBLIC TRANSPORTATION) STATIONS. MORE THAN THREE-
qUARTERS OF COSTAR’S HEADqUARTERS STAFF TAKE ADVANTAGE OF THE
AREA’S PUBLIC TRANSPORTATION SYSTEM, FREE EMPLOYEE SHUTTLE,
AND OTHER RESOURCES.
FOUR ELECTRIC-CAR CHARGERS AVAILABLE IN THE COSTAR GROUP
BUILDING’S GARAGE ENCOURAGE THOSE WHO CONTINUE TO COMMUTE BY
CAR TO CONVERT FROM GASOLINE TO ELECTRIC-POWERED VEHICLES.
WINDOW LINES ON ALL FOUR SIDES PROVIDE AN ABUNDANCE OF
NATURAL LIGHT WITHIN THE ExPANSIVE, VIRTUALLY COLUMN-FREE OFFICE
ENVIRONMENT. DAYLIGHT HARVESTING SENSORS ALLOW LIGHTING POWER
DENSITY TO BE REDUCED.
FLUORESCENT AND LED LIGHT FIxTURES ARE USED ExCLUSIVELY AND
THE ExTENSIVE USE OF ROOM OCCUPANCY SENSORS FURTHER REDUCE
POWER USE.
WORKSTATIONS AND OFFICES ARE GREENGUARD-CERTIFIED FOR INDOOR
AIR qUALITY.
ExTENSIVE WATER CONSERVATION MEASURES IN OFFICE PANTRIES AND
RESTROOMS REDUCE TOTAL WATER CONSUMPTION IN ExCESS OF 30% FROM
THE LEED CI VERSION 3.0 BASELINE.
WHENEVER POSSIBLE, CONSTRUCTION WASTE WILL BE DIVERTED FROM A
LANDFILL, MATERIALS USED ON THE PROjECT WILL BE REGIONALLY SOURCED
(MANUFACTURED WITHIN 500 MILES), AND PROjECT MATERIALS WILL
CONTAIN RECYCLED CONTENT.
COsTAr GrOup 2010 AnnuAL RepoRT
13
lOcated in the heart
OF the capital
Being closer to the center
of the Washington region’s
transportation hub benefits
our employees, many of
whom take advantage of
public transportation, the
city’s vibrant cultural and
entertainment amenities.
a center
OF learning
Included in the planned build-out
is a tiered 50-seat auditorium
that will provide a superb venue
for live and video-cast lectures.
The auditorium will be equipped
with the very latest audio and
video technology.
a cOmFOrtaBle +
eFFicient wOrkplace
The new office’s attractive and
functional design includes
high-quality lighting,
temperature controls, and
extensive day-lighting and
openness, providing a richer,
more robust collaborative work
environment. The open, spacious
floor plan supports teamwork
across all departments.
new envirOnmentallY
FriendlY research
vehicles
CoStar has added the new
Chevrolet Volt to its fleet of
research vehicles, further
reducing the company’s
carbon output while
enhancing its extensive
field research capabilities.
FOrm
10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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, 2010
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.)
1331 L Street, NW
Washington, DC 20005
(Address of principal executive offices) (zip code)
(202) 346-6500
Registrant’s telephone number, including area code
(877) 739-0486
Registrant’s facsimile 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 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 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
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or
for such shorter period that registrant was required to submit and post such files.) Yes No
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.
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
Non-accelerated filer
Accelerated filer
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
Based on the closing price of the common stock on June 30, 2010 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 $658 million.
As of February 18, 2011, there were 20,761,799 shares of the registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
1
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, 2010, are incorporated by reference into Part III of this Report.
2
TABLE OF CONTENTS
COsTAr GrOup 2010 AnnuAL RepoRT
17
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.
Business ............................................................................................................................................. 4
Risk Factors ....................................................................................................................................... 15
Unresolved Staff Comments.............................................................................................................. 22
Properties ........................................................................................................................................... 22
Legal Proceedings.............................................................................................................................. 23
[Removed and Reserved]................................................................................................................... 23
Market for the Registrant’s Common Stock, Related Stockholder Matters and Issuer
Purchases of Equity Securities ....................................................................................................... 24
Selected Consolidated Financial and Operating Data ....................................................................... 26
Management’s Discussion and Analysis of Financial Condition and Results of Operations............ 27
Quantitative and Qualitative Disclosures about Market Risk............................................................ 44
Financial Statements and Supplementary Data ................................................................................. 44
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ........... 45
Controls and Procedures .................................................................................................................... 45
Other Information .............................................................................................................................. 46
Directors, Executive Officers and Corporate Governance ................................................................ 46
Executive Compensation ................................................................................................................... 46
46
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters........................................................................................................................
Certain Relationships and Related Transactions, and Director Independence .................................. 46
Principal Accountant Fees and Services............................................................................................ 46
Exhibits and Financial Statement Schedules ..................................................................................... 46
Signatures .......................................................................................................................................... 48
Index to Exhibits................................................................................................................................ 49
Index to Consolidated Financial Statements...................................................................................... F-1
3
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 and analytic
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 and analytic 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. We manage our business geographically in two operating segments; our primary areas
of measurement and decision-making are 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., February 2007 acquisition of Property Investment Exchange Limited, and July
2009 acquisition of Property and Portfolio Research, Inc. (“PPR”) and its wholly owned U.K. subsidiary, Property
and Portfolio Research Ltd. (“PPR UK”), 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 11 to our consolidated financial
statements. CoStar’s revenues, net income, assets and liabilities, broken out by segment are set forth in Note 11 to
our consolidated financial statements. Information about risks associated with our foreign operations is included in
“Item 7A. Quantitative and Qualitative Disclosures about Market Risk.”
We deliver our content to our U.S. customers primarily 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 also provide market research and analysis for commercial real estate investors and lenders via our PPR service
offerings, and portfolio and debt management and reporting capabilities through our Resolve Technology, Inc.
(“Resolve Technology”) service offerings. 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 supply.
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 and analytic services; a large team of analysts and economists and
a large base of clients. Our database has been developed and enhanced for more than 23 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 52 proprietary databases.
We intend to continue to grow our standardized platform of commercial real estate information, marketing and
analytic services. In 2004, we began research for a 21-market U.S. expansion effort. By the end of the first quarter
of 2006, we 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
of 2007, we released our CoStar Property Professional service in the 81 new CBSAs across the U.S. In 2008, we
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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 websites, www.CoStar.com and
www.showcase.com.
During the second half of 2009, as part of our strategy for providing subscribers with tools for conducting
primary research and analysis on commercial real estate, we expanded subscribers’ capabilities to use our database
of research-verified commercial property information to conduct in-depth analysis and generate online reports of
trends in sales and leasing activity. Furthermore, in July 2009, we added analytic and market forecasting services to
our platform of research and marketing services with our acquisition of PPR, and in October 2009 we acquired
Resolve Technology’s business intelligence and portfolio management software used by institutional real estate
investment companies.
We also intend to continue to expand the coverage of our service offerings within our International segment. In
December 2006, our 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. Our July 2009
acquisition of PPR and PPR UK also expanded the market research capabilities of our U.K. operations. Further
information about CoStar’s acquisitions is included in Note 3 to our consolidated financial statements.
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. In 2007, we introduced the “CoStar Group” as the
brand encompassing our worldwide operations.
Following our acquisitions of PPR and Resolve Technology in 2009, we began integrating their respective
product and service offerings with our own, including the services we have successfully integrated following prior
acquisitions. We believe that our recent U.S. and International expansion and integration efforts have created a
platform for long-term growth.
Our subscription-based information services, consisting primarily of CoStar Property Professional, CoStar
Tenant, CoStar COMPS Professional and FOCUS services, currently generate more than 94% 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. The majority of our contracts for our subscription-based
information services typically have a minimum term of one year and renew automatically. Upon renewal, many of
the subscription contract rates may change 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 information 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.
Industry Overview
The market for commercial real estate information and analysis 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 and analysis. 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. Market research (including historical and forecast conditions) and applied analytics
have also become instrumental to the success of commercial real estate industry participants operating in the current
economic environment. There is a strong need for an efficient marketplace, where commercial real estate
professionals can exchange information, evaluate opportunities using standardized data and interpretive analyses,
and interact with each other on a continuous basis.
5
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
•
• Commercial bankers
• Mortgage bankers
• Mortgage brokers
• Retailers
Investment bankers
Pension fund managers
• Government agencies
• Mortgage-backed security issuers
• Appraisers
•
• Reporters
•
• Building services vendors
• Communications providers
•
•
•
Insurance companies’ managers
Institutional advisors
Investors and asset managers
Tenant vendors
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.
The creation of a standardized information platform for commercial real estate requires an infrastructure
including a standardized database, accurate and comprehensive research capabilities, experienced analysts, easy to
use technology and intensive participant interaction. By combining our extensive database, approximately 957
researchers and outside contractors, our experienced team of analysts and economists, technological expertise and
broad customer base, we believe that we have created such a platform.
CoStar’s Comprehensive Database
CoStar has spent more than 23 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 31, 2011, our database of real estate information covered the U.S., London, England and other
parts of the U.K. and parts of France, and contained:
• Approximately 1.5 million sale and lease listings;
• Approximately 4.0 million total properties;
• Approximately 11.1 billion square feet of sale and lease listings;
• Approximately 8.9 million tenants;
• Approximately 1.8 million sales transactions valued in the aggregate at approximately $3.7 trillion;
and
• Approximately 11.2 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:
Location
Site and zoning information
•
•
• Building characteristics
Space availability
•
•
Tax assessments
• Ownership
•
Sales and lease comparables
Space requirements
•
• Number of retail stores
• Mortgage and deed information
For-sale information
•
Income and expense histories
•
Tenant names
•
•
Lease expirations
• Contact information
• Historical trends
• Demographic information
• Retail sales per square foot
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CoStar Research
We have developed a sophisticated data collection organization utilizing a multi-faceted research process. In
2010, 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 31, 2011, we had approximately 957 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,
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 144 high-tech field research vehicles in 41 states and the U.K. Of these vehicles, 98 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 and
analytic 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:
•
•
•
•
calling our information sources on recently updated properties to re-verify information;
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.
7
Proprietary Technology
As of January 31, 2011, CoStar had a staff of 154 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 services, including
CoStar Property Professional, CoStar COMPS, CoStar Tenant, CoStar Showcase, CoStar Commercial MLS, CoStar
Connect, FOCUS, SPN, Shopproperty, PPR products and services, and Resolve Portfolio Maximizer and Request.
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 websites,
www.CoStar.com and www.showcase.com. In 2009, we expanded subscribers’ capabilities to use CoStar’s
database of research-verified commercial property information to conduct in-depth analysis and generate reports on
trends in sales and leasing activity online. In 2010, we launched Showcase in the U.K. via www.Showcase.co.uk.
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 and analytic
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 and analytic 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 continue to enhance our existing
information, marketing and analytic 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 and analytic services are described in detail in the following paragraphs as
of January 31, 2011:
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 and analytic services, is delivered solely via the internet.
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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
valuations. COMPS Professional 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 Google, Yahoo, Bing, Showcase.com
and Costar.com to find commercial properties. When customers sign up for CoStar Showcase, their listings become
accessible to visitors to Showcase.com and Costar.com, who can search those listings for free. To drive traffic to
CoStar Showcase subscriber listings, CoStar invests in Google, Yahoo and Bing 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 Showcase can be purchased as a firm-wide annual subscription by firms who want all of their
brokers to be able to access the service, or it can be purchased by individual brokers on a month-to-month basis.
When individual brokers sign up for CoStar Showcase, they also receive access to CoStar Commercial MLS
(described below).
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.
9
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.
CoStar Professional Directory® CoStar Professional Directory, a service available exclusively to CoStar
Property Professional subscribers, provides detailed contact information for approximately 1.4 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.
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.
PPR® Our subsidiary PPR, and its U.K. subsidiary, PPR UK, offer products and services designed to meet the
research needs of commercial real estate investors and lenders. PPR covers metropolitan areas throughout the United
States, the U.K., and Europe, with offerings including historical and forecast market data and analysis by market and
property type, and services including access to PPR’s analysts, economists, and strategists to develop and deliver
custom research solutions. Key tools include analysis of underlying property data, assessment of current market
fundamentals, forecasts of future market performance, and credit default models.
PPR Portal™ is PPR’s primary delivery platform for research, forecasts, analytics, and granular data
surrounding a specific address and property type. Information is organized around clearly defined tabs, for ease of
access. The information is presented in written, table data, graphic, and map formats, and can easily be downloaded
by the user for integration into their own analytical framework. PPR’s Portal is used by lenders, investors, and
owners to identify and price investment opportunities, manage assets and portfolios, and source and service capital.
PPR COMPASS™ is PPR’s premier commercial real estate risk management tool. It allows users to calculate
Probability of Default, Loss Given Default, Expected Loss, and Confidence Interval (of Expected Loss) results for a
loan or a portfolio. It provides direct comparisons of credit risk and refinance risk across Time, Market, Property
Type, and Loan Structure for all macroeconomic forecast scenarios. COMPASSCRE is used by lenders, issuers,
ratings agencies, and regulators to estimate required loss reserves and economic capital, target lending opportunities,
set pricing strategy, objectively compare/price loans, more effectively allocate capital, and manage refinance risk.
Resolve Portfolio Maximizer® Resolve Portfolio Maximizer is an industry leading real estate portfolio
management software solution. Resolve Portfolio Maximizer allows users to model partnership structures, calculate
waterfall distributions and fees, model and analyze debt obligations, and create multiple “what if” scenarios for
alternative investment decisions.
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Request™ Request is the first business intelligence software solution built specifically for managing
commercial real estate investments. Request helps users eliminate some of the difficulties of consolidating real
estate investment data from disparate sources and facilitates standardization of information presentation and
reporting across an organization. Request also provides a platform for users to develop business intelligence and
reporting capabilities.
FOCUS™ CoStar’s U.K. subsidiary, CoStar U.K. Limited, offers several services; its primary service 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.
Showcase.co.uk Showcase.co.uk 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 Google, Yahoo, Bing, and Showcase.co.uk
to find commercial properties. When customers sign up for Showcase.co.uk, their listings become accessible to
visitors to www.Showcase.co.uk and other CoStar URLs who can search those listings for free. To drive traffic to
Showcase.co.uk subscriber listings, CoStar UK Limited invests in Google, Yahoo and Bing 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 Showcase.co.uk 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. Showcase.co.uk is available as a firm-wide annual subscription by firms who want all of their brokers
to be able to access the service or can be purchased by a single location of a national firm on an annual subscription
basis.
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 31, 2011.
11
Brokers
Lenders, Investment Bankers
Institutional Advisors, Asset Managers
BlackRock
Prudential
Prudential — U.K.
Metropolitan Life
ING Clarion Partners
Progressive Casualty Insurance Co.
USAA Real Estate Company
NorthMarq Capital
AEW Capital Management LP
Manulife Financial
Hartford Investment Management Company
Appraisers, Accountants
Integra
Deloitte
Marvin F. Poer
KPMG
Thomson Reuters
FirstService PGP Valuation
Deutsche Bank
Wells Fargo
JP Morgan Chase Bank
Key Bank
TD Bank
Citibank
AEGON USA Realty Advisors, Inc.
Bank of America, N.A.
East West Bank
Q10 Capital LLC
GE Capital
CB Richard Ellis
CB Richard Ellis — U.K.
Colliers
Colliers International UK — U.K.
Cushman & Wakefield
Cushman & Wakefield — U.K.
Weichert Commercial Brokerage
Jones Lang LaSalle
Jones Lang LaSalle — U.K.
Grubb & Ellis
Drivers Jonas Deloitte — U.K.
King Sturge — U.K.
Lambert Smith Hampton — U.K.
Charles Dunn Company, Inc.
Marcus & Millichap
Mohr Partners
Newmark Knight Frank
CRESA Partners
Studley
Coldwell Banker Commercial NRT
UGL Services
NAI Global
Cassidy Turley
Binswanger
Re/Max
Carter
USI Real Estate Brokerage Services
DAUM Commercial Real Estate Services In-N-Out Burger
HFF
U.S. Equities Realty
Sperry Van Ness
DTZ — U.K.
Savills Commercial — U.K.
Capita Symonds — U.K.
GVA Grimley — U.K.
BNP Paribas — U.K.
Avision Young Commercial Real Estate
Starbucks
Taco Bell
Massage Envy
7-Eleven
Dollar General Corporation
Walgreens
Denny’s
Rent-A-Center
Spencer Gifts LLC
Owners, Developers
Hines
LNR Property Corp
Shorenstein Company, LLC
Tishman Speyer
The British Land Company - UK
Industrial Developments International (IDI)
Retailers
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
Scottish Enterprise — U.K.
Federal Reserve Bank of New York
Federal Deposit Insurance Corporation
Transportation Security Administration
REITs
Simon Property Group, Inc.
Brandywine Realty Trust
Brookfield Properties
Boston Properties
Duke Realty Corporation
Kimco Realty Corporation
Vornado/Charles E. Smith
Property Managers
Transwestern Commercial Services
Lincoln Property Company
PM Realty Group
Navisys Group
Osprey Management Company
Leggat McCall Properties
Asset Plus Corporation
Vendors
Turner Construction Company
Kastle Systems
Comcast Corporation
ADT Security
Cox Communications, Inc.
Time Warner Cable, Inc.
Verizon Communications, Inc.
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For the years ended December 31, 2008, 2009 and 2010, no single client accounted for more than 5% of our
revenues.
Sales and Marketing
As of January 31, 2011, we had 262 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 23 field sales offices
throughout the U.S. and in offices located in London, England; Manchester, England; Glasgow, Scotland and Paris,
France. Our inside sales team is located in our downtown Washington, DC. office. 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.
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 other business publications; client referrals; and
CoStar Advisor™, the Company’s newsletter, which is distributed to our clients and prospects. We currently offer
dozens of webinars each year aimed at helping customers learn more about the commercial real estate industry and
how to use our services. The webinars are available both as live presentations and as on-demand programs hosted
on our website. On a monthly basis, we issue the CoStar Commercial Repeat Sales Index (CCRSI), a
comprehensive set of benchmarks that investors and other market participants can use to better understand
commercial real estate price movements. The Index is produced using our underlying data and is publicly
distributed by CoStar through the news media and made available online at www.costar.com/ccrsi.
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, including industry-
leading events for commercial brokers and retail and financial services institutions, and attend and/or exhibit at
industry trade shows and conferences to reinforce our relationships with our core user groups.
Competition
The market for information, marketing and analytic services generally is competitive and rapidly changing. In
the commercial real estate industry, the principal competitive factors for commercial real estate information,
marketing and analytic 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:
•
•
•
•
•
•
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.,
Cityfeet.com,
Information Limited, officespace.com, MrOfficeSpace.com,
TenantWise, Inc., WorkplaceIQ, RealPoint LLC and RealUp;
Inc., Reed Business
publishers and distributors of information, marketing and analytic services, including regional providers
and national print publications, such as Black’s Guide, CBRE Economic Advisors, 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,
CCIM Institute, Society of Industrial and Office Realtors (SIOR) the Commercial Association of Realtors
Data Services and the Association of Industrial Realtors (AIR);
real estate portfolio management software solutions, such as Cougar Software, Yardi Systems, MRI
Software, Argus Software and Intuit Inc.;
in-house research departments operated by commercial real estate brokers; and
public record providers.
As the commercial real estate information, marketing and analytic services marketplace develops, additional
competitors (including companies which could have greater access to data, financial, product development,
technical, analytic or marketing resources than we do) may enter the market and competition may intensify. A
company like Bloomberg L.P. has the resources and has previously announced an intention to move into the
commercial real estate information business. Further, a company like Google, which has a far-reaching web
presence and substantial data aggregation capabilities, could easily enter the commercial real estate marketing arena.
While we believe that we have successfully differentiated ourselves from existing competitors, current or future
competitors 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:
•
•
•
•
•
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.
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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
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 and analytic 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 six patents in the U.S. which expire in 2020, 2021, 2022, 2023 (2 patents) and 2025, 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 31, 2011, we employed 1,389 employees. None of our employees are 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 2011 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
15
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: commercial real estate market conditions;
general economic 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; our ability to
integrate our U.S. and international product offerings; 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 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. A reversal of recent improvements in the commercial real estate industry’s leasing activity and absorption
rates or a renewed downturn in the commercial real estate market may affect our ability to generate revenues and
may lead to more cancellations by our current or future customers, either 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 and
analytic 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 and analytic 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 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. If we
experience greater cancellations or 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. Adverse national and global economic events, as well as any significant terrorist attack, are
likely to have a dampening effect on the economy in general, which could negatively affect our financial
performance and our stock price. Market disruptions may also contribute to extreme price and volume fluctuations
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31
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.
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 and analytic
services. Our subscription-based information, marketing and analytic 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, and revenues may decline.
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. We may incur costs in the preliminary stages of an acquisition, but
may ultimately be unable or unwilling to consummate the proposed transaction for various reasons. In addition,
acquisitions involve numerous risks, including the ability to realize or capitalize on synergy created through
combinations; 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, Propex and Property and Portfolio
Research Ltd. 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 acquired businesses or assets and
may not achieve anticipated benefits of an acquisition, including expected synergy. 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. 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 restrict our operations.
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 revenues and future 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.
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 have decreased 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
17
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 could decline. Increased competition could result in lower
revenues and higher expenses, which would reduce our profitability.
If we are unable to increase our revenues or our operating costs are higher than expected, our profitability may
continue to decline and our operating results may fluctuate significantly. We may not be able to accurately forecast
our revenues or future 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 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 ability
to increase our revenues and operating profit will depend on 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 economy, competition or
other reasons, may result in decreased revenue and growth, adversely affecting our operating results.
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.
Fluctuating foreign currencies may negatively impact our business, results of operations and financial position.
Due to our acquisitions of CoStar U.K. Limited (formerly FOCUS Information Limited), SPN, Grecam S.A.S.,
Propex, and Property and Portfolio Research Ltd., 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. Foreign currency exchange rates have fluctuated 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.
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. Continuing 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, 2010, we
held $32.2 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.
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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,
2010. 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, 2010, we determined there was a decline in the
fair value of our ARS investments of approximately $3.0 million. The decline was deemed to be a temporary
impairment and was recorded as an unrealized loss in accumulated other comprehensive loss in stockholders’ equity.
If the issuers of these ARS are unable to successfully close future auctions and/or their credit ratings deteriorate, we
may be required to record additional unrealized losses in accumulated other comprehensive loss or an other-than-
temporary impairment charge to earnings on these investments, which would reduce our profitability and adversely
affect our financial position.
We have not made any material changes in the accounting methodology used to determine the fair value of the
ARS. We do not expect any material changes in the near term to the underlying assumptions used to determine the
unobservable inputs used to calculate the fair value of the ARS as of December 31, 2010. However, if changes in
these assumptions occur, and, should those changes be significant, we may be required to record additional
unrealized losses in accumulated other comprehensive loss or an other-than-temporary impairment charge to
earnings on these investments.
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 2011, we plan to
continue to increase the depth of our coverage in the U.S., U.K and France, and we may expand into additional
geographies. 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.
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 and analytic services to users.
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 distract management’s attention away from operating our business,
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 or take other action that
materially restricts or impedes our operations, 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.
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 Financial Accounting Standards Board (“FASB”) authoritative guidance for consideration of
19
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
results in the periods of such charges, which may reduce our profitability. As of December 31, 2010, we had $79.6
million of goodwill, $55.3 million in our U.S. segment and $24.3 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, 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.
We may not be able to successfully introduce new or upgraded information, marketing and analytic 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 and analytic 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 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 and reducing our profitability.
Our expansion into the commercial real estate analytics sector may not be successful or may not result in
increased revenues, which may negatively impact our business, results of operations and financial position.
Expanding into the commercial real estate market research and forecasting arena imposes additional burdens on our
research, systems development, sales, marketing and general management resources. During 2011, we expect to
continue to expand our presence in the commercial real estate analytics sector. If we are unable to manage this
20
COsTAr GrOup 2010 AnnuAL RepoRT
35
expansion effectively or if our costs for this effort exceed our expectations, our financial position could be adversely
affected. In addition, if we incur additional costs to expand our analytics services and we are not successful in
marketing or selling these expanded 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.
As a result of consolidation of facilities, we may incur additional costs. We have taken, and may continue to
take, actions that may increase our cost structure in the short-term but are intended to reduce certain portions of our
long-term cost structure, such as consolidation of office space. As a result of consolidation of office space, we may
reduce our long-term occupancy costs, but incur restructuring charges. If our long-term cost reduction efforts are
ineffective or our estimates of cost savings are inaccurate, our profitability could be negatively impacted. Expected
savings from relocating facilities can be highly variable and uncertain. For instance, we may not meet the
requirements necessary to receive the full property tax abatement provided by the District of Columbia as incentive
for us to relocate our headquarters to downtown Washington, DC and may incur greater property taxes than
anticipated in connection with the move to our new headquarters. Further, we may not be successful in achieving
the operating efficiencies or operating cost reductions expected from these efforts in the amounts or at the times we
anticipate.
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 and analytic services and could reduce 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 and
analytic 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 and
analytic services. If we experience technical problems in distributing our services, we could experience reduced
demand for our information, marketing and analytic 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 and analytic 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 and analytic services. Our success depends on our clients’
confidence in the comprehensiveness, accuracy and reliability of the data and analysis we provide. The task of
establishing and maintaining accurate and reliable data and analysis is challenging. If our data, including the data we
obtain from third parties, or analysis 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.
21
Temporary or permanent outages of our computers, software or telecommunications equipment could lead to
reduced demand for our information, marketing and analytic 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 and analytic services to clients, we could experience
reduced demand for our information, marketing and analytic 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
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 2006, we adopted authoritative guidance for stock
compensation, which required us to expense the value of granted stock options.
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
On February 5, 2010, we purchased an office building located at 1331 L Street, NW, in downtown Washington,
DC, through our wholly owned subsidiary, 1331 L Street Holdings, LLC (“Holdings”), for use as our new
headquarters and have since relocated to this location. This facility is used primarily by our U.S. segment. The lease
for our previous headquarters in Bethesda, MD expired on October 15, 2010.
On February 2, 2011, Holdings and GLL L-Street 1331, LLC (“GLL”), an affiliate of Munich-based GLL Real
Estate Partners GmbH, entered into a purchase and sale agreement pursuant to which (i) Holdings agreed to sell to
GLL its interest in the 169,429 square-foot office building located at 1331 L Street, NW, in downtown Washington,
DC, and (ii) CoStar Realty Information, Inc. (“CoStar Realty”), our wholly owned subsidiary, agreed to enter into a
lease expiring May 31, 2025 (with two 5-year renewal options) with GLL to lease back 149,514 square feet of the
office space located in this building, which we will continue to use as our corporate headquarters. The closing of the
sale took place on February 18, 2011.
Our principal facility in the U.K. is located in London, England, where we occupy approximately 11,000 square
feet of office space. Our lease for this facility has a maximum term ending October 20, 2018, with early termination
at our option on October 18, 2013, with advance notice. This facility is used primarily by our International segment.
In addition to our downtown Washington, DC and London, England facilities, our research operations are
principally run out of leased spaces in San Diego, California; Columbia, Maryland; White Marsh, Maryland;
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; Fort Lauderdale; Denver; Dallas; Kansas City; Cleveland;
Cincinnati; Indianapolis; Austin; Salt Lake City; Seattle; and St. Louis. Our subsidiaries, PPR and Resolve
Technology, share space with CoStar in one facility leased in Boston, Massachusetts.
We believe these facilities are suitable and appropriately support our business needs.
22
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.
[Removed and Reserved]
COsTAr GrOup 2010 AnnuAL RepoRT
37
23
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, 2009
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year Ended December 31, 2010
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
$ 35.93
$ 40.09
$ 41.57
$ 44.43
$ 42.97
$ 45.95
$ 49.53
$ 57.75
$ 24.23
$ 31.10
$ 33.97
$ 38.35
$ 38.22
$ 38.80
$ 37.66
$ 48.86
As of February 3, 2011, there were 438 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 year ended
December 31, 2010.
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, 2010:
ISSUER PURCHASES OF EQUITY SECURITIES
Month, 2010
October 1 through 31
November 1 through 30
December 1 through 31
Total
Total Number of
Shares Purchased
⎯
⎯
30,400 (1)
30,400
Average Price Paid
per Share
⎯
⎯
$55.70
$55.70
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
⎯
⎯
⎯
⎯
(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.
24
COsTAr GrOup 2010 AnnuAL RepoRT
39
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, 2005, and ending on December 31, 2010, 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 RETURN
CoStar Group, Inc.
S&P 500 Index
S&P 500 Application Software Index
200
150
S
R
A
L
L
O
D
100
50
0
12/31/05
12/31/06
12/31/07
12/31/08
12/31/09
12/31/10
Company / Index
CoStar Group, Inc.
S&P 500 Index
S&P 500 Application Software Index
12/31/05
100
100
100
12/31/06
124.07
115.79
105.33
12/31/07
109.45
122.16
117.00
12/31/08 12/31/09 12/31/10
133.33
96.76
111.99
97.33
137.37
102.21
76.30
76.96
63.96
25
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, 2010. The consolidated statement of operations data shown below for each of the three years ended
December 31, 2008, 2009, and 2010 and the consolidated balance sheet data as of December 31, 2009 and 2010 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, 2006 and 2007 and the consolidated balance sheet data as
of December 31, 2006, 2007, and 2008 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 expense, net ...........................................
Net income .............................................................. $
Net income per share − basic ................................... $
2008
2007
2006
158,889 $ 192,805 $ 212,428
73,408
139,020
99,232
39,788
4,914
44,702
20,079
24,623
1.27
76,704
116,101
98,249
17,852
8,045
25,897
9,946
15,951 $
0.84 $
56,136
102,753
88,672
14,081
6,845
20,926
8,516
12,410 $
0.66 $
2009
209,659
73,714
135,945
104,110
31,835
1,253
33,088
14,395
18,693
0.95
2010
$ 226,260
83,599
142,661
119,886
22,775
735
23,510
10,221
13,289
0.65
$
$
$
$
$
Net income per share − diluted ................................ $
0.65 $
0.82 $
1.26
$
0.94
$
0.64
Weighted average shares outstanding − basic..........
Weighted average shares outstanding − diluted .......
18,751
19,165
19,044
19,404
19,372
19,550
19,780
19,925
20,330
20,707
Consolidated Balance Sheet Data:
Cash, cash equivalents, short-term and long-term
investments........................................................... $
Working capital ........................................................
Total assets ...............................................................
Total liabilities..........................................................
Stockholders’ equity.................................................
2006
2007
2008
2009
2010
As of December 31,
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
$
255,698 $
203,660
404,579
45,573
359,006
239,316
184,247
439,648
58,146
381,502
Other Operating Data:
Number of subscription client sites..........................
Millions of properties in database ............................
2006
13,257
2.1
2007
14,467
2.7
2008
15,920
3.2
2009
16,020
3.6
2010
16,781
4.0
As of December 31,
26
COsTAr GrOup 2010 AnnuAL RepoRT
41
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 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 and analytic 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 and analytic services than any of our competitors and believe we generate more revenues
than any of our competitors. We have created a standardized information, marketing and analytic platform where
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, analytical capabilities,
information for clients' websites, information about industry professionals and their business relationships, data
integration, and industry news. We also provide market research and analysis for commercial real estate investors
and lenders via our PPR service offerings and portfolio and debt management and reporting capabilities through our
Resolve Technology service offerings. Our service offerings span all commercial property types, including office,
industrial, retail, land, mixed-use, hospitality and multifamily.
Since 1994, we have expanded the geographical coverage of our existing information and marketing services
and developed new information, marketing and analytic 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. 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 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. Most recently, in July 2009, we acquired Massachusetts-based Property and Portfolio Research, Inc.
(“PPR”), a provider of real estate analysis, market forecasts and credit risk analytics to the commercial real estate
industry, and its wholly owned U.K. subsidiary Property and Portfolio Research Ltd., and in October 2009, we
27
acquired Massachusetts-based Resolve Technology, a provider of business intelligence and portfolio management
software serving the institutional real estate investment industry. The PPR and Resolve Technology acquisitions are
discussed later in this section under the heading “Recent Acquisitions.”
We have consistently worked to expand our service offerings, both in terms of geographical coverage and the
scope of services offered, in order to position the company for future revenue growth. In 2004, we began our
expansion into 21 new metropolitan markets throughout the U.S. and began 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 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, in order 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., we
increased our U.S. field research fleet by adding 89 vehicles and we hired researchers to staff these vehicles. We
released our CoStar Property Professional service in the 81 new CBSAs across the U.S. in the fourth quarter of
2007. Throughout our recent expansion efforts, we have remained focused on ensuring that CoStar continues to
provide the quality of information our customers expect. As such, in 2010 we expanded our research operations, and
we plan to continue to grow our research operations slightly in 2011 in order to continue to meet customer
expectations.
During the second half of 2009, as a part of our strategy to provide subscribers with tools for conducting
primary research and analysis on commercial real estate, we expanded subscribers’ capabilities to use CoStar’s
database of research-verified commercial property information to conduct in-depth analysis and generate reports on
trends in sales and leasing activity online. Further, in July 2009, we acquired PPR and its wholly owned subsidiary,
providers of real estate investment analysis and market forecasting services.
In connection with our acquisitions of Propex, Grecam and PPR’s wholly owned subsidiary Property and
Portfolio Research Ltd., we intend to expand the coverage of our service offerings within the U.K. and to integrate
our international operations more fully with those in 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, and in early 2010 we
launched Showcase, our Internet marketing service that provides commercial real estate professionals the
opportunity to make their listings accessible to all visitors to our public websites, in the U.K. We believe that our
recent U.S. and international expansion and integration efforts have created a platform for long-term growth, which
we intend to continue to develop, invest in and expand.
We expect to continue to develop and distribute new services, expand existing services within our current
platform, and expand and develop our sales and marketing organization. For instance, in July 2009, we expanded
subscribers’ analytic capabilities to use our online database to conduct in-depth analysis and generate reports on
sales and leasing activity through our acquisition of PPR and in October 2009, we acquired Resolve Technology,
which enabled us to provide our customers with additional tools for analyzing commercial real estate markets. Any
future expansion, including expansion through acquisitions and expansion internationally, could reduce our
profitability and increase our capital expenditures. Therefore, while we expect current service offerings to remain
profitable, driving overall earnings throughout 2011 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.
Our goal is to provide additional tools that make our research and analytics even more valuable to subscribers.
For example, we are currently focusing on integration and further development of the PPR and Resolve Technology
service offerings. We have launched an initiative to develop a discounted cash flow (DCF) forecasting and
valuation solution that effectively integrates the combined capabilities of CoStar’s market and property information
and PPR’s analytics and forecasting expertise with Resolve Technology’s real estate investment software expertise.
In order to implement this initiative, we have incurred, and expect to continue to incur additional costs, including
28
costs of hiring additional personnel. While our investments in PPR and Resolve Technology have resulted and may
continue to result in an increase in expenses, our revenues have also increased as a result of these acquisitions, and
we have experienced increased cross-selling opportunities among CoStar and the acquired companies.
COsTAr GrOup 2010 AnnuAL RepoRT
43
in
the U.S. and
In some cases, the business operations of some of our clients continue to be negatively affected by challenging
economic conditions
in business consolidations and,
the world, resulting at
in some circumstances, business failure. If cancellations, reductions of services and failures to pay continue at the
current rate or increase, and we are unable to offset the resulting decrease in revenue by increasing sales to new or
existing customers, our revenues may decline or grow at reduced rates. Additionally, current economic conditions
may cause customers to reduce expenses, and customers may be forced to purchase fewer services from us or cancel
all services. We compete against many other commercial real estate information, marketing and analytic service
providers for business. If customers choose to cancel our services for cost-cutting or other reasons, our revenue
could decline.
times
There are clear signs of improving conditions in the commercial real estate industry, including heightened
leasing activity and positive net absorption of office space, resulting from modest office-related job growth and
recent business expansions in the U.S. The extent and duration of continued improvement of the economy and the
commercial real estate industry is unknown, as is the extent and duration of any benefits resulting from any of the
governmental or private sector initiatives designed to strengthen the economy. Because of these uncertainties and
any resulting impact on our business, we may not be able to accurately forecast our revenue or earnings. Based on
current economic conditions, we believe that the Company is positioned to generate continued, sustained earnings
from current operations in 2011 and for the foreseeable future.
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 stockholders 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 exchange rate volatility may continue,
which may impact (either positively or negatively) our reported financial results and consolidated trends and period-
to-period comparisons of our consolidated operations.
We currently issue stock options and/or restricted stock 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 stock-based compensation for our officers, directors and employees, which may include, among other things,
restricted stock, restricted stock units 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 recently decided to take advantage of favorable market conditions to lower our long-term occupancy costs
as a tenant. As part of our overall strategy to consolidate our London office locations and reduce occupancy costs,
we relocated our London offices and in July 2010 entered into a settlement pursuant to which we terminated our
lease for our former London offices. In addition, in September 2010, we consolidated our three facilities located in
the Boston, Massachusetts area, including the facilities used by CoStar, PPR and Resolve Technology, into one
facility. We recorded a lease restructuring charge of approximately $1.3 million in general and administrative
expense in the third quarter of 2010 as a result of the Boston office consolidation. In December 2010, we
consolidated our New York and Iselin, New Jersey offices into one facility. The consolidation of these facilities did
not result in a lease restructuring charge.
On February 5, 2010, we took advantage of favorable market conditions and purchased an office building in
downtown Washington, DC for $41.25 million for use as our new headquarters and have since relocated to this
location. The lease for our previous headquarters in Bethesda, MD expired on October 15, 2010; therefore, we
incurred overlapping occupancy costs through the end of the Bethesda lease term as we transitioned to our new
headquarters. We were able to create value through our occupancy of the building in Washington, DC and on
February 18, 2011 sold the building for aggregate consideration of $101.0 million, $15.0 million of which is being
held in escrow to fund additional build-out and planned improvements at the building. As part of the sale, we
entered into a long-term lease with the buyer to lease back approximately 88% of the office space, where our
corporate headquarters will remain. We expect that the lease-back arrangement will result in additional expense of
approximately $4.5 million to $5.0 million in 2011.
29
Our subscription-based information services, consisting primarily of CoStar Property Professional, CoStar
Tenant, CoStar COMPS Professional, and FOCUS services currently generate more than 94% 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. The majority of our contracts for our subscription-based
information services typically have a minimum term of one year and renew automatically. Upon renewal, many of
the subscription contract rates may change 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 information 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 twelve months ended December 31, 2010 and 2009, our contract renewal rate for subscription-based
services was approximately 90% and 85%, respectively, and therefore our cancellation rate was approximately 10%
and 15%, respectively, for the same periods of time. Our contract renewal rate is a quantitative measurement that is
typically closely correlated with our revenue results. As a result, management also believes that the rate may be a
reliable indicator of short-term and long-term performance. Our trailing twelve-month contract renewal rate may
decline if negative economic conditions lead to greater business failures and/or consolidations among our clients,
further reductions in customer spending, or decreases in our customer base.
Application of Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity with U.S. generally accepted
accounting principles (“GAAP”) 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 acceptable
assumptions would yield different results. 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.
Fair Value of Auction Rate Securities
Fair value is defined as the price that would be received in the sale of an asset or paid to transfer a liability in an
orderly transaction between market participants. There is a three-tier fair value hierarchy, which categorizes assets
and liabilities by 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. Our Level 3 assets consist of auction rate
securities (“ARS”), whose underlying assets are primarily student loan securities supported by guarantees from the
Federal Family Education Loan Program (“FFELP”) of the U.S. Department of Education.
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,
2010. 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, 2010, we determined there was a decline in the
fair value of our ARS investments of approximately $3.0 million. The decline was deemed to be a temporary
impairment and recorded as an unrealized loss in accumulated other comprehensive loss in stockholders’ equity. If
the issuers of these ARS are unable to successfully close future auctions and/or their credit ratings deteriorate, we
may be required to record additional unrealized losses in accumulated other comprehensive loss or an other-than-
30
COsTAr GrOup 2010 AnnuAL RepoRT
45
temporary impairment charge to earnings on these investments, which would reduce our profitability and adversely
affect our financial position.
We have not made any material changes in the accounting methodology used to determine the fair value of the
ARS. We do not expect any material changes in the near term to the underlying assumptions used to determine the
unobservable inputs used to calculate the fair value of the ARS as of December 31, 2010. However, if changes in
these assumptions occur, and, should those changes be significant, we may be exposed to additional unrealized
losses in accumulated other comprehensive loss or an other-than-temporary impairment charge to earnings on these
investments.
Fair Value of Deferred Consideration
Our Level 3 liabilities consist of a $3.2 million liability as of December 31, 2010 for deferred consideration
related to the October 19, 2009 acquisition of Resolve Technology. The deferred consideration is for (i) a potential
deferred cash payment two years after closing based on the incremental growth of Resolve Technology’s revenue,
and (ii) other potential deferred cash payments for successful completion of operational and sales milestones during
the period from closing through October 31, 2013, which period may be extended by the parties to a date no later
than December 31, 2014.
We used a discounted cash flow model to determine the estimated fair value of our Level 3 liabilities as of
December 31, 2010. The significant assumptions used in preparing the discounted cash flow model include the
discount rate, estimates for future incremental revenue growth and probabilities for completion of operational and
sales milestones.
We have not made any material changes in the accounting methodology used to determine the fair value of the
deferred consideration. We do not expect any material changes in the near term to the underlying assumptions used
to determine the unobservable inputs used to calculate the fair value of the deferred consideration as of December
31, 2010. However, if changes in these assumptions occur, and, should those changes be significant, we may be
required to recognize additional liabilities related to this deferred consideration.
Stock-Based Compensation
We account for equity instruments issued in exchange for employee services using a fair-value based method and
we recognize the fair value of such equity instruments as an expense in the consolidated statements of operations.
We estimated the fair value of each option granted on the date of grant using the Black-Scholes option-pricing
model, which requires us to estimate the dividend yield, expected volatility, risk-free interest rate and expected life
of the stock option. These assumptions and the estimation of expected forfeitures are based on multiple factors,
including historical employee behavior patterns of exercising options and post-employment termination behavior,
expected future employee option exercise patterns, and the historical volatility of the Company’s stock price.
We do not expect any material changes in the near term to the underlying assumptions used to calculate stock-
based compensation expense for the twelve months ended December 31, 2010. However, if changes in these
assumptions occur, and, should those changes be significant, they could have a material impact on our stock-based
compensation expense.
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.
31
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 that are not subject to amortization are tested annually for
impairment by each reporting unit on October 1 of each year and are also 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 FASB authoritative guidance 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. As of October 1, 2010, the date of our most recent impairment analysis, the estimated fair value of
each of our reporting units substantially exceeded the carrying value of our reporting units. There have been no
events or changes in circumstances since the date of our impairment analysis on October 1, 2010 that would indicate
that the carrying value of each reporting unit may not be recoverable.
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 consolidated
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, investor conference calls
and filings with the Securities and Exchange Commission. The non-GAAP financial measures that we may disclose
include EBITDA, adjusted EBITDA, non-GAAP net income and non-GAAP net income per diluted share.
EBITDA is our net income (loss) before interest, income taxes, depreciation and amortization. We typically 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. Adjusted EBITDA is different from EBITDA because we
further adjust EBITDA for stock-based compensation expense, acquisition related costs, restructuring costs,
headquarters acquisition and transition related costs and settlements and impairments incurred outside our ordinary
course of business. Non-GAAP net income and non-GAAP net income per diluted share are similarly adjusted for
stock-based compensation expense, acquisition related costs, restructuring costs, headquarters acquisition and
transition related costs and settlement and impairment costs incurred outside our ordinary course of business as well
as purchase amortization and other related costs. We may disclose adjusted EBITDA, non-GAAP net income and
non-GAAP net income per diluted share on a consolidated 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
results of operations to our previously reported results of operations or to those of other companies in our industry.
We view EBITDA, adjusted EBITDA, non-GAAP net income and non-GAAP net income per diluted share as
operating performance measures and as such we believe that the most directly comparable GAAP financial measure
is net income (loss). In calculating EBITDA, adjusted EBITDA, non-GAAP net income and non-GAAP net income
32
COsTAr GrOup 2010 AnnuAL RepoRT
47
per diluted share, 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, adjusted EBITDA, non-GAAP net income and
non-GAAP net income per diluted share are not measurements 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, adjusted EBITDA, non-GAAP net income and non-GAAP net income per diluted share 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 GAAP financial information included as part of our Quarterly
Reports on Form 10-Q 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, adjusted EBITDA, non-GAAP net
income and non-GAAP net income per diluted share.
EBITDA, adjusted EBITDA, non-GAAP net income and non-GAAP net income per diluted share may be used
by management to internally measure our operating and management performance and may be used by investors as
supplemental financial measures to evaluate the performance of our business. We believe that these non-GAAP
measures, when viewed with our GAAP results and the accompanying reconciliation, provide additional information
that is useful to understand the factors and trends affecting our business. We have spent more than 23 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 and analytic services,
which included acquisitions, our net income (loss) has included significant charges for purchase amortization,
depreciation and other amortization, acquisition costs and restructuring costs. EBITDA, adjusted EBITDA, non-
GAAP net income and non-GAAP net income per diluted share exclude these charges and provide meaningful
information about the operating performance of our business, apart from charges for purchase amortization,
depreciation and other amortization, acquisition costs, restructuring costs and settlement and impairment costs
incurred outside our ordinary course of business. We believe the disclosure of these non-GAAP measures can help
investors meaningfully evaluate and compare our performance from quarter to quarter and from year to year. We
also believe these non-GAAP measures are measures of our ongoing operating performance because the isolation of
non-cash charges, such as amortization and depreciation, and other items, such as interest, income taxes, stock-based
compensation expenses, acquisition costs, headquarters acquisition and transition related costs, restructuring costs
and settlement and impairment costs incurred outside our ordinary course of business, 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 and may rely on adjusted EBITDA, non-GAAP net
income or non-GAAP net income per diluted share 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.
33
•
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.
Set forth below are descriptions of the financial items that have been excluded from our net income (loss) to
calculate adjusted 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, purchase amortization in operating expenses, depreciation and
other amortization, interest income, net, and income tax expense (benefit) as previously described above
with respect to the calculation of EBITDA.
Stock-based compensation expense may be useful for investors to consider because it represents a portion
of the compensation of our employees and executives. Determining the fair value of the stock-based
instruments involves a high degree of judgment and estimation and the expenses recorded may bear little
resemblance to the actual value realized upon the future exercise or termination of the related stock-based
awards. Therefore, we believe it is useful to exclude stock-based compensation in order to better
understand the long-term performance of our core business.
• The amount of acquisition related costs incurred may be useful for investors to consider because they
generally represent professional service fees and direct expenses related to the acquisition. Because we do
not acquire businesses on a predictable cycle we do not consider the amount of acquisition related costs to
be a representative component of the day-to-day operating performance of our business.
• The amount of restructuring costs incurred may be useful for investors to consider because they generally
represent costs incurred in connection with a change in the makeup of our properties or personnel. We do
not consider the amount of restructuring related costs to be a representative component of the day-to-day
operating performance of our business.
• The amount of headquarters acquisition and transition related costs incurred may be useful for investors to
consider because they generally represent the overlapping rent and building carrying costs, legal costs and
other related costs incurred to relocate our headquarters. We do not believe these charges necessarily reflect
the current and ongoing charges related to our operating cost structure.
• The amount of material settlement and impairment costs incurred outside of our ordinary course of business
may be useful for investors to consider because they generally represent gains or losses from the settlement
of litigation matters. We do not believe these charges necessarily reflect the current and ongoing cash
charges related to our operating cost structure.
The financial items that have been excluded from our net income (loss) to calculate non-GAAP net income and
non-GAAP net income per diluted share are stock-based compensation, acquisition related costs, restructuring costs,
headquarter acquisition and transition related costs and settlement and impairment costs incurred outside our
ordinary course of business. These items are discussed above with respect to the calculation of adjusted EBITDA
along with the material limitations associated with using this non-GAAP financial measure as compared to net
income (loss). We subtract an assumed provision for income taxes to calculate non-GAAP net income. We assume
a 40% tax rate in order to approximate our long-term effective corporate tax rate.
Non-GAAP net income per diluted share is a non-GAAP financial measure that represents non-GAAP net
income divided by the number of diluted shares outstanding for the period used in the calculation of GAAP net
income per diluted share.
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
understand the factors and trends affecting our business.
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COsTAr GrOup 2010 AnnuAL RepoRT
49
The following table shows our EBITDA reconciled to our net income and our net cash flows from operating,
investing and financing activities for the indicated periods (in thousands):
Year Ended December 31,
2008
Net income ......................................................................................... $ 24,623
2,284
Purchase amortization in cost of revenues.........................................
Purchase amortization in operating expenses ....................................
4,880
Depreciation and other amortization..................................................
9,637
Interest income, net............................................................................
(4,914)
Income tax expense, net..................................................................... 20,079
EBITDA............................................................................................. $ 56,589
2009
2010
$ 18,693
2,389
3,412
8,875
(1,253)
14,395
$ 46,511
$ 13,289
1,471
2,305
9,873
(735)
10,221
$ 36,424
Net cash flows provided by (used in)
Operating activities ........................................................................ $ 40,908
Investing activities.......................................................................... $ 52,430
Financing activities ........................................................................ $ 11,475
$ 38,445
4,532
$
2,172
$
$ 39,269
$ (40,504)
2,042
$
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 ................................................. $ 212,428
Cost of revenues...................................... 73,408
Gross margin........................................... 139,020
Operating expenses:
Selling and marketing.......................... 41,705
Software development......................... 12,759
General and administrative.................. 39,888
4,880
Purchase amortization .........................
Total operating expenses......................... 99,232
Income from operations .......................... 39,788
Interest and other income, net.................
4,914
Income before income taxes ................... 44,702
Income tax expense, net.......................... 20,079
Net income ............................................. $ 24,623
2008
Year Ended December 31,
2009
2010
100.0 % $ 209,659
73,714
34.6
135,945
65.4
100.0 % $ 226,260
83,599
35.2
142,661
64.8
100.0 %
36.9
63.1
19.6
6.0
18.8
2.3
46.7
18.7
2.3
21.0
9.5
11.6 %
42,508
13,942
44,248
3,412
104,110
31,835
1,253
33,088
14,395
$ 18,693
52,455
20.3
17,350
6.6
47,776
21.1
2,305
1.6
119,886
49.7
22,775
15.2
735
0.6
23,510
15.8
6.9
10,221
8.9 % $ 13,289
23.2
7.7
21.1
1.0
53.0
10.1
0.3
10.4
4.5
5.9 %
Comparison of Year Ended December 31, 2010 and Year Ended December 31, 2009
Revenues. Revenues increased to $226.3 million in 2010, from $209.7 million in 2009. The increase in revenues
of approximately $16.6 million is primarily due to additional revenue from our July 2009 acquisition of PPR. 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, 2010, our subscription-based
information services represented more than 94% of our total revenues.
Gross Margin. Gross margin increased to $142.7 million in 2010, from $135.9 million in 2009. The increase in
the amount of gross margin was principally due to a $16.6 million increase in revenue partially offset by an increase
in cost of revenues. The gross margin percentage decreased to 63.1% in 2010, from 64.8% in 2009. The decrease in
the percentage of gross margin was principally due to an increase in the cost of revenues. Cost of revenues
35
increased to $83.6 million in 2010, from $73.7 million in 2009. The increase in cost of revenues was principally due
to additional cost of revenues of approximately $7.4 million included as a result of our July 2009 acquisition of PPR
and our October 2009 acquisition of Resolve Technology.
Selling and Marketing Expenses. Selling and marketing expenses increased to $52.5 million in 2010, from
$42.5 million in 2009, and increased as a percentage of revenues to 23.2% in 2010, from 20.3% in 2009. The
increase in the amount and percentage of selling and marketing expenses was primarily due to increased costs of
approximately $6.1 million due to increased sales personnel costs, as well as additional selling and marketing
expenses of approximately $1.7 million included as a result of our July 2009 acquisition of PPR and our October
2009 acquisition of Resolve Technology.
Software Development Expenses. Software development expenses increased to $17.4 million in 2010, from
$13.9 million in 2009, and increased as a percentage of revenues to 7.7% in 2010, from 6.6% in 2009. The increase
in the amount and percentage of software development expense was primarily due to additional software
development expenses included as a result of our July 2009 acquisition of PPR and our October 2009 acquisition of
Resolve Technology.
General and Administrative Expenses. General and administrative expenses increased to $47.8 million in 2010,
from $44.2 million in 2009, and remained relatively constant as a percentage of revenues at 21.1% in 2010 and
2009. The increase in the amount of general and administrative expenses was principally due to $2.8 million
recorded for the settlement of two litigation matters in June 2010, the 2010 lease restructuring charge of
approximately $1.3 million, and additional general and administrative expense of approximately $2.0 million
included as a result of our July 2009 acquisition of PPR and our October 2009 acquisition of Resolve Technology,
partially offset by a decrease in bad debt expense of approximately $3.0 million.
Purchase Amortization. Purchase amortization decreased to $2.3 million in 2010, from $3.4 million in 2009,
and decreased as a percentage of revenues to 1.0% in 2010, from 1.6% in 2009. The decrease in purchase
amortization expense is due to the completion of amortization for certain identifiable intangible assets in 2010.
Interest and Other Income, Net. Interest and other income, net decreased to approximately $700,000 in 2010,
from $1.3 million in 2009, primarily due to lower short-term investment balances.
Income Tax Expense, Net. Income tax expense, net decreased to $10.2 million in 2010, from $14.4 million in
2009. This decrease was primarily due to lower income before income taxes.
Comparison of Business Segment Results for Year Ended December 31, 2010 and Year Ended December 31,
2009
We 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 operating segment EBITDA, which is our net
income before interest, income taxes, depreciation and amortization. Management believes that operating segment
EBITDA is an appropriate measure for evaluating the operational performance of our operating 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. 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 $208.5 million from $191.6 million for the years ended December 31, 2010 and 2009,
respectively. This increase in U.S. revenue was primarily due to additional revenues as a result of our July 2009
acquisition of PPR. FOCUS is our primary service offering in our International operating segment. International
revenues decreased approximately $300,000 primarily due to foreign currency fluctuations, offset by intersegment
revenues of approximately $1.3 million attributable to services performed by Property and Portfolio Research Ltd.
for PPR. PPR and Property and Portfolio Research Ltd. were acquired in July 2009. Intersegment revenues are
eliminated from total revenues.
36
COsTAr GrOup 2010 AnnuAL RepoRT
51
Segment EBITDA. U.S. EBITDA decreased to $39.6 million from $47.7 million for the years ended December
31, 2010 and 2009, respectively. The decrease in U.S. EBITDA was due primarily to additional personnel cost of
approximately $8.1 million, increased legal settlement charges of approximately $800,000, and a lease restructuring
charge of approximately $1.3 million related to the consolidation of our three facilities located in Boston,
Massachusetts, partially offset by a decrease in bad debt expense of approximately $2.2 million. International
EBITDA increased to a loss of $3.2 million for the year ended December 31, 2010 from a $1.2 million loss for the
year ended December 31, 2009. This increased loss was primarily due to approximately $2.0 million paid in
connection with the settlement of our litigation with Nokia U.K. Limited. International EBITDA includes a
corporate allocation of approximately $400,000 and $500,000 for the years ended December 31, 2010 and 2009,
respectively. The corporate allocation represents costs incurred for U.S. employees involved in international
management and expansion activities.
Comparison of Year Ended December 31, 2009 and Year Ended December 31, 2008
Revenues. Revenues decreased to $209.7 million in 2009, from $212.4 million in 2008. Revenues from
customers in our International operations decreased $4.3 million primarily due to foreign currency fluctuations. The
decrease in International revenues was partially offset by an increase in U.S. revenues of approximately $1.5
million. The increase in U.S. revenues is primarily due to additional revenue of approximately $8.5 million from
our July 2009 acquisition of PPR partially offset by decreased sales resulting from a difficult commercial real estate
and economic environment. 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, 2009, our subscription-based information services represented more than 95% of our total revenues.
Gross Margin. Gross margin decreased to $135.9 million in 2009, from $139.0 million in 2008. The gross
margin percentage decreased to 64.8% in 2009, from 65.4% in 2008. The decrease in the amount and percentage of
gross margin was principally due to a $2.8 million decrease in revenue in 2009.
Selling and Marketing Expenses. Selling and marketing expenses increased to $42.5 million in 2009, from
$41.7 million in 2008, and increased as a percentage of revenues to 20.3% in 2009, from 19.6% in 2008. The
increase in the amount and percentage of selling and marketing expenses was primarily due to additional selling and
marketing expenses of approximately $1.7 million incurred by PPR and included as a result of our July 2009
acquisition of PPR. The increase was offset by an approximately $900,000 decrease due to foreign currency
fluctuations.
Software Development Expenses. Software development expenses increased to $13.9 million in 2009, from
$12.8 million in 2008, and increased as a percentage of revenues to 6.6% in 2009, from 6.0% in 2008. The increase
in the amount and percentage of software development expenses was due to additional software development
expenses of approximately $600,000 incurred by PPR and included as a result of our July 2009 acquisition of PPR
as well as additional development expenses of approximately $400,000 incurred by Resolve Technology, and
included as a result of our October 2009 acquisition of Resolve Technology.
General and Administrative Expenses. General and administrative expenses increased to $44.2 million in 2009,
from $39.9 million in 2008, and increased as a percentage of revenues to 21.1% in 2009, from 18.8% in 2008. The
increase in the amount and percentage of general and administrative expenses was principally a result of an increase
of acquisition and deal related costs of approximately $700,000, an increase in legal fees of $2.0 million and
additional general and administrative expenses of approximately $1.1 million incurred by PPR and included as a
result of our July 2009 acquisition of PPR.
Purchase Amortization. Purchase amortization decreased to $3.4 million in 2009, from $4.9 million in 2008,
and decreased as a percentage of revenues to 1.6% in 2009, from 2.3% in 2008. The decrease in purchase
amortization expense is due to the completion of amortization for certain identifiable intangible assets in 2009.
Interest and Other Income, Net. Interest and other income, net decreased to $1.3 million in 2009, from $4.9
million in 2008. Interest and other income, net decreased due to lower average interest rates in 2009 compared to
2008.
Income Tax Expense, Net. Income tax expense, net decreased to $14.4 million in 2009, from $20.1 million in
2008. This decrease was due to lower income before income taxes as a result of our decreased profitability.
37
Comparison of Business Segment Results for Year Ended December 31, 2009 and Year Ended December 31,
2008
We 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 operating segment revenue and EBITDA, which is our net
income before interest, income taxes, depreciation and amortization. Management believes that operating 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. 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 $191.6 million from $190.1 million for the years ended December 31, 2009 and 2008,
respectively. This increase in U.S. revenue is due to additional revenues of approximately $8.5 million included as a
result of our July 2009 acquisition of PPR, partially offset by a decrease of approximately $7.0 million in U.S.
revenues due to decreased sales resulting from a difficult commercial real estate and economic environment.
FOCUS is our primary service offering in our International operating segment. International revenues decreased
approximately $4.3 million primarily due to foreign currency fluctuations, partially offset by intersegment revenues
of approximately $900,000 attributable to services performed by Property and Portfolio Research Ltd. for PPR.
Intersegment revenues are eliminated from total revenues.
Segment EBITDA. U.S. EBITDA decreased to $47.7 million from $58.8 million for the years ended December
31, 2009 and 2008, respectively. The decrease in U.S. EBITDA was due primarily to additional costs incurred by
PPR, which we acquired in July of 2009 and increased legal fees. International EBITDA decreased to a loss of $1.2
million for the year ended December 31, 2009 from a $2.2 million loss for the year ended December 31, 2008. This
decreased loss is primarily due to a lower corporate allocation in 2009 as compared to 2008. International EBITDA
includes a corporate allocation of approximately $500,000 and $1.1 million for the years ended December 31, 2009
and 2008, respectively. The corporate allocation represents costs incurred for U.S. employees involved in
international management and expansion activities.
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):
2009
2010
Mar. 31
Revenues .......................... $ 51,370
16,894
Cost of revenues...............
34,476
Gross margin....................
23,735
Operating expenses ..........
Income from operations ...
10,741
Interest and other income,
net ................................
442
Jun. 30
$ 50,064
16,744
33,320
25,129
8,191
Sep. 30
$ 53,590
19,149
34,441
27,490
6,951
Dec. 31
$ 54,635
20,927
33,708
27,756
5,952
Mar. 31
$ 55,093
21,200
33,893
28,791
5,102
Jun. 30
Sep. 30
$ 55,838 $ 57,144
20,762
36,382
30,247
6,135
20,360
35,478
30,987
4,491
Dec. 31
$ 58,185
21,277
36,908
29,861
7,047
322
263
226
238
196
156
145
Income before income
taxes.............................
Income tax expense, net...
Net income ...................... $
Net income per share −
11,183
5,077
6,106
8,513
3,897
4,616
$
7,214
2,889
$ 4,325
$
6,178
2,532
3,646
$
5,340
2,451
2,889
basic.............................
$
0.31
$
0.24
$
0.22
$
0.18
$
0.14
Net income per share −
diluted ..........................
$
0.31
$
0.24
$
0.22
$
0.18
$
0.14
6,291
4,687
1,436
2,909
3,251 $ 3,382
$
7,192
3,425
3,767
0.16
$
0.17
$
0.18
0.16
$
0.16
$
0.18
$
$
$
38
COsTAr GrOup 2010 AnnuAL RepoRT
53
2009
2010
Dec. 31
Mar. 31
Jun. 30
Dec. 31
Mar. 31
100.0 %
32.9
67.1
46.2
20.9
Jun. 30
100.0 %
33.4
66.6
50.2
16.4
Sep. 30
100.0 %
35.7
64.3
51.3
13.0
100.0 %
38.3
61.7
50.8
10.9
100.0 %
38.5
61.5
52.3
9.3
100.0 %
36.5
63.5
55.5
8.0
Sep. 30
100.0 %
36.3
63.7
52.9
10.7
100.0 %
36.6
63.4
51.3
12.1
0.9
21.8
9.9
11.9 %
0.6
0.5
0.4
0.4
0.4
0.3
0.2
17.0
7.8
9.2 %
13.5
5.4
8.1 %
11.3
4.6
6.7 %
9.7
4.4
5.2 %
8.4
2.6
5.8 %
11.0
5.1
5.9 %
12.4
5.9
6.5 %
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
PPR. On July 17, 2009, we acquired all of the issued and outstanding equity securities of PPR, and its wholly
owned subsidiary Property and Portfolio Research Ltd., providers of real estate analysis, market forecasts and credit
risk analytics to the commercial real estate industry. We acquired PPR from DMG Information, Inc. (“DMGI”) in
exchange for 572,999 shares of CoStar common stock, which had an aggregate value of approximately $20.9 million
as of the closing date. On July 17, 2009, we issued 433,667 shares of our common stock to DMGI, and we issued the
remaining 139,332 shares to DMGI on September 28, 2009 after taking into account post-closing purchase price
adjustments.
Resolve Technology. On October 19, 2009, we acquired all of the outstanding capital stock of Resolve
Technology, a Delaware corporation, for approximately $4.5 million, consisting of approximately $3.4 million in
cash and 25,886 shares of CoStar common stock, which had an aggregate value of approximately $1.1 million as of
the closing date. The shares are subject to a three-year lockup, pursuant to which one-third were released in October
2010. The purchase price is subject to certain post-closing adjustments. Additionally, the seller may be entitled to
receive (i) a potential deferred cash payment due approximately two years after closing based on the incremental
growth of Resolve Technology’s revenue as of September 2011 over its revenue as of September 2009, and (ii) other
potential deferred cash payments for successful completion of operational and sales milestones during the period
from closing through no later than October 31, 2013, which period may be extended by the parties to a date no later
than December 31, 2014.
Accounting Treatment. These acquisitions were accounted for as purchase business combinations. For each of
the PPR and Resolve Technology acquisitions, the purchase price was allocated to various working capital accounts,
developed technology, customer base, trademarks, non-competition agreements and goodwill. 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 identified intangibles are amortized over their estimated useful lives.
Goodwill for these acquisitions is not amortized, but is subject to annual impairment tests. The results of operations
of PPR and Resolve Technology 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 any of the acquisitions.
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 $210.1 million at December 31, 2010 compared to $226.0 million at
December 31, 2009. The decrease in cash, cash equivalents and short-term investments for the year ended December
31, 2010 was primarily due to the purchase of a 169,429 square-foot office building located at 1331 L Street, NW in
downtown Washington, DC for a purchase price of $41.25 million in cash, and approximately $1.7 million in
acquisition costs, as well as other purchases of property and equipment of approximately $14.4 million, partially
offset by net cash flows from operating and financing activities of $41.3 million.
Changes in cash, cash equivalents and short-term investments are dependent upon changes in, among other
things, working capital items such as accounts receivable, accounts payable, various accrued expenses and deferred
39
revenues, as well as changes in our capital structure due to stock option exercises, purchases and sales of short-term
investments and similar events.
Net cash provided by operating activities for the year ended December 31, 2010 was $39.3 million compared to
$38.5 million for the year ended December 31, 2009. The $800,000 increase in net cash provided by operating
activities is primarily due to a $4.4 million net increase in changes in operating assets and liabilities due to
differences in timing of collection of receipts and payments of disbursements partially offset by a decrease of
approximately $3.6 million from net income plus non-cash items. The $4.4 million net increase in changes in
operating assets and liabilities was primarily related to an increase in changes in accounts payable and other
liabilities of approximately $5.2 million and approximately $3.0 million in increased change in deferred revenue
primarily associated with cash received for annual billings. The increase in the change in accounts payable and
other liabilities of approximately $5.2 million includes increased changes in accruals of deferred rent of
approximately $2.6 million, $800,000 accrued in June 2010 in anticipation of the settlement of a litigation matter,
$900,000 remaining in the lease restructuring charge associated with our Boston lease consolidation in September
2010 and increased accruals associated with the operations of our recent acquisitions and new headquarters. These
increases in changes in operating assets and liabilities were partially offset by a decrease in the changes in income
tax receivable of approximately $4.9 million, as the tax legislation enacted during the fourth quarter of 2010 allowed
us to deduct 100% of qualifying assets purchased after September 8, 2010, resulting in an income tax receivable
recorded for the year ended December 31, 2010.
Net cash used in investing activities was $40.5 million for the year ended December 31, 2010, compared to net
cash provided by investing activities of $4.5 million for the year ended December 31, 2009. This $45.0 million
increased change in net cash used in investing activities was primarily due to the February 2010 purchase of our new
headquarters in downtown Washington, DC, as well as capital improvements for our facilities in 2010, partially
offset by the $3.2 million in net cash payments for acquisitions.
Net cash provided by financing activities was relatively consistent at $2.0 million for the year ended December
31, 2010 compared to $2.2 million for the year ended December 31, 2009.
Contractual Obligations. The following table summarizes our principal contractual obligations at December 31,
2010 and the effect such obligations are expected to have on our liquidity and cash flows in future periods (in
thousands):
Operating leases ............................................................ $ 47,453 $
Purchase obligations(1) ..................................................
Total contractual principal cash obligations.................. $ 54,216 $ 11,488 $
8,691 $
2,797
6,763
13,105 $
3,366
16,471 $
Total
2011
2012-2013
2014-2015
2016 and
thereafter
18,749
⎯
18,749
6,908 $
600
7,508 $
(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. Amounts do not include unrecognized tax benefits of $1.8 million due to uncertainty
regarding the timing of future cash payments.
In 2010, we purchased our new headquarters in downtown Washington, DC, and made capital expenditures of
approximately $14.4 million. We expect to make total capital expenditures in 2011 of approximately $7.0 million to
$10.0 million.
On February 2, 2011, 1331 L Street Holdings, LLC (“Holdings”), our wholly owned subsidiary, and GLL L-
Street 1331, LLC (“GLL”), an affiliate of Munich-based GLL Real Estate Partners GmbH, entered into a purchase
and sale agreement pursuant to which (i) Holdings agreed to sell to GLL its interest in the 169,429 square-foot office
building located at 1331 L Street, NW, in downtown Washington, DC, and (ii) CoStar Realty Information, Inc.
(“CoStar Realty”), our wholly owned subsidiary, agreed to enter into a lease expiring May 31, 2025 (with two 5-
year renewal options) with GLL to lease back 149,514 square feet of the office space located in this building, which
we will continue to use as our corporate headquarters. The closing of the sale took place on February 18, 2011. The
aggregate consideration paid by GLL to Holdings pursuant to the purchase and sale agreement was $101.0 million in
cash, $15.0 million of which is being held in escrow to fund additional build-out and planned improvements at the
building.
40
COsTAr GrOup 2010 AnnuAL RepoRT
55
The lease is effective as of June 1, 2010 and will expire May 31, 2025. The initial base rent is $38.50 per square
foot of occupied space, escalating 2.5% per year commencing June 1, 2011. Our obligation to pay rent increases
proportionately over the course of the first year of the lease as certain scheduled completion dates for our build out,
on a floor-by-floor basis, are reached. Our occupied space under the lease will consist of the entire rented premises
as of June 1, 2011, from and after which we will owe rent on the entire leased premises. Annual lease payments for
2011 will be approximately $5.0 million. This obligation is not included in the above December 31, 2010
contractual obligation table.
Our future capital requirements will depend on many factors, including our operating results, expansion efforts,
and our level of acquisition activity or other strategic transactions.
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 may use cash, stock, debt or other
means of funding to make these acquisitions. In the third quarter of 2009, we issued 572,999 shares of common
stock to DMGI, Inc. for all of the issued and outstanding capital stock of PPR and its wholly owned subsidiary. In
October 2009, we acquired Resolve Technology for approximately $3.4 million ($2.9 million was paid upon
acquisition and $450,000 was deferred until February 2010) in cash and 25,886 shares of CoStar common stock,
which had an aggregate value of approximately $1.1 million as of the closing date. The shares are subject to a three-
year lockup, pursuant to which one-third were released in October 2010. Additionally, the seller may be entitled to
receive (i) a potential deferred cash payment due approximately two years after closing based on the incremental
growth of Resolve Technology’s revenue as of September 2011 over its revenue as of September 2009, and (ii) other
potential deferred cash payments for successful completion of additional operational and sales milestones during the
period from closing through October 31, 2013, which period may be extended by the parties to a date no later than
December 31, 2014.
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, 2010, we had $32.2 million par value 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.
On December 8, 2009, a former employee filed a lawsuit against us in the United States District Court for the
Southern District of California alleging violations of the Fair Labor Standards Act and California state wage-and-
hour laws and is seeking unspecified damages under those laws. The complaint also seeks to declare a class of all
similarly situated employees to pursue similar claims. In May 2010, the parties reached a preliminary agreement to
settle this lawsuit, and in June 2010, we accrued approximately $800,000 in anticipation of making a settlement
payment that will formally resolve this litigation. We anticipate the payment will be due during the second quarter
of 2011.
Recent Accounting Pronouncements
In April 2008, the FASB issued authoritative guidance on existing intangibles or expected future cash flows
from those intangibles, which is effective for all fiscal years and interim periods beginning after December 15, 2008.
Early adoption of this guidance is not permitted. This guidance 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, this guidance requires that we consider our experience
regarding renewal and extensions of similar arrangements in determining the useful life of such intangibles. If we do
not have experience with similar arrangements, this guidance requires that we use the assumptions of a market
participant putting the intangible to its highest and best use in determining the useful life. We adopted this guidance
41
on January 1, 2009. The adoption of this guidance did not have a material impact on our results of operations or
financial position.
In June 2008, the FASB issued authoritative guidance related to determining whether instruments granted in
share-based payment transactions are participating securities. This guidance clarifies that unvested share-based
payment awards with a right to receive non-forfeitable dividends are participating securities. This guidance is
effective for all annual and interim periods beginning after December 15, 2008. Adoption of this standard will
require the two-class method of calculating basic earnings per share to the extent that unvested share-based
payments have the right to receive non-forfeitable dividends. We adopted this guidance on January 1, 2009. The
adoption of this guidance did not have a material impact on our results of operations or financial position.
In April 2009, the FASB issued authoritative guidance related to the initial recognition, measurement and
subsequent accounting for assets and liabilities arising from pre-acquisition contingencies in a business combination.
It requires that such assets acquired or liabilities assumed be initially recognized at fair value at the acquisition date
if fair value can be determined during the measurement period. When fair value cannot be determined, companies
should typically account for the acquired contingencies using existing guidance. This guidance requires that
companies expense acquisition and deal-related costs that were previously allowed to be capitalized. This guidance
also requires that a systematic and rational basis for subsequently measuring and accounting for the assets or
liabilities be developed depending on their nature. This guidance was effective for contingent assets or liabilities
arising from business combinations with an acquisition date on or after January 1, 2009. The adoption of this
guidance changes the accounting treatment and disclosure for certain specific items in a business combination with
an acquisition date subsequent to December 31, 2008. We adopted this guidance on January 1, 2009, and expensed
acquisition and deal-related costs associated primarily with the acquisitions of PPR and Resolve Technology.
In April 2009, the FASB issued authoritative guidance for determining whether a market is active or inactive,
and whether a transaction is distressed. This guidance is applicable to all assets and liabilities (financial and non-
financial) and will require enhanced disclosures. We adopted this guidance for our interim period ending June 30,
2009. The adoption of this guidance did not have a material impact on our results of operations or financial position,
but did require additional disclosures in our financial statements.
In April 2009, the FASB issued authoritative guidance requiring disclosures in interim reporting periods
concerning the fair value of financial instruments that were previously only required in the annual financial
statements. We adopted the provisions of this guidance for our interim period ending June 30, 2009. The adoption of
this guidance did not have a material impact on our results of operations or financial position, but did require
additional disclosures in our financial statements.
In April 2009, the FASB issued authoritative guidance that redefines what constitutes an other-than-temporary
impairment, defines credit and non-credit components of an other-than-temporary impairment, prescribes their
financial statement treatment, and requires enhanced disclosures relating to such impairments. We adopted this
guidance for our interim period ending June 30, 2009. The adoption of this guidance did not have a material impact
on our results of operations or financial position, but did require additional disclosures in our financial statements.
In May 2009, the FASB issued authoritative guidance which establishes general standards of accounting for and
disclosure of events that occur after the balance sheet date but before financial statements are issued. This guidance
was effective for all interim and annual reporting periods ending after June 15, 2009. This guidance has not and is
not expected to result in significant changes in the subsequent events that we report, either through recognition or
disclosure, in our financial statements.
In June 2009, the FASB issued authoritative guidance to amend the manner in which entities evaluate whether
consolidation is required for variable interest entities (VIE). Previously, variable interest holders were required to
determine whether they had a controlling financial interest in a VIE based on a quantitative analysis of the expected
gains and/or losses of the entity. The new guidance requires an enterprise with a variable interest in a VIE to
qualitatively assess whether it has a controlling financial interest in the entity, and if so, whether it is the primary
beneficiary. This guidance also requires that companies continually evaluate VIEs for consolidation, rather than
assessing whether consolidation is required based upon the occurrence of triggering events. This guidance enhances
disclosures to provide financial statement users with greater transparency about transfers of financial assets and a
transferor’s continuing involvement with transferred financial assets. This guidance will be effective for the first
42
COsTAr GrOup 2010 AnnuAL RepoRT
57
annual reporting period beginning after November 15, 2009. This guidance did not materially impact our results of
operations, financial position or related disclosures.
In June 2009, the FASB issued authoritative guidance which replaced the previous hierarchy of U.S. GAAP and
establishes the FASB Codification as the single source of authoritative U.S. GAAP recognized by the FASB to be
applied by nongovernmental entities. This guidance is effective for financial statements issued for interim and
annual periods ending after September 15, 2009. This guidance did not materially impact our results of operations or
financial position, but did require changes to our disclosures in our financial statements.
In July 2009, the FASB issued authoritative guidance to improve the consistency with which companies apply
fair value measurements guidance to liabilities. This guidance is effective for interim and annual periods beginning
after September 30, 2009. This guidance did not materially impact our results of operations, financial position or
related disclosures.
In October 2009, the FASB issued authoritative guidance that amends existing guidance for identifying separate
deliverables in a revenue-generating transaction where multiple deliverables exist, and provides guidance for
measuring and allocating revenue to one or more units of accounting. In addition, the FASB issued authoritative
guidance on arrangements that include software elements. Under this guidance, tangible products containing
software components and non-software components that are essential to the functionality of the tangible product will
no longer be within the scope of the software revenue recognition guidance. This guidance is effective using the
prospective application or the retrospective application for revenue arrangements entered into or materially modified
in fiscal years beginning on or after June 15, 2010 with earlier application permitted. This guidance did not
materially impact our results of operations or financial position.
In January 2010, the FASB issued authoritative guidance that amends the disclosure requirements related to
recurring and nonrecurring fair value measurements. This guidance requires new disclosures on the transfers of
assets and liabilities between Level 1 (assets and liabilities measured using observable inputs such as quoted prices
in active markets) and Level 2 (assets and liabilities measured using inputs other than quoted prices in active
markets that are either directly or indirectly observable) of the fair value measurement hierarchy, including the
amount and reason of the transfers. Additionally, this guidance requires a roll forward of activities on purchases,
sales, issuance, and settlements of the assets and liabilities measured using significant unobservable inputs (Level 3
fair value measurements). This guidance is effective for interim and annual reporting periods beginning after
December 15, 2009, with the exception of the additional disclosure for Level 3 assets and liabilities, which is
effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. This
guidance did not materially impact our results of operations or financial position, but did require changes to our
disclosures in our interim and annual financial statements.
In February 2010, the FASB issued authoritative guidance that amends the disclosure requirements related to
subsequent events. This guidance includes the definition of a Securities and Exchange Commission filer, removes
the definition of a public entity, redefines the reissuance disclosure requirements and allows public companies to
omit the disclosure of the date through which subsequent events have been evaluated. This guidance is effective for
financial statements issued for interim and annual periods ending after February 2010. This guidance did not
materially impact our results of operations or financial position, but did require changes to our disclosures in our
financial statements.
In April 2010, the FASB issued authoritative guidance related to the criteria that should be met for determining
whether the milestone method of revenue recognition is appropriate. A vendor can recognize consideration that is
contingent upon achievement of a milestone in its entirety as revenue in the period in which the milestone is
achieved if the milestone is: (a) commensurate with either the vendor’s performance to achieve the milestone or the
enhancement of the value of the item delivered; (b) relates solely to past performance; and (c) is reasonable relative
to all deliverables and payment terms in the arrangement. This guidance is effective on a prospective basis for
financial statements issued for interim and annual periods ending after June 15, 2010 with early adoption permitted.
The adoption of this guidance did not have a material impact on our results of operations or financial position.
43
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We provide information, marketing and analytic 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, 2010, revenue denominated in foreign
currencies was approximately 8.4% of total revenue. For the year ended December 31, 2010, our revenue would
have decreased by approximately $1.9 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, 2010 would have resulted in an
increase of approximately $900,000 in the carrying amount of net assets. For the year ended December 31, 2010, our
revenue would have increased by approximately $1.9 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, 2010 would have resulted
in a decrease of approximately $900,000 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 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, 2010,
accumulated other comprehensive loss included a loss from foreign currency translation adjustments of
approximately $5.9 million.
We do not have material exposure to market risks associated with changes in interest rates related to cash
equivalent securities held as of December 31, 2010. As of December 31, 2010, we had $210.1 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, 2010, auctions for $32.2 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, 2010, we determined that there was a decline in the fair
value of our ARS investments of approximately $3.0 million, which was deemed to be a temporary impairment and
recorded as an unrealized loss in accumulated other comprehensive loss 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
accumulated other comprehensive loss 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 $98.4 million in intangible assets as of December 31, 2010. As of December 31, 2010,
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.”
44
COsTAr GrOup 2010 AnnuAL RepoRT
59
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
objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible
controls and procedures.
As of December 31, 2010, 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, 2010 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, 2010.
45
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.
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 2011 annual
meeting of stockholders.
Item 11.
Executive Compensation
The information required by this Item is incorporated by reference to our Proxy Statement for our 2011 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 2011 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 2011 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 2011 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.
46
(a)(2) Financial statement schedules:
Schedule II – Valuation and Qualifying Accounts
Years Ended December 31, 2008, 2009, and 2010 (in thousands):
Allowance for doubtful accounts and
billing adjustments (1)
Year ended December 31, 2008 ......................................................
$
Year ended December 31, 2009 ......................................................
$
Year ended December 31, 2010 ...................................................................
$
Charged to
Expense
4,042
4,172
1,471
2,959
3,213
2,863
$
$
$
Balance at
Beginning
of Year
COsTAr GrOup 2010 AnnuAL RepoRT
61
Write-offs,
Net of
Recoveries
$
$
$
3,788
4,522
1,919
Balance at End
of Year
3,213
2,863
2,415
$
$
$
(1) Additions to the allowance for doubtful accounts are charged to bad debt expense. Additions to the
allowance for billing adjustments are charged against revenues.
Additional financial statement 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.
47
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
Washington, District of Columbia, on the 24th day of February 2011.
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 J. Nassetta
Christopher J. Nassetta
/s/ Michael J. Glosserman
Michael J. Glosserman
Chairman of the Board
February 24, 2011
Chief Executive Officer and
President and a Director
(Principal Executive Officer)
February 24, 2011
Chief Financial Officer
February 24, 2011
(Principal Financial and Accounting Officer)
February 24, 2011
February 24, 2011
February 24, 2011
February 18, 2011
February 21, 2011
Director
Director
Director
Director
Director
48
COsTAr GrOup 2010 AnnuAL RepoRT
63
Exhibit
No.
2.1
INDEX TO EXHIBITS
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
Amended and Restated By-Laws (Incorporated by reference to Exhibit 3.3 to the Registrant’s Report on
Form 10-K for the year ended December 31, 2008).
4.1
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
CoStar Group, Inc. 2007 Stock Incentive Plan, as amended (Incorporated by reference to Exhibit 10.1 to
the Registrant’s Current Report on Form 8-K filed June 8, 2010.
*10.3
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
*10.8
*10.9
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).
Form of 2007 Plan Incentive Stock Option Grant Agreement between the Registrant and certain of its
officers and employees (Incorporated by reference to Exhibit 10.8 to the Registrant’s Report on Form
10-K for the year ended December 31, 2008).
Form of 2007 Plan Incentive Stock Option Grant Agreement between the Registrant and Andrew C.
Florance (Incorporated by reference to Exhibit 10.9 to the Registrant’s Report on Form 10-K for the year
ended December 31, 2008).
*10.10 Form of 2007 Plan Nonqualified Stock Option Grant Agreement between the Registrant and certain of
its officers and employees (Incorporated by reference to Exhibit 10.10 to the Registrant’s Report on
Form 10-K for the year ended December 31, 2008).
*10.11 Form of 2007 Plan Nonqualified Stock Option Grant Agreement between the Registrant and certain of
its directors (Incorporated by reference to Exhibit 10.11 to the Registrant’s Report on Form 10-K for the
year ended December 31, 2008).
*10.12 Form of 2007 Plan Nonqualified Stock Option Grant Agreement between the Registrant and Andrew C.
Florance (Incorporated by reference to Exhibit 10.12 to the Registrant’s Report on Form 10-K for the
year ended December 31, 2008).
*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).
49
INDEX TO EXHIBITS ⎯ (CONTINUED)
Exhibit
No.
Description
*10.14 CoStar Group, Inc. Employee Stock Purchase Plan, as amended (filed herewith).
*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).
First Amendment to Andrew C. Florance Employment Agreement, effective January 1, 2009
(Incorporated by reference to Exhibit 10.16 to the Registrant’s Report on Form 10-K for the year ended
December 31, 2008).
*10.16
*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).
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).
*10.18
10.19
10.20
10.21
21.1
23.1
31.1
Agreement for Lease between CoStar UK Limited and Wells Fargo & Company, dated August 25,
2009 (Incorporated by reference to Exhibit 10.26 to the Registrant’s Report on Form 10-K for the year
ended December 31, 2009).
Sub-Underlease between CoStar UK Limited and Wells Fargo & Company, dated November 18, 2009
(Incorporated by reference to Exhibit 10.28 to the Registrant’s Report on Form 10-K for the year ended
December 31, 2009).
Purchase and Sale Agreement between 1331 L Street LLC and 1331 L Street Holdings, LLC, dated
January 20, 2010 (Incorporated by reference to Exhibit 10.1 to the Registrant’s Report on Form 10-Q
for the quarter ended March 31, 2010).
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.
50
COsTAr GrOup 2010 AnnuAL RepoRT
65
COSTAR GROUP, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Registered Public Accounting Firm........................................................................... F-2
Consolidated Statements of Operations for the years ended December 31, 2008, 2009 and 2010................. F-4
Consolidated Balance Sheets as of December 31, 2009 and 2010................................................................... F-5
F-6
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2008, 2009 and 2010
Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2009 and 2010 ................ F-7
Notes to Consolidated Financial Statements .................................................................................................... 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, 2010
and 2009, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the
three years in the period ended December 31, 2010. Our audits also included the financial statement schedule listed
in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial statements and schedule 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, 2010 and 2009, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended December 31, 2010, in conformity with
U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the
information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), CoStar Group, Inc.’s internal control over financial reporting as of December 31, 2010, 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 24, 2011 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
McLean, Virginia
February 24, 2011
F-2
COsTAr GrOup 2010 AnnuAL RepoRT
67
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of CoStar Group, Inc.
We have audited CoStar Group, Inc.’s internal control over financial reporting as of December 31, 2010, based
on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). CoStar Group, Inc.’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 Group, Inc. maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2010, 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, 2010 and 2009, and the related consolidated
statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended
December 31, 2010 of CoStar Group, Inc. and our report dated February 24, 2011 expressed an unqualified opinion
thereon.
/s/ Ernst & Young LLP
McLean, Virginia
February 24, 2011
F-3
COSTAR GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Year Ended December 31,
2008
2009
2010
Revenues................................................................................................. $ 212,428
Cost of revenues......................................................................................
73,408
Gross margin........................................................................................... 139,020
$
209,659 $
73,714
135,945
226,260
83,599
142,661
Operating expenses:
Selling and marketing .........................................................................
Software development.........................................................................
General and administrative .................................................................
Purchase amortization .........................................................................
Income from operations ..........................................................................
Interest and other income, net.................................................................
Income before income taxes ...................................................................
Income tax expense, net..........................................................................
Net income .............................................................................................. $
Net income per share ⎯ basic ................................................................ $
Net income per share ⎯ diluted ............................................................. $
41,705
12,759
39,888
4,880
99,232
39,788
4,914
44,702
20,079
24,623
1.27
1.26
42,508
13,942
44,248
3,412
104,110
31,835
1,253
33,088
14,395
18,693 $
52,455
17,350
47,776
2,305
119,886
22,775
735
23,510
10,221
13,289
0.95 $
0.94 $
0.65
0.64
$
$
$
Weighted average outstanding shares ⎯ basic.......................................
Weighted average outstanding shares ⎯ diluted....................................
19,372
19,550
19,780
19,925
20,330
20,707
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 $2,863 and $2,415
as of December 31, 2009 and 2010, respectively ...................................................
Deferred income taxes, net.........................................................................................
Income tax receivable.................................................................................................
Prepaid expenses and other current assets..................................................................
Total current assets ........................................................................................................
COsTAr GrOup 2010 AnnuAL RepoRT
69
December 31,
2009
2010
$
206,405
3,722
205,786
20,188
(cid:1)
12,855
3,450
⎯
5,128
247,407
13,094
5,203
4,940
5,809
239,173
29,189
⎯
69,921
79,602
18,774
2,989
439,648
3,123
12,465
18,411
16,895
4,032
54,926
1,450
1,770
⎯
⎯
Long-term investments ..................................................................................................
Deferred income taxes, net ............................................................................................
Property and equipment, net ..........................................................................................
Goodwill ........................................................................................................................
Intangibles and other assets, net.....................................................................................
Deposits and other assets ...............................................................................................
Total assets..................................................................................................................... $
29,724
1,978
19,162
80,321
23,390
2,597
404,579
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable ....................................................................................................... $
Accrued wages and commissions...............................................................................
Accrued expenses .......................................................................................................
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; 20,617 and 20,773
3,667
9,696
14,167
14,840
1,377
43,747
⎯
1,826
⎯
⎯
$
$
issued and outstanding as of December 31, 2009 and 2010, respectively..............
Additional paid-in capital...........................................................................................
Accumulated other comprehensive loss .....................................................................
Retained earnings .......................................................................................................
Total stockholders’ equity..............................................................................................
Total liabilities and stockholders’ equity....................................................................... $
206
364,635
(7,565)
1,730
359,006
404,579
$
208
374,981
(8,706)
15,019
381,502
439,648
See accompanying notes.
F-5
COSTAR GROUP, INC.(cid:1)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
Comprehensive
Income
$
24,623
Common Stock
Amount
Shares
19,474 $
⎯
Additional
Paid-In
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
(Accumulated
Deficit)
Total
Stockholders’
Equity
195 $
⎯
317,570
⎯
$
5,626 $
⎯
(41,586) $
24,623
(14,061)
⎯
⎯
(5,361)
5,201
⎯
⎯
⎯
⎯
(14,061)
(5,361)
Balance at December 31, 2007
Net income
Foreign currency translation
adjustment
Net unrealized loss on
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
Net income
Foreign currency translation
adjustment
Net unrealized gain on
investments
Comprehensive income
$
Exercise of stock options
Restricted stock grants
Restricted stock grants
surrendered
Stock compensation expense, net
of forfeitures
ESPP
Consideration for PPR
Consideration for Resolve
Technology
Excess tax benefit for exercised
stock options
Balance at December 31, 2009
Net income
Foreign currency translation
adjustment
Net unrealized loss on
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, 2010
198
102
2
1
6,555
⎯
(49)
(1)
(695)
⎯
8
⎯
19,733
⎯
⎯
⎯
⎯
197
⎯
18,693
3,671
⎯
⎯
2,560
24,924
⎯
⎯
4,907
329
5,317
333,983
⎯
⎯
⎯
85
237
⎯
2
2,232
⎯
(44)
⎯
(672)
⎯
7
573
⎯
⎯
6
6,438
230
20,897
26
1
1,124
⎯
20,617
⎯
⎯
206
⎯
403
364,635
⎯
13,289
(1,064)
⎯
⎯
(77)
⎯
⎯
⎯
⎯
$
12,148
138
113
2
⎯
3,720
⎯
(103)
⎯
(2,906)
⎯
8
⎯
⎯
8,270
360
⎯
⎯
902
⎯
⎯
⎯
⎯
⎯
⎯
⎯
⎯
(16,963)
18,693
⎯
⎯
⎯
⎯
⎯
⎯
⎯
⎯
⎯
⎯
1,730
13,289
⎯
⎯
⎯
⎯
⎯
⎯
⎯
⎯
⎯
⎯
⎯
⎯
⎯
⎯
(13,796)
⎯
3,671
2,560
⎯
⎯
⎯
⎯
⎯
⎯
⎯
⎯
(7,565)
⎯
(1,064)
(77)
⎯
⎯
⎯
⎯
⎯
⎯
281,805
24,623
(14,061)
(5,361)
6,557
1
(696)
4,907
329
5,317
303,421
18,693
3,671
2,560
2,232
2
(672)
6,438
230
20,903
1,125
403
359,006
13,289
(1,064)
(77)
3,722
⎯
(2,906)
8,270
360
902
20,773 $
208 $
374,981 $
(8,706) $
15,019 $
381,502
See accompanying notes.
F-6
COsTAr GrOup 2010 AnnuAL RepoRT
71
COSTAR GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Operating activities:
Net income .............................................................................................. $
Adjustments to reconcile net income to net cash provided by
operating activities:
Year Ended December 31,
2009
2010
2008
24,623
$
18,693
$
13,289
Depreciation.....................................................................................
Amortization ....................................................................................
Deferred income tax expense, net....................................................
Provision for losses on accounts receivable ....................................
Excess tax benefit from stock options .............................................
Stock-based compensation expense.................................................
Fixed asset write-off ........................................................................
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable.........................................................................
Interest receivable ............................................................................
Income tax receivable ......................................................................
Prepaid expenses and other current assets .......................................
Deposits and other assets .................................................................
Accounts payable and other liabilities .............................................
Deferred revenue .............................................................................
Net cash provided by operating activities ...........................................
8,360
8,441
2,148
4,042
(5,317)
4,940
⎯
(6,196)
533
⎯
1,464
652
(3,044)
262
40,908
7,583
7,093
(2,428)
4,172
(403)
6,460
603
(1,610)
97
⎯
(1,521)
(1,013)
1,531
(812)
38,445
8,607
5,042
1,675
1,471
(902)
8,306
674
(1,776)
70
(4,940)
(714)
(385)
6,690
2,162
39,269
Investing activities:
Purchases of investments .................................................................
Sales of investments ........................................................................
Purchases of property and equipment and other assets ...................
Acquisitions, net of cash acquired ...................................................
Net cash provided by (used in) investing activities.............................
(4,839)
63,949
(3,656)
(3,024)
52,430
⎯
17,159
(9,420)
(3,207)
4,532
⎯
16,854
(57,358)
⎯
(40,504)
Financing activities:
Excess tax benefit from stock options .............................................
Repurchase of restricted stock to satisfy tax withholding
5,317
(695)(cid:1)
obligations ....................................................................................
Proceeds from exercise of stock options and ESPP.........................
Net cash provided by financing activities ...........................................
6,853
11,475
403
(672)
902
(2,904)
2,441
2,172
4,044
2,042
Effect of foreign currency exchange rates on cash and cash
equivalents...........................................................................................
(2,616)
Net increase in cash and cash equivalents ..............................................
102,197
Cash and cash equivalents at beginning of year .....................................
57,785
Cash and cash equivalents at end of year................................................ $ 159,982
655
45,804
159,982
$ 205,786
$
(188)
619
205,786
206,405
See accompanying notes.
F-7
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010
1. ORGANIZATION
CoStar Group, Inc. (the “Company”) has created a comprehensive, proprietary database of commercial real
estate information covering the United States (“U.S.”), as well as parts of the United Kingdom and France. Based on
its unique database, the Company provides information, marketing and analytic services to the commercial real
estate and related business community and operates within two segments, U.S. and International. The Company’s
information, marketing and analytic services are typically distributed to its clients under subscription-based license
agreements, which typically have a minimum term of one year and renew automatically.
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 U.S. generally accepted accounting principles
(“GAAP”) 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 in Note 9 and the Consolidated Statements of Cash Flows have been
reclassified to conform to the Company’s current presentation.
Revenue Recognition
The Company primarily derives revenues by 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, geography 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.
Revenue is recognized when (1) there is persuasive evidence of an arrangement, (2) the fee is fixed and
determinable, (3) services have been rendered and payment has been contractually earned and (4) collectability is
reasonably assured.
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 and analytic
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.
F-8
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73
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ⎯ (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ⎯ (CONTINUED)
Significant Customers
No single customer accounted for more than 5% of the Company’s revenues for each of the years ended
December 31, 2008, 2009 and 2010.
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 (loss). 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, 2009 and 2010.
Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss were as follows (in thousands):
Foreign currency translation adjustment ...................................................... $
Accumulated net unrealized loss on investments, net of tax ........................
Total accumulated other comprehensive loss ............................................... $
Advertising Costs
Year Ended December 31,
2010
2009
(5,914)
(4,850)
(2,792)
(2,715)
(8,706)
(7,565)
$
$
The Company expenses advertising costs as incurred. Advertising expenses were approximately $2.8 million,
$3.3 million and $3.0 million for the years ended December 31, 2008, 2009 and 2010, respectively.
Income Taxes
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 an asset may not be realized through
future taxable earnings or implementation of tax planning strategies. Interest and penalties related to income tax
matters are recognized in income tax expense.
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 potentially dilutive common shares would have
an anti-dilutive effect.
F-9
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ⎯ (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ⎯ (CONTINUED)
Stock-Based Compensation
Equity instruments issued in exchange for employee services are accounted for using a fair-value based method
and the fair value of such equity instruments is recognized as expense in the consolidated statements of operations.
Stock-based compensation cost is measured at the grant date of the share-based awards based on their fair
values, and is recognized on a straight line basis as expense over the vesting periods of the awards, net of an
estimated forfeiture rate.
Cash flows resulting from excess tax benefits are classified as part of net cash flows from operating and
financing activities. Excess tax benefits represent tax benefits related to stock-based compensation in excess of the
associated deferred tax asset for such equity compensation. Net cash proceeds from the exercise of stock options
and ESPP were approximately $6.9 million; $2.4 million and $4.0 million for the years ended December 31, 2008,
2009 and 2010, respectively. There were approximately $5.3 million, $403,000 and $902,000 of excess tax benefits
realized from stock option exercises for the years ended December 31, 2008, 2009 and 2010.
Stock-based compensation expense for stock options and restricted stock under equity incentive plans and stock
purchases under the employee stock purchase plan included in the Company's results of operations for the years
ended December 31, was as follows (in thousands):
Cost of revenues ................................................................................................... $
Selling and marketing...........................................................................................
Software development ..........................................................................................
General and administrative...................................................................................
547
400
423
3,570
Total ............................................................................................................... $ 4,940
2008
$
Year Ended December 31,
2010
2009
888 $ 1,504
1,518
949
4,335
$ 6,460 $ 8,306
1,125
588
3,859
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, 2009 and 2010, cash of approximately $519,000 and $190,000, respectively, was
held to support letters of credit for security deposits.
Investments
The Company determines the appropriate classification of debt and equity 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 (“ARS”). Investments are carried at fair value.
F-10
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75
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ⎯ (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ⎯ (CONTINUED)
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 the Company’s 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:
Building
Leasehold improvements
Furniture and office equipment
Research vehicles
Computer hardware and software
Thirty-nine years
Shorter of lease term or useful life
Five to ten years
Five years
Two to five years
Qualifying internal-use software 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.
Goodwill, Intangibles and Other Assets
Goodwill represents the excess of costs over the fair value of assets of businesses acquired. 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. The Company’s operating
segments, U.S. and International, are the reporting units tested for potential impairment. 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 the Company’s 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 the Company’s management to be commensurate with the risk in its current business
model.
Intangible assets with estimable useful lives that arose from acquisitions on or after July 1, 2001, are 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 are reviewed at least annually for
impairment.
F-11
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ⎯ (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ⎯ (CONTINUED)
Goodwill, Intangibles and Other Assets⎯ (Continued)
Acquired database technology, customer base and trade names and other are related to the Company’s
acquisitions (see Notes 3, 7 and 8). 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
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 estimated 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.
Recent Accounting Pronouncements
In April 2008, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance on existing
intangibles or expected future cash flows from those intangibles, which is effective for all fiscal years and interim
periods beginning after December 15, 2008. Early adoption of this guidance is not permitted. This guidance 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, this guidance 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, this guidance 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 Company adopted this guidance on
January 1, 2009. The adoption of this guidance did not have a material impact on the Company’s results of
operations or financial position.
In June 2008, the FASB issued authoritative guidance related to determining whether instruments granted in
share-based payment transactions are participating securities. This guidance clarifies that unvested share-based
payment awards with a right to receive non-forfeitable dividends are participating securities. This guidance is
effective for all annual and interim periods beginning after December 15, 2008. Adoption of this standard will
require the two-class method of calculating basic earnings per share to the extent that unvested share-based
payments have the right to receive non-forfeitable dividends. The Company adopted this guidance on January 1,
2009. The adoption of this guidance did not have a material impact on the Company’s results of operations or
financial position.
F-12
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77
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ⎯ (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ⎯ (CONTINUED)
Recent Accounting Pronouncements⎯ (Continued)
In April 2009, the FASB issued authoritative guidance related to the initial recognition, measurement and
subsequent accounting for assets and liabilities arising from pre-acquisition contingencies in a business combination.
It requires that such assets acquired or liabilities assumed be initially recognized at fair value at the acquisition date
if fair value can be determined during the measurement period. When fair value cannot be determined, companies
should typically account for the acquired contingencies using existing guidance. This guidance requires that
companies expense acquisition and deal-related costs that were previously allowed to be capitalized. This guidance
also requires that a systematic and rational basis for subsequently measuring and accounting for the assets or
liabilities be developed depending on their nature. This guidance was effective for contingent assets or liabilities
arising from business combinations with an acquisition date on or after January 1, 2009. The adoption of this
guidance changes the accounting treatment and disclosure for certain specific items in a business combination with
an acquisition date subsequent to December 31, 2008. The Company adopted this guidance on January 1, 2009,
and expensed acquisition and deal-related costs of approximately $700,000 associated primarily with the
acquisitions of Property and Portfolio Research, Inc. (“PPR”) and Resolve Technology, Inc. (“Resolve
Technology”).
In April 2009, the FASB issued authoritative guidance for determining whether a market is active or inactive,
and whether a transaction is distressed. This guidance is applicable to all assets and liabilities (financial and non-
financial) and will require enhanced disclosures. The Company adopted this guidance for its interim period ending
June 30, 2009. The adoption of this guidance did not have a material impact on the Company’s results of operations
or financial position, but did require additional disclosures in the Company’s financial statements.
In April 2009, the FASB issued authoritative guidance requiring disclosures in interim reporting periods
concerning the fair value of financial instruments that were previously only required in the annual financial
statements. The Company adopted the provisions of this guidance for the interim period ending June 30, 2009. The
adoption of this guidance did not have a material impact on the Company’s results of operations or financial
position, but did require additional disclosures in the Company’s financial statements.
In April 2009, the FASB issued authoritative guidance that redefines what constitutes an other-than-temporary
impairment, defines credit and non-credit components of an other-than-temporary impairment, prescribes their
financial statement treatment, and requires enhanced disclosures relating to such impairments. The Company
adopted this guidance for the interim period ending June 30, 2009. The adoption of this guidance did not have a
material impact on the Company’s results of operations or financial position, but did require additional disclosures
in the Company’s financial statements.
In May 2009, the FASB issued authoritative guidance which establishes general standards of accounting for and
disclosure of events that occur after the balance sheet date but before financial statements are issued. This guidance
was effective for all interim and annual reporting periods ending after June 15, 2009. This guidance has not and is
not expected to result in significant changes in the subsequent events that the Company reports, either through
recognition or disclosure, in its financial statements.
In June 2009, the FASB issued authoritative guidance to amend the manner in which entities evaluate whether
consolidation is required for variable interest entities (VIE). Previously, variable interest holders were required to
determine whether they had a controlling financial interest in a VIE based on a quantitative analysis of the expected
gains and/or losses of the entity. The new guidance requires an enterprise with a variable interest in a VIE to
qualitatively assess whether it has a controlling financial interest in the entity, and if so, whether it is the primary
beneficiary. This guidance also requires that companies continually evaluate VIEs for consolidation, rather than
assessing whether consolidation is required based upon the occurrence of triggering events. This guidance enhances
disclosures to provide financial statement users with greater transparency about transfers of financial assets and a
transferor’s continuing involvement with transferred financial assets. This guidance will be effective for the first
annual reporting period beginning after November 15, 2009. This guidance did not materially impact the Company’s
results of operations, financial position or related disclosures.
F-13
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ⎯ (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ⎯ (CONTINUED)
Recent Accounting Pronouncements⎯ (Continued)
In June 2009, the FASB issued authoritative guidance which replaced the previous hierarchy of U.S. GAAP and
establishes the FASB Codification as the single source of authoritative U.S. GAAP recognized by the FASB to be
applied by nongovernmental entities. This guidance is effective for financial statements issued for interim and
annual periods ending after September 15, 2009. This guidance did not materially impact the Company’s results of
operations or financial position, but did require changes to the disclosures in the Company’s financial statements.
In July 2009, the FASB issued authoritative guidance to improve the consistency with which companies apply
fair value measurements guidance to liabilities. This guidance is effective for interim and annual periods beginning
after September 30, 2009. This guidance did not materially impact the Company’s results of operations, financial
position or related disclosures.
In October 2009, the FASB issued authoritative guidance that amends existing guidance for identifying separate
deliverables in a revenue-generating transaction where multiple deliverables exist, and provides guidance for
measuring and allocating revenue to one or more units of accounting. In addition, the FASB issued authoritative
guidance on arrangements that include software elements. Under this guidance, tangible products containing
software components and non-software components that are essential to the functionality of the tangible product will
no longer be within the scope of the software revenue recognition guidance. This guidance is effective using the
prospective application or the retrospective application for revenue arrangements entered into or materially modified
in fiscal years beginning on or after June 15, 2010 with earlier application permitted. This guidance did not
materially impact the Company’s results of operations or financial position.
In January 2010, the FASB issued authoritative guidance that amends the disclosure requirements related to
recurring and nonrecurring fair value measurements. This guidance requires new disclosures on the transfers of
assets and liabilities between Level 1 (assets and liabilities measured using observable inputs such as quoted prices
in active markets) and Level 2 (assets and liabilities measured using inputs other than quoted prices in active
markets that are either directly or indirectly observable) of the fair value measurement hierarchy, including the
amount and reason of the transfers. Additionally, this guidance requires a roll forward of activities on purchases,
sales, issuance, and settlements of the assets and liabilities measured using significant unobservable inputs (Level 3
fair value measurements). This guidance is effective for interim and annual reporting periods beginning after
December 15, 2009, with the exception of the additional disclosure for Level 3 assets and liabilities, which is
effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. This
guidance did not materially impact the Company’s results of operations or financial position, but did require changes
to the disclosures in its interim and annual financial statements.
In February 2010, the FASB issued authoritative guidance that amends the disclosure requirements related to
subsequent events. This guidance includes the definition of a Securities and Exchange Commission filer, removes
the definition of a public entity, redefines the reissuance disclosure requirements and allows public companies to
omit the disclosure of the date through which subsequent events have been evaluated. This guidance is effective for
financial statements issued for interim and annual periods ending after February 2010. This guidance did not
materially impact the Company’s results of operations or financial position, but did require changes to the
Company’s disclosures in its financial statements.
In April 2010, the FASB issued authoritative guidance related to the criteria that should be met for determining
whether the milestone method of revenue recognition is appropriate. A vendor can recognize consideration that is
contingent upon achievement of a milestone in its entirety as revenue in the period in which the milestone is
achieved if the milestone is: (a) commensurate with either the vendor’s performance to achieve the milestone or the
enhancement of the value of the item delivered; (b) relates solely to past performance; and (c) is reasonable relative
to all deliverables and payment terms in the arrangement. This guidance is effective on a prospective basis for
financial statements issued for interim and annual periods ending after June 15, 2010 with early adoption permitted.
The adoption of this guidance did not have a material impact on the Company’s results of operations or financial
position.
F-14
COsTAr GrOup 2010 AnnuAL RepoRT
79
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ⎯ (CONTINUED)
3. ACQUISITIONS
On July 17, 2009, the Company acquired all of the issued and outstanding equity securities of PPR, and its
wholly owned subsidiary Property and Portfolio Research Ltd., providers of real estate analysis, market forecasts
and credit risk analytics to the commercial real estate industry. The Company acquired PPR from DMG Information,
Inc. (“DMGI”) in exchange for 572,999 shares of CoStar common stock, which had an aggregate value of
approximately $20.9 million as of the closing date. On July 17, 2009, 433,667 shares of the Company’s common
stock were issued to DMGI, and the remaining 139,332 shares were issued to DMGI on September 28, 2009 after
taking into account post-closing purchase price adjustments.
The purchase price for the PPR acquisition was allocated as follows (in thousands):
Working capital ..................................................................................................................................... $
Acquired trade names and other............................................................................................................
Acquired customer base ........................................................................................................................
Acquired database technology ..............................................................................................................
Goodwill................................................................................................................................................
Total purchase consideration ............................................................................................................. $
(5,479)
810
5,300
3,700
16,572
20,903
On October 19, 2009, the Company acquired all of the outstanding capital stock of Resolve Technology, Inc.
(“Resolve Technology”), a Delaware corporation, for approximately $4.5 million, consisting of approximately $3.4
million in cash and 25,886 shares of CoStar common stock, which had an aggregate value of approximately $1.1
million as of the closing date. The shares are subject to a three-year lockup, pursuant to which one-third were
released in October 2010. Additionally, the seller may be entitled to receive (i) a potential deferred cash payment
due approximately two years after closing based on the incremental growth of Resolve Technology’s revenue as of
September 2011 over its revenue as of September 2009, and (ii) other potential deferred cash payments for
successful completion of operational and sales milestones during the period from closing through no later than
October 31, 2013, which period may be extended by the parties to a date no later than December 31, 2014.
The purchase price for the Resolve Technology acquisition was allocated as follows (in thousands):
Purchase price in cash and stock ........................................................................................................... $
Deferred consideration ..........................................................................................................................
Total purchase consideration ............................................................................................................. $
Working capital ..................................................................................................................................... $
Acquired trade names and other............................................................................................................
Acquired customer base ........................................................................................................................
Acquired database technology ..............................................................................................................
Goodwill................................................................................................................................................
Total purchase consideration ............................................................................................................. $
4,499
3,052
7,551
(550)
430
890
1,200
5,581
7,551
F-15
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ⎯ (CONTINUED)
3. ACQUISITIONS⎯ (CONTINUED)
These acquisitions were accounted for as purchase business combinations. For each of the PPR and Resolve
Technology acquisitions, the purchase price was allocated to various working capital accounts, developed
technology, customer base, trademarks, non-competition agreements and goodwill. 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 identified intangibles are being amortized over their estimated useful lives. Goodwill for these
acquisitions is not amortized, but is subject to annual impairment tests. Goodwill includes acquired workforce. The
results of operations of PPR and Resolve Technology have been consolidated with those of the Company since the
respective dates of the acquisitions and are not considered material to the Company’s consolidated financial
statements. Accordingly, pro forma financial information has not been presented for either of the acquisitions.
4. INVESTMENTS
The Company determines the appropriate classification of debt and equity investments at the time of purchase
and re-evaluates 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 variable rate debt instruments with an auction reset feature, referred to as ARS. Investments
are carried at fair market value.
Scheduled maturities of investments classified as available-for-sale as of December 31, 2010 are as follows (in
thousands):
Maturity
Due in:
Fair Value
2011 .............................................................................................................................................. $
2012-2015.....................................................................................................................................
2016-2020.....................................................................................................................................
2021 and thereafter.......................................................................................................................
Available-for-sale investments .......................................................................................................... $
46
3,603
73
29,189
32,911
The realized gains on the Company’s investments for the years ended December 31, 2008, 2009 and 2010 were
approximately $329,000, $4,000 and $11,000, respectively. The realized losses on the Company’s investments for
the years ended December 31, 2008, 2009 and 2010 were approximately $489,000, $5,000 and $41,000,
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 accumulated other comprehensive income (loss) 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.
F-16
COsTAr GrOup 2010 AnnuAL RepoRT
81
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ⎯ (CONTINUED)
4. INVESTMENTS ⎯ (CONTINUED)
As of December 31, 2010, the amortized cost basis and fair value of investments classified as available-for-sale
are as follows (in thousands):
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
Collateralized debt obligations........................................................
3,407
Corporate debt securities .................................................................
Government-sponsored enterprise obligations ............................................
74
32,175
Auction rate securities ..................................................................................
35,702 $
Available-for-sale investments.....................................................................
46 $
$
$
⎯
196
⎯
⎯
196
$
$
⎯ $
⎯
(1)
(2,986)
(2,987) $
46
3,603
73
29,189
32,911
As of December 31, 2009, the amortized cost basis and fair value of investments classified as available-for-sale
are as follows (in thousands):
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
12,987 $
Collateralized debt obligations........................................................
6,396
Corporate debt securities .................................................................
Residential mortgage-backed securities ......................................................
394
97
Government-sponsored enterprise obligations ............................................
Auction rate securities ..................................................................................
32,750
52,624 $
Available-for-sale investments.....................................................................
$
$
5
331
⎯
⎯
⎯
336
$
$
(14) $
⎯
(7)
(1)
(3,026)
(3,048) $
12,978
6,727
387
96
29,724
49,912
The unrealized losses on the Company’s investments as of December 31, 2009 and 2010 were generated
primarily from changes 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 does not intend to sell these instruments and it is more likely than not that the Company will
not be required to sell these instruments prior to anticipated recovery, which may be maturity, it does not consider
these investments to be other-than-temporarily impaired as of December 31, 2009 and 2010. See Note 5 to the
consolidated financial statements for further discussion on the fair value of the Company’s financial assets.
The components of the Company’s investments in an unrealized loss position for more than twelve months
consists of the following (in thousands):
December 31,
2009
2010
Aggregate
Fair
Value
Gross
Unrealized
Losses
Aggregate
Fair
Value
Gross
Unrealized
Losses
Collateralized debt obligations...............................................................
Residential mortgage-backed securities .................................................
Government-sponsored enterprise obligations.......................................
Auction rate securities............................................................................
7,578 $
387
96
29,724
(14) $
(7)
(1)
(3,026)
$
⎯ $
⎯
73
29,189
$
37,785 $ (3,048) $
29,262 $
F-17
⎯
⎯
(1)
(2,986)
(2,987)
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ⎯ (CONTINUED)
4. INVESTMENTS ⎯ (CONTINUED)
The Company did not have any investments in an unrealized loss position for less than twelve months as of
December 31, 2009 and 2010, respectively.
The gross unrealized gains on the Company’s investments as of December 31, 2009 and 2010 were
approximately $336,000 and $196,000, respectively.
5. FAIR VALUE
Fair value is defined as the price that would be received in the sale of an asset or paid to transfer a liability in an
orderly transaction between market participants. There is 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.
The following table represents the Company's fair value hierarchy for its financial assets (cash, cash equivalents
and investments) and liabilities measured at fair value on a recurring basis as of December 31, 2010 (in thousands):
Assets:
Level 1
Level 2
Level 3
Total
Cash ............................................................................................ $ 55,496
Money market funds................................................................... 150,909
⎯
Collateralized debt obligations................................................................
⎯
Corporate debt securities .........................................................................
⎯
Government-sponsored enterprise obligations........................................
⎯
Auction rate securities .............................................................................
Total assets measured at fair value...............................................................
Liabilities:
$ 206,405 $
$
Deferred consideration ............................................................................
Total liabilities measured at fair value .........................................................
$
$
⎯ $
⎯ $
⎯
⎯
46
3,603
73
⎯
3,722
$
⎯
⎯
⎯
⎯
⎯
29,189
$ 29,189
$ 55,496
150,909
46
3,603
73
29,189
$ 239,316
⎯
⎯
$
$
3,222
3,222
$
$
3,222
3,222
The following table represents the Company's fair value hierarchy for its financial assets (cash, cash equivalents
and investments) and liabilities measured at fair value on a recurring basis as of December 31, 2009 (in thousands):
Assets:
Level 1
Level 2
Level 3
Total
Cash ............................................................................................ $ 38,721
Money market funds................................................................... 167,065
⎯
Collateralized debt obligations................................................................
⎯
Corporate debt securities .........................................................................
⎯
Residential mortgage-backed securities ..................................................
⎯
Government-sponsored enterprise obligations........................................
⎯
Auction rate securities .............................................................................
Total assets measured at fair value...............................................................
Liabilities:
⎯
⎯
12,978
6,727
387
96
⎯
$ 205,786 $ 20,188
$
$
⎯
⎯
⎯
⎯
⎯
⎯
29,724
$ 29,724
$ 38,721
167,065
12,978
6,727
387
96
29,724
$ 255,698
Deferred consideration ............................................................................
Total liabilities measured at fair value .........................................................
$
$
⎯ $
⎯ $
⎯
⎯
$
$
3,082
3,082
$
$
3,082
3,082
F-18
COsTAr GrOup 2010 AnnuAL RepoRT
83
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ⎯ (CONTINUED)
5. FAIR VALUE ⎯ (CONTINUED)
The Company’s Level 2 assets consist of collateralized debt obligations, corporate debt securities, residential
mortgage-backed securities and government-sponsored enterprise obligations, which do not have directly observable
quoted prices in active markets. The Company’s Level 2 assets are valued using matrix pricing.
The Company’s Level 3 assets consist of ARS, whose underlying assets are primarily student loan securities
supported by guarantees from the Federal Family Education Loan Program (“FFELP”) of the U.S. Department of
Education.
The following table summarizes changes in fair value of the Company’s Level 3 assets from December 31,
2007 to December 31, 2010 (in thousands):
Auction
Rate
Securities
Balance at December 31, 2007 .................................................................................................................... $
Unrealized loss included in other comprehensive loss............................................................................
Settlements ..............................................................................................................................................
Balance at December 31, 2008 ....................................................................................................................
Unrealized gain included in other comprehensive loss ...........................................................................
Settlements ..............................................................................................................................................
Balance at December 31, 2009 ....................................................................................................................
Unrealized gain included in other comprehensive loss ...........................................................................
Settlements ..............................................................................................................................................
Balance at December 31, 2010 .................................................................................................................... $
53,975
(3,710)
(20,925)
29,340
684
(300)
29,724
40
(575)
29,189
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.
As of December 31, 2010, the Company held ARS with $32.2 million par value, all of which failed to settle at
auction. 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, 2010.
While the Company continues to earn interest on its ARS investments at the 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, 2010. 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, 2010, the Company determined there was a decline in the fair value of its ARS
investments of approximately $3.0 million. The decline was deemed to be a temporary impairment and recorded as
an unrealized loss in accumulated other comprehensive loss 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/or their credit
ratings deteriorate, the Company may be required to record additional unrealized losses in accumulated other
comprehensive loss or an other-than-temporary impairment charge to earnings on these investments.
F-19
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ⎯ (CONTINUED)
5. FAIR VALUE ⎯ (CONTINUED)
As of December 31, 2010, the Company’s Level 3 liabilities consist of a $3.2 million liability for deferred
consideration related to the October 19, 2009 acquisition of Resolve Technology. The deferred consideration
includes (i) a potential deferred cash payment due approximately two years after closing based on the incremental
growth of Resolve Technology’s revenue as of September 2011 over its revenue as of September 2009, and (ii) other
potential deferred cash payments for successful completion of operational and sales milestones during the period
from closing through no later than October 31, 2013, which period may be extended by the parties to a date no later
than December 31, 2014.
The following table summarizes changes in fair value of the Company’s Level 3 liabilities from December 31,
2008 to December 31, 2010 (in thousands):
Balance at December 31, 2008 .................................................................................................................... $
Deferred consideration upon acquisition.................................................................................................
Accretion for 2009 ..................................................................................................................................
Balance at December 31, 2009 ....................................................................................................................
Accretion for 2010 ..................................................................................................................................
Balance at December 31, 2010 .................................................................................................................... $
Deferred
Consideration
⎯
3,052
30
3,082
140
3,222
The Company used a discounted cash flow model to determine the estimated fair value of its Level 3 liabilities
as of December 31, 2010. The significant assumptions used in preparing the discounted cash flow model include the
discount rate, estimates for future incremental revenue growth and probabilities for completion of operational and
sales milestones.
6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
⎯
Building .......................................................................................................................... $
Leasehold improvements ................................................................................................ 10,333
Furniture, office equipment and research vehicles ......................................................... 20,279
Computer hardware and software ................................................................................... 28,259
58,871
Accumulated depreciation and amortization .................................................................. (39,709)
Property and equipment, net ........................................................................................... $ 19,162
$ 42,920
16,290
21,116
24,354
104,680
(34,759)
$ 69,921
December 31,
2009
2010
F-20
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ⎯ (CONTINUED)
7. GOODWILL
The changes in the carrying amount of goodwill by operating segment consist of the following (in thousands):
COsTAr GrOup 2010 AnnuAL RepoRT
85
United States
31,547
Goodwill, December 31, 2008 .....................................................................
$
23,858
Acquisitions.............................................................................................
⎯
Effect of foreign currency translation .....................................................
Purchase accounting adjustment .............................................................
(145)
55,260
Goodwill, December 31, 2009 .....................................................................
⎯
Effect of foreign currency translation .....................................................
Goodwill, December 31, 2010 .....................................................................
55,260
$
International
$
22,781
⎯
2,280
⎯
25,061
(719)
24,342
$
Total
54,328
23,858
2,280
(145)
80,321
(719)
79,602
$
$
The Company recorded goodwill of approximately $1.1 million in connection with the First CLS, Inc.
acquisition in April 2008, which was decreased by $145,000 in 2009, upon completion of purchase
accounting. Approximately $1.7 million in additional goodwill was recorded in connection with the First CLS, Inc.
acquisition as a result of the payment of deferred consideration of $1.7 million in August 2009. The Company
recorded goodwill of approximately $16.6 million in connection with the July 2009 acquisition of PPR. In July
2009, the Company had recorded $12.1 million in goodwill for the PPR acquisition, which was increased by $4.5
million in December 2009 upon completion of the Company’s review of the income tax attributes and deferred taxes
related to the PPR purchase accounting. The Company recorded goodwill of approximately $5.6 million in
connection with the Resolve Technology acquisition in October 2009.
During the fourth quarters of 2009 and 2010, the Company completed the annual impairment test of goodwill
and concluded that goodwill was not impaired.
F-21
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ⎯ (CONTINUED)
8. INTANGIBLES AND OTHER ASSETS
Intangibles and other assets consist of the following (in thousands, except amortization period data):
December 31,
2009
2010
Weighted-Average
Amortization
Period (in years)
Building photography ..........................................................................
Accumulated amortization...................................................................
Building photography, net ...................................................................
11,504
(9,089)
2,415
$
Acquired database technology.............................................................
Accumulated amortization...................................................................
Acquired database technology, net......................................................
25,790
(21,144)
4,646
Acquired customer base ......................................................................
Accumulated amortization...................................................................
Acquired customer base, net................................................................
55,770
(41,208)
14,562
Acquired trade names and other ..........................................................
Accumulated amortization...................................................................
Acquired trade names and other, net
9,755
(7,988)
1,767
Intangibles and other assets, net ..........................................................
23,390
$
5
4
10
7
$
11,771
(10,311)
1,460
26,034
(22,150)
3,884
55,380
(43,349)
12,031
9,640
(8,241)
1,399
$
18,774
Amortization expense for intangibles and other assets was approximately $8.4 million, $7.1 million and $5.0
million for the years ended December 31, 2008, 2009 and 2010.
In the aggregate, amortization for intangibles and other assets existing as of December 31, 2010 for future
periods is expected to be approximately $3.3 million, $3.3 million, $2.4 million, $1.8 million and $1.7 million for
the years ending December 31, 2011, 2012, 2013, 2014 and 2015, respectively.
F-22
COsTAr GrOup 2010 AnnuAL RepoRT
87
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ⎯ (CONTINUED)
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,
2009
2008
2010
Federal................................................................................................
State....................................................................................................
Foreign ...............................................................................................
Total current ...........................................................................................
Deferred:
$ 18,289
3,842
⎯
22,131
$
$ 15,194
1,593
26
16,813
Federal................................................................................................
State....................................................................................................
Foreign ...............................................................................................
Total deferred .........................................................................................
Total provision for income taxes............................................................
(408)
(52)
(1,592)
(2,052)
$ 20,079
(2,097)
(199)
(122)
(2,418)
$ 14,395
The components of deferred tax assets and liabilities consists of the following (in thousands):
7,061
1,424
61
8,546
1,706
(6)
(25)
1,675
$ 10,221
December 31,
2009
2010
Deferred tax assets:
Reserve for bad debts .................................................................................................. $
Accrued compensation ................................................................................................
Stock compensation.....................................................................................................
Net operating losses.....................................................................................................
Accrued reserve ...........................................................................................................
Capital loss carryovers ................................................................................................
Unrealized loss on securities .......................................................................................
Deferred rent................................................................................................................
Deferred revenue .........................................................................................................
Other liabilities ............................................................................................................
1,093
3,156
3,168
2,985
238
348
1,076
501
214
209
Total deferred tax assets .................................................................................... 12,988
$
921
3,030
3,087
3,365
961
312
1,074
1,546
1,154
226
15,676
Deferred tax liabilities:
Prepaids .......................................................................................................................
Depreciation ................................................................................................................
Intangibles ...................................................................................................................
Total deferred tax liabilities...............................................................................
(638)
(587)
(3,350)
(4,575)
Net deferred tax asset ..................................................................................................
Valuation allowance ....................................................................................................
Net deferred taxes........................................................................................................ $
8,413
(2,985)
5,428
$
(725)
(2,396)
(4,132)
(7,253)
8,423
(4,670)
3,753
F-23
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ⎯ (CONTINUED)
9. INCOME TAXES ⎯ (CONTINUED)
For the years ended December 31, 2009 and 2010, a valuation allowance has been established for certain
deferred tax assets due to the uncertainty of realization. The valuation allowance for the years ended December 31,
2009 and 2010 includes an allowance for unrealized losses, capital loss carryforwards, foreign deferred tax assets
and state net operating loss carryforwards. The valuation allowance for the deferred tax asset for unrealized losses
has been recorded as an adjustment to accumulated other comprehensive loss.
The Company established the valuation allowance because it is more likely than not that a portion of the
deferred tax asset for certain items will not be realized based on the weight of available evidence. A valuation
allowance was established for the unrealized losses on securities and the capital loss carryovers as the Company has
not historically generated capital gains, and it is uncertain whether the Company will generate sufficient capital
gains in the future to absorb the capital losses. A valuation allowance was established for the foreign deferred tax
assets due to the uncertainty of future foreign taxable income. The Company has not had sufficient taxable income
historically to utilize the foreign deferred tax assets, and it is uncertain whether the Company will generate sufficient
taxable income in the future. Similarly, the Company has established a valuation allowance for net operating losses
in certain states where it is uncertain whether the Company will generate sufficient taxable income before the losses
expire.
The Company’s change in valuation allowance was a decrease of approximately $62,000 for the year ended
December 31, 2009 and an increase of approximately $1.7 million for the year ended December 31, 2010. The
increase for the year ended December 31, 2010 is primarily due to the increase in the valuation allowance for
foreign deferred tax assets.
For the year ended December 31, 2010, the Company had U.S. income of approximately $30.2 million and a
foreign loss of approximately $6.7 million.
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,
2009
2008
2010
Expected federal income tax provision at statutory rate ........................
State income taxes, net of federal benefit...............................................
Foreign income taxes, net effect.............................................................
Stock compensation ...............................................................................
Increase in valuation allowance .............................................................
Disregarded entity election.....................................................................
Nondeductible compensation .................................................................
Other adjustments...................................................................................
Income tax expense, net .........................................................................
$ 15,646
2,505
497
87
1,023
⎯
⎯
321
$ 20,079
$ 11,581
1,778
347
300
1,446
(1,477)
140
280
$ 14,395
$
8,229
1,372
(1,688)
289
1,657
(992)
945
409
$ 10,221
The Company paid approximately $13.4 million, $19.4 million, and $12.9 million in income taxes for the years
ended December 31, 2008, 2009 and 2010, respectively.
The Company has net operating loss carryforwards for international income tax purposes of approximately
$11.8 million, which do not expire.
F-24
COsTAr GrOup 2010 AnnuAL RepoRT
89
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ⎯ (CONTINUED)
9. INCOME TAXES ⎯ (CONTINUED)
The following tables summarize the activity related to the Company’s unrecognized tax benefits (in thousands):
Unrecognized tax benefit as of December 31, 2007........................................................................ $
Increase for current year tax positions ......................................................................................
Decrease for prior year tax positions ........................................................................................
Expiration of the statute of limitation for assessment of taxes ..................................................
Unrecognized tax benefit as of December 31, 2008........................................................................
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, 2009........................................................................
Increase for current year tax positions .......................................................................................
Decrease for prior year tax positions .........................................................................................
Expiration of the statute of limitation for assessment of taxes ..................................................
Unrecognized tax benefit as of December 31, 2010........................................................................ $
233
1,451
(9)
(117)
1,558
69
257
(28)
1,856
70
(116)
(44)
1,766
Approximately $244,000 and $217,000 of the unrecognized tax benefit as of December 31, 2010, and 2009,
respectively, would favorably affect the annual effective tax rate, if recognized in future periods. During 2010, the
Company recognized approximately $20,000 of interest and $7,000 of penalties, and had total accruals of
approximately $184,000 for interest and $61,000 for penalties as of December 31, 2010. During 2009, the Company
recognized approximately $10,000 of interest benefit and $20,000 of penalties, and had total accruals of
approximately $164,000 for interest and $54,000 for penalties as of December 31, 2009. 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. 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 2006 through 2009 remain open to
examination. The Company’s U.K. income tax returns for tax years 2004 through 2009 remain open to examination.
10. 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, 2008, 2009 and 2010 was
approximately $8.0 million, $9.1 million and $12.0 million, respectively.
Future minimum lease payments as of December 31, 2010 are as follows (in thousands):
2011 ........................................................................................................................................................
2012 ........................................................................................................................................................
2013 ........................................................................................................................................................
2014 ........................................................................................................................................................
2015 ........................................................................................................................................................
2016 and thereafter .................................................................................................................................
$
$
8,691
7,774
5,331
3,567
3,341
18,749
47,453
F-25
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ⎯ (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES ⎯ (CONTINUED)
On December 8, 2009, a former employee filed a lawsuit against the Company in the United States District
Court for the Southern District of California alleging violations of the Fair Labor Standards Act and California state
wage-and-hour laws and is seeking unspecified damages under those laws. The complaint also seeks to declare a
class of all similarly situated employees to pursue similar claims. In May 2010, the parties reached a preliminary
agreement to settle this lawsuit, and in June 2010, the Company accrued approximately $800,000 in general and
administrative expense in anticipation of making a settlement payment that will formally resolve this litigation. The
Company anticipates the payment will be due during the second quarter of 2011.
Currently, and from time to time, the Company is involved in litigation incidental to the conduct of its
business. In accordance with GAAP, the Company records a provision for a liability when it is both probable that a
liability has been incurred and the amount can be reasonably estimated. At the present time, while it is reasonably
possible that an unfavorable outcome may occur as a result of one or more of the Company’s current litigation
matters, management has concluded that it is not probable that a loss has been incurred in connection with the
Company’s current litigation other than as described above. In addition, other than as described above, the
Company is unable to estimate the possible loss or range of loss that could result from an unfavorable outcome in
the Company’s current litigation and accordingly, the Company has not recognized any liability in the consolidated
financial statements for unfavorable results, if any, other than described above. Legal defense costs are expensed as
incurred.
11. SEGMENT REPORTING
The Company manages its 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 services, consisting primarily of CoStar Property Professional®, CoStar
Tenant®, CoStar COMPS Professional®, and FOCUSTM services, currently generate approximately 94% 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 operating segment
EBITDA, which is the Company’s net income before interest, income taxes, depreciation and amortization.
Management believes that operating segment EBITDA is an appropriate measure for evaluating the operational
performance of our operating 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.
F-26
COsTAr GrOup 2010 AnnuAL RepoRT
91
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
11. SEGMENT REPORTING⎯ (CONTINUED)
Summarized information by operating segment was as follows (in thousands):
Year Ended December 31,
2009
2008
2010
Revenues
United States..........................................................................................................
International
$ 190,075
$ 191,556
External customers ...........................................................................................
Intersegment revenue .......................................................................................
Total international revenue....................................................................................
Intersegment eliminations .....................................................................................
Total revenues .....................................................................................................
22,353
⎯
22,353
⎯
$ 212,428
18,103
898
19,001
(898)
$ 209,659
$ 208,463
17,797
1,266
19,063
(1,266)
$ 226,260
EBITDA
United States..........................................................................................................
International...........................................................................................................
Total EBITDA .....................................................................................................
58,813
(2,224)
56,589
$
$
$
$
47,697
(1,186)
46,511
$
$
39,607
(3,183)
36,424
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...........................................................................................................
$ 56,589
(2,284)
(4,880)
(9,637)
4,914
(20,079)
24,623
$
$
46,511
(2,389)
(3,412)
(8,875)
1,253
(14,395)
18,693
$
$
36,424
(1,471)
(2,305)
(9,873)
735
(10,221)
13,289
$
Intersegment revenue is attributable to services performed by Property and Portfolio Research Ltd., a wholly
owned subsidiary of PPR, for PPR. Intersegment revenue is recorded at an amount the Company believes
approximates fair value. U.S. EBITDA includes a corresponding cost for the services performed by Property and
Portfolio Research Ltd. for PPR. PPR and Property and Portfolio Research Ltd. were acquired in July 2009.
International EBITDA includes a corporate allocation of approximately $1.1 million, $500,000 and $400,000 for the
years ended December 31, 2008, 2009 and 2010, respectively. The corporate allocation represents costs incurred for
U.S. employees involved in management and expansion activities of the Company’s International operating
segment.
F-27
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
11. SEGMENT REPORTING⎯ (CONTINUED)
Summarized information by operating segment consists of the following (in thousands):
December 31,
2009
2010
Property and equipment, net
United States........................................................................................................... $
International............................................................................................................
Total property and equipment, net........................................................................ $
Goodwill
United States........................................................................................................... $
International............................................................................................................
Total goodwill..................................................................................................... $
14,851
4,311
19,162
55,260
25,061
80,321
Assets
United States........................................................................................................... $
International.............................................................................................................
Total segment assets .............................................................................................. $
424,479
44,558
469,037
Reconciliation of segment assets to total assets
Total segment assets ............................................................................................... $
Investment in subsidiaries ......................................................................................
Intercompany receivables .......................................................................................
Total assets ........................................................................................................... $
469,037
(18,344)
(46,114)
404,579
Liabilities
United States............................................................................................................ $
International............................................................................................................
Total segment liabilities ....................................................................................... $
37,838
46,678
84,516
Reconciliation of segment liabilities to total liabilities
Total segment liabilities ......................................................................................... $
Intercompany payables ...........................................................................................
Total liabilities....................................................................................................... $
84,516
(38,943)
45,573
$
$
$
$
$
$
$
$
$
$
$
$
67,076
2,845
69,921
55,260
24,342
79,602
469,449
39,038
508,487
508,487
(18,344)
(50,495)
439,648
52,482
47,944
100,426
100,426
(42,280)
58,146
F-28
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ⎯ (CONTINUED)
COsTAr GrOup 2010 AnnuAL RepoRT
93
12. 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.
13. 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,
2009
2010
2008
Net income ......................................................................................... $ 24,623
$ 18,693
$ 13,289
Denominator:
Denominator for basic net income per share ⎯ weighted-
average outstanding shares .............................................................
19,372
19,780
20,330
Effect of dilutive securities:
Stock options and restricted stock......................................................
Denominator for diluted net income per share ⎯ weighted-
178
145
377
average outstanding shares .............................................................
19,550
19,925
20,707
Net income per share ⎯ basic................................................................ $
Net income per share ⎯ diluted............................................................. $
1.27
1.26
$
$
0.95
0.94
$
$
0.65
0.64
Stock options to purchase approximately 250,200, 483,800 and 167,000 shares that were outstanding as of
December 31, 2008, 2009 and 2010, respectively, 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 during
the period and, therefore, the effect would have been anti-dilutive.
F-29
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ⎯ (CONTINUED)
14. 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 provided 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 could 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 was determined by the Board of Directors and was 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 (including an increase of 1,300,000 shares of common stock pursuant to an
amendment to the 2007 Plan approved by the Stockholders on June 2, 2010): (a) 2,300,000 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 430,000
and 1.9 million shares were available for future grant under the 2007 Plan as of December 31, 2009 and 2010,
respectively.
F-30
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ⎯ (CONTINUED)
COsTAr GrOup 2010 AnnuAL RepoRT
95
14. 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, 2007 ...............
967,845
$16.20 - $54.12
Granted .................................................... 93,900 $43.99 - $55.07
(198,434) $17.77 - $45.18
Exercised..................................................
Canceled or expired .................................
(47,725) $39.00 - $52.13
Outstanding at December 31, 2008 ...............
Granted ....................................................
Exercised..................................................
Canceled or expired .................................
815,586
267,756 $25.00 - $40.13
(85,228) $17.35 - $36.38
(44,818) $30.06 - $46.81
$16.20 - $55.07
Outstanding at December 31, 2009 ...............
Granted ....................................................
Exercised..................................................
Canceled or expired .................................
953,296
160,892 $40.06 - $54.51
(137,724) $16.20 - $45.18
(30,768) $18.31 - $44.86
$16.20 - $55.07
$33.25
$45.76
$33.05
$46.36
$33.98
$31.05
$26.20
$39.40
$33.60
$43.49
$27.01
$37.83
Outstanding at December 31, 2010 ...............
945,696
$17.34 - $55.07
$36.10
5.70
$20,293
Exercisable at December 31, 2008 ................
701,975
$16.20 - $54.12
$31.84
Exercisable at December 31, 2009 ................
650,063
$16.20 - $55.07
$33.60
Exercisable at December 31, 2010 ................
609,274
$17.34 - $55.07
$35.21
4.05
$13,618
The aggregate intrinsic value is calculated as the difference between (i) the closing price of the common stock at
December 31, 2008, 2009 and 2010 and (ii) the exercise prices of the underlying awards, multiplied by the shares
underlying options as of December 31, 2008, 2009 and 2010, that had an exercise price less than the closing price on
that date. Options to purchase 198,434, 85,228, and 137,724 shares were exercised for the years ended December
31, 2008, 2009, and 2010, respectively. The aggregate intrinsic value of options exercised, determined as of the date
of option exercise, was $3.4 million, $1.2 million and $2.5 million, respectively.
At December 31, 2010, there was $9.9 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 2.2 years.
The weighted-average grant date fair value of each option granted during the years ended December 2008, 2009
and 2010 was $27.81, $12.72 and $16.54, respectively.
F-31
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ⎯ (CONTINUED)
14. 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,
2009
2010
2008
Dividend yield ........................................................................................ 0%
Expected volatility.................................................................................. 59%
Risk-free interest rate ............................................................................. 3.0%
Expected life (in years)........................................................................... 5
0%
43%
2.2%
5
0%
40%
2.2%
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, 2010:
Options Outstanding
Options Exercisable
Range of
Exercise Price
$17.34 - $22.87
$23.08 - $24.01
$25.00 - $25.00
$25.01 - $30.06
$36.48 - $39.00
$39.53 - $42.10
$42.29 - $42.29
$42.71 - $44.86
$45.18 - $54.51
$55.07 - $55.07
$17.34 - $55.07
Number of
Shares
122,167
1,625
124,357
110,290
168,564
52,978
106,600
146,886
97,229
15,000
945,696
Weighted-Average
Remaining
Contractual Life
(in years)
1.50
1.06
8.16
2.63
6.07
5.01
9.19
6.04
6.46
7.67
5.70
Weighted-
Average
Exercise Price
$20.19
$23.80
$25.00
$28.77
$37.92
$40.04
$42.29
$44.18
$51.60
$55.07
$36.10
Number of
Shares
122,167
1,625
39,222
110,290
100,551
38,762
⎯
106,457
80,200
10,000
609,274
Weighted-
Average
Exercise Price
$20.19
$23.80
$25.00
$28.77
$38.54
$40.02
$0.00
$44.40
$50.98
$55.07
$35.21
The following table presents unvested restricted stock awards activity for the year ended December 31, 2010:
Number
of
Shares
Unvested restricted stock at December 31, 2009 ......................................... 419,347
Granted ................................................................................................... 106,931
Vested ..................................................................................................... (169,363)
(42,541)
Canceled .................................................................................................
Unvested restricted stock at December 31, 2010 ......................................... 314,374
Weighted-Average
Grant Date
Fair Value per Share
$39.40
$43.01
$47.54
$38.63
$39.09
F-32
COsTAr GrOup 2010 AnnuAL RepoRT
97
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ⎯ (CONTINUED)
14. 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 2008, the Company matched 100% of employee
contributions up to a maximum of 6% of total compensation. In 2009 and 2010, the Company matched 50% 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, 2008, 2009 and 2010 were
approximately $2.6 million, $1.4 million and $1.5 million, respectively. The Company paid administrative expenses
in connection with the 401(k) plan of approximately $28,000 for the year ended December 31, 2008 and $0 for the
years ended December 31, 2009 and 2010, 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, 2008, 2009 and 2010 were approximately
$265,000, $130,000 and $160,000, 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 72,237 and 64,106 shares available for purchase under the plan as of
December 31, 2009 and 2010, respectively and approximately 6,600 and 8,100 shares of the Company’s common
stock were purchased during 2009 and 2010, respectively.
15. LEASE RESTRUCTURING CHARGES
Effective September 24, 2010, the Company consolidated its three facilities located in the Boston,
Massachusetts area, including the facilities used by CoStar, PPR, and Resolve Technology, into one facility. The
consolidation of the facilities resulted in a lease restructuring charge of approximately $1.3 million recorded in
general and administrative expense in the third quarter of 2010. The third quarter lease restructuring charge included
amounts for the abandonment of certain lease space and the impairment of leasehold improvements. The amount of
the lease restructuring charge was based upon management’s best estimate of amounts and timing of certain events
that will occur in the future. It is possible that the actual outcome of these events may differ from estimates. Changes
will be made to the restructuring accrual when any such differences become determinable.
F-33
COSTAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ⎯ (CONTINUED)
15. LEASE RESTRUCTURING CHARGES ⎯ (CONTINUED)
The following table summarizes the amount included in accrued expenses related to these restructuring charges
at December 31, 2010 (in thousands):
Lease
Restructuring
Accrual
Accrual balance at December 31, 2009 ....................................................................................................... $
Original charge ........................................................................................................................................
Rent payments made in 2010 ..................................................................................................................
Accrual balance at December 31, 2010........................................................................................................ $
⎯
1,160
(229)
931
16. PURCHASE OF BUILDING
In February 2010, the Company purchased a 169,429 square-foot office building located at 1331 L Street, NW
in downtown Washington, DC together with the tenancy in the underlying ground lease for the property for a
purchase price of $41.25 million in cash. This facility is being used primarily by the Company’s U.S. segment. The
Company began relocating its Bethesda-based employees and infrastructure to the new building starting in July 2010
and completed its relocation by October 15, 2010, the expiration date of the lease of its Bethesda property.
In connection with the purchase of the building, the Company assumed the ground lease for the parcel of land
under the building. The lease, which expires February 29, 2088, requires the payment of minimum annual rent of
$778,000 through February 29, 2012, then approximately $918,000 annually through February 29, 2024. Thereafter,
the minimum rate is adjusted to fair market value, as defined in the lease, once every 7 years.
The purchase of the building was accounted for as an asset acquisition. The total purchase price of $41.25
million, plus $1.7 million of direct transaction costs was allocated to the building. No other significant assets or
liabilities were acquired in this transaction.
17. SUBSEQUENT EVENTS
On February 2, 2011, 1331 L Street Holdings, LLC (“Holdings”), a wholly owned subsidiary of the Company,
and GLL L-Street 1331, LLC (“GLL”), an affiliate of Munich-based GLL Real Estate Partners GmbH, entered into
a purchase and sale agreement pursuant to which (i) Holdings agreed to sell to GLL its interest in the 169,429
square-foot office building located at 1331 L Street, NW, in downtown Washington, DC, and (ii) CoStar Realty
Information, Inc. (“CoStar Realty”), a wholly owned subsidiary of the Company, agreed to enter into a lease
expiring May 31, 2025 (with two 5-year renewal options) with GLL to lease back 149,514 square feet of the office
space located in this building, which the Company will continue to use as its corporate headquarters. The closing of
the sale took place on February 18, 2011. The aggregate consideration paid by GLL to Holdings pursuant to the
purchase and sale agreement was $101.0 million in cash, $15.0 million of which is being held in escrow to fund
additional build-out and planned improvements at the building.
The lease is effective as of June 1, 2010 and will expire May 31, 2025. The initial base rent is $38.50 per square
foot of occupied space, escalating 2.5% per year commencing June 1, 2011. The Company’s obligation to pay rent
increases proportionately over the course of the first year of the lease as certain scheduled completion dates for the
Company’s build out, on a floor-by-floor basis, are reached. The Company’s occupied space under the lease will
consist of the entire rented premises as of June 1, 2011, from and after which the Company will owe rent on the
entire leased premises. Annual lease payments for 2011 will be approximately $5.0 million.
F-34
COsTAr GrOup 2010 AnnuAL RepoRT
99
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
a) CoStar Realty Information, Inc., a Delaware corporation
b) CoStar Limited, a U.K. company
c) CoStar UK Limited, a U.K. company
d) Grecam S.A.S., a France Societée par Actions Simplifiée
e) Property and Portfolio Research, Inc., a Delaware corporation
f) Property and Portfolio Research Ltd., a U.K. company
g) Resolve Technology, Inc., a Delaware corporation
h) 1331 L Street Holdings, LLC, a Delaware limited liability company
i) CGI Building Finance, LLC, a Delaware limited liability company
Consent of Independent Registered Public Accounting Firm
EXHIBIT 23.1
We consent to the incorporation by reference in the following Registration Statements:
(1) Registration Statement Number 333-82599 on Form S-8 pertaining to the Realty Information Group, Inc.
1998 Stock Incentive Plan
(2) Registration Statement Number 333-92165 on Form pertaining to the CoStar Group, Inc. 1998 Stock
Incentive Plan, as amended
(3) Registration Statement Number 333-45770 on Form S-8 pertaining to the CoStar Group, Inc. 1998 Stock
Incentive Plan, as amended
(4) Registration Statement Number 333-69548 on Form S-8 pertaining to the CoStar Group, Inc. 1998 Stock
Incentive Plan (as amended)
(5) Registration Statement Number 333-135709 on Form S-8 pertaining to the CoStar Group, Inc. Employee
Stock Purchase Plan
(6) Registration Statement Number 333-143968 on Form S-8 pertaining to the CoStar Group, Inc. 2007 Stock
Incentive Plan, as amended
(7) Registration Statement Number 333-167424 on Form S-8 pertaining to the CoStar Group, Inc. 2007 Stock
Incentive Plan, as amended
of our reports dated February 24, 2011, with respect to the consolidated financial statements and schedule 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) of CoStar Group, Inc for the year ended December 31, 2010.
/s/ Ernst & Young LLP
McLean, Virginia
February 24, 2011
COsTAr GrOup 2010 AnnuAL RepoRT 101
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 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 report;
3. Based on my knowledge, the financial statements, and other financial information included in this 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 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 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 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
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 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 24, 2011
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 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 report;
3. Based on my knowledge, the financial statements, and other financial information included in this 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 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 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 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
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 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 24, 2011
By:
/s/ Brian J. Radecki
Brian J. Radecki
Chief Financial Officer
(Principal Financial and Accounting
Officer and Duly Authorized Officer)
COsTAr GrOup 2010 AnnuAL RepoRT 103
EXHIBIT 32.1
CoStar Group, Inc.
1331 L Street, NW
Washington, DC 20005
February 24, 2011
Securities and Exchange Commission
100 F Street, NE
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, 2010, 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, 2010, 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, 2010, 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.
1331 L Street, NW
Washington, DC 20005
February 24, 2011
Securities and Exchange Commission
100 F Street, NE
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, 2010, 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, 2010, 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, 2010, 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*
john L. Stanfill*
jennifer L. Kitchen*
Paul Marples*
Frank A. Carchedi
jonathan M. Coleman
Susan E. jeffress
Dr. Ruijue Peng
joshua A. Scoville
Frank A. Simuro
Dean L. Violagis
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 CoStar’s Form 10-K for the year ended
December 31, 2010, 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.
meet Our team
leading
The
way
BOard OF directOrs
Michael R. Klein
Chairman of the Board,
CoStar Group, Inc. +
Chairman of the Board of
The Sunlight Foundation
Warren H. Haber
Chairman of the
Board + Chief
Executive Officer,
Founders Equity, Inc.
Andrew C. Florance*
President + Chief Executive
Officer, CoStar Group, Inc.
Josiah O. Low, III
Senior Advisor,
Catterton Partners L.P.
Christopher J. Nassetta
President +
Chief Executive Officer,
Hilton Worldwide
David Bonderman
Founding Partner,
TPG Capital, L.P.
Michael J. Glosserman
Managing Partner
The jBG Companies
management team
Andrew C. Florance*
President +
Chief Executive Officer
Jonathan M. Coleman
General Counsel +
Secretary
Brian J. Radecki*
Chief Financial Officer
John L. Stanfill*
Senior Vice President,
Sales + Customer Service
Jennifer L. Kitchen*
Senior Vice President,
Research
Paul Marples*
Managing Director,
CoStar U.K. Limited
Frank A. Carchedi
Senior Vice President,
Corporate Development
Susan E. Jeffress
Vice President,
Customer Service
Dr. Ruijue Peng
Chief Research Officer,
PPR
Joshua A. Scoville
Director of U.S. Research,
PPR
Frank A. Simuro
Chief Information Officer
Dean L. Violagis
Vice President, Research
photo of Andrew Florance (page 4) ©Joanne s. lawton/Washington Business Journal
*DENOTEs COsTAr ExECuTIVE + sECTION 16 OFFICEr
COSTAR GROUP
2010
ANNUAL
REPORT
SHAREHOLDER INFORMATION
Stock Listing
Symbol: CSGP,
NASDAQ Listed
Independent Auditors
Ernst & Young LLP
8484 Westpark Drive
McLean, VA 22102
Transfer Agent
and Registrar
American Stock Transfer &
Trust Company, LLC
6201 15th Avenue
Brooklyn, NY 11219
CORPORATE INFORMATION
Corporate Offi ce
CoStar Group, Inc.
1331 L Street, NW
Washington, DC 20005
1-800-811-4798
www.costar.com
Investor Relations
Brian J. Radecki
Chief Financial Offi cer
(202) 336-6920
Timothy J. Trainor
Communications Director
(202) 336-6975
ABOUT COSTAR
CoStar Group (Nasdaq: CSGP) is commercial real estate’s
leading provider of information, analytic and marketing
services. Founded in 1987, CoStar conducts expansive,
ongoing research to produce and maintain the largest and
most comprehensive database of commercial real estate
information. Our suite of online services enables clients to
analyze, interpret and gain unmatched insight on
commercial property values, market conditions and current
availabilities. Headquartered in Washington, DC, CoStar
maintains offi ces throughout the U.S. and in Europe with a
staff of approximately 1,500 worldwide, including the
industry’s largest professional research organization.
For more information, visit http://www.costar.com.
©2011 CoStar Group, Inc.
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