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e10-q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

      [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.

For the quarterly period ended: June 30, 2001

OR

      [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.

For the transition period from ________ to ________

Commission file number: 0-24531

COSTAR GROUP, INC.

(Exact name of registrant as specified in its charter)

     
DELAWARE 52-2091509
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)

2 BETHESDA METRO CENTER
BETHESDA, MD 20814
(301) 215-8300

(Address, including zip code, and telephone number, including area code, of
registrant’s principal executive offices)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [ X ] – No [ ]

As of July 31, 2001, there were 15,639,229 shares outstanding of the Registrant’s Common Stock, par value $.01.

COSTAR GROUP, INC.

TABLE OF CONTENTS

PART I —FINANCIAL INFORMATION

           
Item 1 - Financial Statements
   Condensed Consolidated Statements of Operations 3
   Condensed Consolidated Balance Sheets 4
   Condensed Consolidated Statements of Cash Flows 5
   Notes to Condensed Consolidated Financial Statements 6
Item 2 - Management’s Discussion and Analysis of
                  Financial Condition and Results of Operations		 9
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 16
PART II — OTHER INFORMATION
Item 1 - Legal Proceedings 17
Item 2 - Changes in Securities 17
Item 3 - Defaults upon Senior Securities 17
Item 4 - Submission of Matters to a Vote of Security Holders 17
Item 5 - Other Information 17
Item 6 - Exhibits and Reports on Form 8-K 17
Signatures 18

2

PART 1 FINANCIAL INFORMATION

ITEM 1 FINANCIAL STATEMENTS

CoStar Group, Inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)

                                         
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2001 2000 2001 2000
Revenues $ 18,073 $ 14,572 $ 35,427 $ 25,944
Cost of revenues 7,516 7,730 15,506 13,707
Gross margin 10,557 6,842 19,921 12,237
Operating expenses:
Selling and marketing 5,944 11,168 12,853 19,570
Software development 1,357 1,004 2,586 1,722
General and administrative 7,659 6,660 15,360 12,081
Purchase amortization 1,907 2,739 3,697 4,476
Acquired in-process development — — — 5,812
16,867 21,571 34,496 43,661
Loss from operations (6,310 ) (14,729 ) (14,575 ) (31,424 )
Loss on disposal of assets — (182 ) — (182 )
Other income, net 374 933 949 1,959
Net loss before income taxes (5,936 ) (13,978 ) (13,626 ) (29,647 )
Income tax benefit 41 845 82 1,410
Net loss $ (5,895 ) $ (13,133 ) $ (13,544 ) $ (28,237 )
Basic and diluted net loss per share $ (0.38 ) $ (0.85 ) $ (0.87 ) $ (1.91 )
Weighted average common shares 15,610 15,391 15,592 14,822

See accompanying notes.

3

CoStar Group, Inc.
Condensed Consolidated Balance Sheets
(in thousands)

                       
June 30, December 31,
2001 2000
ASSETS (unaudited )
Current assets:
Cash and cash equivalents $ 42,020 $ 47,101
Accounts receivable, less allowance for doubtful accounts of $2,940 and
    $2,890 as of June 30, 2001 and December 31, 2000		 6,092 6,148
Prepaid expenses and other current assets 692 862
Total current assets 48,804 54,111
Property and equipment 22,346 21,168
Accumulated depreciation (8,971 ) (6,475 )
13,375 14,693
Goodwill, intangible and other assets, net 69,852 76,659
Deposits 283 409
Total assets $ 132,314 $ 145,872
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 12,667 $ 13,561
Deferred revenue 5,021 4,949
Total current liabilities 17,688 18,510
Deferred taxes 904 988
Stockholders’ equity 113,722 126,374
Total liabilities and stockholders’ equity $ 132,314 $ 145,872

See accompanying notes.

4

CoStar Group, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)

                     
For the Six Months
Ended June 30,
2001 2000
Operating activities:
Net loss $ (13,544 ) $ (28,237 )
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 2,496 994
Amortization 6,938 6,835
Acquired in-process development — 5,812
Loss on disposal of assets — 182
Provision for losses on accounts receivable 1,054 879
Income tax benefit (82 ) (1,410 )
Changes in operating assets and liabilities (1,526 ) 436
Net cash used in operating activities (4,664 ) (14,509 )
Investing activities:
Net purchases of property and equipment (1,178 ) (8,391 )
Goodwill, intangibles and other assets (131 ) (2,976 )
Acquisitions (net of acquired cash) — (2,407 )
Net cash used in investing activities (1,309 ) (13,774 )
Financing activities:
Payment of long-term liability — (2,625 )
Net proceeds from exercise of stock options 892 1,092
Net cash provided by (used in) financing activities 892 (1,533 )
Net decrease in cash and cash equivalents (5,081 ) (29,816 )
Cash and cash equivalents at beginning of period 47,101 94,074
Cash and cash equivalents at end of period $ 42,020 $ 64,258

See accompanying notes.

5

COSTAR GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION

      CoStar Group, Inc. (the “Company”) has created a comprehensive, proprietary, national database of commercial real estate information for metropolitan areas throughout the United States. Based on its unique database, the Company provides information to the commercial real estate and related business community and operates within one reportable business segment. The information in the Company’s database is distributed to its clients under license agreements, which are typically one to three years in duration.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

      The Company is a Delaware corporation and was incorporated in February 1998 to succeed its predecessors, Realty Information Group L.P. (“RIGLP”) and OLD RIG, Inc. (“RIGINC”). RIGLP was an operating entity, while RIGINC was a holding company. In connection with the Company’s initial public offering on July 1, 1998 (“the Offering”), RIGLP and RIGINC merged with the Company pursuant to the RIG Contribution Agreement dated March 5, 1998. The limited partners of RIGLP (other than RIGINC) and all of the stockholders of RIGINC received 3.03 shares of Common Stock of the Company per each limited partnership unit or share of common stock exchanged, for a total of 5,754,017 shares. As a result of the reorganization of these entities, the Company owned (directly or indirectly) all of the capital stock of RIGINC and all the equity of RIGLP.

      The merger has been accounted for as a reorganization of entities under common control similar to a pooling of interests. Following the merger, each shareholder of the Company maintained their exact same ownership of the operating entity, RIGLP, as before the merger. The transfer of assets and liabilities of RIGLP and RIGINC have been recorded at their historical carrying values. The financial statements are presented as if the Company was in existence throughout all periods presented, as one operating entity. All share amounts have been restated to reflect the conversion of partnership units to common stock of the Company. On January 1, 1999, RIGLP and RIGINC were merged into a newly formed corporation, CoStar Realty Information, Inc. (“CoStar Realty”), a wholly owned subsidiary of the Company.

      Additionally, the consolidated financial statements of the Company include the accounts of COMPS.COM, Inc. (“Comps”) acquired on February 10, 2000 and First Image Technologies, Inc. (“First Image”) acquired and merged into Comps on November 9, 2000.

INTERIM FINANCIAL STATEMENTS

      The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information. In the opinion of the Company’s management, the financial statements reflect all adjustments necessary to present fairly the results of operations for the three and six month periods ended June 30, 2001 and 2000, the Company’s financial position at June 30, 2001, and the cash flows for the six month periods ended June 30, 2001 and 2000. These adjustments are of a normal recurring nature.

      Certain notes and other information have been condensed or omitted from the interim financial statements presented in this Quarterly Report on Form 10-Q. Therefore, these financial statements should be read in conjunction with the Company’s 2000 Annual Report on Form 10-K and the Company’s June 30, 2000, September 30, 2000 and March 31, 2001 Quarterly Reports on Form 10-Q.

      The results of operations for the three and six month periods ended June 30, 2001 are not necessarily indicative of future financial results.

6

CONSOLIDATION

      The consolidated financial statements include the accounts of the Company and its subsidiaries after elimination of all significant intercompany transactions.

USE OF ESTIMATES

      The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

RECLASSIFICATIONS

      Certain previously reported amounts have been reclassified to conform to the Company’s current presentation.

3. ACQUISITIONS

      On February 10, 2000, the Company acquired all of the outstanding capital stock of Comps, a San Diego based provider of commercial real estate information, for $49,015,905 in cash and 2,259,034 shares of the Company’s common stock. The acquisition has been accounted for using purchase accounting and has been valued at approximately $101,379,000 for accounting purposes. The purchase price was allocated primarily to cash, acquired technology and other intangibles, which will be amortized over a period of 2 to 10 years. In connection with the acquisition, $5,812,000 of the purchase price was allocated to purchased in-process development and expensed upon acquisition because the technological feasibility of products under development had not been established and no future alternative use existed. The acquired in-process development was analyzed through an independent third-party valuation using the expected cash flow approach.

      On November 9, 2000, CoStar completed the acquisition of First Image Technologies, Inc. The primary asset of First Image is the Metropolis software system, a single interface that combines commercial real estate data from multiple information providers into a comprehensive resource. The Company acquired all of the outstanding capital stock of First Image Technologies, Inc. for approximately $665,000 in cash and 9,424 shares of the Company’s common stock. The transaction was accounted for as a purchase and the initial consideration was valued for accounting purposes at approximately $950,000 including acquisition expenses. In addition, the acquisition agreement provides for $950,000 of additional consideration (in a combination of cash and stock) to be paid by the Company upon the achievement of certain operating goals by the sole stockholder of First Image.

      The operations of all acquired businesses were included in the Company’s statement of operations after the respective date of acquisitions. Except for the portion of the purchase price of acquisitions acquired with cash, these transactions have been excluded from the statements of cash flows.

      The Company’s unaudited pro forma condensed consolidated statements of operations for the six month periods ended June 30, 2001 and 2000, assuming the acquisition of Comps and First Image had been consummated as of January 1 of each period, is summarized as follows:

                 
For the Six Month Period
Ended June 30,
2001 2000
Revenues $ 35,427 $ 27,869
Net loss $ (13,544 ) $ (33,050 )
Basic and diluted net loss per share $ (0.87 ) $ (2.15 )
Weighted average common shares 15,592 15,341

7

4. GOODWILL, INTANGIBLES AND OTHER ASSETS

      Goodwill, intangibles and other assets consists of the following (in thousands):

                 
June 30, December 31,
2001 2000
Capitalized product development costs $ 1,801 $ 1,801
Accumulated amortization (1,048 ) (935 )
753 866
Building photography 4,574 4,467
Acquired database technology 17,649 17,649
Customer base 31,645 31,645
Tradename 4,198 4,198
Goodwill 37,568 37,568
Accumulated amortization (26,535 ) (19,734 )
69,099 75,793
Goodwill, intangible and other assets $ 69,852 $ 76,659

5. NEW ACCOUNTING PRONOUNCEMENTS

      In June 2000, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities,” which amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 133 was previously amended by SFAS No. 137 “Accounting for Derivative Instruments and Hedging Activities —Deferral of the Effective Date of FASB Statement 133,” which deferred the effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000. The Company adopted SFAS No. 138 and SFAS No. 133 effective January 1, 2001. SFAS No. 133 and SFAS No. 138 require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value will be recognized immediately in earnings. The adoption of these new standards has not had a material effect on the Company’s financial position or results of operations.

      In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, “Business Combinations”, and No. 142, “Goodwill and Other Intangible Assets”, effective for fiscal years beginning after December 15, 2001. Under the new rule, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Standards. Other intangible assets will continue to be amortized over their useful lives. We will apply the new rules on accounting for goodwill and intangible assets deemed to have indefinite lives beginning in the first quarter of 2002. We are currently in the process of evaluating the effect of the nonamortization provisions of the Statement, which are expected to result in an increase in net income commencing in 2002. During 2002, we will perform the first of the required impairment tests of goodwill and intangible assets deemed to have indefinite lives as of January 1, 2002. We have not yet determined what the effect of these tests will be on our earnings and financial position.

8

ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

      The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains “forward-looking statements,” which involve many risks and uncertainties that could cause actual results to differ materially from those discussed in these statements. Factors that could cause or contribute to such differences include, but are not limited to, successful adoption of our products, competition, general economic conditions, changes or consolidations in the commercial real estate industry, managerial execution, customer retention, development of our sales force, data quality, employee retention, and the our ability to control costs. More information concerning these and other 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 below under the heading “Risk Factors” and those included 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 filings with the Securities and Exchange Commission and the unaudited condensed consolidated financial statements included herein.

Overview

      CoStar is the leading provider of information services to the U.S. commercial real estate industry. We are creating a digital marketplace where the members of the commercial real estate and related business community can continuously interact and facilitate transactions by efficiently exchanging accurate and standardized information. Our wide array of digital service offerings includes a leasing marketplace, a selling marketplace, comparable sales information, decision support, tenant information, property marketing, data hosting for clients’ Web sites, contact management, property data integration and industry news. Substantially all of our current services are digitally delivered over the Internet.

      We completed our initial public offering in July 1998 and received net proceeds of approximately $22.7 million. We primarily used those net proceeds to fund the geographic and service expansion of our business, including three strategic acquisitions, and to expand our sales and marketing organization. In May 1999, we completed a follow-on public offering and received net proceeds of approximately $97.4 million. We used a portion of those net proceeds to fund the acquisition of Comps and we expect to use the remainder of the proceeds primarily for development and distribution of new services, expansion of all existing services across our current markets, geographic expansion in the U.S. and international markets, strategic acquisitions and working capital and general corporate purposes.

      From 1994 through 2000, we expanded the geographical coverage of our existing services and developed new services. In addition to internal growth, this expansion included the acquisitions of Chicago ReSource, Inc. in Chicago in 1996 and New Market Systems, Inc. in San Francisco in 1997. In August 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, and into Atlanta and Dallas/Fort Worth by acquiring Jamison Research, Inc. In September 1999, we acquired ARES, a Los Angeles based developer and distributor of ARES for ACT!. In February 2000, we acquired Comps. In November 2000, we acquired First Image Technologies.

      We consider regions that have had ongoing operations for at least 18 months to be established, and we currently generate positive cash flow from our operations in established regions. As of June 30, 2001, the majority of our regions throughout the United States were considered to be established. These regions provide us with substantial cash flow, which we reinvest into the business. Emerging regions are those in the process of becoming established, and require substantial investment until such time that the revenue for the region exceeds the operating costs for the region. Since our inception, the development of our business has required substantial investments for the expansion of services and the establishment of operating regions, which has resulted in substantial net losses on an overall basis.

      The incremental cost of introducing new services in an established region in the future may reduce the profitability of a region or cause it to incur losses. We expect to continue development and distribution of new services and expansion of existing services across current markets and we may expand geographically in the United States and international markets in the future. Therefore, while we expect operations in existing established regions to remain profitable and provide substantial funding, we expect our overall expansion plans to generate losses and negative cash flow from operations for at least the next six months.

9

      Although our services continue to expand, our CoStar Property, CoStar Tenant and CoStar COMPS services currently generate the largest portion of our revenue. The CoStar Property, CoStar Tenant and CoStar COMPS contracts typically range from terms of one to three years and generally renew automatically. Upon renewal, many of the contract rates increase automatically in accordance with contract provisions or as a result of renegotiations. To encourage clients to use our services regularly, we generally charge fixed amounts rather than fees based on actual system usage. We charge our clients based on the number of sites, organization size, the company’s business focus, and the number of services to which a client subscribes.

      Our contract renewal rate generally exceeds 90% on an annual basis. However, recently many telecommunications companies (which represented approximately 6% of our revenues at their peak) have discontinued or curtailed their operations. This has resulted in an increased number of cancellations of our services by these telecommunications companies. These cancellations, together with other factors, including an overall slowing of economic growth, could result in a lower annual renewal rate for our services during 2001.

      Our clients pay contract fees on an annual, quarterly, or monthly basis. We recognize this revenue over the life of the contract on a straight-line basis beginning with the installation or renewal date. Annual and quarterly advance payments result in deferred revenue, substantially reducing the working capital requirements generated by the growth in our accounts receivable.

Three Months Ended June 30, 2000 Compared To
Three Months Ended June 30, 2001

      Revenues. Revenues grew 24% from $14.6 million in the second quarter of 2000 to $18.1 million in the second quarter of 2001. The growth was principally the result of further penetration of our products in our potential customer base across our national platform, as well as the successful cross selling of our products into our existing customer base.

      Gross Margin. Gross margin increased from $6.8 million in the second quarter of 2000 to $10.6 million in second quarter of 2001. Gross margin as a percentage of revenues also increased from 47% to 58%. The increase in gross margin amounts resulted principally from significant revenue growth. Gross margin percentages have increased as a result of the relatively fixed cost structure required to operate within the scope of our current business. Our cost of revenues for the three months ended June 30, 2001 includes purchase price amortization from the LeaseTrend, Jamison, ARES, Comps and First Image acquisitions amounting to $1.3 million compared to $1.2 million for the same period in 2000.

      Selling and Marketing Expenses. Selling and marketing expenses decreased 47% from $11.2 million in the second quarter of 2000 to $5.9 million in the second quarter of 2001 and decreased as a percentage of revenues from 77% to 33%. Selling and marketing expenses decreased principally as a result of a reduction in required marketing activities after the successful completion of the rollout of our CoStar Exchange product, which was launched at the end of the second quarter in 2000 and required significant non-recurring marketing costs through the fourth quarter of 2000.

      Software Development Expenses. Software development expenses increased from $1.0 million in the second quarter of 2000 to $1.4 million in the second quarter of 2001 and increased as a percentage of revenues from 6.9% to 7.5%. The increase in expenses reflects development costs for the increased number of products we now offer including CoStar COMPS, CoStar Exchange and CoStar Connect, as well as our emphasis on the enhancement of our products and internal systems.

      General and Administrative Expenses. General and administrative expenses increased from $6.7 million in the second quarter of 2000 to $7.7 million in the second quarter of 2001 but decreased as a percentage of revenues from 46% to 42%. General and administrative expenses increased due to the hiring of new employees, including senior executives, to support our expanded operations and client base.

      Purchase Amortization. Purchase amortization decreased from $2.7 million to $1.9 million. Purchase amortization decreased primarily due to adjustments of the purchase accounting for the acquisition of Comps.

      Other Income, Net. Interest and other income decreased from $933,000 in the second quarter of 2000 to $374,000 in the second quarter of 2001. This decrease was primarily a result of lower average cash balances from one period to another, and a decline in market interest rates for invested cash and cash equivalents.

      Income Tax Benefit. Income tax benefit decreased from $845,000 to $41,000 as a result of the previous recognition of net operating losses arising from recent acquisitions.

10

Six Months Ended June 30, 2000 Compared To
Six Months Ended June 30, 2001

      Revenues. Revenues grew 37% from $25.9 million for the six months ended June 30, 2000 to $35.4 million for the six months ended June 30, 2001. The growth was principally the result of further penetration of our products to our potential customer base across our national platform, the successful cross selling of products into our existing customer base and the acquisition of Comps in February 2000. Our Comps division contributed $9.7 million to revenues for the six months ended June 30, 2001, compared to $7.8 million for the same period of 2000.

      Gross Margin. Gross margin increased from $12.2 million for the six months ended June 30, 2000 to $19.9 million for the six months ended June 30, 2001. Gross margin as a percentage of revenues also increased from 47% to 56%. The increase in gross margin amounts resulted principally from significant revenue growth and the acquisition of Comps. Gross margin percentages have increased as a result of the relatively fixed cost structure required to operate within the scope of our current business. Our cost of revenues for the six months ended June 30, 2001 includes purchase price amortization from the LeaseTrend, Jamison, ARES, Comps and First Image acquisitions amounting to $2.7 million compared to $2.1 million for the same period in 2000.

      Selling and Marketing Expenses. Selling and marketing expenses decreased 34% from $19.6 million for the six months ended June 30, 2000 to $12.9 million for the six months ended June 30, 2001 and decreased as a percentage of revenues from 75% to 36%. Selling and marketing expenses decreased as a result of a reduction in required marketing activities after the successful completion of the rollout of our CoStar Exchange product, which was launched at the end of the second quarter in 2000 and required significant non-recurring marketing costs through the fourth quarter of 2000.

      Software Development Expenses. Software development expenses increased from $1.7 million for the six months ended June 30, 2000 to $2.6 million for the six months ended June 30, 2001 and increased as a percentage of revenues from 6.6% to 7.3%. The increase in expenses reflects development costs for the increased number of products we now offer including CoStar COMPS, CoStar Exchange and CoStar Connect, as well as our emphasis on the enhancement of our products and internal systems.

      General and Administrative Expenses. General and administrative expenses increased from $12.1 million for the six months ended June 30, 2000 to $15.4 million for the six months ended June 30, 2001 but decreased as a percentage of revenues from 47% to 43%. General and administrative expenses increased due to the hiring of new employees, including senior executives, to support our expanded operations and client base.

      Purchase Amortization. Purchase amortization decreased from $4.5 million to $3.7 million. Purchase amortization decreased primarily due to adjustments of the purchase accounting for the acquisition of Comps.

      Acquired In-Process Development. Acquired in-process development costs of $5.8 million for the six months ended June 30, 2000 consisted of in-process development costs that were written off in connection with the Comps acquisition.

      Other Income, Net. Interest and other income decreased from $2.0 million for the six months ended June 30, 2000 to $949,000 for the six months ended June 30, 2001. This decrease was primarily a result of lower average cash balances from one period to another, and a decline in market interest rates for invested cash and cash equivalents.

      Income Tax Benefit. Income tax benefit decreased from $1.4 million to $82,000 as a result of the previous recognition of net operating losses arising from recent acquisitions.

11

Liquidity and Capital Resources

      Our cash and cash equivalents balance was $42.0 million at June 30, 2001, a decrease of $5.1 million from $47.1 million at December 31, 2000. This decrease was due principally to the cash used in operating activities and $1.2 million in purchases of property and equipment. During the six month period ended June 30, 2001, we financed our operations and growth principally through cash flow from our profitable regions and proceeds from the follow-on offering. Net cash used in operating activities for the six month period ended June 30, 2001 was $4.7 million compared to net cash used in operating activities of $14.5 million for the six month period ended June 30, 2000. This $9.8 million decrease in cash used in operating activities was a direct result of increased revenue growth and a reduction in expenditures required for expansion, both of which contributed to a reduction of our net loss for the first six months of 2001 compared to the first six months of 2000.

      Net cash used in investing activities amounted to $1.3 million for the six months ended June 30, 2001 as compared to net cash used in investing activities of $13.8 million for the six months ended June 30, 2000. Net cash used in investing activities decreased by $12.5 million during the first six months of 2001 compared to the first six months of 2000 due to a decline in required purchases of property, equipment and building photography. Additionally, the acquisition of Comps occurred during the first quarter of 2000 and required $2.4 million of investment.

      We have entered into numerous operating leases for office space throughout the country, including our headquarters, and have commitments for rent payments ranging from $450,000 to $3,989,000 annually over the next ten years. We currently have no material commitments for capital expenditures.

      To date, we have grown in part by acquiring other companies, and we may continue to make acquisitions. Our acquisitions may vary in size and could be material to our current operations. We expect to use cash, stock, or other means of funding to make these acquisitions.

      During the first six months of 2001, we experienced losses and negative operating cash flow as a result of the recent expansion in emerging regions, expansion of services within the majority of regions and costs for the introduction of new products. Some of these costs are non-recurring, and the remainder are generally fixed operating costs, which are not expected to increase at the same rate as revenue growth. As we emerge from a period of rapid product and geographical expansion, for the remainder of 2001 we expect continued sequential quarterly growth in revenue and a fixed or declining overall operating cost structure. As a result, we expect reductions in the level of operating losses and negative operating cash flow during the remainder of 2001.

      Based on current plans, we believe that our available cash combined with positive cash flow from our established regions should be sufficient to fund our operations for the foreseeable future.

      Through June 30, 1998, we operated as either a Subchapter S corporation or a limited partnership, and we were not subject to corporate income taxes. After June 30, 1998, we became a taxable entity. Although we have experienced losses to date, future profits, to the extent not offset by the benefits of loss carryforwards, would result in income tax liabilities. In addition, we have recorded a valuation allowance for the portion of the deferred tax assets related to tax loss carryforwards. We do not expect to benefit substantially from tax loss carryforwards generated prior to July 1998.

      We do not believe the impact of inflation has significantly affected our operations.

Recent Accounting Pronouncements

      In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, “Business Combination”, and No. 142, “Goodwill and Other Intangible Assets”, effective for fiscal years beginning after December 15, 2001. Under the new rule, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Standards. Other intangible assets will continue to be amortized over their useful lives. We will apply the new rules on accounting for goodwill and intangible assets deemed to have indefinite lives beginning in the first quarter of 2002. We are currently in the process of evaluating the effect of the nonamortization provisions of the Statement, which are expected to result in an increase in net income commencing in 2002. During 2002, we will perform the first of the required impairment tests of goodwill and intangible assets deemed to have indefinite lives as of January 1, 2002. We have not yet determined what the effect of these tests will be on our earnings and financial position.

Risk Factors

      Investing in our common stock involves a high degree of risk. You should consider the following risk factors, as well as the risk factors contained in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2001 and other SEC filings, before deciding to purchase any shares of our common stock. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. If any of the following risks actually occur, our business, financial condition, operating results and stock price could be materially adversely affected.

12

      Our future profitability is uncertain due to our continuing operating losses. We have never recorded an overall operating profit because the investment required for geographic expansion and new services has exceeded the profits generated in our established markets. We intend to continue investing in the expansion of our operations and new services and therefore expect to sustain losses for at least the next six months. Our ability to earn a profit will largely depend on our ability to manage our growth, and to generate profits that exceed our investment in geographic expansion and new services. In addition, our ability to earn a profit, to increase revenues, or to control costs could be affected by the factors set forth below. We may not be able to generate revenues or control expenses sufficient to earn a profit, to maintain profits on a quarterly or annual basis, or to sustain or increase our future revenue growth.

      Our operating results may fluctuate significantly. Our operating results, revenues, and expenses may fluctuate with general economic conditions and also for many other reasons, such as: successful adoption of the Company’s products; competition; loss of clients or revenues; changes or consolidation in the real estate industry; the development of our sales force; managerial execution; cancellations or non-renewals of our products; data quality; employee retention; our investments in geographic expansion; the timing of new service introductions and enhancements; the timing of investing the net proceeds from our offerings; acquisitions of other companies or assets; sales, brand enhancement and marketing promotional activities; client training and support activities; changes in client budgets; our ability to control expenses; or our investments in other corporate resources.

      We may not be able to attract and retain clients. Our success and revenues depend on attracting and retaining subscribers to our services. The CoStar Property, CoStar Tenant and CoStar COMPS subscription contracts, which generate the largest portion of our revenue, generally range from terms of one to three years. Our clients may decide not to renew or to cancel their agreements as a result of several factors, including: a decision that they have no need for our products; a decision to use alternative products; pricing and budgetary constraints; consolidation in the real estate industry; data quality; technical problems; or economic or competitive pressures. If clients decide not to renew or cancel their agreements, then our revenues will be adversely affected.

      Our operating costs may be higher than we expect. Many of our expenses, particularly personnel costs and occupancy costs, are relatively fixed. Therefore, we may be unable to adjust spending quickly enough to offset any unexpected revenue shortfall. Additionally, we may experience higher than expected operating costs, including increased personnel costs, selling and marketing costs, occupancy costs, communications costs, travel costs, software development costs, outside services costs, and other costs. If operating costs exceed our expectations or cannot be adjusted accordingly, our business, results of operations and financial condition will be adversely affected.

      Competition could render our services uncompetitive. The market for information systems and services in general is highly competitive and rapidly changing. The barriers to entry for Web-based services and businesses are low, making it possible for the number of competitors to proliferate rapidly. Many of our existing competitors, or a number of potential new competitors, may have longer operating histories in the Internet market, greater name recognition, larger customer bases, lower prices, easier access to data, greater user traffic and greater financial, technical and marketing resources than we have. Our competitors may be able to undertake more extensive marketing campaigns, adopt more aggressive pricing policies, make more attractive offers to potential employees, subscribers, distribution partners and content providers and may be able to respond more quickly to new or emerging technologies and changes in Internet user requirements. Increased competition could result in lower revenues and higher expenses, which would reduce our profitability.

      If our data is not accurate, comprehensive or reliable, our business could be harmed. Our success depends on our clients’ confidence in the comprehensiveness, accuracy, and reliability of the data we provide. The task of establishing and maintaining accurate and reliable data is challenging. If our data 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.

      If we are unable to hire, retain and continue to develop our sales force, it could have a material adverse effect on our business. In order to support revenue growth, we need to continue to develop, train and retain our sales force. Our ability to build and develop a strong sales force involves a number of risks, including: our ability to 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 products; 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 manage a multi-location sales organization. If we are unable to hire, develop or retain the members of our sales force, or if our sales force is unproductive, it could have a material adverse effect on our revenues and expenses.

13

      Cyclical downturns and consolidation in the commercial real estate industry could have an adverse effect on our business. Our business may be affected by conditions in the commercial real estate industry, including conditions affecting businesses that supply or invest in that industry. A decrease in the level of commercial real estate activities could adversely affect demand for our services. The traditional economic downturns in the commercial real estate industry could also harm our business. These changes could increase cancellation rates, which could have a material adverse impact on our operating results. Also, companies in this industry are consolidating, often in order to reduce expenses. Consolidation could reduce the number of our existing clients, reduce the size of our target market and increase our clients’ bargaining power. Any of these factors could adversely affect our business.

      General economic conditions could have an adverse effect on our business. 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 inflation, interest rates, perceived and actual economic conditions, taxation policies, availability of credit, employment levels, and wage and salary levels. A negative trend in any of these general economic conditions could adversely affect our business. For example, a recent downturn in telecom related businesses has forced many of our telecom company clients to discontinue or curtail their operations, which has resulted in an increased number of cancellations of our services. If other clients choose to cancel our services as a result of economic conditions, our financial position could be adversely affected.

      We may not be able to successfully introduce new products. Our future business and financial success will depend on our ability to continue to introduce new products into the marketplace. Developing new products imposes heavy burdens on our systems development department, product managers, management and researchers. In addition, successfully launching and selling a new product, such as CoStar Connect or CoStar Exchange, puts pressure on our sales and marketing resources. If we are unable to develop new products, then our customers may choose a competitive service over ours and our business may be adversely affected. In addition, if we incur significant costs in developing new products, or are not successful in marketing and selling these new products, it could have a material adverse effect on our results of operations.

      We may not be able to adapt to the rapid technological changes to the Internet and Internet products. To be successful, we must adapt to the rapid technological changes to the Internet and Internet products by continually enhancing our products and services, and introducing and integrating new services and products to capitalize on the technological advances in the Internet. This process is costly and we cannot assure you that we will be able to successfully integrate our services and products with the Internet’s technological advances. The collection, storage, management and dissemination of commercial real estate information from a centralized database on the Internet were developed recently and continue to evolve. Our market is characterized by rapidly changing technologies, evolving industry standards; increasingly sophisticated customer needs and frequent new product introductions. These factors are exacerbated by the rapid technological change experienced in the computer and software industries. Our business increasingly depends on our ability to anticipate and adapt to all of these changes, as well as our customers’ ability to adapt to the use of our existing and future services and products on the Internet. We could incur substantial costs if we need to modify our services or infrastructure in order to adapt to these changes, and our customers’ failure to accept these changes could have a material adverse effect on our revenues. If we incurred significant costs without adequate results or we are unable to adapt to rapid technological changes, it could have a material adverse effect on our business.

      Unsatisfactory Internet performance, interruption or failure could have an adverse effect on our business. Our business increasingly depends upon the satisfactory performance, reliability and availability of our Web site, the Internet and the World Wide Web. Problems with our Web site, the Internet or the Web may impede the development of our business for a number of reasons. As the number of Internet users or their use of Internet resources continues to grow, and as companies deliver increasingly larger amounts of data over the Internet, the Internet’s infrastructure must also grow. Growth in Internet usage that is not matched by comparable growth of the infrastructure supporting the Internet could result in slower response time, cause outright failure of the Internet, or otherwise adversely affect usage. In addition, if we experience technical problems in distributing our products over the Web, including interruption or failure of services provided by our local exchange carriers or Internet service providers, we could experience reduced demand for our products.

      Temporary or permanent outages of our computers, software or telecommunications equipment could have an adverse effect on our business. 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, 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 results in our not being able to deliver our products to clients, or to update our products, we could experience reduced demand for our products.

14

      We may be subject to legal liability for displaying or distributing information. Because the content in our database is distributed to others, we may be subject to claims for defamation, negligence or copyright or trademark infringement or claims based on other theories. These types of claims have been brought, sometimes successfully, against Internet services in the past. We could also be subject to claims based upon the content that is accessible from our Web site through links to other Web sites or information on our Web site 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 liability, which may require the expenditure of substantial resources and limit the attractiveness of our service to users.

      We may be unable to enforce or defend our ownership and use of intellectual property. The success of our business depends in large part on the intellectual property involved in our methodologies, database 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 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 do not succeed in protecting our content and our other intellectual property. The same would be true if a court should find that our services infringe other persons’ intellectual property rights. Any intellectual property lawsuits in which we are involved, either as a plaintiff or as a defendant, could cost us a significant amount of time and money. In addition, if any intellectual property claims are adversely determined, this could result in a material adverse result on our financial position.

      Litigation in which we become involved may adversely affect our business. Currently and from time to time, we are involved in litigation incidental to the conduct of our business. We cannot assure you that we will have insurance to cover our pending claims or our future claims. Any lawsuits in which we are involved could cost us a significant amount of time and money. If any pending claims or future claims are adversely determined, they could have a material adverse effect on our financial position or results of operations.

      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, our officers, and other 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, a stock option 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.

      Problems with our software could impair the use of our services. The software underlying our services is complex and may contain undetected errors. We have previously discovered errors in our proprietary software. Despite testing, we cannot be certain that errors will not be found in current versions, new versions or enhancements of that software. Any errors could result in adverse publicity, impaired use of our services, loss of revenues, cost increases and legal claims by customers. All these factors could seriously damage our business, operating results and financial condition.

      We may not be able to manage successfully our geographic expansion. Our future business and financial success will depend on our ability to manage our geographic expansion. Our efforts to manage expanded growth must occur while information technology is rapidly changing. These efforts impose additional burdens on our research, systems development, sales, and general managerial resources. If we were not able to manage our expanded growth successfully, it would have a material adverse effect on our profitability.

      If we are unable to provide our clients with training and technical support, our business could be harmed. Since many of our clients are not sophisticated computer users, it is important that they find our products easy to use. To meet these needs, we provide client training and have developed a client support network that seeks to respond to client inquiries as soon as possible. If we do not maintain adequate training and support levels, we could experience reduced demand for our services.

15

      Our increasing use of the Internet and the World Wide Web exposes us to regulatory and other uncertainties. Most of our clients currently receive their CoStar data via the Internet. This exposes us to various uncertainties arising from the future course of development of the Internet and the World Wide Web. Governments in the United States and abroad might adopt laws or regulations applicable to Internet commerce that could harm our business by, for example, regulating our transmissions over the Internet or exposing our business to new taxes in various jurisdictions. User concerns about the privacy and security of Internet-distributed communications might impede the growth of our business. We may need to expend substantial resources to protect against security breaches on our Web site or in our Internet communications.

      We face risks associated with legislation in the real estate industry. Real estate is a regulated industry in the United States. These laws and related regulations, and any newly adopted regulations, may limit or restrict our activities or could require us to expend significant resources to comply. As the real estate industry evolves in the Internet environment, legislators, regulators and industry participants may advocate additional legislative or regulatory initiatives. Should existing laws or regulations be amended or new laws or regulations be adopted, we may need to comply with additional legal requirements and incur resulting costs, or we may be precluded from certain activities. In addition, if we are found to be in violation of these regulations, we may incur penalties and legal costs or we may be precluded from certain activities.

      Our business depends on our management team’s ability to execute our business plan. In 2000, we added several key officers to our management team. Our business depends on the ability of our assembled management team to successfully execute our business plan. The inability of our management team to successfully execute our business plan could have an adverse effect on our operations.

      If we do not generate sufficient cash flows from operations, we may need additional capital. To date, we have financed our operations through cash from profitable operations in our established markets, the sale of our stock and borrowing money. If we do not generate enough cash from operations to finance our business in the future, we will need to raise additional funds through public or private financing. Selling additional equity securities could dilute the equity interests of our stockholders. If we borrow money, we will have to pay interest and agree to restrictions that may limit our operating flexibility. We may not be able to obtain funds needed to finance our operations at all or may be able to obtain funds only on unattractive terms. If we require additional funds and are not able to obtain such funds, it would have a material adverse effect on our operations.

      International expansion may result in new business risks. If we expand internationally, this expansion could subject us to new business risks, including: adapting to the differing business practices and laws in foreign commercial real estate markets; 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 United States; currency exchange rate fluctuations; and potentially adverse tax consequences.

      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: 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; regulatory developments; and economic or other factors. In addition, in recent years, the stock market in general, and the shares of Internet-related and other technology companies in particular, have experienced extreme price fluctuations. This volatility has had a substantial effect on the market prices of securities issued by many companies for reasons unrelated to the operating performance of the specific companies.

      Stock ownership by executive officers and directors provides substantial influence over matters requiring a vote of stockholders. Our executive officers and directors, and entities affiliated with them, beneficially own a sufficient number of shares of our outstanding common stock to exercise substantial influence over the election of directors and other matters requiring a vote of stockholders. This concentrated ownership might delay or prevent a change in control and may impede or prevent transactions in which stockholders might otherwise receive a premium for their shares.

ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      We do not have significant exposure to market risks associated with the changes in interest rates related to its cash equivalent securities held as of June 30, 2001.

16

PART II.       OTHER INFORMATION

ITEM 1             LEGAL PROCEEDINGS

      Currently and from time to time, we are involved in litigation incidental to the conduct of our business. We are not a party to any lawsuit or proceeding that, in the opinion of our management, is likely to have a material adverse effect on our financial position or results of operations.

ITEM 2             CHANGES IN SECURITIES

      None

ITEM 3             DEFAULTS UPON SENIOR SECURITIES

      None

ITEM 4             SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

      The Annual Meeting of our stockholders was held on June 19, 2001. The following people were elected to our Board of Directors for a one-year term: Michael Klein, Andrew Florance, David Bonderman, Warren Haber, Josiah Low III, and John Simon. The vote was as follows:

                 
Name Votes For Votes Withheld
 
Michael Klein 13,616,940 318,404
Andrew Florance 13,013,991 921,353
David Bonderman 11,989,615 1,945,729
Warren Haber 13,655,140 280,204
Josiah Low III 13,655,140 280,204
John Simon 13,655,140 280,204

      The appointment of Ernst & Young, LLP as our independent public accountants for the fiscal year ending December 31, 2001 was approved upon the following vote: For 13,861,477 shares; against, 70,607 shares; and abstain 3,260 shares.

      The amendment to our 1998 Stock Incentive Plan, as amended, was approved upon the following vote: For, 12,666,344 shares; against, 1,253,875 shares; and abstain, 15,125 shares.

ITEM 5             OTHER INFORMATION

      None

ITEM 6             EXHIBITS AND REPORTS ON FORM 8-K

EXHIBIT NUMBER:  EXHIBIT DESCRIPTION:

     
10.1 CoStar Group, Inc. 1998 Stock Incentive Plan, as amended.
10.2 Separation Agreement for John Place

17

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

     
COSTAR GROUP, INC.
 
 
 
 
 
 
 
Date: August 13, 2001 By: /s/ Frank A. Carchedi
 
 
Frank A. Carchedi
Chief Financial Officer
(Principal Financial and Accounting Officer
and Duly Authorized Officer)

18

INDEX TO EXHIBITS

             
Exhibit No. Description
 
10.1 CoStar Group, Inc. 1998 Stock Incentive Plan, as amended.
10.2 Separation Agreement for John Place

ex10-1

EXHIBIT 10.1

COSTAR GROUP, INC.
1998 STOCK INCENTIVE PLAN
(AS LAST AMENDED ON JUNE 19, 2001)

     
PURPOSE CoStar Group, Inc., a Delaware corporation (“CoStar” or the “Company”), wishes to recruit, reward, and retain employees and outside directors. To further these objectives, the Company hereby sets forth the CoStar Group, Inc. 1998 Stock Incentive Plan (the “Plan”) to provide options (“Options”) or direct grants (“Stock Grants” and, together with the Options, “Awards”) to employees and outside directors with respect to shares of the Company’s common stock (the “Common Stock”). The Plan is effective as of the effective date (the “Effective Date”) of the Company’s registration under Section 12 of the Securities Exchange Act of 1934 (the “Exchange Act”) with respect to its initial public offering (“IPO”).
     
PARTICIPANTS All Employees of CoStar and any Eligible Subsidiaries are eligible for Options and Stock Grants under this Plan, as are the directors of CoStar and the Eligible Subsidiaries who are not employees (“Eligible Directors”). Eligible employees and directors become “optionees” when the Administrator grants them an option under this Plan or “recipients” when they receive a direct grant of Common Stock. (Optionees and recipients are referred to collectively as “participants.” The term participant also includes, where appropriate, a person authorized to exercise an Award in place of the original optionee.) The Administrator may also grant Options or make Stock Grants to certain other service providers.
     
Employee means any person employed as a common law employee of the Company or an Eligible Subsidiary.
     
ADMINISTRATOR The Administrator will be the Compensation Committee of the Board of Directors of CoStar (the “Compensation Committee”), unless the Board specifies another committee. The Board may also act under the Plan as though it were the Compensation Committee.
     
The Administrator is responsible for the general operation and administration of the Plan and for carrying out its provisions and has full discretion in interpreting and administering the provisions of the Plan. Subject to the express provisions of the Plan, the Administrator may exercise such powers and authority of the Board as the Administrator may find necessary or appropriate to carry out its functions. The Administrator may delegate its

CoStar Group, Inc.
1998 Stock Incentive Plan

     
functions (other than those described in the Granting of Awards section) to officers or employees of CoStar.
     
The Administrator’s powers will include, but not be limited to, the power to amend, waive, or extend any provision or limitation of any Award. The Administrator may act through meetings of a majority of its members or by unanimous consent.
     
GRANTING OF
AWARDS		 Subject to the terms of the Plan, the Administrator will, in its sole discretion, determine
  the participants who receive Awards,
   
  the terms of such Awards,
   
  the schedule for exercisability or nonforfeitability
(including any requirements that the participant or
the Company satisfy performance criteria),
   
  the time and conditions for expiration of the Award, and
   
  the form of payment due upon exercise, if any.
     
The Administrator’s determinations under the Plan need not be uniform and need not consider whether possible participants are similarly situated.
     
Options granted to employees may be nonqualified stock options (“NQSOs”) or “incentive stock options” (“ISOs”) within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended from time to time (the “Code”), or the corresponding provision of any subsequently enacted tax statute. Options granted to Eligible Directors must be NQSOs. The Administrator will not grant ISOs unless the stockholders have approved the Plan.
     
The Administrator may impose such conditions on or charge such price for the Stock Grants as it deems appropriate.
     
SUBSTITUTIONS The Administrator may also grant Awards in substitution for options or other equity interests held by individuals (i) as a result of their employment by or services to CoStar Group, L.P. or (ii) who become Employees of the Company or of an Eligible Subsidiary as a result of the Company’s acquiring or merging with the individual’s employer or acquiring its assets. If necessary to conform the Awards to the interests for which they are substitutes, the Administrator may grant substitute Awards under terms and conditions that vary from those the Plan otherwise requires.

CoStar Group, Inc.
1998 Stock Incentive Plan

     
DIRECTOR
FORMULA
OPTIONS		 Each Eligible Director of the Company shall be entitled to receive at the first meeting of the Board of Directors immediately following each of the Company’s Annual Meeting of Stockholders an Option to purchase 1,000 shares of the Company’s Common Stock at an exercise price equal to the Fair Market Value (as defined below) on such date of grant. Such Options shall vest in full on the first anniversary of the date of grant, provided that such Director is still a Director of the Company.
     
DATE OF GRANT The Date of Grant will be the date as of which this Plan or the Administrator grants an Award to a participant, as specified in the Plan or in the Administrator’s minutes.
     
EXERCISE PRICE The Exercise Price is the value of the consideration that a participant must provide in exchange for one share of Common Stock. The Administrator will determine the Exercise Price under each Award and may set the Exercise Price without regard to the Exercise Price of any other Awards granted at the same or any other time. The Company may use the consideration it receives from the participant for general corporate purposes.
     
The Exercise Price per share for NQSOs may not be less than 100% of the Fair Market Value of a share on the Date of Grant. If an Option is intended to be an ISO, the Exercise Price per share may not be less than 100% of the Fair Market Value (on the Date of Grant) of a share of Common Stock covered by the Option; provided, however, that if the Administrator decides to grant an ISO to someone covered by Sections 422(b)(6) and 424(d) (as a more-than-10%-stock-owner), the Exercise Price of the Option must be at least 110% of the Fair Market Value (on the Date of Grant).
     
The Administrator may satisfy any state law requirements regarding adequate consideration for Stock Grants by (i) issuing Common Stock held as treasury stock or (ii) charging the recipients at least the par value for the shares covered by the Stock Grant. The Administrator may designate that a recipient may satisfy (ii) either by direct payments or by the Administrator’s withholding from other payments due to the recipient.
     
FAIR MARKET
VALUE             		 Fair Market Value of a share of Common Stock for purposes of the Plan will be determined as follows:
  if the Common Stock is traded on a national securities exchange, the closing sale price on that date;

CoStar Group, Inc.
1998 Stock Incentive Plan

   
  if the Common Stock is not traded on any such exchange, the closing sale price as reported by the National Association of Securities Dealers, Inc. Automated Quotation System (“Nasdaq”) for such date;
   
  if no such closing sale price information is available, the average of the closing bid and asked prices as reported by Nasdaq for such date; or
   
  if there are no such closing bid and asked prices, the average of the closing bid and asked prices as reported by any other commercial service for such date.
     
For any date that is not a trading day, the Fair Market Value of a share of Common Stock for such date shall be determined by using the closing sale price or the average of the closing bid and asked prices, as appropriate, for the immediately preceding trading day.
     
The Fair Market Value will be deemed equal to the IPO price for any Options granted as of the date on which the IPO’s underwriters price the IPO.
     
EXERCISABILITY The Administrator will determine the times and conditions for exercise of or purchase under each Award but may not extend the period for exercise beyond the tenth anniversary of its Date of Grant (or five years for ISOs granted to 10% owners covered by Code Sections 422(b)(6) and 424(d)).
     
Awards will become exercisable at such times and in such manner as the Administrator determines and the Award Agreement, if any, indicates; provided, however, that the Administrator may, on such terms and conditions as it determines appropriate, accelerate the time at which the participant may exercise any portion of an Award or at which restrictions on Stock Grants lapse. For Stock Grants, “exercise” refers to acceptance of the Award or lapse of restrictions, as appropriate in context.
     
If the Administrator does not specify otherwise, Options will become exercisable and restrictions on Stock Grants (other than the Director Formula Grants) will lapse as to one-third of the covered shares on each of the first, second, and third anniversaries of the Date of Grant.
     
No portion of an Award that is unexercisable at a participant’s termination of employment will thereafter become exercisable, unless the Award Agreement provides otherwise, either initially or by amendment.
     
CHANGE OF Upon a Change of Control (as defined below), all Options held by

CoStar Group, Inc.
1998 Stock Incentive Plan

     
CONTROL       current Employees and directors will become fully exercisable and all restrictions on Stock Grants will lapse. A Change of Control for this purpose means the occurrence, after the Company’s IPO, of any one or more of the following events:
   
  a person, entity, or group (other than the Company, any Company subsidiary, any Company benefit plan, or any underwriter temporarily holding securities for an offering of such securities) acquires ownership of more than 80% of the undiluted total voting power of the Company’s then-outstanding securities eligible to vote to elect members of the Board (“Company Voting Securities”);
   
  consummation of a merger or consolidation of the Company into any other entity — unless the holders of the Company Voting Securities outstanding immediately before such consummation, together with any trustee or other fiduciary holding securities under a Company benefit plan, hold securities that represent immediately after such merger or consolidation at least 20% of the combined voting power of the then outstanding voting securities of either the Company or the other surviving entity or its parent; or
   
  the stockholders of the Company approve (i) a plan of complete liquidation or dissolution of the Company or (ii) an agreement for the Company’s sale or disposition of all or substantially all the Company’s assets, and such liquidation, dissolution, sale, or disposition is consummated.
   
  Even if other tests are met, a Change of Control has not occurred under any circumstance in which the Company files for bankruptcy protection or is reorganized following a bankruptcy filing.
     
The Adjustment Upon Changes in Capital Stock provisions will also apply if the Change of Control is a Substantial Corporate Change (as defined in those provisions).
     
LIMITATION ON
ISOs		 An Option granted to an employee will be an ISO only to the extent that the aggregate Fair Market Value (determined at the Date of Grant) of the stock with respect to which ISOs are exercisable for the first time by the optionee during any calendar year (under the Plan and all other plans of the Company and its subsidiary corporations, within the meaning of Code Section 422(d)), does not exceed $100,000. This limitation will be applied by taking Options into account in the order in which such Options were granted. If, by design or operation, the Option exceeds this limit, the excess will be treated as an NQSO.

CoStar Group, Inc.
1998 Stock Incentive Plan

     
METHOD OF
EXERCISE		 To exercise any exercisable portion of an Award, the participant must:
  Deliver a written notice of exercise to the Secretary of the Company (or to whomever the Administrator designates), in a form complying with any rules the Administrator may issue, signed by the participant, and specifying the number of shares of Common Stock underlying the portion of the Award the participant is exercising;
   
  Pay the full Exercise Price, if any, by cashier’s or certified check for the shares of Common Stock with respect to which the Award is being exercised, unless the Administrator consents to another form of payment (which could include the use of Common Stock); and
   
  Deliver to the Administrator such representations and documents as the Administrator, in its sole discretion, may consider necessary or advisable.
     
Payment in full of the Exercise Price need not accompany the written notice of exercise provided the notice directs that the stock certificates for the shares issued upon the exercise be delivered to a licensed broker acceptable to the Company as the agent for the individual exercising the option and at the time of closing of the sale of the Common Stock issued upon exercise of the Option, the broker will tender to the Company cash or cash equivalents acceptable to the Company and equal to the Exercise Price.
     
If the Administrator agrees to payment through the tender to the Company of shares of Common Stock, the individual must have held the stock being tendered for at least six months at the time of surrender. Shares of stock offered as payment will be valued, for purposes of determining the extent to which the participant has paid the Exercise Price, at their Fair Market Value on the date of exercise. The Administrator may also, in its discretion, accept attestation of ownership of Common Stock and issue a net number of shares upon Option exercise.
     
AWARD
EXPIRATION		 No one may exercise an Award more than ten years after its Date of Grant (or five years, for an ISO granted to a more-than-10% shareholder). Unless the Award Agreement provides otherwise, either initially or by amendment, no one may exercise an Award after the first to occur of:
       
  EMPLOYMENT
TERMINATION		 The 90th day after the date of termination of employment (other than for death or Disability), where termination of employment means the time when the employer-employee or other service-providing relationship between the employee and the Company ends for any reason, including retirement. Unless the Award Agreement provides otherwise, termination of employment does not include instances in

CoStar Group, Inc.
1998 Stock Incentive Plan

       
  which the Company immediately rehires a common law employee as an independent contractor. The Administrator, in its sole discretion, will determine all questions of whether particular terminations or leaves of absence are terminations of employment;
       
  DISABILITY For disability, the earlier of (i) the first anniversary of the participant’s termination of employment for disability and (ii) thirty (30) days after the participant no longer has a disability, where “disability” means the inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or that has lasted or can be expected to last for a continuous period of not less than twelve months; or
       
  DEATH The date twelve months after the participant’s death.
     
If exercise is permitted after termination of employment, the Award will nevertheless expire as of the date that the former service provider violates any covenant not to compete in effect between the Company and the former employee. In addition, an optionee who exercises an Option more than 90 days after termination of employment with the Company and/or the Eligible Subsidiaries will only receive ISO treatment to the extent permitted by law, and becoming or remaining an employee of another related company (that is not an Eligible Subsidiary) or an independent contractor to the Company will not prevent loss of ISO status as a result of the formal termination of employment.
     
Nothing in this Plan extends the term of an Award beyond the tenth anniversary of its Date of Grant, nor does anything in this Award Expiration section make an Award exercisable that has not otherwise become exercisable.
     
AWARD
AGREEMENT		 Option Agreements will set forth the terms of each Option and will include such terms and conditions, consistent with the Plan, as the Administrator may determine are necessary or advisable. To the extent the agreement is inconsistent with the Plan, the Plan will govern. The Option Agreements may contain special rules. The Administrator may, but is not required to, issue agreements for Stock Grants.
     
STOCK SUBJECT
TO PLAN		 Except as adjusted below under Corporate Changes, the aggregate number of shares of Common Stock that may be issued under the Awards (whether ISOs, NQSOs, or Stock Grants) may not exceed 3,750,000 shares and the maximum number of shares that may be granted under Awards for a single individual in a calendar year may not exceed 400,000 shares. (The individual maximum applies only to Awards first made under this Plan and not to Awards made in substitution of a prior employer’s options or other incentives, except as Code Section 162(m) otherwise requires.) The Common Stock will come from

CoStar Group, Inc.
1998 Stock Incentive Plan

     
either authorized but unissued shares or from previously issued shares that the Company reacquires, including shares it purchases on the open market. If any Award expires, is canceled, or terminates for any other reason, the shares of Common Stock available under that Award will again be available for the granting of new Awards (but will be counted against that calendar year’s limit for a given individual).
     
No adjustment will be made for a dividend or other right for which the record date precedes the date of exercise.
     
The participant will have no rights of a stockholder with respect to the shares of stock subject to an Award except to the extent that the Company has issued certificates for, or otherwise confirmed ownership of, such shares upon the exercise of the Award.
     
The Company will not issue fractional shares pursuant to the exercise of an Award, but the Administrator may, in its discretion, direct the Company to make a cash payment in lieu of fractional shares.
     
PERSON WHO
MAY EXERCISE		 During the participant’s lifetime, only the participant or his duly appointed guardian or personal representative may exercise the Awards. After his death, his personal representative or any other person authorized under a will or under the laws of descent and distribution may exercise any then exercisable portion of an Award. If someone other than the original recipient seeks to exercise any portion of an Award, the Administrator may request such proof as it may consider necessary or appropriate of the person’s right to exercise the Award.
     
ADJUSTMENTS
UPON CHANGES
IN CAPITAL STOCK		 Subject to any required action by the Company (which it shall promptly take) or its stockholders, and subject to the provisions of applicable corporate law, if, after the Date of Grant of an Award,
   
  the outstanding shares of Common Stock increase or decrease or change into or are exchanged for a different number or kind of security by reason of any recapitalization, reclassification, stock split, reverse stock split, combination of shares, exchange of shares, stock dividend, or other distribution payable in capital stock, or
   
  some other increase or decrease in such Common Stock occurs without the Company’s receiving consideration,
     
the Administrator may make a proportionate and appropriate adjustment in the number of shares of Common Stock underlying each Award, so that the proportionate interest of the participant immediately following such event will,

CoStar Group, Inc.
1998 Stock Incentive Plan

     
to the extent practicable, be the same as immediately before such event. (This adjustment does not apply to Common Stock that the optionee has already purchased nor to Stock Grants that are already nonforfeitable, except to the extent of similar treatment for all stockholders.) Unless the Administrator determines another method would be appropriate, any such adjustment to an Award will not change the total price with respect to shares of Common Stock underlying the unexercised portion of the Award but will include a corresponding proportionate adjustment in the Award’s Exercise Price.
     
The Administrator will make a commensurate change to the maximum number and kind of shares provided in the Stock Subject to Plan section.
     
Any issue by the Company of any class of preferred stock, or securities convertible into shares of common or preferred stock of any class, will not affect, and no adjustment by reason thereof will be made with respect to, the number of shares of Common Stock subject to any Award or the Exercise Price except as this Adjustments section specifically provides. The grant of an Award under the Plan will not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure, or to merge or to consolidate, or to dissolve, liquidate, sell, or transfer all or any part of its business or assets.
     
SUBSTANTIAL
CORPORATE  
CHANGE         		 Upon a Substantial Corporate Change, the Plan and any unexercised Awards will terminate unless provision is made in writing in connection with such transaction for
  the assumption or continuation of outstanding Awards, or
   
  the substitution for such options or grants of any options or grants covering the stock or securities of a successor employer corporation, or a parent or subsidiary of such successor, with appropriate adjustments as to the number and kind of shares of stock and prices, in which event the Awards will continue in the manner and under the terms so provided.
     
Unless the Board determines otherwise, if an Award would otherwise terminate pursuant to the preceding sentence, participants who are then Employees or directors of the Company will have the right, at such time before the consummation of the transaction causing such termination as the Board reasonably designates, to exercise any unexercised portions of the Award, whether or not they had previously become exercisable. However, unless the Board determines otherwise, the acceleration will not occur if it would render unavailable “pooling of interest” accounting for any reorganization, merger, or consolidation of the Company.

CoStar Group, Inc.
1998 Stock Incentive Plan

     
A Substantial Corporate Change means the
   
  dissolution or liquidation of the Company,
   
  merger, consolidation, or reorganization of the Company with one or more corporations in which the Company is not the surviving corporation,
   
  the sale of substantially all of the assets of the Company to another corporation, or
   
  any transaction (including a merger or reorganization in which the Company survives) approved by the Board that results in any person or entity (other than any affiliate of the Company as defined in Rule 144(a)(1) under the Securities Act) owning 100% of the combined voting power of all classes of stock of the Company.
     
SUBSIDIARY
EMPLOYEES		 Employees of Company Subsidiaries will be entitled to participate in the Plan, except as otherwise designated by the Board of Directors or the Committee.
     
Eligible Subsidiary means each of the Company’s Subsidiaries, except as the Board otherwise specifies. For ISO grants, Subsidiary means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if, at the time an ISO is granted to a Participant under the Plan, each of the corporations (other than the last corporation in the unbroken chain) owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. For NQSOs, the Board or the Committee can use a different definition of Subsidiary in its discretion.
     
LEGAL
COMPLIANCE		 The Company will not issue any shares of Common Stock under an Award until all applicable requirements imposed by Federal and state securities and other laws, rules, and regulations, and by any applicable regulatory agencies or stock exchanges, have been fully met. To that end, the Company may require the participant to take any reasonable action to comply with such requirements before issuing such shares. No provision in the Plan or action taken under it authorizes any action that is otherwise prohibited by Federal or state laws.
     
The Plan is intended to conform to the extent necessary with all provisions of the Securities Act of 1933 (“Securities Act”) and the Exchange Act and all regulations and rules the Securities and Exchange Commission issues under those laws. Notwithstanding anything in the Plan to the contrary, the

CoStar Group, Inc.
1998 Stock Incentive Plan

     
Administrator must administer the Plan, and Awards may be granted and exercised, only in a way that conforms to such laws, rules, and regulations. To the extent permitted by applicable law, the Plan and any Awards will be deemed amended to the extent necessary to conform to such laws, rules, and regulations.
     
PURCHASE FOR
INVESTMENT
AND OTHER
RESTRICTIONS		 Unless a registration statement under the Securities Act covers the shares of Common Stock a participant receives upon exercise of his Award, the Administrator may require, at the time of such exercise or receipt of a grant, that the participant agree in writing to acquire such shares for investment and not for public resale or distribution, unless and until the shares subject to the Award are registered under the Securities Act. Unless the shares are registered under the Securities Act, the participant must acknowledge:
   
  that the shares purchased on exercise of the Award are not so registered,
   
  that the participant may not sell or otherwise transfer the shares unless
   
  the shares have been registered under the Securities Act in connection with the sale or transfer thereof, or
   
  counsel satisfactory to the Company has issued an opinion satisfactory to the Company that the sale or other transfer of such shares is exempt from registration under the Securities Act, and
   
  such sale or transfer complies with all other applicable laws, rules, and regulations, including all applicable Federal and state securities laws, rules, and regulations.
     
Additionally, the Common Stock, when issued upon the exercise of an Award, will be subject to any other transfer restrictions, rights of first refusal, and rights of repurchase set forth in or incorporated by reference into other applicable documents, including the Company’s articles or certificate of incorporation, by-laws, or generally applicable stockholders’ agreements.
     
The Administrator may, in its sole discretion, take whatever additional actions it deems appropriate to comply with such restrictions and applicable laws, including placing legends on certificates and issuing stop-transfer orders to transfer agents and registrars.
     
TAX WITHHOLDING The participant must satisfy all applicable Federal, state, and local income and employment tax withholding requirements before the Company will deliver stock certificates upon the exercise of an Award. The Company may decide to satisfy the withholding obligations through additional withholding on salary or

CoStar Group, Inc.
1998 Stock Incentive Plan

     
wages. If the Company does not or cannot withhold from other compensation, the participant must pay the Company, with a cashier’s check or certified check, the full amounts required by withholding. Payment of withholding obligations is due before the Company issues shares with respect to the Award. If the Committee so determines, the participant may instead satisfy the withholding obligations by directing the Company to retain shares from the Award exercise, by tendering previously owned shares, or by attesting to his ownership of shares (with the distribution of net shares).
     
TRANSFERS,
ASSIGNMENTS,
AND PLEDGES		 Unless the Administrator otherwise approves in advance in writing, an Award may not be assigned, pledged, or otherwise transferred in any way, whether by operation of law or otherwise or through any legal or equitable proceedings (including bankruptcy), by the participant to any person, except by will or by operation of applicable laws of descent and distribution. If Rule 16b-3 then applies to an Award, the participant may not transfer or pledge shares of Common Stock acquired under a Stock Grant or upon exercise of an Option until at least six (6) months have elapsed from (but excluding) the Date of Grant, unless the Administrator approves otherwise in advance in writing.
     
AMENDMENT OR
TERMINATION
OF PLAN AND
OPTIONS		 The Board may amend, suspend, or terminate the Plan at any time, without the consent of the participants or their beneficiaries; provided, however, that no amendment will deprive any participant or beneficiary of any previously declared Award. Except as required by law or by the Corporate Changes section, the Administrator may not, without the participant’s or beneficiary’s consent, modify the terms and conditions of an Award so as to adversely affect the participant. No amendment, suspension, or termination of the Plan will, without the participant’s or beneficiary’s consent, terminate or adversely affect any right or obligations under any outstanding Awards.
     
PRIVILEGES OF
STOCK OWNERSHIP		 No participant and no beneficiary or other person claiming under or through such participant will have any right, title, or interest in or to any shares of Common Stock allocated or reserved under the Plan or subject to any Award except as to such shares of Common Stock, if any, that have been issued to such participant.
     
EFFECT ON
OTHER PLANS		 Whether exercising or receiving an Award causes the participant to accrue or receive additional benefits under any pension or other plan is governed solely by the terms of such other plan.
     
LIMITATIONS ON
LIABILITY		 Notwithstanding any other provisions of the Plan, no individual acting as a director, employee, or agent of the Company shall be liable to any participant, former participant, spouse, beneficiary, or any other person for any claim, loss, liability, or expense incurred in connection with the Plan, nor shall

CoStar Group, Inc.
1998 Stock Incentive Plan

     
such individual be personally liable because of any contract or other instrument he executes in such other capacity. The Company will indemnify and hold harmless each director, employee, or agent of the Company to whom any duty or power relating to the administration or interpretation of the Plan has been or will be delegated, against any cost or expense (including attorneys’ fees) or liability (including any sum paid in settlement of a claim with the Board’s approval) arising out of any act or omission to act concerning this Plan unless arising out of such person’s own fraud or bad faith.
     
NO EMPLOYMENT
CONTRACT		 Nothing contained in this Plan constitutes an employment contract between the Company and the participants. The Plan does not give any participant any right to be retained in the Company’s employ, nor does it enlarge or diminish the Company’s right to terminate the participant’s employment.
     
APPLICABLE LAW The laws of the State of Delaware (other than its choice of law provisions) govern this Plan and its interpretation.
     
DURATION OF PLAN Unless the Board extends the Plan’s term, the Administrator may not grant Awards after May 8, 2008. The Plan will then terminate but will continue to govern unexercised and unexpired Awards.

CoStar Group, Inc.
1998 Stock Incentive Plan
ex10-2

EXHIBIT 10.2

CONFIDENTIAL SEPARATION AGREEMENT
AND GENERAL RELEASE

John Place (“Employee”) and CoStar Realty Information, Inc. (including its predecessors, “CoStar” or “Employer”) agree to terminate their employment relationship on the following basis:

1.      Last Day of Employment. Employee and CoStar agree that Employee shall separate his employment with CoStar effective May 10, 2001 (the “Separation Date”). The parties agree that for certain purposes of this Agreement, the date of July 9, 2001 (the “Termination Date”) shall be treated as Employee’s last day of employment with CoStar. Within 30 days after the Separation Date, Employee will return all of CoStar’s property, including without limitation keys, phones, computers, credit cards, records, and files (electronic or other) and will cooperate fully with CoStar’s managers and employees in a professional manner to assure a smooth transition. Employee acknowledges that he shall have thirty (30) days from the Separation Date to execute and deliver this Agreement to CoStar.

2.      Consideration. (a)      In consideration for Employee’s agreement and commitments set forth in this Confidential Separation Agreement and General Release (the “Agreement”), CoStar agrees that for the period from the Separation Date until December 31, 2001, CoStar will pay Employee’s current base salary of $10,769.23 bi-weekly in accordance with the normal payroll practices of CoStar then in effect, and subject to all federal, state and local taxes and withholdings and any other required withholdings.

          (b)      CoStar further agrees that, in consideration for Employee’s agreement and commitments herein, pursuant to Section 7(a) of the Employment Agreement, dated May 1, 2000, between CoStar and the Employee (the “Employment Agreement”), all of Employee’s unvested options due to vest within the twelve (12) month period following the Separation Date shall vest on the Separation Date. CoStar and Employee acknowledge that Employee shall have ninety (90) days from the Termination Date to exercise any options granted to Employee under CoStar Group, Inc.’s 1998 Stock Incentive Plan.

          (c)      In consideration for Employee’s agreement and commitments herein, CoStar agrees to continue providing Employee with access to CoStar’s employee health and benefit plans then in effect to the Termination Date, and subject to any and all required withholdings and employee contributions.

          (d)      CoStar further agrees that, in consideration for Employee’s agreement and commitments herein, CoStar will (i) pay Employee an annual bonus for the year ended December 31, 2000 in the amount of $46,667, subject to federal, state and local taxes and withholdings and any other required withholdings, within thirty (30) days from the date CoStar receives this Agreement signed by Employee; (ii) pay Employee an annual bonus for the period from January 1, 2001 to the Separation Date in the amount of $23,333, subject to federal, state and local taxes and withholdings and any other required withholdings, within thirty (30) days from the date CoStar receives this Agreement signed by Employee; and (iii) reimburse Employee for his reasonable and necessary business related expenses for which Employee incurred prior to the Separation Date and which Employee submits to CoStar a properly completed expense report within thirty (30) days from the Separation Date. Employee agrees that CoStar may set off an amount equal to $717.50 from the bonus amounts set forth above, as reimbursement to CoStar for personal charges made by Employee on a CoStar-issued credit card. The parties agree that

 

Employee shall not receive (A) any bonus of any kind from CoStar for any periods after the Separation Date, or (B) any reimbursement from CoStar of any relocation expenses.

          (e)      CoStar further agrees that, in consideration for Employee’s agreements and commitments herein, CoStar will pay Employee a lump sum amount of $3,868.85, subject to federal, state and local taxes and withholdings and any other required withholdings, for his accrued and unused vacation time, within thirty (30) days from the date CoStar receives this Agreement signed by Employee. The parties agree that Employee shall not be entitled to accrue any vacation pay for any periods after the Separation Date.

          (f)      CoStar further agrees that from the Termination Date through September 9, 2001, CoStar shall make all payments directly to the third party administrator on Employee’s behalf for family health care coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) if Employee elects to continue such coverage under CoStar’s group health plan pursuant to paragraph 14 herein. Any and all payments after September 9, 2001 related to health care coverage shall be made by Employee. In the event that prior to September 9, 2001, Employee secures other health care benefits comparable to those provided by CoStar, Employee shall notify CoStar of such coverage and CoStar shall have no further obligation to make any payments discussed in this Section 2(f).

3.      No Consideration Absent Execution of this Agreement. Employee understands and agrees that he would not receive any monies and/or benefits specified in Section 2 except for his execution of this Agreement and Release and the fulfillment of the promises contained herein. Employee agrees that he will not claim, any right, benefit, payment or compensation of any kind whatsoever from CoStar or its affiliates other than what is expressly set forth in Section 2 above, and hereby expressly waives any claim to any compensation, benefit, compensation or payment whatsoever under the Employment Agreement or otherwise.

4.      Confidentiality, Non-Competition and Non-Solicitation. Employee agrees that the provisions set forth in Section 9 of the Employment Agreement shall continue to be in full force and effect and shall survive termination of Employee’s employment with CoStar. Employee understands that CoStar’s obligations under this Agreement remain conditioned on Employee’s satisfaction of and adherence to the covenants and obligations set forth in Section 9 of the Employment Agreement. Employee further agrees to keep this Agreement and its contents in complete confidence and not to disclose the fact or amount of these additional payments to any past, present or prospective employee of CoStar. The terms of this Agreement are confidential and shall not be divulged to any party without the prior written consent of CoStar, which may be withheld in CoStar’s sole discretion; provided, however, that CoStar hereby gives permission to Employee to disclose the details of this Agreement to Employee’s counsel, family members and financial advisors.

5.      General Release. Except for any claims that Employee may have for workers’ compensation benefits, for pension benefits, or for health care, life or disability insurance (which are not released under this Agreement), in consideration of the compensation set forth in Section 2, Employee does hereby unconditionally, irrevocably and absolutely release and discharge CoStar and its affiliates and their respective owners, directors, officers, employees, agents, attorneys, affiliates, stockholders, insurers, divisions, predecessors, successors and/or assigns and any related holding, parent or subsidiary corporations (collectively, the “Released Parties”), from any and all loss, liability, claims, expenses, demands, causes of action, suits, rights and

 

entitlements of every kind and description of any type, whether in law and/or in equity (collectively, the “Claims”), related directly or indirectly or in any way connected with any transaction, affairs or occurrences between the Employee and any Released Party to date, including, but not limited to, any claims under the Employment Agreement, with respect to Employee’s employment with CoStar (or its affiliates), the termination of said employment or arising out of any acts committed or omitted during said employment relationship.

           Notwithstanding any other provision of this Release, Employee does not hereby release or waive any obligation of CoStar or any Released Party to indemnify, make contribution to, defend or hold harmless Employee that may exist as of and prior to the date of this Agreement, including, but not limited to, any obligation arising out of Employee’s former status as an officer, director, employee or fiduciary of CoStar or any other Released Party. It is the intent of the parties and of this Agreement that any existing indemnification obligations be excluded from the claims being released by Employee.

           This release includes, but is not limited to, any Claims for back pay reinstatement, personal injuries, breach of contract (express or implied), breach of any covenant of good faith and fair dealing (express or implied), and for any recovery of any losses or other damages to Employee or Employee’s property based on any alleged violation of any of the following:

  •   The National Labor Relations Act, as amended, 29 U.S.C., 151 et seq;
 
  •   Title VII of the Civil Act of 1964, as amended, 42 U.S.C. Section 2000e et seq;
 
  •   The Employee Retirement Income Security Act of 1974, as amended, 29 U.S.C. 621 et seq;
 
  •   The Americans With Disabilities Act of 1990, as amended, 42 U.S.C. 12101;
 
  •   The Fair Labor Standards Act, as amended, 29 U.S.C. 201 et seq;
 
  •   The Occupational Safety and Health Act, as amended;
 
  •   The Family and Medical Leave Act of 1993, 29 U.S.C. 2601 et seq;
 
  •   Sections 1981 through 1988 of Title 42 of the United States Code, as amended;
 
  •   The Occupational Safety and Health Act of 1970, 29 U.S.C. 651 et seq;
 
  •   The Immigration Reform Control Act, as amended;
 
  •   The Maryland Fair Employment Practice Act, Maryland Code Ann., Art. 49B, § 1 et seq; and
 
  •   Any other federal, state or local statutory or common law.

           In further consideration thereof, and except as specifically provided in paragraph 3, Employee irrevocably and absolutely agrees that he will not prosecute nor allow to be prosecuted on his behalf in any administrative agency, whether federal or state, or in any court, whether federal or state, any claim or demand of any type related to the matters released above, it being an intention of the parties that with the execution by Employee of this Agreement, the Released Parties will be absolutely, unconditionally and forever discharged of and from all obligations to or on behalf of Employee related in any way to the matters discharged herein.

6.      No Promises. Employee agrees that no promises, coercion, representations or inducements have been made which caused him to sign this Agreement other than those which are expressly set forth above and that the terms of this Agreement are contractual and not a mere recital.

 

7.      Governing Law. This Agreement will be construed and interpreted in accordance with the laws of the State of Maryland.

8.      Severability. If any provision of this Agreement, or part thereof, is held invalid, void or voidable as against the public policy or otherwise, the invalidity shall not affect other provisions, or parts thereof.

9.      Release as a Defense. The release contained herein may be pleaded as a full and complete defense and may be used as the basis for an injunction against any action, suit or proceeding which may be prosecuted, instituted or attempted by either party in breach thereof.

10.     Consultation with Counsel. Employee further acknowledges that he has been advised in writing and offered the opportunity to discuss this Agreement and its contents with his attorney. Employee acknowledges that he has fully discussed this Agreement with his attorney with respect to the meaning and effect of the provisions of this Agreement, or has voluntarily chosen to sign this Agreement without consulting his attorney, fully understanding the content, meaning and legal effect and consequences of this Agreement.

11.      Understanding of Agreement. Employee warrants and represents to CoStar that he has read and understands the meaning of each provision of this Agreement and his signature below constitutes his acceptance of each term of the Agreement.

12.      Non-Disparagement. Employee agrees not to make and/or publish in any manner any derogatory, adverse, false or defamatory statements, written or verbal, regarding any of the Released Parties to anyone including, but not limited to, CoStar’s or its affiliates’ respective directors, officers, employees, agents, vendors, existing clients, or potential clients that Employee knows that CoStar or any of its affiliates has targeted. Employee agrees that he has not and will not engage in the following activities: (1) raise allegations of wrongdoing against any of the Released Parties with any governmental agency or any other entity; (2) incite other persons and/or entities to raise allegations of wrongdoing against any of the Released Parties; and/or (3) publish any representation that any of the Released Parties in any way treated him unfairly, breached any obligation to him/her, or in any other manner mistreated him. Notwithstanding the foregoing, CoStar agrees that the Employee shall be permitted to raise good faith allegations of wrongdoing by any of the Released Parties against the Employee to any governmental agency, provided that the provisions of Section 9 of the Employment Agreement are not violated.

13.      Future Assistance. Employee agrees to be available to respond to future reasonable inquiries or requests for assistance from CoStar (or its successor and/or affiliates) related to matters arising during Employee’s employment with CoStar or its predecessors.

14.      COBRA. Employee hereby acknowledges that CoStar has advised him that (if applicable) under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) he has a right to elect continued coverage under CoStar’s group health plan, at his own expense, subject to Section 2(f) above, for a period of 18 months from the Termination Date. This election must be made no later than 60 days after the notification date.

15.      Notice. Employee acknowledges that this Agreement shall constitute written notice to Employee pursuant to Section 7(a) of the Employment Agreement.

 

WE AGREE TO ALL OF THE FOREGOING TERMS. THIS AGREEMENT HAS BEEN EXECUTED ON
THE DATE SHOWN BELOW.

CoStar Realty Information, Inc. (CoStar)

     
      /s/ Andrew Florance
       May 22, 2001
By: Date
 
 
      /s/ John Place
       May 22, 2001
John Place Date
 

Note: Return signed agreement to:

Human Resources
CoStar Group
2 Bethesda Metro Center, 10th Floor
Bethesda, MD 20814