Attached files
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8-K - FORM 8-K - COSTAR GROUP, INC. | w82866e8vk.htm |
EX-2.1 - EX-2.1 - COSTAR GROUP, INC. | w82866exv2w1.htm |
EX-99.3 - EX-99.3 - COSTAR GROUP, INC. | w82866exv99w3.htm |
EX-99.2 - EX-99.2 - COSTAR GROUP, INC. | w82866exv99w2.htm |
Exhibit 99.1
INDEX TO
FINANCIAL STATEMENTS
Page | ||||
F-2 | ||||
F-3 | ||||
Financial Statements
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F-4 | ||||
F-5 | ||||
F-6 | ||||
F-7 | ||||
F-8 |
F-1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Board of Directors and Stockholders
LoopNet, Inc.
We have audited LoopNet, Inc.s internal control over
financial reporting as of December 31, 2010, based on
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (the COSO criteria). LoopNet,
Inc.s management is responsible for maintaining effective
internal control over financial reporting, and for its
assessment of the effectiveness of internal control over
financial reporting included in the accompanying
Managements Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the
companys internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, LoopNet, Inc. maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2010, based on the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of LoopNet, Inc. as of
December 31, 2009 and 2010, and the related consolidated
statements of income, stockholders equity, and cash flows
for each of the three years in the period ended
December 31, 2010 of LoopNet, Inc. and our report dated
March 3, 2011 expressed an unqualified opinion thereon.
/s/ Ernst &
Young LLP
Los Angeles, California
March 3, 2011
F-2
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
LoopNet, Inc.
We have audited the accompanying consolidated balance sheets of
LoopNet, Inc. as of December 31, 2009 and 2010, and the
related consolidated statements of income, stockholders
equity, and cash flows for each of the three years in the period
ended December 31, 2010. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of LoopNet, Inc. at December 31, 2009
and 2010, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended
December 31, 2010, in conformity with U.S. generally
accepted accounting principles.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
LoopNet, Inc.s internal control over financial reporting
as of December 31, 2010, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our
report dated March 3, 2011 expressed an unqualified opinion
thereon.
/s/ Ernst &
Young LLP
Los Angeles, California
March 3, 2011
F-3
LOOPNET,
INC.
CONSOLIDATED
BALANCE SHEETS
December 31, |
December 31, |
|||||||
2009 | 2010 | |||||||
(In thousands, except share data) | ||||||||
ASSETS
|
||||||||
Current assets:
|
||||||||
Cash and cash equivalents
|
$ | 125,571 | $ | 88,773 | ||||
Short-term investments
|
3,440 | 3,512 | ||||||
Accounts receivable, net of allowance of $213 and $236,
respectively
|
1,308 | 1,494 | ||||||
Prepaid expenses and other current assets
|
1,080 | 1,095 | ||||||
Deferred income taxes, net
|
558 | 1,317 | ||||||
Total current assets
|
131,957 | 96,191 | ||||||
Property and equipment, net
|
2,216 | 2,010 | ||||||
Goodwill
|
23,368 | 41,507 | ||||||
Intangibles, net
|
4,487 | 8,940 | ||||||
Deferred income taxes, net, non-current
|
8,059 | 17,134 | ||||||
Deposits and other non-current assets
|
4,162 | 6,208 | ||||||
Total assets
|
$ | 174,249 | $ | 171,990 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY | ||||||||
Current liabilities:
|
||||||||
Accounts payable
|
$ | 546 | $ | 471 | ||||
Accrued liabilities
|
2,027 | 3,393 | ||||||
Accrued compensation and benefits
|
2,995 | 3,522 | ||||||
Income taxes payable
|
154 | | ||||||
Deferred revenue
|
9,025 | 8,888 | ||||||
Total current liabilities
|
14,747 | 16,274 | ||||||
Other long-term liabilities
|
| 2,491 | ||||||
Commitments and contingencies
|
||||||||
Series A convertible preferred stock
|
48,207 | 48,546 | ||||||
Stockholders equity:
|
||||||||
Common stock, $.001 par value, 125,000,000 shares
authorized; 39,493,526 and 39,866,097 shares issued,
respectively; and 34,567,565 and 32,183,836 shares
outstanding, respectively
|
39 | 40 | ||||||
Additional paid in capital
|
122,388 | 132,019 | ||||||
Other comprehensive loss
|
(418 | ) | (389 | ) | ||||
Treasury stock, at cost, 4,925,961 and 7,682,261 shares,
respectively
|
(54,556 | ) | (86,220 | ) | ||||
Retained earnings
|
43,842 | 59,229 | ||||||
Total stockholders equity
|
111,295 | 104,679 | ||||||
Total liabilities and stockholders equity
|
$ | 174,249 | $ | 171,990 | ||||
See accompanying notes.
F-4
LOOPNET,
INC.
CONSOLIDATED
STATEMENTS OF INCOME
Year Ended December 31, | ||||||||||||
2008 | 2009 | 2010 | ||||||||||
(In thousands, except per share data) | ||||||||||||
Revenues
|
$ | 86,074 | $ | 76,487 | $ | 78,002 | ||||||
Cost of revenue
|
10,858 | 11,060 | 12,562 | |||||||||
Gross margin
|
75,216 | 65,427 | 65,440 | |||||||||
Operating expenses:
|
||||||||||||
Sales and marketing
|
18,825 | 15,064 | 16,785 | |||||||||
Technology and product development
|
9,075 | 10,707 | 12,231 | |||||||||
General and administrative
|
17,773 | 20,677 | 15,693 | |||||||||
Amortization of acquired intangible assets
|
966 | 1,191 | 2,083 | |||||||||
Total operating expenses
|
46,639 | 47,639 | 46,792 | |||||||||
Income from operations
|
28,577 | 17,788 | 18,648 | |||||||||
Interest and other (expense) income, net
|
1,998 | 211 | (2,461 | ) | ||||||||
Income before tax
|
30,575 | 17,999 | 16,187 | |||||||||
Income tax expense
|
12,297 | 6,246 | 461 | |||||||||
Net income
|
18,278 | 11,753 | 15,726 | |||||||||
Convertible preferred stock accretion of discount
|
| (240 | ) | (339 | ) | |||||||
Net income applicable to common stockholders
|
$ | 18,278 | $ | 11,513 | $ | 15,387 | ||||||
Net income per share applicable to common stockholders:
|
||||||||||||
Basic
|
$ | 0.51 | $ | 0.28 | $ | 0.38 | ||||||
Diluted
|
$ | 0.49 | $ | 0.27 | $ | 0.36 | ||||||
Number of shares used in per share calculations:
|
||||||||||||
Basic
|
35,772 | 41,860 | 40,615 | |||||||||
Diluted
|
37,110 | 42,844 | 42,371 |
See accompanying notes.
F-5
LOOPNET,
INC.
CONSOLIDATED
STATEMENT OF STOCKHOLDERS EQUITY
Accumulated |
||||||||||||||||||||||||||||||||
Additional |
Other |
Total |
||||||||||||||||||||||||||||||
Common Stock |
Paid-in |
Retained |
Comprehensive |
Treasury Stock |
Stockholders |
|||||||||||||||||||||||||||
Shares | Amount | Capital | Earnings | Loss | Shares | Amount | Equity | |||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||||
Balance at December 31, 2007
|
38,908 | $ | 39 | $ | 107,866 | $ | 14,051 | $ | (103 | ) | | $ | | $ | 121,853 | |||||||||||||||||
Exercise of stock options
|
311 | | 356 | | | | | 356 | ||||||||||||||||||||||||
Stock-based compensation expense
|
| | 5,934 | | | | | 5,934 | ||||||||||||||||||||||||
Repurchase of common stock
|
| | | | | 4,926 | (54,556 | ) | (54,556 | ) | ||||||||||||||||||||||
Tax benefit from exercise of stock options
|
| | 759 | | | | | 759 | ||||||||||||||||||||||||
Change in unrealized loss on marketable securities
|
| | | | (173 | ) | | | (173 | ) | ||||||||||||||||||||||
Net income
|
| | | 18,278 | | | | 18,278 | ||||||||||||||||||||||||
Total comprehensive income
|
| | | | | | | 18,105 | ||||||||||||||||||||||||
Balance at December 31, 2008
|
39,219 | $ | 39 | $ | 114,915 | $ | 32,329 | $ | (276 | ) | 4,926 | $ | (54,556 | ) | $ | 92,451 | ||||||||||||||||
Stock-based activity awards
|
274 | | 258 | | | | | 258 | ||||||||||||||||||||||||
Stock-based compensation expense
|
| | 6,827 | | | | | 6,827 | ||||||||||||||||||||||||
Tax benefit from exercise of stock options
|
| | 388 | | | | | 388 | ||||||||||||||||||||||||
Convertible preferred stock accretion of discount
|
| | | (240 | ) | | | | (240 | ) | ||||||||||||||||||||||
Change in unrealized loss on
available-for-sale
investments
|
| | | | (250 | ) | | | (250 | ) | ||||||||||||||||||||||
Change in unrealized loss on marketable securities
|
| | | | 108 | | | 108 | ||||||||||||||||||||||||
Net income
|
| | | 11,753 | | | | 11,753 | ||||||||||||||||||||||||
Total comprehensive income
|
| | | | | | | 11,611 | ||||||||||||||||||||||||
Balance at December 31, 2009
|
39,493 | $ | 39 | $ | 122,388 | $ | 43,842 | $ | (418 | ) | 4,926 | $ | (54,556 | ) | $ | 111,295 | ||||||||||||||||
Stock-based activity awards
|
373 | 1 | 867 | | | | | 868 | ||||||||||||||||||||||||
Stock-based compensation expense
|
| | 8,232 | | | | | 8,232 | ||||||||||||||||||||||||
Repurchase of common stock
|
| | | | | 2,756 | (31,664 | ) | (31,664 | ) | ||||||||||||||||||||||
Tax benefit from exercise of stock options
|
| | 532 | | | | | 532 | ||||||||||||||||||||||||
Convertible preferred stock accretion of discount
|
| | | (339 | ) | | | | (339 | ) | ||||||||||||||||||||||
Change in unrealized loss on marketable securities
|
| | | | 29 | | | 29 | ||||||||||||||||||||||||
Net income
|
| | | 15,726 | | | | 15,726 | ||||||||||||||||||||||||
Total comprehensive income
|
| | | | | | | 15,755 | ||||||||||||||||||||||||
Balance at December 31, 2010
|
39,866 | $ | 40 | $ | 132,019 | $ | 59,229 | $ | (389 | ) | 7,682 | $ | (86,220 | ) | $ | 104,679 | ||||||||||||||||
See accompanying notes.
F-6
LOOPNET,
INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Year Ended December 31, | ||||||||||||
2008 | 2009 | 2010 | ||||||||||
(In thousands) | ||||||||||||
Cash flows from operating activities:
|
||||||||||||
Net income
|
$ | 18,278 | $ | 11,753 | $ | 15,726 | ||||||
Adjustments to reconcile net income to net cash provided by
operating activities:
|
||||||||||||
Depreciation and amortization expense
|
2,199 | 2,601 | 3,480 | |||||||||
Stock-based compensation
|
5,934 | 6,827 | 8,232 | |||||||||
Tax benefits from exercise of stock options
|
(759 | ) | (388 | ) | (532 | ) | ||||||
Deferred income tax
|
(1,683 | ) | (2,180 | ) | (9,834 | ) | ||||||
Impairment of equity investment
|
| | 1,420 | |||||||||
Changes in assets and liabilities, net of effects of
acquisitions:
|
||||||||||||
Accounts receivable
|
23 | 256 | (20 | ) | ||||||||
Prepaid expenses and other assets
|
(678 | ) | 388 | 1,498 | ||||||||
Income taxes payable
|
61 | 542 | (154 | ) | ||||||||
Accounts payable
|
(211 | ) | (76 | ) | (75 | ) | ||||||
Accrued expenses and other liabilities
|
1,304 | 7 | 1,295 | |||||||||
Accrued compensation and benefits
|
198 | 236 | 528 | |||||||||
Deferred revenue
|
439 | (1,334 | ) | (302 | ) | |||||||
Net cash provided by operating activities
|
25,105 | 18,632 | 21,262 | |||||||||
Cash flows from investing activities:
|
||||||||||||
Purchase of property and equipment
|
(1,319 | ) | (1,437 | ) | (1,197 | ) | ||||||
Purchase of investments
|
(1,000 | ) | (1,250 | ) | (4,485 | ) | ||||||
Acquisitions, net of cash acquired
|
(12,584 | ) | (312 | ) | (22,113 | ) | ||||||
Net cash used in investing activities
|
(14,903 | ) | (2,999 | ) | (27,795 | ) | ||||||
Cash flows from financing activities:
|
||||||||||||
Net proceeds from exercise of stock options
|
356 | 308 | 1,104 | |||||||||
Net proceeds from sale of convertible preferred stock
|
| 47,967 | | |||||||||
Tax withholding related to net share settlements of restricted
stock units
|
| (50 | ) | (237 | ) | |||||||
Repurchase of common stock
|
(54,556 | ) | | (31,664 | ) | |||||||
Tax benefit from exercise of stock options
|
759 | 388 | 532 | |||||||||
Net cash (used in) provided by financing activities
|
(53,441 | ) | 48,613 | (30,265 | ) | |||||||
Net (decrease) increase in cash and cash equivalents
|
(43,239 | ) | 64,246 | (36,798 | ) | |||||||
Cash and cash equivalents at beginning of year
|
104,564 | 61,325 | 125,571 | |||||||||
Cash and cash equivalents at end of year
|
$ | 61,325 | $ | 125,571 | $ | 88,773 | ||||||
Supplemental disclosures of cash flow information:
|
||||||||||||
Cash paid during the year for income taxes
|
$ | 14,444 | $ | 8,535 | $ | 9,791 | ||||||
Settlement of contingent purchase price
|
$ | | $ | 312 | $ | 188 |
See accompanying notes.
F-7
LOOPNET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(1) | The Company and Summary of Significant Accounting Policies |
Organization
and Basis of Presentation
LoopNet, Inc. (the Company or LoopNet)
was incorporated under the laws of the state of California on
June 2, 1997. The Company changed its name from Loop
Ventures, Inc. to LoopNet, Inc. on November 3, 1998. Prior
to Loop Ventures, Inc., the Company operated as a limited
liability corporation known as Loop Ventures, LLC. On
August 26, 1997, the owners of Loop Ventures, LLC exchanged
all units held for a proportionate number of the shares of Loop
Ventures, Inc. The transaction was recorded at historical basis.
On July 13, 2001, the Company merged with
PropertyFirst.com, Inc. (PropertyFirst), with
LoopNet, Inc. being the surviving company. The merger was
accounted for under the purchase method of accounting. In order
to preserve the existing rights and preferences of the different
classes and series of PropertyFirst and LoopNet capital stock,
each company reorganized by forming its own holding company. The
two holding companies were limited liability companies (the
LLCs), and continued in separate existence after the
business combination of LoopNet and PropertyFirst. The LLCs were
the direct owners of LoopNet, Inc. and the LLC members were the
beneficial owners. In May 2006, prior to its initial public
offering, the Company reincorporated in Delaware via a merger
with and into LoopNet, Inc., a Delaware corporation.
The accompanying consolidated financial statements include the
accounts of the Company and its subsidiaries. All intercompany
balances and transactions have been eliminated in consolidation.
The Company evaluated subsequent events after the balance sheet
date through the financial statement issuance date for
appropriate accounting and disclosure.
Use of
Estimates
The preparation of financial statements in conformity with
U.S. generally accepted accounting principles
(GAAP) requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenue, costs and expenses during the reporting period.
Actual results could differ materially from these estimates.
Cash
and Cash Equivalents
The Company considers all highly liquid investments with an
original maturity of three months or less to be cash
equivalents. As of December 31, 2010, substantially all of
the Companys cash and cash equivalents were in money
market funds.
Short-term
Investments
The Company accounts for short-term investments in accordance
with Financial Accounting Standards Board (FASB)
authoritative guidance on debt and equity securities
investments. Management determines the appropriate
classification of investments at the time of purchase and
reevaluates such designation as of each balance sheet date.
Short-term investments consist of debt securities that the
Company classifies as available for sale. The weighted average
maturities of short-term investments are less than one year.
These securities are carried at fair value, using level 1
indicators, which are quoted market prices for these securities.
Unrealized gains and losses if any, net of taxes, are reported
as other comprehensive income, a component of stockholders
equity. Any realized gains or losses on the sale of investments
are determined on a specific identification method, and such
gains and losses are reflected as a component of interest and
other income, net. As of December 31, 2010 and 2009, the
cost basis of short-term investments was not significantly
different than their carrying value.
Concentration
of Risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash and cash
equivalents, short-term investments and accounts receivable.
Cash and cash equivalents and short-term investments are placed
with high credit quality financial institutions. The
Companys revenue and accounts
F-8
LOOPNET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
receivable are primarily derived from credit card transactions
with subscribers and are typically settled within two to three
business days.
No single customer accounted for more than 2.0% of the
Companys revenues for the years ended December 31,
2008, 2009 and 2010.
Fair
Value of Financial Instruments
The Companys financial instruments, including cash and
cash equivalents, accounts receivable, and accounts payable and
accrued liabilities are carried at cost, which approximates
their fair value because of the short-term maturity of these
instruments and the relatively stable interest rate environment.
Accounts
Receivable
Accounts receivable are recorded at the invoiced amount and are
non-interest bearing. The Company maintains an allowance for
doubtful accounts to reserve for potentially uncollectible
receivables. Management reviews the accounts receivable to
identify specific subscribers where collectibility may not be
probable. The amount of the allowance is determined by
management estimates based on historic write-off trends and
specific account analysis.
Property
and Equipment
Property and equipment are stated at historical cost.
Depreciation and amortization is computed using the
straight-line method over the estimated useful lives of the
assets, generally three years or less, or the shorter of the
lease term or the estimated useful lives of the assets, if
applicable.
Website
Development Costs
The Company follows FASB authoritative guidance, which
addresses whether certain web site development costs should be
capitalized or expensed. Because the Companys current
website development costs incurred relate to routine maintenance
and operating costs, the Company expenses such costs as incurred.
Long-Lived
Assets Including Goodwill and Other Intangible
Assets
The Company reviews property and equipment and certain
identifiable intangibles, excluding goodwill, for impairment
whenever events or changes in circumstances indicate the
carrying amount of an asset may not be recoverable. If property
and equipment and these identifiable intangibles are considered
to be impaired, the impairment to be recognized equals the
amount by which the carrying value of the assets exceeds their
fair value. The Company has not recorded any impairment of these
assets in any of the years presented.
The Company applies FASB authoritative guidance related to
goodwill and other intangibles. The authoritative guidance
requires that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead be tested for
impairment at least annually or sooner whenever events or
changes in circumstances indicate that they may be impaired. The
Company performed the annual impairment test during the fourth
quarter of 2008, 2009 and 2010 and concluded that goodwill and
intangible assets with indefinitive useful lives were not
impaired.
The authoritative guidance also requires that intangible assets
with definite lives be amortized over their estimated useful
lives and reviewed for impairment whenever events or changes in
circumstances indicate that an assets carrying value may
not be recoverable in accordance with the authoritative guidance
on property, plant, and equipment.
Intangible assets are comprised of customer relationships,
acquired technology and a domain name acquired in connection
with the Companys acquisitions. Amortization is calculated
using the straight-line method over estimated useful lives
ranging from 0.5 years to 8 years.
Goodwill represents the excess of the purchase price over the
fair value of identifiable assets acquired and liabilities
assumed in business combinations accounted for under the
purchase method. The Company believes no
F-9
LOOPNET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
events or changes in circumstances have occurred that would
require an impairment test for these assets other than required
annual tests.
Income
Tax Expense
Deferred tax assets and liabilities arise from the differences
between the tax basis of an asset or liability and its reported
amount in the financial statements as well as from net operating
loss and tax credit carry forwards. Deferred tax amounts are
determined by using the tax rates expected to be in effect when
the taxes will actually be paid or refunds received, as provided
under current tax law. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected
to be realized. Income tax expense or benefit is the tax payable
or refundable, respectively, for the period plus or minus the
change during the period in deferred tax assets and liabilities.
On January 1, 2007, the Company adopted new FASB
authoritative guidance surrounding accounting for uncertainty in
income taxes. The guidance clarifies the accounting for income
taxes by prescribing a minimum probability threshold that a tax
position must meet before a financial statement benefit is
recognized. The minimum threshold is defined as a tax position
that is more likely than not to be sustained upon examination by
the applicable taxing authority, including resolution of any
related appeals or litigation processes, based on the technical
merits of the position. The tax benefit to be recognized is
measured as the largest amount of benefit that is greater than
fifty percent likely of being realized upon ultimate settlement.
The new authoritative guidance must be applied to all existing
tax positions upon initial adoption. The cumulative effect of
applying the new authoritative guidance at adoption, if any, is
to be reported as an adjustment to opening retained earnings for
the year of adoption. The adoption of new authoritative guidance
did not have a material effect on the Companys
consolidated financial position or results of operations.
Business
Segment
The Company considers itself to be in a single business segment
which is defined as providing an online marketplace serving the
commercial real estate industry and operating businesses for
sale industry. Substantially all of the Companys business
comes from customers and operations located within the United
States, and the Company does not have any assets located in
foreign countries.
Revenue
Recognition
The Company derives substantially all its revenue from customers
that pay fees for a suite of services to market and search for
commercial real estate and operating businesses. These services
include a premium membership that gives the customer unlimited
access to listings, maximized exposure for their listings along
with enhanced services to market their listings. The Company
recognizes revenue under the provisions of Securities and
Exchange Commission (SEC) Staff Accounting Bulletin
(SAB) guidance related to revenue recognition, when
persuasive evidence of an agreement exists, delivery has
occurred, the sales price is fixed or determinable and
collectibility is reasonably assured. Payments received in
advance of services being rendered are recorded as deferred
revenue and recognized on a straight-line basis over the service
period.
Revenue from other sources includes advertising revenues which
are recognized ratably over the period in which the
advertisement is displayed provided that no significant
obligations remain and collection of the resulting receivable is
probable. Advertising rates are dependent on the services
provided and the placement of the advertisements. To date, the
duration of the Companys advertising commitments has
generally averaged two to three months.
Cost
of Revenues
Cost of revenues consists of the expenses associated with the
operation of the Companys website, including depreciation
of network infrastructure equipment, salaries and benefits of
network operations personnel, internet connectivity and hosting
costs. Cost of revenues also includes salaries and benefit
expenses associated with the
F-10
LOOPNET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Companys data quality, data import and customer support
personnel and credit card and other transaction fees relating to
processing customer transactions.
Sales
and Marketing
The Companys sales and marketing expenses relate primarily
to the compensation and associated costs for sales and marketing
personnel, advertising expenses as well as public relations and
other promotional activities.
Advertising costs are expensed in the period they are incurred.
Included in sales and marketing expenses were $3.4 million,
$2.6 million and $2.6 million for the years ended
December 31, 2008, 2009 and 2010, respectively.
Technology
and Product Development
Technology and product development costs are expensed as
incurred and include expenses for the research and development
of new products and services, as well as improvements to
existing products and services. Also included are costs
associated with the maintenance of the Companys existing
products.
General
and Administrative
General and administrative costs consist primarily of salaries
and related expenses for executive, accounting and human
resources personnel. These costs also include insurance and
professional fees, facility costs and related expenses.
Professional fees primarily consist of outside legal and audit
fees. All costs are expensed as incurred.
Comprehensive
Income
Comprehensive income is comprised of net income and other
comprehensive income. Other comprehensive income includes
unrealized gains and losses on
available-for-sale
investments. The differences between total comprehensive income
and net income as disclosed on the consolidated statements of
stockholders equity for the years ended December 31,
2008, 2009 and 2010 were insignificant.
Stock-Based
Compensation
Since 2006, the Company has applied FASB authoritative guidance
surrounding share-based compensation. The guidance requires that
share-based payment transactions with employees be recognized in
the financial statements based on their fair value and
recognized as compensation expense over the vesting period.
Recent
Accounting Pronouncements
In June 2009, the FASB issued new authoritative guidance which
amends the evaluation criteria for determining the primary
beneficiary of a Variable Interest Entity, or VIE.
This new guidance requires an ongoing assessment of whether an
enterprise is the primary beneficiary of a variable interest
entity. The effective date for this amendment is reporting
periods beginning after November 15, 2009. The Company
adopted this guidance effective January 1, 2010, and there
has been no material impact to the consolidated financial
statements upon adoption.
F-11
LOOPNET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(2) | Earnings per Share |
The number of shares used to compute basic and diluted net
income per share is calculated as follows (in thousands):
Year Ended December 31, | ||||||||||||
2008 | 2009 | 2010 | ||||||||||
Weighted average common shares outstanding
|
35,772 | 34,420 | 33,175 | |||||||||
Convertible preferred stock
|
| 7,440 | 7,440 | |||||||||
Shares used to compute basic net income applicable to common
stockholders
|
35,772 | 41,860 | 40,615 | |||||||||
Add dilutive common equivalents:
|
||||||||||||
Stock options
|
1,270 | 930 | 1,308 | |||||||||
Restricted stock units
|
8 | 54 | 448 | |||||||||
Unvested restricted stock(1)
|
60 | | | |||||||||
Shares used to compute diluted net income applicable to common
stockholders
|
37,110 | 42,844 | 42,371 | |||||||||
(1) | Outstanding unvested common stock purchased by employees is subject to repurchase by the Company and therefore is not included in the calculation of the weighted-average shares outstanding for basic earnings per share. |
The following is a summary of the securities outstanding during
the respective periods that have been excluded from the
calculations because the effect on earnings per share would have
been anti-dilutive (in thousands):
Year Ended December 31, | ||||||||||||
2008 | 2009 | 2010 | ||||||||||
Stock options
|
3,294 | 4,673 | 3,595 | |||||||||
Restricted stock units
|
| 113 | 55 |
F-12
LOOPNET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table sets forth the computation of basic and
diluted EPS (in thousands, except per share data):
Year Ended December 31, | ||||||||||||
2008 | 2009 | 2010 | ||||||||||
Calculation of basic net income per share applicable to
common shareholders:
|
||||||||||||
Net income
|
$ | 18,278 | $ | 11,753 | $ | 15,726 | ||||||
Convertible preferred stock accretion of discount
|
| (240 | ) | (339 | ) | |||||||
Net income applicable to common shareholders
|
$ | 18,278 | $ | 11,513 | $ | 15,387 | ||||||
Shares used to compute basic net income applicable to common
shareholders
|
35,772 | 41,860 | 40,615 | |||||||||
Basic net income per share applicable to common
shareholders
|
$ | 0.51 | $ | 0.28 | $ | 0.38 | ||||||
Calculation of diluted net income per share applicable to
common shareholders:
|
||||||||||||
Net Income
|
$ | 18,278 | $ | 11,753 | $ | 15,726 | ||||||
Convertible preferred stock accretion of discount
|
| (240 | ) | (339 | ) | |||||||
Net income applicable to common shareholders
|
$ | 18,278 | $ | 11,513 | $ | 15,387 | ||||||
Shares used to compute diluted net income applicable to common
shareholders
|
37,110 | 42,844 | 42,371 | |||||||||
Dilutive net income per share applicable to common
shareholders
|
$ | 0.49 | $ | 0.27 | $ | 0.36 | ||||||
(3) | Property and Equipment, net |
Property and equipment, net consists of the following (in
thousands):
As of December 31, | ||||||||
2009 | 2010 | |||||||
Computer equipment and purchased software
|
$ | 6,363 | $ | 6,839 | ||||
Office equipment and furniture (includes leasehold improvements)
|
1,057 | 1,102 | ||||||
7,420 | 7,941 | |||||||
Less accumulated depreciation and amortization
|
(5,204 | ) | (5,931 | ) | ||||
Property and equipment, net
|
$ | 2,216 | $ | 2,010 | ||||
During 2010, the Company recorded an adjustment to eliminate
from property and equipment approximately $0.6 million of
fully depreciated property and equipment.
(4) | Acquisitions |
During the year ended December 31, 2010, the Company
acquired BizQuest on January 4, 2010, Reaction Web on
March 15, 2010 and LandsofAmerica on September 1,
2010, each pursuant to Asset Purchase Agreements for a total
cash consideration of $22.1 million (net of cash acquired),
plus potential gross earn-out payments ranging from zero to
$4.3 million that are contingent upon achievement of
certain performance targets. As of December 31, 2010, the
Company recorded a discounted contingent liability of
$2.6 million for these potential earn-out payments. With
these acquisitions, LoopNet has expanded its
business-for-sale
and land marketplaces, as well, as enhanced the Companys
suite of products.
F-13
LOOPNET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The acquisitions were accounted for as business combinations
consistent with the authoritative guidance regarding business
combinations, and accordingly, the purchase prices have been
allocated to the tangible assets and identifiable intangible
assets acquired based on their estimated fair values on the
acquisition date. The excess of the purchase prices over the
aggregate fair values were recorded as goodwill. Goodwill
recorded in connection with the above acquisitions is primarily
attributable to the assembled workforces of the acquired
businesses and the synergies expected to arise after the
Companys acquisition of those businesses.
As a result of the above acquisitions, the Company recorded
intangible assets related to customer relationships, developed
technology and non-competition agreements in the aggregate of
$4.0 million that are being amortized on a straight-line
basis. Also, included in other intangible assets are trade names
of $2.5 million which have an indefinite life and are
tested on an annual basis for impairment. The remaining excess
purchase price over tangible assets and identifiable intangible
assets for these acquisitions of $18.0 million have been
recorded as goodwill.
The Companys purchase prices were allocated as follows (in
thousands):
Customer relationships
|
$ | 1,852 | ||
Trade names
|
2,521 | |||
Developed technology
|
2,068 | |||
Non-competition agreements
|
95 | |||
Goodwill
|
17,951 | |||
Total
|
$ | 24,487 | ||
Customer relationships, developed technology and non-competition
agreements have a weighted-average useful life of
3.4 years, 2.0 years and 2.9 years, respectively
from the date of acquisition. The amount of goodwill expected to
be deductible for tax purposes is $18.0 million.
The results of operations of the entities have been included in
the Companys consolidated statements of income for the
period subsequent to the Companys acquisition. The
entities results of operations for the periods prior to
the acquisition were not material to the Companys
consolidated statement of income and, accordingly, pro forma
financial information have not been presented.
(5) | Goodwill and Intangible Assets, net |
The changes in the carrying amount of goodwill for the years
ended December 31, 2008, 2009 and 2010 were as follows (in
thousands):
Balance as of December 31, 2007
|
$ | 15,233 | ||
Goodwill acquired
|
8,349 | |||
Goodwill adjustment
|
(526 | ) | ||
Balance as of December 31, 2008
|
23,056 | |||
Goodwill adjustment
|
312 | |||
Balance as of December 31, 2009
|
23,368 | |||
Goodwill acquired
|
17,951 | |||
Goodwill adjustment
|
188 | |||
Balance as of December 31, 2010
|
$ | 41,507 | ||
The $188,000 and $312,000 goodwill adjustments in 2010 and 2009,
respectively were due to the contingent payments earned upon the
achievement of certain performance targets by LandAndFarm.com,
Inc. The $526,000 goodwill adjustment in 2008 was due to the
release of a portion of the valuation allowance against
Cityfeets net operating losses.
F-14
LOOPNET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Intangible assets, net consisted of the following (in thousands):
As of December 31, | ||||||||
2009 | 2010 | |||||||
Cost:
|
||||||||
Customer relationships
|
$ | 1,711 | $ | 3,563 | ||||
Technology
|
3,377 | 5,445 | ||||||
Non-competition agreement
|
63 | 158 | ||||||
Domain name
|
1,994 | 4,515 | ||||||
Total cost
|
7,145 | 13,681 | ||||||
Accumulated amortization:
|
||||||||
Customer relationships
|
(831 | ) | (1,416 | ) | ||||
Technology
|
(1,479 | ) | (2,791 | ) | ||||
Non-competition agreement
|
(30 | ) | (65 | ) | ||||
Domain name
|
(318 | ) | (469 | ) | ||||
Total accumulated amortization
|
(2,658 | ) | (4,741 | ) | ||||
Intangible assets, net
|
$ | 4,487 | $ | 8,940 | ||||
Customer relationships, developed technology and non-competition
agreements have a weighted-average useful life of
5.0 years, 0.8 years and 1.4 years, respectively
from the date of acquisition. Amortization expense was
$1.0 million, $1.2 million and $2.1 million for
the years ended December 31, 2008, 2009 and 2010,
respectively. As of December 31, 2010, expected
amortization expense for acquisition-related intangible assets
for each of the next five years and thereafter is as follows (in
thousands):
2011
|
$ | 2,556 | ||
2012
|
1,807 | |||
2013
|
640 | |||
2014
|
198 | |||
2015 and thereafter
|
114 | |||
$ | 5,315 | |||
(6) | Income Tax Expense |
Income tax expense (benefit) was comprised of the following (in
thousands):
Year Ended December 31, | ||||||||||||
2008 | 2009 | 2010 | ||||||||||
Current:
|
||||||||||||
Federal
|
$ | 11,136 | $ | 6,688 | $ | 8,025 | ||||||
State
|
2,901 | 1,767 | 2,352 | |||||||||
Total
|
$ | 14,037 | $ | 8,455 | $ | 10,377 | ||||||
Deferred:
|
||||||||||||
Federal
|
$ | (1,204 | ) | $ | (1,513 | ) | $ | (9,066 | ) | |||
State
|
(536 | ) | (696 | ) | (850 | ) | ||||||
Total
|
$ | (1,740 | ) | $ | (2,209 | ) | $ | (9,916 | ) | |||
Income tax expense
|
$ | 12,297 | $ | 6,246 | $ | 461 | ||||||
F-15
LOOPNET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A reconciliation of the statutory federal income tax rate to the
effective tax rate is as follows:
Year Ended December 31, | ||||||||||||
2008 | 2009 | 2010 | ||||||||||
Statutory federal tax rate
|
35.0 | % | 35.0 | % | 35.0 | % | ||||||
State tax rate, net of federal benefit
|
5.0 | % | 3.9 | % | 6.0 | % | ||||||
Change in valuation allowance
|
(1.9 | )% | (4.4 | )% | (39.6 | )% | ||||||
Other adjustments
|
2.1 | % | 0.2 | % | 1.5 | % | ||||||
Effective tax rate
|
40.2 | % | 34.7 | % | 2.9 | % |
The tax effects of temporary differences that gave rise to
significant components of deferred tax assets (liabilities) were
as follows (in thousands):
As of December 31, | ||||||||
2009 | 2010 | |||||||
Deferred tax assets (liabilities):
|
||||||||
Net operating loss carryforwards
|
$ | 11,480 | $ | 10,108 | ||||
Depreciation and amortization
|
(92 | ) | 598 | |||||
Stock-based compensation
|
5,122 | 7,235 | ||||||
Accruals and allowances
|
379 | 364 | ||||||
Tax credits
|
1,235 | 1,235 | ||||||
Intangibles
|
(1,750 | ) | (1,750 | ) | ||||
Valuation allowance
|
(8,084 | ) | (564 | ) | ||||
Other
|
327 | 1,225 | ||||||
Deferred tax assets, net
|
$ | 8,617 | $ | 18,451 | ||||
In the fourth quarter of 2010, the Company determined that it is
more likely than not that it would generate sufficient taxable
income from operations in future years to realize tax benefits
arising from the use of our net operating loss carryforwards and
therefore in 2010 the Company reversed $6.6 million of the
valuation allowance on the deferred tax assets. The release of
the valuation allowance in the fourth quarter of 2010 resulted
in a tax benefit of $6.6 million that was recognized in our
results from operations. As of December 31, 2010, the
Company continued to maintain a valuation allowance of
approximately $0.6 million for certain state net operating
loss carryforwards due to the uncertainty of realization. The
Company utilized net operating loss carryforwards against
taxable income of $3.7 million for the fiscal years 2008,
2009 and 2010, respectively.
At December 31, 2010, the Company had approximately
$24.1 million of federal and $19.7 million of state
net operating loss carryforwards available to reduce future
taxable income which will begin to expire in 2019 for federal
and 2014 for state purposes, respectively.
Under Section 382 of the Internal Revenue Code, the
utilization of the net operating loss carryforwards is limited
based upon changes in the percentage of the ownership of the
Company. As a result of prior ownership changes, the Company was
limited to using $3.7 million of net operating losses to
offset taxable income in 2010 and estimates that the Company
will be able to utilize approximately $3.7 million in 2011,
$2.9 million in 2012 and $2.0 million each year
thereafter until 2021.
The Company evaluates its tax positions for all income tax items
based on their technical merits to determine whether each
position satisfies the more likely than not to be
sustained upon examination test. The tax benefits are then
measured as the largest amount of benefit, determined on a
cumulative basis, that is more likely than not to be
realized upon ultimate settlement. The Company will report a
liability for unrecognized tax benefits resulting from uncertain
tax positions taken or expected to be taken in a tax return.
GAAP further requires that a change in judgment related to the
expected ultimate resolution of uncertain tax positions be
recognized in earnings in the
F-16
LOOPNET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
quarter in which such change occurs. As of December 31,
2010, the Company has a $145,000 liability for unrecognized tax
benefits.
(7) | Series A Convertible Preferred Stock |
On April 14, 2009, the Company completed a $50 million
private placement to accredited investors (the
Purchasers). The transaction was exempt from
registration pursuant to Section 4(2) of the Securities Act
of 1933, as amended. Pursuant to the Securities Purchase
Agreement (the Purchase Agreement), the Company
agreed to sell to the Purchasers an aggregate of
50,000 shares of its newly-created Series A
Convertible Preferred Stock, par value $0.001 per share (the
Series A Preferred Stock). The Series A
Preferred Stock is initially convertible into an aggregate of
7,440,476 shares of the Companys common stock, par
value $0.001 per share (Common Stock), at a
conversion price of $6.72 per share (as may be adjusted for
stock dividends, stock splits or similar recapitalizations).
The holders of the Series A Preferred Stock are entitled to
receive, prior to any distribution to the holders of the Common
Stock, an amount per share equal to the greater of (1) the
Original Issue Price, plus any declared and unpaid dividends and
(2) the amount that Purchasers would receive in respect of
the shares of Common Stock issuable upon conversion of the
Series A Preferred Stock if all of the then outstanding
Series A Preferred Stock were converted into Common Stock.
The rights, privileges and preferences of the Series A
convertible preferred stock are set forth in the Certificate of
Designations of Series A Convertible Preferred Stock
attached as an exhibit to the Companys
Form 8-K
filed with the SEC on April 2, 2009.
The transaction closed on April 14, 2009. The net proceeds
of $48 million from the issuance of the Series A
Preferred Stock are net of issuance costs of $2 million.
The Series A Preferred Stock reported on the Companys
consolidated balance sheet consists of the net proceeds plus the
amount of accretion for issuance costs. Such accretion costs are
being accreted over 72 months with such accretion being
recorded as a reduction in retained earnings.
A summary of activity related to the Series A convertible
preferred stock is as follows (in thousands):
Gross Proceeds
|
$ | 50,000 | ||
Costs and expenses of issuance
|
(2,033 | ) | ||
Accretion of discount
|
240 | |||
Net convertible preferred stock at December 31, 2009
|
$ | 48,207 | ||
The rights, privileges and preferences of the Series A
convertible preferred stock are set forth in the Certificate of
Designations of Series A Convertible Preferred Stock
attached as an exhibit to the Companys
Form 8-K
filed with the SEC on April 2, 2009.
Voting
Each share of Series A Preferred Stock shall entitle the
holder thereof to vote, in person or by proxy, at a special or
annual meeting of the stockholders of the Company, on all
matters voted on by holders of Common Stock, voting together as
a single class with the holders of the Common Stock and all
other shares entitled to vote thereon as a single class with the
Common Stock. With respect to all such matters, each issued and
outstanding share of Series A Preferred Stock shall entitle
the holder thereof to cast that number of votes per share as is
equal to the number of votes that such holder would be entitled
to cast had such holder converted such holders
Series A Preferred Stock into Common Stock on the record
date for determining the stockholders of the Company eligible to
vote on any such matters.
Dividends
Whenever the Company shall pay a dividend or distribution on the
Common Stock of the Company, par value $0.001 per share, each
holder of a share of Series A Preferred Stock shall be
entitled to receive, at the same time the dividend or
distribution is paid on the Common Stock, out of the assets of
the Company legally available therefore, a dividend or
distribution equal to the amount that would have been paid in
respect of the Common Stock issuable
F-17
LOOPNET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
upon conversion of such share of Series A Preferred Stock
immediately prior to the close of business on the record date
for determining the holders entitled to receive such dividend or
distribution on the Common Stock, or, if no such record is
taken, the date on which the record holders of Common Stock
entitled to such dividend or distribution is determined.
The holders of shares of Series A Preferred Stock shall not
be entitled to receive any dividends except as provided herein.
Liquidation
Upon the effective date of any voluntary or involuntary
liquidation, dissolution or winding up of the Company
(Liquidation Event), the holders of Series A
Preferred Stock shall be entitled to be paid out of the assets
of the Company legally available for distribution to its
stockholders an amount per share (Liquidation
Preference) equal to the greater of (a) (i) $1,000
(subject to appropriate adjustments in the event of any stock
dividend, stock split, combination or other similar
recapitalization affecting such shares) ( Original Issue
Price ) plus (ii) all declared but unpaid dividends
and (b) the amount that the holder of such shares of
Series A Preferred Stock would receive in respect of the
shares of Common Stock issuable upon conversion of such shares
of Series A Preferred Stock if all of the then outstanding
shares of Series A Preferred Stock were converted into
Common Stock in accordance herewith immediately prior to the
Liquidation Event. A Change of Control (as defined below) shall
not be deemed a Liquidation Event. If, upon the effective date
of a Liquidation Event, the assets of the Company shall be
insufficient to make payment in full of the Liquidation
Preference to all holders of the Series A Preferred Stock
and all other now or hereafter authorized capital stock of the
Company ranking on a parity with (upon liquidation, dissolution
or winding up) the Series A Preferred Stock, then such
assets shall be distributed among the holders of Series A
Preferred Stock and the holders of such other capital stock of
the Company ranking on a parity with (upon dissolution,
liquidation or winding up) the Series A Preferred Stock at
the time outstanding, ratably in proportion to the full amounts
to which they would otherwise be respectively entitled.
No distribution shall be made in respect of any shares of
Series A Preferred Stock pursuant to Section 3(a)
unless, at the time of such distribution, all amounts due in
respect of any shares of any now or hereafter authorized capital
stock of the Company ranking senior to (upon liquidation,
dissolution or
winding-up)
the Series A Preferred Stock have been paid in full.
Upon the effective date of a Liquidation Event, no distribution
shall be made in respect of any shares of Common Stock or any
other now or hereafter authorized capital stock of the Company
ranking junior to (upon liquidation, dissolution or
winding-up)
the Series A Preferred Stock unless, at the time of such
distribution, the holders of shares of Series A Preferred
Stock shall have received the full Liquidation Preference with
respect to each share.
After payment in full of the Liquidation Preference to holders
of all shares of Series A Preferred Stock, the
Series A Preferred Stock shall not be entitled to receive
any additional cash, property or other assets of the Company
upon the liquidation, dissolution or winding up of the Company.
Conversion
Each share of Series A Preferred Stock shall be
convertible, at the option of the holder thereof, at any time
and from time to time, and without the payment of additional
consideration by the holder thereof, into a number of shares of
Common Stock determined by dividing the Original Issue Price by
the Conversion Price. The Conversion Price shall initially be
$6.72, and shall be subject to adjustment.
Redemption
at the option of the Company
If at any time the closing price of the Common Stock as reported
by the principal exchange or quotation system on which such
Common Stock is traded or reported exceeds sixteen dollars and
eighty cents ($16.80) per share for 20 consecutive trading or
reporting days, the Company shall have the option, at its sole
discretion, to redeem all, but not less than all, of the then
outstanding Series A Preferred Stock for cash consideration
per share of Series A
F-18
LOOPNET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Preferred Stock in an amount equal to one-hundred and one
percent (101%) of the Original Issue Price plus all accrued but
unpaid dividends.
Redemption
at the option of the Holder
At any time on or after the sixth (6th ) anniversary of the
Original Issuance Date and on or before the date that is ten
(10) Business Days thereafter, each holder of shares of
Series A Preferred Stock shall have the option, at such
holders sole discretion, to request that the Company
redeem any or all, of such holders then outstanding
Series A Preferred Stock for cash consideration per share
of Series A Preferred Stock in an amount equal to the
Original Issue Price plus all declared but unpaid dividends.
(8) | Treasury Stock |
LoopNets Board of Directors authorized the repurchase of
up to $50.0 million of the companys common stock on
February 5, 2008 and an additional authorized level of
$50.0 million was announced on July 30, 2008. In
February 2010, the Board of Directors approved the repurchase of
up to an additional $29.6 million in shares of the
companys common stock, bringing to $75.0 million the
total amount of currently authorized common stock repurchases,
of which $43.3 million remained available as of
December 31, 2010. Repurchased shares are recorded as
treasury stock and are accounted for under the cost method.
(9) | Stock Option Plan |
The Company adopted the 2006 Equity Incentive Plan (the
2006 Plan), which became effective on completion of
our initial public offering in June 2006. The 2006 Plan provides
for the grant of stock options, stock appreciation rights, stock
units and other similar stock awards. Options granted under the
2006 Plan may be either incentive stock options, as
defined under Section 422 of the Internal Revenue Code, or
non-qualified stock options. Through December 31, 2006 the
Board of Directors had reserved 7,000,000 shares of common
stock to be issued under the 2006 Plan. The 2006 Plan provides
for an automatic annual increase in the number of shares
available for issuance on January 1st of each year for the
life of the plan starting 2007, equal to the least of
(i) 1,800,000 shares, (ii) 4% of the shares
outstanding as of the end of the prior fiscal year, or
(iii) a lesser number determined by the Board of Directors
or Compensation Committee.
Prior to June 6, 2006, the Company issued options under the
2001 Stock Option Plan (the 2001 Plan). The 2001
Plan was terminated on June 6, 2006 with respect to new
grants. Available shares created by cancellations will be
transferred automatically to the 2006 Plan.
Incentive and nonqualified stock options typically vest over a
four-year period, 25% for the first year and monthly thereafter
over the remaining three years. Stock options may be exercised
during continued employment, or within 60 days of
terminating employment and they expire seven years from the date
of grant for the 2006 Plan and ten years from the date of grant
for the 2001 Plan.
F-19
LOOPNET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of the Companys stock option activity was as
follows:
Options Outstanding | Options Exercisable | |||||||||||||||
Weighted |
Weighted |
|||||||||||||||
Average |
Average |
|||||||||||||||
Number of |
Exercise |
Number of |
Exercise |
|||||||||||||
Shares | Price | Shares | Price | |||||||||||||
Outstanding at December 31, 2007
|
3,638,382 | $ | 8.93 | 1,339,128 | $ | 4.59 | ||||||||||
Granted
|
1,600,496 | $ | 11.62 | |||||||||||||
Exercised
|
(310,357 | ) | $ | 1.15 | ||||||||||||
Cancelled
|
(291,281 | ) | $ | 13.41 | ||||||||||||
Outstanding at December 31, 2008
|
4,637,240 | $ | 10.10 | 2,175,935 | $ | 7.96 | ||||||||||
Granted
|
2,391,697 | $ | 7.37 | |||||||||||||
Exercised
|
(232,802 | ) | $ | 1.32 | ||||||||||||
Cancelled
|
(343,510 | ) | $ | 13.15 | ||||||||||||
Outstanding at December 31, 2009
|
6,452,625 | $ | 9.24 | 3,331,025 | $ | 9.11 | ||||||||||
Granted
|
2,987,000 | $ | 10.37 | |||||||||||||
Exercised
|
(285,670 | ) | $ | 3.86 | ||||||||||||
Cancelled
|
(200,287 | ) | $ | 11.17 | ||||||||||||
Outstanding at December 31, 2010
|
8,953,668 | $ | 9.75 | 4,548,818 | $ | 9.73 | ||||||||||
Included in the options granted during the twelve month period
ended December 31, 2010 are 1,440,000 shares of
performance-based options awarded to its executive officers by
the Board of Directors. These options are tied to incentivizing
execution of the Companys long-term strategic plan. The
Company is unable to assess the likelihood of achieving the
strategic plan at this time and therefore the recognition of the
compensation expense for these options has been deferred.
Additional information regarding stock options outstanding and
exercisable as of December 31, 2010 is as follows:
Options Outstanding | Options Exercisable | |||||||||||||||||||||||
Weighted |
Weighted |
|||||||||||||||||||||||
Average |
Weighted |
Weighted |
Average |
|||||||||||||||||||||
Number |
Remaining |
Average |
Average |
Remaining |
||||||||||||||||||||
Options |
Contractual |
Exercise |
Number |
Exercise |
Contractual |
|||||||||||||||||||
Exercise Prices | Outstanding | Life (Years) | Price | Exercisable | Price | Life (Years) | ||||||||||||||||||
$0.10
|
311,113 | 2.5 | $ | 0.10 | 311,113 | $ | 0.10 | |||||||||||||||||
$0.23 $4.08
|
757,591 | 5.0 | 3.63 | 757,591 | 3.62 | |||||||||||||||||||
$5.70 $7.96
|
2,063,218 | 5.1 | 7.21 | 924,274 | 7.21 | |||||||||||||||||||
$8.00 $9.97
|
2,070,981 | 6.1 | 9.85 | 271,678 | 9.44 | |||||||||||||||||||
$10.00 $11.99
|
1,818,983 | 5.3 | 11.04 | 588,757 | 11.03 | |||||||||||||||||||
$12.00 $12.98
|
607,249 | 3.5 | 12.10 | 491,625 | 12.10 | |||||||||||||||||||
$13.18 $15.61
|
461,296 | 3.4 | 13.98 | 406,002 | 14.06 | |||||||||||||||||||
$16.07 $16.94
|
554,659 | 3.2 | 16.10 | 521,611 | 16.10 | |||||||||||||||||||
$17.06 $19.68
|
136,766 | 3.2 | 18.77 | 129,004 | 18.77 | |||||||||||||||||||
$20.80 $24.40
|
171,812 | 3.6 | 22.35 | 147,163 | 22.35 | |||||||||||||||||||
$0.10 $24.40
|
8,953,668 | 4.9 | $ | 9.75 | 4,548,818 | $ | 9.73 | 4.1 | ||||||||||||||||
In connection with the FASB authoritative guidance of
stock-based compensation (see Note 1), the Company reviewed
and updated, among other things, its forfeiture rate, expected
life and volatility assumptions. The weighted
F-20
LOOPNET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
average expected option life reflects the application of the
simplified method. The simplified method defines the life as the
average of the contractual term of the options and the weighted
average vesting period for all option tranches. Estimated
volatility also reflects the application of the authoritative
guidance and, accordingly, incorporates historical volatility of
similar entities whose share prices are publicly available.
The fair value of each stock option was estimated on the date of
grant using the Black-Scholes method with the following
assumptions:
Year Ended December 31, | ||||||||||||
2008 | 2009 | 2010 | ||||||||||
Risk-free interest rate
|
2.80 | % | 2.19 | % | 1.93 | % | ||||||
Expected volatility
|
42 | % | 49 | % | 48 | % | ||||||
Expected life
|
4.6 years | 4.6 years | 4.6 years | |||||||||
Dividend yield
|
0 | % | 0 | % | 0 | % |
The weighted-average fair value of options granted in the years
ended December 31, 2008, 2009 and 2010 was $4.47, $3.05,
and $4.37, respectively, using the Black-Scholes option-pricing
model. The total intrinsic value (market value on date of
exercise less exercise price) of options exercised during 2008,
2009 and 2010 totaled $3.1 million, $1.5 million and
$2.2 million, respectively. The aggregate intrinsic values
of stock options outstanding and exercisable at
December 31, 2010 were $20.0 million and
$13.2 million, respectively.
For the year ended December 31, 2010, the Companys
stock-based compensation expense related to stock option grants
was $6.6 million. As of December 31, 2010, there was
$8.9 million of unrecognized compensation expense related
to unvested stock options, net of estimated forfeitures. That
compensation expense is expected to be recognized over a
weighted-average period of 1.3 years.
Cash received from stock options exercised for 2008, 2009 and
2010 was $0.4 million, $0.3 million and
$1.1 million, respectively. Tax benefits realized from tax
deductions associated with options exercises for 2008, 2009 and
2010 totaled $0.8 million, $0.4 million, and
$0.5 million, respectively.
Under the 2006 Plan, the Company also issued restricted stock
units. A restricted stock unit award is an agreement to issue
specified numbers of shares of the Companys common stock
at specified vesting dates. Restricted stock units are measured
based on the fair market values of the underlying stock on the
dates of grant. Restricted stock units vest in equal 25%
increments over a four-year period on the anniversary of the
grant date.
A summary of the Companys restricted stock unit activity
is as follows:
Unvested Restricted Stock Units | ||||||||||||
Weighted |
||||||||||||
Weighted |
Average |
|||||||||||
Average |
Remaining |
|||||||||||
Number of |
Grant Date |
Contractual |
||||||||||
Shares | Fair Value | Life (Years) | ||||||||||
Outstanding at December 31, 2008
|
195,000 | $ | 11.47 | 1.74 | ||||||||
Granted
|
245,000 | $ | 7.19 | |||||||||
Vested
|
(48,750 | ) | $ | 11.47 | ||||||||
Cancelled
|
| $ | | |||||||||
Outstanding at December 31, 2009
|
391,250 | $ | 8.79 | 1.49 | ||||||||
Granted
|
1,122,500 | $ | 10.29 | |||||||||
Vested
|
(110,000 | ) | $ | 9.09 | ||||||||
Cancelled
|
| $ | | |||||||||
Outstanding at December 31, 2010
|
1,403,750 | $ | 9.98 | 3.74 | ||||||||
Included in the restricted stock units granted during the twelve
month period ended December 31, 2010 are
690,000 shares of performance-based restricted stock units
awarded to its executive officers by the Board of Directors.
These restricted stock units are tied to incentivizing execution
of the Companys long-term strategic plan.
F-21
LOOPNET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company is unable to assess the likelihood of achieving the
strategic plan at this time and therefore the recognition of the
compensation expense for these options has been deferred.
For the year ended December 31, 2010, the Companys
stock-based compensation expense related to restricted stock
units was $1.6 million. As of December 31, 2010, there
was $4.0 million of unrecognized compensation expense
related to unvested restricted stock units, net of forecasted
forfeitures. That compensation expense is expected to be
recognized over a weighted-average period of 1.8 years.
Total stock-based compensation has been allocated as follows (in
thousands):
Year Ended December 31, | ||||||||||||
2008 | 2009 | 2010 | ||||||||||
Cost of revenue
|
$ | 570 | $ | 495 | $ | 546 | ||||||
Sales and marketing
|
2,198 | 894 | 1,786 | |||||||||
Technology and product development
|
1,311 | 2,298 | 2,680 | |||||||||
General and administrative
|
1,855 | 3,140 | 3,220 | |||||||||
Total
|
$ | 5,934 | $ | 6,827 | $ | 8,232 | ||||||
(10) | Commitments and Contingencies |
Leases
The Company leases office space in California. The offices are
currently leased under noncancelable operating lease agreements
which expire at various dates through 2018. Future minimum
payments under these noncancelable operating leases as of
December 31, 2010, are as follows (in thousands):
2011
|
$ | 3,028 | ||
2012
|
2,994 | |||
2013
|
3,022 | |||
2014
|
3,080 | |||
2015 and thereafter
|
3,837 | |||
$ | 15,961 | |||
Rent expense under operating leases for the years ended
December 31, 2008, 2009 and 2010 totaled approximately
$2.5 million, $2.9 million and $2.9 million,
respectively.
Litigation
April 2008, LoopNet and CityFeet (collectively the
Defendants) were sued by Real Estate Alliance, Ltd.
(REAL) in the U.S. District Court for the
Central District of California for alleged infringement of
certain patents (the REAL v. LoopNet Action).
The complaint seeks unspecified damages, attorney fees and
costs. The Defendants deny the alleged infringement and have
filed a counter-claim for a declaratory judgment that the
patents-in-suit
are invalid and not infringed. To date, discovery in the
REAL v. LoopNet Action has been limited and the court has
not yet set a trial date. Moreover, because the
patents-in-suit
have been asserted against several other entities, in another
pending lawsuit in the same court, (the earlier filed
action), the REAL v. LoopNet Action was stayed in
February 2009, and administratively closed in February 2010. It
is possible that REAL may attempt to re-institute the
REAL v. LoopNet Action, depending upon the outcome of the
earlier filed action, which is currently on appeal to the
U.S. Court of Appeals for the Federal Circuit. At this
time, the Company cannot predict the outcome of either the
earlier filed action or the REAL v. LoopNet Action, but if
the REAL v. LoopNet Action is re-instituted, the Company
intends to vigorously defend itself.
From time to time, we are involved in other legal proceedings
arising in the ordinary course of our business. While we cannot
assure you as to the ultimate outcome of any legal proceedings,
we are not currently party to any
F-22
LOOPNET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
legal proceedings that management believes would have a material
adverse effect on our financial position or results of
operations.
(11) | 401(k) Plan |
Employees may participate in the Companys 401(k) Plan.
Participating employees may contribute a portion of their salary
to the Plan up to the maximum allowed by the federal tax
guidelines. The Company matches employee contributions up to 4%
of the employees salary. Employee and Company
contributions are fully vested when contributed. The company
contributed $0.5 million, $0.6 million and
$0.7 million for the years ended December 31, 2008,
2009 and 2010, respectively.
F-23
TABLE OF CONTENTS
Page | ||||
F-25 | ||||
F-26 | ||||
F-27 | ||||
F-28 |
F-24
December 31, | March 31, | |||||||
2010 | 2011 | |||||||
(Unaudited) | ||||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 88,773 | $ | 93,805 | ||||
Short-term investments |
3,512 | 3,530 | ||||||
Accounts receivable, net of allowance of $236 and $195 , respectively |
1,494 | 1,744 | ||||||
Prepaid expenses and other current assets |
1,095 | 1,111 | ||||||
Deferred income taxes, net |
1,317 | 1,315 | ||||||
Total current assets |
96,191 | 101,505 | ||||||
Property and equipment, net |
2,010 | 2,556 | ||||||
Goodwill |
41,507 | 41,507 | ||||||
Intangibles, net |
8,940 | 8,299 | ||||||
Deferred income taxes, net, non-current |
17,134 | 16,432 | ||||||
Deposits and other non-current assets |
6,208 | 6,526 | ||||||
Total assets |
$ | 171,990 | $ | 176,825 | ||||
Liabilities and stockholders equity |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 471 | $ | 820 | ||||
Accrued liabilities and other current liabilities |
3,393 | 3,167 | ||||||
Accrued compensation and benefits |
3,522 | 2,531 | ||||||
Deferred revenue |
8,888 | 9,443 | ||||||
Total current liabilities |
16,274 | 15,961 | ||||||
Other long-term liabilities |
2,491 | 2,644 | ||||||
Commitments and contingencies |
||||||||
Series A convertible preferred stock |
48,546 | 48,631 | ||||||
Stockholders equity: |
||||||||
Common stock, $.001 par value, 125,000,000 shares authorized;
32,183,836 and 32,504,472 shares outstanding, respectively |
40 | 40 | ||||||
Additional paid in capital |
132,019 | 135,172 | ||||||
Other comprehensive loss |
(389 | ) | (383 | ) | ||||
Treasury stock, at cost, 7,682,261 and 7,682,962 shares, respectively |
(86,220 | ) | (86,227 | ) | ||||
Retained earnings |
59,229 | 60,987 | ||||||
Total stockholders equity |
104,679 | 109,589 | ||||||
Total liabilities and stockholders equity |
$ | 171,990 | $ | 176,825 | ||||
The accompanying notes are an integral part of these unaudited condensed financial statements.
F-25
Three months ended March 31, | ||||||||
2010 | 2011 | |||||||
(Unaudited) | ||||||||
Revenues |
$ | 18,822 | $ | 20,713 | ||||
Cost of revenue (1) |
2,846 | 3,157 | ||||||
Gross margin |
15,976 | 17,556 | ||||||
Operating expenses: |
||||||||
Sales and marketing (1) |
4,290 | 5,134 | ||||||
Technology and product development (1) |
2,949 | 3,659 | ||||||
General and administrative (1) |
4,371 | 4,924 | ||||||
Amortization of acquired intangible assets |
445 | 641 | ||||||
Total operating expenses |
12,055 | 14,358 | ||||||
Income from operations |
3,921 | 3,198 | ||||||
Interest and other (expense) income, net |
(104 | ) | (317 | ) | ||||
Income before tax |
3,817 | 2,881 | ||||||
Income tax expense |
1,417 | 1,038 | ||||||
Net income |
2,400 | 1,843 | ||||||
Convertible preferred stock accretion of discount |
(85 | ) | (85 | ) | ||||
Net income applicable to common stockholders |
$ | 2,315 | $ | 1,758 | ||||
Net income per share applicable to common shareholders: |
||||||||
Basic |
$ | 0.06 | $ | 0.04 | ||||
Diluted |
$ | 0.05 | $ | 0.04 | ||||
Shares used in per share calculations: |
||||||||
Basic |
41,938 | 39,791 | ||||||
Diluted |
43,281 | 41,881 | ||||||
(1) | Stock-based compensation is allocated as follows: |
Cost of revenue |
$ | 128 | $ | 130 | ||||
Sales and marketing |
485 | 585 | ||||||
Technology and product development |
682 | 801 | ||||||
General and administrative |
827 | 994 |
The accompanying notes are an integral part of these unaudited condensed financial statements.
F-26
Three months ended March 31, | ||||||||
2010 | 2011 | |||||||
(Unaudited) | ||||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 2,400 | $ | 1,843 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation and amortization expense |
817 | 995 | ||||||
Stock-based compensation |
2,122 | 2,510 | ||||||
Tax benefits from exercise of stock options |
(141 | ) | (165 | ) | ||||
Deferred income tax |
557 | 704 | ||||||
Changes in assets and liabilities, net of effects of acquisitions: |
||||||||
Accounts receivable |
(385 | ) | (250 | ) | ||||
Prepaid expenses and other assets |
(820 | ) | 320 | |||||
Accounts payable |
9 | 348 | ||||||
Accrued expenses and other liabilities |
95 | (73 | ) | |||||
Accrued compensation and benefits |
(855 | ) | (991 | ) | ||||
Deferred revenue |
202 | 555 | ||||||
Net cash provided by operating activities |
4,001 | 5,796 | ||||||
Cash flows from investing activities: |
||||||||
Purchase of property and equipment |
(153 | ) | (900 | ) | ||||
Purchase of investments |
(2,050 | ) | (500 | ) | ||||
Acquisitions, net of acquired cash |
(9,430 | ) | | |||||
Net cash used in investing activities |
(11,633 | ) | (1,400 | ) | ||||
Cash flows from financing activities: |
||||||||
Net proceeds from exercise of stock options |
76 | 960 | ||||||
Tax withholdings related to net share settlements of restricted stock units |
(168 | ) | (482 | ) | ||||
Repurchase of common stock |
(2,924 | ) | (7 | ) | ||||
Tax benefits from exercise of stock options |
141 | 165 | ||||||
Net cash provided by (used in) financing activities |
(2,875 | ) | 636 | |||||
Net increase (decrease) in cash and cash equivalents |
(10,507 | ) | 5,032 | |||||
Cash and cash equivalents at beginning of period |
125,571 | 88,773 | ||||||
Cash and cash equivalents at end of period |
$ | 115,064 | $ | 93,805 | ||||
The accompanying notes are an integral part of these unaudited condensed financial statements.
F-27
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Unaudited)
Note 1 Background and Basis of Presentation
The Company
LoopNet, Inc. (we, the Company or LoopNet) was incorporated under the laws of the state
of California on June 2, 1997, and was reincorporated as a Delaware corporation in May 2006.
We own and operate the leading online marketplace for commercial real estate in the
United States, based on the number of monthly unique visitors to our marketplace, which averaged
approximately 2.1 million during the first quarter of 2011, compared with approximately 1.5 million
during 2010, and approximately 985,000 during 2009, as reported by comScore Media Metrix. comScore
Media Metrix defines a unique visitor as an individual who visited any content of a website, a
category, a channel, or an application. Our online marketplace, available at www.LoopNet.com,
enables commercial real estate agents, working on behalf of property owners and landlords, to list
properties for sale or for lease and submit detailed information on property listings including
qualitative descriptions, financial and tenant information, photographs and key property
characteristics, in order to find a buyer or tenant. Commercial real estate agents, buyers and
tenants use the LoopNet online marketplace to search for available property listings that meet
their commercial real estate criteria. By connecting the sources of commercial real estate supply
and demand in an efficient manner, we believe that our online marketplace enables commercial real
estate participants to initiate and complete more transactions more cost-effectively than through
other means. As of March 31, 2011, the LoopNet online marketplace contained 816,471 listings.
The Company derives most of its revenue from customers that pay fees for a suite of services
to market and search for commercial real estate and operating businesses. These services include a
premium membership that gives the customer unlimited access to listings, maximized exposure for
their listings along with enhanced services to market their listings.
Basis of Presentation
The accompanying condensed consolidated balance sheet as of March 31, 2011, the statements of
income for the three months ended March 31, 2010 and 2011 and the statements of cash flows for the
three months ended March 31, 2010 and 2011 are unaudited. These statements should be read in
conjunction with the audited consolidated financial statements and related notes, together with
managements discussion and analysis of financial position and results of operations, contained in
the Companys annual report on Form 10-K for the year ended December 31, 2010.
The accompanying condensed consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States, or GAAP. In the opinion of the
Companys management, the unaudited condensed consolidated financial statements have been prepared
on the same basis as the audited consolidated financial statements in the Companys annual report
on Form 10-K for the year ended December 31, 2010 and include normal and recurring adjustments
necessary for the fair presentation of the Companys financial position for the periods presented.
The results for the three months ended March 31, 2011 are not necessarily indicative of the results
to be expected for the fiscal year ending December 31, 2011. The Company has evaluated subsequent
events after the balance sheet date through the financial statement issuance date for appropriate
accounting and disclosure.
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
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ materially from these estimates.
F-28
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Unaudited)
Note 2 Earnings Per Share (EPS)
The share count used to compute basic and diluted net income per share is calculated as
follows (in thousands):
Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2011 | |||||||
(Unaudited) | ||||||||
Weighted average common shares outstanding |
34,498 | 32,351 | ||||||
Convertible preferred stock |
7,440 | 7,440 | ||||||
Shares used to compute basic net income applicable to common shareholders |
41,938 | 39,791 | ||||||
Add dilutive common equivalents: |
||||||||
Stock options |
1,094 | 1,489 | ||||||
Restricted stock units |
248 | 601 | ||||||
Shares used to compute diluted net income applicable to common shareholders |
43,281 | 41,881 | ||||||
The following is a summary of the securities outstanding during the respective periods that
have been excluded from the calculations because the effect on earnings per share would have been
anti-dilutive (in thousands):
Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2011 | |||||||
(Unaudited) | ||||||||
Stock options |
4,979 | 3,721 | ||||||
Restricted stock units |
98 | |
The following table sets forth the computation of basic and diluted EPS (in thousands, except
per share data):
Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2011 | |||||||
(Unaudited) | ||||||||
Calculation of basic net income per share applicable to common shareholders: |
||||||||
Net income |
$ | 2,400 | $ | 1,843 | ||||
Convertible preferred stock accretion of discount |
(85 | ) | (85 | ) | ||||
Net income applicable to common shareholders |
$ | 2,315 | $ | 1,758 | ||||
Shares used to compute basic net income applicable to common shareholders |
41,938 | 39,791 | ||||||
Basic net income per share applicable to common shareholders |
$ | 0.06 | $ | 0.04 | ||||
Calculation of diluted net income per share applicable to common shareholders: |
||||||||
Net income |
$ | 2,400 | $ | 1,843 | ||||
Convertible preferred stock accretion of discount |
(85 | ) | (85 | ) | ||||
Net income applicable to common shareholders |
$ | 2,315 | $ | 1,758 | ||||
Shares used to compute diluted net income applicable to common shareholders |
43,281 | 41,881 | ||||||
Dilutive net income per share applicable to common shareholders |
$ | 0.05 | $ | 0.04 | ||||
F-29
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Unaudited)
Note 3 Acquisitions
In 2010, the Company acquired three entities, each pursuant to Asset Purchase Agreements for a
total cash consideration of $22.1 million (net of cash acquired), plus potential gross earn-out
payments up to $4.3 million that are contingent upon achievement of certain performance targets. In
February 2011, the Company made a cash payment of $0.3 million, which represents the first
potential contingent payment obligation.
The acquisitions were accounted for as a business combination consistent with the
authoritative guidance regarding business combinations (see the Companys 2010 Form 10-K for
additional information). The results of operations of the three entities were included in the
Companys condensed consolidated statements of income for the period subsequent to their respective
acquisition dates. The entities results of operations for the periods prior to the acquisitions
were not material to our condensed consolidated statement of income and, accordingly, pro forma
financial information has not been presented.
Note 4 Series A Convertible Preferred Stock
The Company completed a $50 million private placement to accredited investors in 2009. The
Company sold an aggregate of 50,000 shares of its newly-created Series A Convertible Preferred
Stock, par value $0.001 per share (the Series A Preferred Stock), which is initially convertible
into an aggregate of 7,440,476 shares of the Companys common stock, par value $0.001 per share
(the Common Stock), at a conversion price of $6.72 per share (as may be adjusted for stock
dividends, stock splits or similar recapitalizations). Holders of Series A Preferred Stock are
entitled to receive, prior to any distribution to the holders of the Common Stock, an amount per
share equal to the greater of (1) the Original Issue Price, plus any declared and unpaid dividends
and (2) the amount that Purchasers would receive in respect of the shares of Common Stock issuable
upon conversion of the Series A Preferred Stock if all of the then outstanding Series A Preferred
Stock were converted into Common Stock.
The net proceeds of $48 million from the issuance of the Series A Preferred Stock are net of
issuance costs of $2 million. The Series A Preferred Stock reported on the Companys condensed
consolidated balance sheet consists of the net proceeds plus the amount of accretion for issuance
costs. Such accretion costs are being accreted over 72 months with such accretion being recorded as
a reduction in retained earnings. For the three month periods ended March 31, 2011, the Company
recorded accretion on the issuance costs of $85,000.
Note 5 Stock Plan
Stock Plan Activity
Stock options and other equity awards are granted by the Company under its 2006 Equity
Incentive Plan. The 2006 Equity Incentive Plan became effective on June 9, 2006. Prior to that
date, stock options were granted under the Companys 2001 Stock Option Plan, which terminated on
June 9, 2006.
A summary of the Companys stock option activity is as follows:
Options Outstanding | Options Exercisable | |||||||||||||||||||||||
Weighted | Weighted | |||||||||||||||||||||||
Weighted | Average | Weighted | Average | |||||||||||||||||||||
Average | Remaining | Average | Remaining | |||||||||||||||||||||
Number of | Exercise | Contractual | Number of | Exercise | Contractual | |||||||||||||||||||
Shares | Price | Life (Years) | Shares | Price | Life (Years) | |||||||||||||||||||
Outstanding at December 31, 2010 |
8,953,668 | $ | 9.75 | 4.9 | 4,548,818 | $ | 9.73 | 4.1 | ||||||||||||||||
Granted |
813,500 | $ | 11.66 | |||||||||||||||||||||
Exercised |
(187,016 | ) | $ | 5.13 | ||||||||||||||||||||
Cancelled |
(86,696 | ) | $ | 15.07 | ||||||||||||||||||||
Outstanding at March 31, 2011 (unaudited) |
9,493,456 | $ | 9.95 | 4.9 | 4,670,165 | $ | 9.88 | 4.0 | ||||||||||||||||
Included in the options outstanding at March 31, 2011 are 1,440,000 shares of
performance-based options awarded to its executive officers by the Board of Directors. These
options are tied to incentivizing execution of the Companys long-term strategic plan. The Company
has determined that the performance condition criteria have not been met to date, and therefore
recognition of the compensation expense for these options has been deferred.
F-30
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Unaudited)
A summary of the Companys restricted stock unit activity is as follows:
Unvested Restricted Stock Units | ||||||||||||
Weighted | Weighted Average | |||||||||||
Average | Remaining | |||||||||||
Grant Date | Contractual | |||||||||||
Number of Shares | Fair Value | Life (Years) | ||||||||||
Balance at December 31, 2010 |
1,403,750 | $ | 9.98 | 3.7 | ||||||||
Granted |
230,000 | $ | 11.71 | |||||||||
Vested |
(175,625 | ) | $ | 9.43 | ||||||||
Cancelled |
| $ | | |||||||||
Outstanding at March 31, 2011 (unaudited) |
1,458,125 | $ | 10.31 | 3.8 | ||||||||
Included in the restricted stock units outstanding at March 31, 2011 are 690,000
shares of performance-based restricted stock units awarded to its executive officers by the Board
of Directors. These restricted stock units are tied to incentivizing execution of the Companys
long-term strategic plan. The Company has determined that the performance condition criteria have
not been met to date, and therefore recognition of the compensation expense for these options has
been deferred.
Stock-based Compensation
Since 2006, the Company has applied the authoritative guidance surrounding stock-based
compensation. The guidance requires that share-based payment transactions with employees be
recognized in the financial statements based on their fair value and recognized as compensation
expense over the vesting period. The Company adopted this guidance effective January 1, 2006,
prospectively for new equity awards issued subsequent to January 1, 2006.
In connection with this guidance, the Company reviews and updates, among other things, its
forfeiture rate, expected term and volatility assumptions. Commencing in the first quarter of 2011,
the Company began estimating the weighted average expected life of the options based upon the
historical exercise behavior of our employees. Prior to the first quarter of 2011, the Company used
the simplified method to calculate the weighted average expected life of the options. The
estimated volatility for the three month period ended March 31, 2011 reflects the application of
the authoritative guidance and, accordingly, incorporates historical volatility of similar
companies whose share price is publicly available. The risk-free interest rate is based on the
U.S. Treasury yield curve in effect at the time of grant.
The fair value of each option is estimated on the date of grant using the Black-Scholes method
with the following assumptions:
Three months ended | ||||||||
March 31, | ||||||||
2010 | 2011 | |||||||
(Unaudited) | ||||||||
Risk-free interest rate |
2.42 | % | 2.12 | % | ||||
Expected volatility |
47 | % | 48 | % | ||||
Expected life (in years) |
4.6 | 4.0 | ||||||
Dividend yield |
0 | % | 0 | % |
The weighted-average fair value of options granted during the three month periods ended March
31, 2010 and 2011 was $4.20 and $4.62, respectively, using the Black-Scholes method.
The total stock-based compensation has been allocated as follows (in thousands):
Three months ended | ||||||||
March 31, | ||||||||
2010 | 2011 | |||||||
(Unaudited) | ||||||||
Cost of revenue |
$ | 128 | $ | 130 | ||||
Sales and marketing |
485 | 585 | ||||||
Technology and product development |
682 | 801 | ||||||
General and administrative |
827 | 994 | ||||||
Total |
$ | 2,122 | $ | 2,510 | ||||
F-31
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Unaudited)
Note 7 Income Taxes
The Company recorded a provision for income taxes of $1.0 million for the three month period
ended March 31, 2011, based upon a 36.0% effective tax rate. The effective tax rate is based upon
the Companys estimated fiscal 2011 income before the provision for income taxes. To the extent the
estimate of fiscal 2011 income before the provision for income taxes changes, the Companys
provision for income taxes will change as well.
Note 8 Stock Repurchases
The Companys Board of Directors (the Board) authorized the repurchase of up to $50.0
million of the Companys common stock on February 5, 2008 and an additional authorized level of
$50.0 million of the Companys common stock on July 30, 2008. In February 2010, the Board approved
the repurchase of up to an additional $29.6 million in shares of the Companys common stock,
bringing to $75.0 million the total amount of authorized Common Stock repurchases, of which $43.3
million remained available as of March 31, 2011.
The stock repurchase program may be limited or terminated at any time without prior notice.
Stock repurchases under this program may be made through open market and privately negotiated
transactions at times and in such amounts as management deems appropriate and will be funded using
the Companys working capital. The timing and actual number of shares repurchased will depend on a
variety of factors including corporate and regulatory requirements, price and other market
conditions. The program is intended to comply with the volume, timing and other limitations set
forth in Rule 10b-18 under the Securities Exchange Act of 1934.
Note 9 Litigation and Other Contingencies
Litigation and Other Legal Matters
The Company and its board of directors are named as defendants in a putative class action
lawsuit brought by an alleged stockholder challenging our proposed merger with CoStar. The
shareholder action was filed on or around May 3, 2011 in the Superior Court of California, County
of San Francisco. The complaint alleges, among other things, that each member of the Companys
board of directors breached his fiduciary duties to the Companys stockholders by authorizing the
sale of the Company to CoStar for consideration that does not maximize value to the shareholders
and engineering the transaction to benefit themselves without regard to the Companys shareholders.
The amended complaint also alleges that the Company aided and abetted the breaches of fiduciary
duty allegedly committed by the members of the Companys board of directors. The shareholder action
seeks equitable relief, including an injunction against consumating the merger. The Company
believes that the claims are without merit, and is currently reviewing the recently filed action.
Except as set forth above, there have been no material changes from legal proceedings as
previously disclosed in Part I Item 3 of our Annual Report on Form 10-K for the year ended December
31, 2010 filed with the Securities and Exchange Commission on March 3, 2011.
Note 10 Subsequent Events
Merger Agreement with CoStar Group, Inc.
On April 27, 2011, the Company entered into an Agreement and Plan of Merger (the Merger
Agreement) with CoStar Group, Inc., a Delaware corporation (CoStar) and Lonestar Acquisition
Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of CoStar (Merger Subsidiary),
pursuant to which Merger Subsidiary will be merged with and into the Company (the Merger), with
the Company surviving as a wholly-owned subsidiary of CoStar.
Subject to the terms and conditions of the Merger Agreement, at the effective time of the
Merger, each outstanding share of the Companys common stock will be converted into the right to
receive a unit consisting of (i) $16.50 in cash, without interest, and (ii) 0.03702 shares of
CoStar common stock (the Common Stock Consideration). The holders of the Companys Series A
Preferred Stock will receive the Common Stock Consideration on an as-converted basis.
Subject to the terms and conditions of the Merger Agreement, at the effective time of the
Merger, each of the Companys outstanding equity awards (including stock options and restricted
stock units), whether vested or unvested, will be cancelled in exchange for cash and/or shares of
CoStar common stock (depending on the type of award and the exercise price of the award, if any)
based on the Common Stock Consideration less, in the case of a stock option, the per share exercise
price.
The Companys board of directors has unanimously approved the Merger Agreement. The Merger
Agreement requires that the Merger be approved by the holders of a majority of the outstanding
shares of the Companys common stock and Series A Preferred Stock, voting together as a single
class on an as-converted basis (the Stockholder Approval).
F-32
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Unaudited)
In addition to the Stockholder Approval, consummation of the Merger is subject to other
customary closing conditions including the receipt of antitrust approvals and the absence of any
government order or other legal restraint prohibiting the Merger. Consummation of the Merger is not
subject to any financing condition.
The Merger Agreement contains customary representations, warranties and covenants by each of
the Company and CoStar.
The Merger Agreement contains termination rights for both the Company and CoStar, including
for the Company if its board of directors changes its recommendation of the Merger to its
stockholders in connection with a superior proposal. Upon termination of the Merger Agreement under
certain circumstances, the Company may be obligated to pay CoStar a termination fee of $25,800,000.
Upon termination of the Merger Agreement in the event necessary antitrust approval is not obtained,
CoStar may be obligated to pay the Company a termination fee of $51,600,000.
Concurrently with the execution of the Merger Agreement, the Companys directors and certain
of its executive officers and significant stockholders entered into a voting and support agreement
(the Support Agreement) with CoStar and the Company, and have agreed, in their capacities as
stockholders of the Company, to, among other things, vote their shares of the Companys capital
stock in favor of the Merger and the Merger Agreement.
The foregoing description of the Merger, the Merger Agreement and the Support Agreement is
qualified in its entirety by reference to the Merger Agreement and the Support Agreement, copies of
which are attached as Exhibit 2.1 and Exhibit 2.2, respectively, to the Companys Current Report on
Form 8-K filed with the Securities and Exchange Commission (the SEC) on April 28, 2011 and which
are incorporated by reference herein.
The Company cannot guarantee that the Merger will be completed or that, if completed, it will
be exactly on the terms as set forth in the Merger Agreement. The Company and CoStar will file a
joint proxy statement/prospectus with the SEC in connection with the proposed Merger, which will
form a part of the Registration Statement on Form S-4 to register shares of CoStar common stock to
be issued in the Merger.
F-33