CoStar Group (CSGP) 10-K risk factor changes: FY2013 vs FY2012

Forward-looking statements include information that is not purely historic fact and include, without limitation, statements concerning our financial outlook for [removed: 2013] [added: 2014] and beyond, our possible or assumed future results of operations generally, and other statements and information regarding assumptions about our revenues, EBITDA, adjusted EBITDA, non-GAAP net income, non-GAAP net income per share, net income per share, fully diluted net income per share, weighted-average outstanding shares, [removed: the anticipated benefits of the LoopNet merger, the timing of future payments of principal under our Credit Agreement, expectations regarding our compliance with financial and restrictive covenants in our Credit Agreement,] taxable income, cash flow from operating activities, available cash, operating costs, amortization expense, intangible asset recovery, capital and other expenditures, effective tax rate, equity compensation charges, future taxable income, purchase amortization, [added: the anticipated benefits of completed acquisitions, the anticipated benefits of cross-selling efforts, the timing of future payments of principal under our $175.0 million term loan facility available to us under a credit agreement (as amended, the “Credit Agreement”), expectations regarding our compliance with financial and restrictive covenants in our Credit Agreement, acquisitions,] financing plans, geographic expansion, product development and release, [added: sales and marketing campaigns,] product integrations, elimination and de-emphasizing of services, [removed: acquisitions,] contract renewal rate, capital structure, contractual obligations, legal proceedings and claims, our database, database growth, services and facilities, employee relations, future economic performance, our ability to liquidate or realize our long-term investments, management’s plans, goals and objectives for future operations, and growth and markets for our stock.

The following important factors, in addition to those discussed or referred to under the heading “Risk Factors,” and other unforeseen events or circumstances, could affect our future results and could cause those results or other outcomes to differ materially from those expressed or implied in our forward-looking statements: commercial real estate market conditions; the pace of recovery in the commercial real estate market; general economic conditions; our ability to identify, acquire and integrate acquisition candidates; our ability to realize [removed: all or any of] the expected benefits, cost savings or other synergies from [removed: the LoopNet merger] [added: acquisitions] on a timely basis or at all; our ability to combine the [added: acquired] businesses [removed: of CoStar and LoopNet] successfully or in a timely and cost-efficient manner; [removed: the possibility that conditions, divestitures or changes relating to the operations or assets of LoopNet and CoStar as a result of the FTC's consent order may result in unanticipated adverse effects on the combined company;] business disruption relating to [removed: the LoopNet] integration [removed: may be greater than expected;] [added: of acquired businesses;] the amount of investment for [removed: the] sales and marketing [removed: campaign] [added: related] to [removed: cross-sell] [added: cross-selling] services [removed: to CoStar] [added: of acquired businesses, the amount of investment for sales] and [removed: LoopNet subscribers, investments] [added: marketing initiatives with respect] to [removed: launch CoStar Suite] [added: product enhancements] and [removed: CoStarGo in the U.K.,] [added: releases,] and/or the amount of investment in CoStarGo or other marketing [removed: initiatives may be higher than expected;] [added: initiatives;] the [removed: amount of investment for development] [added: time] and [removed: expansion of services for the International segment may be higher than expected; development of] [added: resources required to develop] upgraded services and expansion of service [removed: offerings in the International segment may take longer than anticipated;] [added: offerings;] changes or consolidations within the commercial real estate industry; customer retention; our ability to attract new clients; our ability to sell additional services to existing clients; our ability to integrate our U.S. and international product offerings; our ability to successfully introduce new products [added: or upgraded services] in U.S. and foreign markets; our ability to effectively and strategically combine, eliminate or de-emphasize service offerings; competition; foreign currency fluctuations; global credit market conditions affecting investments; our ability to continue to expand [removed: successfully;] [added: successfully, timely and in a cost-efficient manner, including internationally;] our ability to effectively penetrate the market for retail real estate information and gain acceptance in that market; our ability to control costs; litigation; changes in accounting policies or practices; release of new and upgraded services or [added: entry into new] markets by us or our competitors; data quality; [added: growth and] development of our sales force; employee retention; technical problems with our services; managerial execution; changes in relationships with real estate brokers and other strategic partners; legal and regulatory issues; and successful adoption of and training on our services.

We do not undertake any obligation to update any such statements or release publicly any revisions to these forward-looking statements to reflect [added: new information or] events or circumstances after the date of this Report or to reflect the occurrence of unanticipated events.

During [removed: 2013,] [added: 2014,] we plan to continue to increase the depth of our coverage in the U.S. and U.K., and we [removed: may] [added: expect to] expand into additional geographies including Toronto, Canada.

[removed: In 2011 and 2012,] [added: Over the past few years,] we [added: have] increased the rate of investments in our business, including internal investments in product development and sales and marketing, to expand the breadth and depth of services we provide to our customers.

[removed: While we believe this strategy will enable us to capitalize on opportunities we see in our industry and extend our leadership position, we expect our] [added: Our] operating margins [removed: to] [added: may] experience downward pressure in the short term as a result of [removed: our] investments.

Furthermore, if the industry fails to stabilize or deteriorates further in [removed: 2013] [added: 2014] and beyond, our investments may not have their intended effect.

If we are not able to successfully [removed: identify,] finance and/or integrate acquisitions, our business operations and financial position could be adversely affected.

In addition, acquisitions involve numerous risks, including the ability to realize or capitalize on synergy created through combinations; managing the integration of personnel and products; [added: potential increases in operating costs;] managing geographically remote [removed: operations, such as SPN in Scotland, Grecam S.A.S. in France, CoStar U.K. Limited, Propex and Property and Portfolio Research Ltd. in the U.K.;] [added: operations;] the diversion of management’s attention from other business [removed: concerns;] [added: concerns and potential disruptions in ongoing operations during integration;] the inherent risks in entering markets and sectors in which we have either limited or no direct experience; and the potential loss of key [removed: employees or] [added: employees,] clients [added: or vendors and other business partners] of the acquired companies.

As of December 31, [removed: 2012,] [added: 2013,] we had [removed: $718.1] [added: $718.6] million of goodwill, $692.6 million in our U.S. segment and [removed: $25.5] [added: $26.0] million in our International segment.

Our ability to build and develop a strong sales force may be affected by a number of factors, including: our ability to attract, integrate and motivate sales personnel; our ability to effectively train our sales force; the ability of our sales force to sell an increased number [added: and different types] of services; our ability to manage effectively an outbound telesales group; the length of time it takes new sales personnel to become productive; the competition we face from other companies in hiring and retaining sales personnel; our ability to effectively structure our sales force; and our ability to effectively manage a multi-location sales organization.

Due to our acquisitions of CoStar U.K. Limited (formerly FOCUS Information Limited), [removed: SPN,] Grecam S.A.S., [removed: Propex,] and Property and Portfolio Research Ltd., a portion of our business is denominated in the British Pound and Euro.

Expanding into the commercial real estate market research and forecasting [removed: arena imposes] [added: sector has imposed and may continue to impose] additional burdens on our research, systems development, sales, marketing and general management resources.

During [removed: 2013,] [added: 2014,] we expect to continue to expand our presence in the commercial real estate analytics sector.

Our indebtedness [removed: following the completion of the merger] could adversely affect us, including by decreasing our business flexibility and increasing our costs.

As of December 31, [removed: 2012,] [added: 2013,] we held [removed: $24.4] [added: $24.3] million par value of ARS, all of which failed to settle at auctions.

We have used a discounted cash flow model to determine the estimated fair value of our investment in ARS as of December 31, [removed: 2012.][added: 2013.]

Based on this assessment of fair value, as of December 31, [removed: 2012,] [added: 2013,] we determined there was a decline in the fair value of our ARS investments of approximately [removed: $1.9] [added: $1.5] million.

We do not expect any material changes in the near term to the underlying assumptions used to determine the unobservable inputs used to calculate the fair value of the ARS as of December 31, [removed: 2012.][added: 2013.]

Our operations depend on our ability to protect our [removed: database,] [added: databases,] computers and software, telecommunications equipment and facilities against damage from potential dangers such as fire, power loss, security breaches, computer viruses and telecommunications failures.

The consent order approved by the Federal Trade Commission in connection with the [added: LoopNet] merger imposes conditions that could have an adverse effect on us and our business, and failure to comply with the terms of the consent order may result in adverse consequences for the combined company.

We have incurred severance costs and expect to incur additional costs to integrate [removed: the two companies' businesses,] [added: prior acquisitions,] such as IT integration [removed: expenses,] [added: expenses and] costs related to the renegotiation of redundant vendor [removed: agreements, retention costs and further severance costs.][added: agreements.]

Costs in connection with [removed: the merger] [added: acquisitions] and [removed: integration] [added: integrations] may be higher than expected, and we may also incur unanticipated acquisition-related costs.

Further, certain acquisitions may be subject to regulatory approval, which can be time consuming and costly to obtain, and the terms of such regulatory approvals may impose limitations on our ongoing operations or require us to divest assets or lines of business.

In 2011 and 2012, we also acquired Virtual Premise and LoopNet, respectively.

The failure to successfully integrate LoopNet's business and operations and/or fully realize expected synergies from the merger in the expected time frame or at all may adversely affect our future results and our business.

The success of the LoopNet merger will depend, in part, on our ability to successfully integrate LoopNet's business and operations and realize the anticipated benefits and synergies from combining our business and LoopNet's business, including anticipated growth opportunities and cost savings.

We may not be able to achieve these objectives in whole or in part.

Any failure to timely realize these anticipated benefits could have a material adverse effect on our revenues, expenses and operating results.

The success of the merger will also depend in part on our ability to minimize or eliminate any difficulties that may occur in connection with the integration of our business and LoopNet's business.

The integration process could result in the loss of key employees, loss of key clients, loss of key vendors and other business partners, increases in operating costs, increases in taxes, increases in regulatory compliance costs or the disruption of each company's ongoing businesses, any or all of which could adversely affect our ability to achieve the anticipated benefits and synergies of the merger.

Our efforts to integrate the two companies will divert management's attention and other resources from uses that could otherwise have been beneficial to the company.

In addition, management may decide to combine, eliminate or shift focus away from business lines, products or services if management believes those changes will have an accretive impact on our earnings per share, but any such changes could have a negative impact on revenue and earnings in the short- or long-term.

Further, the terms of the FTC's consent order may prohibit us from taking actions we may wish to take as part of the integration, such as combining or eliminating certain existing business lines, products or services that we believe will result in a long-term positive impact on our revenue and earnings.

See “We may have difficulty attracting, motivating and retaining executives and other key employees in light of the merger” for a discussion of the impact the merger with LoopNet may have on our ability to attract, retain and motivate members of our sales force.

See “We may have difficulty attracting, motivating and retaining executives and other key employees in light of the merger” for a discussion of the impact the merger with LoopNet may have on our ability to attract, retain and motivate members of our management and operating personnel.

We may have difficulty attracting, motivating and retaining executives and other key employees in light of the merger.

Uncertainty about the effect of the merger on our employees and LoopNet employees may have an adverse effect on the combined business.

This uncertainty may impair our ability to attract, retain and motivate key personnel.

As an incentive to remain employed by LoopNet and to assist with the integration and ongoing operations of CoStar and LoopNet, we agreed to pay retention bonuses to certain key LoopNet employees.

Most of those retention bonuses were paid in 2012.

Others are payable if the respective employee remains an employee in good standing through April 30, 2013.

We may have greater difficulty retaining those LoopNet personnel after they have earned their retention bonuses.

If our key employees or LoopNet's key employees depart, we may incur significant costs in identifying, hiring, training and retaining replacements for departing employees, which could reduce our ability to realize the anticipated benefits of the merger.

Prior to the merger, neither CoStar nor LoopNet had outstanding bank indebtedness.

Our business relationships, including client relationships, may be subject to disruption due to uncertainty associated with the merger.

The combined company's business relationships may be subject to disruption as clients of CoStar and/or LoopNet and others may attempt to negotiate changes in existing business relationships or consider entering into business relationships with parties other than the combined company.

These disruptions could have an adverse effect on the businesses, financial condition, results of operations or prospects of the combined business.

All forward-looking statements are based on information available to us on the date of this filing and we assume no obligation to update such [removed: statements.][added: statements, whether as a result of new information, future events or otherwise.]

The following discussion should be read in conjunction with our Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other filings with the Securities and Exchange Commission and the consolidated financial statements and related notes [added: included] in this Annual Report on Form 10-K.

CoStar Group, Inc. (the “Company” or “CoStar”) is the number one provider of information, analytics and marketing services to the commercial real estate industry in the [removed: U.S.] [added: United States ("U.S.")] and the [removed: U.K.] [added: United Kingdom ("U.K.")] based on the fact that we offer the most comprehensive commercial real estate database available; have the largest research department in the industry; own and operate the leading online marketplace for commercial real estate in the U.S. based on the number of unique visitors per month; provide more information, analytics and marketing services than any of our competitors and believe that we generate more revenues than any of our competitors.

Our integrated suite of online service offerings includes information about space available for lease, comparable sales information, [removed: tenant information,] information about properties for sale, [added: tenant information,] internet marketing services, analytical capabilities, information for clients' websites, information about industry professionals and their business relationships, data integration and industry news.

[removed: Our subsidiary,] LoopNet, [removed: Inc. (“LoopNet”),] [added: our subsidiary,] operates an online marketplace that enables property owners, landlords, and commercial real estate agents working on their behalf to list properties for sale or for lease and to submit detailed information about property listings.

We also provide market research and analysis for commercial real estate investors and lenders via our Property and Portfolio [removed: Research, Inc.] [added: Research] (“PPR”) service offerings, portfolio and debt management and reporting capabilities through our Resolve [removed: Technology, Inc. (“Resolve Technology”)] [added: Technology] service offerings, and real estate and lease management solutions, including lease administration and abstraction services, through our Virtual [removed: Premise, Inc. (“Virtual Premise”)] [added: Premise] service offerings.

We expect to continue [added: software development] to [removed: develop and distribute new services,] improve existing services, [added: introduce new services,] integrate products and services, cross-sell existing services, and expand and develop supporting technologies for our research, sales and marketing organizations.

We are [removed: also] committed to supporting and improving our existing core information, [added: news,] analytic and marketing services.

[removed: We continue to improve] [added: In October 2013, we also released CoStarGo® 2.0, the next generation of] our mobile application, [removed: CoStarGo®,] which was launched in the U.S. on August 15, 2011 and introduced in the U.K. on November 5, 2012.

CoStarGo is our iPad application that integrates and provides [added: CoStar Suite subscribers] mobile access to [removed: subscribers of] our comprehensive property, tenant and comparable sales [removed: information from our suite of online service offerings - CoStar Property Professional®, CoStar Tenant® and CoStar COMPS Professional®.][added: information.]

We [removed: are also integrating, developing] [added: continue to integrate, develop] and [removed: cross-selling] [added: cross-sell] the services offered by the companies we [removed: acquired most recently,] [added: acquired,] including LoopNet, Virtual Premise, Resolve Technology and PPR.

Our sales and marketing efforts [removed: are] [added: have focused] and will continue to [removed: be focused] [added: focus] on cross-selling and marketing our services.

We [removed: have] [added: also] incurred increased expenses associated with [removed: this] [added: the related] marketing and sales campaign [added: in 2012] and [removed: expect to continue to incur additional expenses for the campaign] during the first [removed: quarter] [added: half] of 2013.

In some cases, when integrating and coordinating our services and assessing industry needs, we may [removed: decide] [added: decide, or may have previously decided,] to combine, shift focus from, de-emphasize, phase out, or eliminate a service that overlaps or is redundant with other services we offer.

[removed: We anticipate that these] [added: These] initiatives [added: resulted in revenue growth, and we expect they] will [added: continue to] position the company for revenue growth [removed: in 2013] [added: during 2014] and [removed: beyond.][added: for the foreseeable future.]

Our [removed: investments in LoopNet, Virtual Premise, Resolve Technology, and PPR have increased, and may continue to increase; however our] revenues have [removed: also] increased as a result of [removed: these] [added: the LoopNet merger and prior] acquisitions, due to revenue from the acquired [removed: businesses, as well as our ability to take advantage of] [added: businesses and from] cross-selling opportunities among the customers of CoStar and the acquired companies.

[removed: In addition, we] [added: We continue to integrate our international operations more fully with those in the U.S. We] intend to continue to upgrade the platform of services and expand the coverage of our service offerings within our International [removed: segment and to integrate our international operations more fully with those in the U.S. In furtherance of those initiatives, in the U.K. during the fourth quarter of 2012, we introduced a consistent international platform of service offerings, consisting of CoStarGo, our iPad application, CoStar Property Professional, CoStar COMPS Professional and CoStar Tenant.][added: segment.]

In order to implement these services in the U.K., we incurred increased development costs through [removed: 2012.][added: 2012; however, development costs incurred by the International segment decreased in 2013.]

In [removed: late 2013 or early] 2014, we expect to expand further internationally by offering [added: our] services in Toronto, Canada.

We believe that our [added: integration efforts and] continued investments in [removed: U.S. and international products, internationalization] [added: our services, including expansion] of our [removed: U.S. products and integration efforts] [added: existing service offerings internationally,] have created [removed: and will continue to build upon] a platform for long-term revenue growth.

We expect these investments to result in further penetration of our international subscription-based information services and the successful cross-selling of our services to customers in existing [removed: markets due to the release of our upgraded international platform and expansion of coverage of our international service offerings.][added: markets.]

Therefore, while we expect current service offerings to remain profitable, driving overall earnings [removed: throughout 2013] [added: in 2014] and providing substantial cash flow for our business, it is possible that any new [removed: investments or] [added: investments,] changes to our service offerings [added: or other unforeseen events] could cause us to generate losses and negative cash flow from operations in the future.

[removed: On] [added: Prior to completion of the LoopNet acquisition on] April 26, [removed: 2012,] [added: 2012] the [removed: Federal Trade Commission (the “FTC”)] [added: FTC] accepted a consent order in connection with the LoopNet merger [added: that was] previously agreed to by [removed: LoopNet] [added: CoStar] and [removed: CoStar.][added: LoopNet.]

[removed: At this time, as discussed above, we expect] [added: We intend] to continue to [added: assess the need for additional investments in our business, in addition to the investments discussed above in order to] develop and distribute new services within our current platform.

[removed: Further,] [added: In general,] the current economic recovery has been slower than past economic recoveries.

Continuing [added: near-term] risks related to [removed: lower than expected] [added: lower-than-expected] job growth, government fiscal [removed: challenges] [added: challenges,] and uncertainty over U.S. and global economic issues may impede the ability and willingness of clients to purchase services from us or result in reductions of services purchased.

If cancellations, reductions of [removed: services] [added: services,] and failures to pay increase, and we are unable to offset the resulting decrease in revenue by increasing sales to new or existing customers, our revenues may decline or grow at [removed: reduced] [added: lower] rates.

We compete against many other commercial real estate information, [removed: analytics] [added: analytics,] and marketing service providers for [removed: business.][added: business, including competitors that offer rapidly changing methods of delivering real estate information.]

If customers choose to cancel our services [removed: for cost-cutting] [added: because of cost cutting, desire to access real estate information through other delivery methods,] or other reasons, our revenue could decline.

We plan to continue [removed: the] [added: to] use [removed: of] stock-based compensation for our officers, directors and employees, which may include, among other things, restricted stock, restricted stock units or stock option grants that typically will require us to record additional compensation expense in our consolidated statements of operations and reduce our net income.

In May and December of 2012, we granted additional shares of restricted common stock that vest based on the achievement of [removed: CoStar] [added: the same] performance conditions to other [added: key] employees.

[removed: These] [added: Specifically, these] shares of performance-based restricted common stock vest upon our achievement of $90.0 million of cumulative [removed: EBITDA] [added: net income before interest, income taxes, depreciation and amortization ("EBITDA")] over a period of four consecutive calendar quarters, and are subject to forfeiture in the event the foregoing performance condition is not met by March 31, 2017.

We granted a total of 399,413 shares of performance-based restricted common stock during the year ended December 31, [removed: 2012, representing a total estimated unrecognized stock-based compensation expense of approximately $24.0 million.][added: 2012.]

As of [removed: December] [added: March] 31, [removed: 2012,] [added: 2013,] we [added: initially] determined that it was [removed: not] probable that the performance condition [added: for these performance-based restricted common stock awards] would be met by the March 31, 2017 forfeiture [removed: date and therefore, we recorded no expense related to the performance-based restricted common stock grants during 2012.][added: date.]

[removed: However,] [added: For equity instruments that vest based on performance,] we [removed: reassess] [added: assess] the probability of the achievement of the performance [removed: condition] [added: conditions] at the end of each reporting [removed: period] [added: period,] or more frequently based upon the occurrence of events that may change the probability [removed: as to] [added: of] whether [removed: or not] the performance [removed: condition] [added: conditions] would be met.

Our subscription-based information services consist primarily of CoStar [removed: Property Professional, CoStar Tenant, CoStar COMPS Professional,] [added: SuiteTM] and [removed: FOCUS] [added: FOCUSTM] services.

CoStar [added: Suite is sold as a platform of service offerings consisting of CoStar] Property Professional, CoStar [removed: Tenant, and CoStar] COMPS Professional [removed: are generally sold as a suite of similar services] and [added: CoStar Tenant and] through our mobile application, CoStarGo, and [removed: comprise] [added: is] our primary service offering in our U.S. operating segment.

To encourage clients to use our services regularly, we generally charge a fixed monthly amount for our subscription-based information services rather than [added: charging] fees based on actual system usage.

We recognize [removed: this] [added: subscription] revenue on a straight-line basis over the life of the contract.

For the twelve months ended December 31, [removed: 2011] [added: 2012] and [removed: 2012,] [added: 2013,] our contract renewal rate for [removed: annual] [added: existing CoStar] subscription-based services was approximately [removed: 93%] [added: 94%] and [removed: 94%,] [added: 93%,] respectively, and therefore our cancellation rate for those services was approximately [removed: 7%] [added: 6%] and [removed: 6%,] [added: 7%,] respectively, for the same time periods.

CoStar Suite is sold as a platform of service offerings consisting of CoStar Property Professional®, CoStar COMPS Professional® and CoStar Tenant® and through our mobile application, CoStarGo®.

CoStar Suite is our primary service offering in our U.S. operating segment.

Additionally, we introduced CoStar Suite in the U.K. in the fourth quarter of 2012 and no longer offered FOCUS to new clients beginning in 2013.

As of December 31, 2012 and 2013, our annualized net new sales of subscription-based services on annual contracts were approximately $10.9 million and $15.8 million, respectively, calculated based on the annualized amount of change in our sales resulting from new annual subscription-based contracts or upsales on existing annual subscription-based contracts, less write downs and cancellations, for the period reported.

In October 2013, we introduced technology enhancements to CoStar Suite, our platform of service offerings consisting of CoStar Property Professional, CoStar COMPS Professional and CoStar Tenant.

The enhancements improve CoStar Suite's user interface, search functionality and analytic capabilities.

The newly introduced CoStar MultifamilyTM information search allows access to our extensive multifamily property database.

In addition, we introduced CoStar Lease AnalysisTM, an integrated workflow tool that provides users a simple way to produce understandable cash flows for any proposed or existing lease.

We will continue software development on our new Lease Analysis workflow tool throughout 2014.

We believe this greater functionality will make our services valuable to an even broader audience and help us increase sales of our services to brokers, banks, owners and institutional investors.

Further, these technology enhancements are expected to drive continued revenue growth in 2014 and for the foreseeable future.

We expect additional selling and marketing activities to promote our new service enhancements will result in increased expenses in 2014.

CoStarGo 2.0 adds powerful analytic capabilities to our comprehensive mobile solution.

We have introduced enhancements to our flagship marketing platform, LoopNet.com.

For example, we added a broker advertising service that allows brokers to purchase advertisements based on geographic and property type criteria.

Additionally, we introduced ProVideo, a service that enables owners and brokers to enhance their listings with high quality videos of interior spaces, amenities and exterior features.

We expect to continue software development to improve the LoopNet marketing platform in 2014.

We recently implemented an automatic cross-selling initiative within the LoopNet marketplace.

As searchers view properties within the LoopNet marketplace, a message may appear indicating that there are additional listings available within CoStar Suite with the same search criteria that they are not able to access under their current subscription.

The message provides contact information, so that the customer can reach their customer service or sales representative and review the most appropriate service for their needs.

Our goal is to upsell clients to the services that best meet their needs and to create further cross-selling revenue synergies.

In addition, we have added a comparison feature to CoStarGo, which allows our sales force to demonstrate how many more properties a prospect could see with respect to a particular search area if that prospect were using CoStar Suite rather than the prospect’s current subscription with LoopNet.

As a result of cross selling CoStar's and LoopNet's complementary services, we began to achieve increased revenue synergies in 2013.

To further develop those initiatives, we introduced CoStar Suite in the U.K. during the fourth quarter of 2012 and no longer offered FOCUS to new clients beginning in 2013.

CoStar Suite is sold as a consistent international platform of service offerings consisting of CoStar Property Professional, CoStar COMPS Professional and CoStar Tenant and through the Company's mobile application, CoStarGo.

CoStarGo 2.0 was released in the U.K. in October 2013 simultaneous with the release in the U.S. Additionally, we have upgraded our back-end research operations, fulfillment and Customer Relationship Management (“CRM”) systems to support these new U.K. services.

The International operating segment continues to experience improved financial performance and most recently, during the three months ended December 31, 2013, International EBITDA increased to a positive amount as a result of increased revenue and decreased operating expenses.

Job growth, in particular, has recovered more slowly than in past economic recoveries, and as a result, the improvement in the commercial real estate industry has been slower, especially with respect to the rental rate growth.

Additionally, since many of our clients use debt to finance a portion of their real estate purchases, material changes in interest rates and risk premiums could harm their ability to complete transactions, especially if the change was relatively rapid and unexpected.

As is typical of this point in the economic cycle, business consolidations, and in some circumstances, business failures, continue to occur.

There was no performance-based restricted common stock granted during the year ended December 31, 2013.

As of December 31, 2013, we reassessed the probability of achieving this performance condition and determined that it was still probable that the performance condition for these awards would be met by the March 31, 2017 forfeiture date, subject to certain approvals under the CoStar Group, Inc. 2007 Stock Incentive Plan.

As a result,we recorded a total of approximately $21.8 million of stock-based compensation expense related to performance-based restricted common stock for the year ended December 31, 2013.

There was no stock-based compensation expense related to performance-based restricted common stock recorded for the years ended December 31, 2011 and 2012.

| Operating activities | $ | 27,785 | | | $ | 86,126 | | | $ | 108,298 | |

Revenues increased to $440.9 million in 2013, from $349.9 million in 2012.

Gross margin increased to $311.8 million in 2013, from $235.1 million in 2012.

Selling and marketing expenses increased to $98.7 million in 2013, from $84.1 million in 2012, and decreased as a percentage of revenues to 22.4% in 2013, from 24.0% in 2012.

Software development expenses increased to $46.8 million in 2013, from $32.8 million in 2012, and increased as a percentage of revenues to 10.6% in 2013, from 9.4% in 2012.

General and administrative expenses increased to $97.0 million in 2013, from $77.2 million in 2012, and remained relatively constant as a percentage of revenues at approximately 22.0% in 2013 and 2012.

Examples of new tools and services that we are currently developing and expect to introduce to customers in the near future include upgrades to our suite of online service offerings – CoStar Property Professional, CoStar Tenant and CoStar COMPS Professional.

These upgrades are expected to include improvements to the search functionality as well as improvements to the reporting capabilities of the system.

We also plan improvements to property type specific searches included as part of CoStar Property Professional.

Planned improvements for CoStarGo include a multifamily search function and enhanced analytic capabilities.

After the acquisition of LoopNet, we launched a sales and marketing campaign directed at cross-selling CoStar's information services to LoopNet customers and LoopNet's marketing services to CoStar customers.

In addition, we expect to continue our efforts to integrate the combined capabilities of CoStar's property and market-level information and PPR's analytics and forecasting expertise with Resolve Technology's real estate investment software expertise.

We plan to continue efforts to integrate CoStar's business with Virtual Premise's real estate and lease management solutions.

These integration efforts include providing additional tools that make our research and analytics even more valuable to subscribers.

In order to implement these initiatives, we have incurred, and expect to continue to incur, additional costs.

We also expect to continue to offer our core products and services individually.

We believe the product launch was well received and a significant marketing and sales effort is currently underway.

Previously, as part of our integration efforts, in 2007, we introduced the “CoStar Group” as the brand encompassing our international operations, and in early 2010, we launched Showcase, our internet marketing service that provides commercial real estate professionals high quality internet lead generation, in the U.K. Additionally, we have upgraded our back-end research operations, fulfillment and Customer Relationship Management (“CRM”) systems to support these new U.K. services.

We expect that development expenses incurred by the International segment will decrease in 2013.

LoopNet Acquisition

On April 30, 2012, we completed the acquisition of LoopNet, which is included within our U.S. operating segment.

The acquisition combines the research capabilities of CoStar with the marketing solutions offered by LoopNet.

We expect the acquisition will create efficiencies in operations and provide greater tools for the combined company's customers.

To acquire LoopNet, we paid stock and cash consideration with an aggregate value of approximately $883.4 million as of the closing date.

We funded the cash portion of the consideration payable to LoopNet stockholders in the merger through a combination of cash on hand, including the net proceeds of approximately $247.9 million from an equity offering we completed in June 2011 and the proceeds of a $175.0 million term loan facility available to us under a credit agreement (as amended, the “Credit Agreement”), dated February 16, 2012, by and among CoStar, as borrower, CoStar Realty Information, Inc. (“CoStar Realty”), as co-borrower, JPMorgan Chase Bank, N.A. (“J.P. Morgan Bank”), as administrative agent, and the other lenders thereto.

The LoopNet transaction was subject to customary closing conditions, including expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvement Act of 1976 (the “HSR Act”).

The consent order was subject to a 30-day public comment period, and on August 29, 2012, the FTC issued its final acceptance of the consent order.

The consent order, which is publicly available on the FTC's website at www.ftc.gov, requires us to maintain certain business practices that the FTC believes will promote competition.

For example, the consent order requires us to maintain our customary practice of selling our products separately and on a market-by-market basis.

It also requires us to license our products to customers who have bought our competitors' products on a non-discriminatory basis, which we have always done in the past.

In addition, we are required to maintain our customary licensing practices with respect to the length of our contracts, to allow customers with multi-year contracts to cancel with one year's advance notice, and to agree to reduce the cost of any litigation with customers by offering to arbitrate certain disputes.

We plan to continue to assess any plans for additional investments in our business in the foreseeable future.

While we expect current service offerings to remain profitable, providing substantial cash flow for our business, the costs associated with our merger with LoopNet and the integration of our two businesses has reduced our profitability and caused us to generate losses in the second quarter of 2012.

We continue to see clear signs of improving conditions in the commercial real estate industry, including falling vacancy rates and positive net absorption in the four main types of property that we track (office, industrial, retail and apartments).

However, the extent and duration of continued improvement in the economy and the commercial real estate industry is unknown.

Job growth, in particular, has recovered more slowly than in past economic recoveries.

Improvements in the commercial real estate industry are largely dependent upon employment trends, which drive demand for real estate space.

In some cases, the business operations of some of our clients continue to be negatively affected by challenging economic conditions in the U.S. and the world, resulting at times in business consolidations and, in some circumstances, business failure.

If we determine at a future date that achievement of the performance condition is probable, we will record stock-based compensation expense related to the performance-based restricted common stock grants over the implied service period.

On February 5, 2010, we took advantage of favorable market conditions and purchased an office building in downtown Washington, DC for $41.25 million for use as our new headquarters and have since relocated to this location (the “DC Office Building”).

The lease for our previous headquarters in Bethesda, MD expired on October 15, 2010; therefore, we incurred overlapping occupancy costs through the end of the Bethesda lease term as we transitioned to our new headquarters.

We were able to create value through our occupancy of the DC Office Building and on February 18, 2011 sold the building for aggregate consideration of $101.0 million, $15.0 million of which was designated to fund additional build-out and planned improvements at the building.

Approximately $12.5 million of the $15.0 million additional build-out is recorded as a leasehold improvement in property and equipment.

As part of the sale, we entered into a long-term lease with the buyer to lease back approximately 88% of the office space, where our corporate headquarters is expected to remain.

During the third quarter of 2011, we incurred approximately $1.5 million of restructuring costs associated with the consolidation of our White Marsh, Maryland office with our Columbia, Maryland and Washington, DC offices.

During the fourth quarter of 2012, we incurred approximately $80,000 of restructuring costs associated with the consolidation of our San Francisco, California office with our LoopNet office in San Francisco, California.

For the year ended December 31, [removed: 2012,] [added: 2013,] revenue denominated in foreign currencies was approximately [removed: 5.9%] [added: 4.6%] of total revenue.

For the year ended December 31, [removed: 2012,] [added: 2013,] our revenue would have decreased by approximately $2.0 million if the U.S. dollar exchange rate used strengthened by 10%.

A 10% strengthening of the U.S. dollar exchange rate against all currencies with which we have exposure at December 31, [removed: 2012] [added: 2013] would have resulted in an increase of approximately [removed: $2.9] [added: $3.6] million in the carrying amount of net assets.

For the year ended December 31, [removed: 2012,] [added: 2013,] our revenue would have increased by approximately $2.0 million if the U.S. dollar exchange rate used weakened by 10%.

A 10% weakening of the U.S. dollar exchange rate against all currencies with which we have exposure at December 31, [removed: 2012] [added: 2013] would have resulted in a decrease of approximately [removed: $2.9] [added: $3.6] million in the carrying amount of net assets.

As of December 31, [removed: 2012,] [added: 2013,] accumulated other comprehensive loss included a loss from foreign currency translation adjustments of approximately [removed: $4.6] [added: $4.0] million.

We do not have material exposure to market risks associated with changes in interest rates related to cash equivalent securities held as of December 31, [removed: 2012.][added: 2013.]

If there is an increase or decrease in interest rates, there will be a corresponding increase or decrease in the amount of interest earned on our [removed: cash,] cash [removed: equivalents] and [removed: short-term investments.][added: cash equivalents.]

As of December 31, [removed: 2012,] [added: 2013,] we had [removed: $170.6] [added: $153.1] million of long-term debt bearing interest at a variable rate of LIBOR plus 2.00%.

Based on our outstanding borrowings as of December 31, [removed: 2012,] [added: 2013,] an increase in the interest rate by 25 basis points would result in an increase of approximately $400,000 in interest expense annually.

Based on our outstanding borrowings as of December 31, [removed: 2012,] [added: 2013,] a decrease in the interest rate by 25 basis points would result in a decrease of approximately $400,000 in interest expense annually.

Based on our ability to access our [removed: cash,] cash [removed: equivalents] and [removed: short-term investments,] [added: cash equivalents,] and our expected operating cash flows, we do not believe that increases or decreases in interest rates will impact our ability to operate our business in the foreseeable future.

As of December 31, [removed: 2012,] [added: 2013,] auctions for [removed: $24.4] [added: $24.3] million of our investments in auction rate securities failed.

Based on an assessment of fair value of these investments in ARS as of December 31, [removed: 2012,] [added: 2013,] we determined that there was a decline in the fair value of our ARS investments of approximately [removed: $1.9] [added: $1.5] million, which was deemed to be a temporary impairment and recorded as an unrealized loss in accumulated other comprehensive loss in stockholders’ equity.

Based on our ability to access our [removed: cash,] cash [removed: equivalents] and [removed: short-term investments,] [added: cash equivalents,] and our expected operating cash flows, we do not anticipate having to sell these securities below par value in order to operate our business in the foreseeable future.

We have approximately [removed: $888.7] [added: $863.1] million in intangible assets as of December 31, [removed: 2012.][added: 2013.]

As of December 31, [removed: 2012,] [added: 2013,] we believe our intangible assets will be recoverable, however, changes in the economy, the business in which we operate and our own relative performance could change the assumptions used to evaluate intangible asset recoverability.

As of December 31, 2013, we had $256.0 million of cash and cash equivalents.

As of December 31, 2012, we had $156.1 million of cash, cash equivalents and short-term investments.

In this report, the words “we,” “our,” “us,” “CoStar” or the “Company” refer to CoStar Group, Inc. and its direct and indirect [added: wholly owned] subsidiaries.

[removed: Our] [added: We deliver our content to our U.S. customers primarily via an] integrated suite of online service offerings [added: that] includes information about space available for lease, [added: tenant information,] comparable sales information, [removed: tenant information,] information about properties for sale, internet marketing services, analytical capabilities, information for [removed: clients'] [added: clients’] websites, information about industry professionals and their business relationships, data integration and industry news.

Since our founding, [removed: CoStar’s] [added: our] strategy has been to provide commercial real estate professionals with critical knowledge to explore and complete transactions by offering the most comprehensive, timely and standardized information on U.S. commercial real estate.

Information about CoStar’s revenues from, and long-lived assets [added: and total assets] located in, foreign countries is included in Notes 2 and 12 of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.

[removed: CoStar’s revenues, EBITDA,] [added: The revenues; net income before interest, income taxes, depreciation and amortization ("EBITDA"); and total] assets and [removed: liabilities, broken out by segment] [added: liabilities for each of our segments] are set forth in Note 12 to our consolidated financial statements.

Information about risks associated with our foreign operations is included in [removed: “Item 7A.][added: "Item 1A.]

[removed: Our subsidiary,] LoopNet, [removed: Inc. (“LoopNet”),] [added: our subsidiary,] operates an online marketplace that enables property owners, landlords, and commercial real estate agents working on their behalf to list properties for sale or for lease and to submit detailed information about property listings.

We also provide market research and analysis for commercial real estate investors and lenders via our Property and Portfolio [removed: Research, Inc.] [added: Research] (“PPR”) service [removed: offerings;] [added: offerings,] portfolio and debt management and reporting capabilities through our Resolve [removed: Technology, Inc. (“Resolve Technology”)] [added: Technology] service offerings; and real estate and lease management solutions, including lease administration and abstraction services, through our Virtual [removed: Premise, Inc. (“Virtual Premise”)] [added: Premise] service offerings.

Our database has been developed and enhanced for more than [removed: 25] [added: 26] years by a research department that makes thousands of daily database updates.

Our subscription-based information services consist primarily of CoStar [removed: Property Professional®, CoStar Tenant®, CoStar COMPS Professional®] [added: SuiteTM] and [removed: FOCUS™] [added: FOCUSTM] services.

CoStar [removed: Property Professional, CoStar Tenant, and CoStar COMPS Professional are generally] [added: Suite is] sold as a [removed: suite] [added: platform] of [removed: similar services] [added: service offerings consisting of CoStar Property Professional®, CoStar COMPS Professional®] and [added: CoStar Tenant® and] through our mobile application, [removed: CoStarGo, and comprise our primary service offering in our U.S. operating segment.][added: CoStarGo®.]

FOCUS is our primary service offering in [removed: our] [added: the] International operating segment.

To encourage clients to use our services regularly, we generally charge a fixed monthly amount for our subscription-based information services rather than [added: charging] fees based on actual system usage.

Historically, our expansion includes the acquisitions of Chicago [removed: ReSource, Inc.] [added: ReSource] in Chicago in 1996 and New Market [removed: Systems, Inc.] [added: Systems] in San Francisco in 1997.

In August 1998, we expanded into the Houston region through the acquisition of Houston-based real estate information provider C Data [removed: Services, Inc.] [added: Services] In January 1999, we expanded further into the Midwest and Florida by acquiring [removed: LeaseTrend, Inc.] [added: LeaseTrend] and into Atlanta and Dallas/Fort Worth by acquiring Jamison [removed: Research, Inc. In February 2000, we acquired COMPS.COM, Inc., a San Diego-based provider of commercial real estate information.][added: Research.]

In November 2000, we acquired First Image Technologies, [removed: Inc.,] a California-based provider of commercial real estate software.

In May 2004, we expanded into Tennessee through the acquisition of Peer Market Research, [removed: Inc.,] and in June 2004, we extended our coverage of the U.K. through the acquisition of Scottish Property Network.

In September 2004, we strengthened our position in Denver, Colorado through the acquisition of substantially all of the assets of RealComp, [removed: Inc.,] a local comparable sales information provider.

In April 2008, we acquired the assets of First [removed: CLS, Inc.] [added: CLS] (doing business as the Dorey Companies and DoreyPRO), an Atlanta-based provider of local commercial real estate information.

In October 2011, we acquired Virtual Premise, a Software as a Service, or on-demand [removed: software,] [added: software] provider of real estate and lease management solutions located in Atlanta, Georgia.

We expect to continue [added: software development] to [removed: develop and distribute new services,] improve existing services, [added: introduce new services,] integrate products and services, cross-sell existing services, and expand and develop supporting technologies for our research, sales and marketing organizations.

We are [removed: also] committed to supporting and improving our existing core information, [added: news,] analytic and marketing services.

[removed: We continue to improve] [added: Further, in October 2013, we released CoStarGo® 2.0, the next generation of] our mobile application, [removed: CoStarGo®,] which was launched in the U.S. on August 15, 2011 and introduced in the U.K. on November 5, 2012.

[added: CoStarGo®] CoStarGo is an iPad application that integrates and provides [added: subscribers of Costar Suite] mobile access to [removed: subscribers of] our comprehensive property, [removed: tenant and] comparable sales [added: and tenant] information in our suite of online service offerings [removed: -] [added: –] CoStar Property Professional, CoStar [removed: Tenant] [added: COMPS Professional] and CoStar [removed: COMPS Professional.][added: Tenant.]

We [removed: are integrating, developing] [added: continue to integrate, develop] and [removed: cross-selling] [added: cross-sell] the services offered by the companies we acquired most recently, including LoopNet, Virtual Premise, Resolve Technology and PPR.

Our sales and marketing efforts [removed: are] [added: have focused] and will continue to [removed: be focused] [added: focus] on cross-selling and marketing our services.

[removed: After] [added: For example, after] the acquisition of LoopNet, we launched a sales and marketing campaign [removed: directed at cross-selling] [added: to cross-sell] CoStar's information services to LoopNet customers and [added: cross-sell] LoopNet's marketing services to CoStar customers.

[added: We continue to integrate our international operations more fully with those in the U.S.] As part of our integration efforts, in [removed: 2007,] [added: 2007] we introduced [removed: the] “CoStar Group” as the brand encompassing our international operations, and in early [removed: 2010,] [added: 2010] we launched Showcase, our internet marketing service that provides commercial real estate professionals high quality internet lead generation, in the U.K. [removed: Our July 2009 acquisition] [added: In addition, we intend to continue to upgrade the platform] of [removed: PPR and Property] [added: services] and [removed: Portfolio Research Ltd. (“PPR UK”), also expanded] [added: expand] the [removed: market research capabilities] [added: coverage] of our [removed: U.K. operations.][added: service offerings within our International segment.]

[added: CoStarGo 2.0 was released in the U.K. in October 2013 simultaneous with the release in the U.S.] Additionally, we have upgraded our back-end research operations, fulfillment and Customer Relationship Management (“CRM”) systems to support these new U.K. services.

In order to implement these services in the U.K., we incurred increased development costs through [removed: 2012.][added: 2012; however, development costs incurred by the International segment decreased in 2013.]

We believe that our [added: integration efforts and] continued investments in [removed: U.S. and international products, internationalization] [added: our services, including expansion] of our [removed: U.S. products and integration efforts] [added: existing service offerings internationally,] have created [removed: and will continue to build upon] a platform for long-term revenue growth.

We expect these investments to result in further penetration of our international subscription-based information services and the successful cross-selling of our services to customers in existing [removed: markets due to the release of our upgraded international platform and expansion of coverage of our international service offerings.][added: markets.]

By combining our extensive database, approximately [removed: 1,108] [added: 1,123] researchers and outside contractors, our experienced team of analysts and economists, technological expertise and broad customer base, we believe that we have created such a platform.

CoStar has spent more than [removed: 25] [added: 26] years building and acquiring a database of commercial real estate information, which includes information on leasing, sales, comparable sales, tenants, and demand statistics, as well as digital images.

As of January 31, [removed: 2013,] [added: 2014,] our database of real estate information covered the U.S., London, England and other parts of the U.K., and contained information about:

| • | Approximately [removed: 1.6] [added: 1.5] million sale and lease listings; |

| • | Approximately [removed: 4.2] [added: 4.3] million total properties; |

| • | Approximately [removed: 9.0] [added: 8.6] billion square feet of sale and lease listings; |

| • | Approximately [removed: 5.8] [added: 5.7] million tenants; |

| • | Approximately [removed: 1.9] [added: 2.1] million sales transactions valued in the aggregate at approximately [removed: $4.5] [added: $5.0] trillion; and |

We have created and compiled our standardized information, analytics and marketing platform where members of the commercial real estate and related business community can continuously interact and facilitate transactions by efficiently exchanging accurate and standardized commercial real estate information.

Risk Factors" and “Item 7A.

CoStar Suite is our primary service offering in the U.S. operating segment.

Additionally, we introduced CoStar Suite in the U.K. in the fourth quarter of 2012 and no longer offered FOCUS to new clients beginning in 2013.

In February 2000, we acquired COMPS.COM, a San Diego-based provider of commercial real estate information.

More recently, on April 30, 2012, we completed the acquisition of LoopNet, an online marketplace that enables property owners, landlords, and commercial real estate agents working on their behalf to list properties for sale or for lease and to submit detailed information about property listings.

In October 2013, we introduced technology enhancements to CoStar Suite, our platform of service offerings consisting of CoStar Property Professional, CoStar COMPS Professional and CoStar Tenant.

The enhancements improve Costar Suite's user interface, search functionality and analytic capabilities.

The newly introduced CoStar MultifamilyTM information search allows access to our extensive multifamily property database.

In addition, we introduced CoStar Lease AnalysisTM, an integrated workflow tool that provides users a simple way to produce understandable cash flows for any proposed or existing lease.

We expect to continue software development on our new Lease Analysis workflow tool throughout 2014.

CoStarGo 2.0 adds powerful analytic capabilities to our comprehensive mobile solution.

We have introduced enhancements to our flagship marketing platform, LoopNet.com.

For example, we added a broker advertising service that allows brokers to purchase advertisements based on geographic and property type criteria.

Additionally, we introduced ProVideo, a service that enables owners and brokers to enhance their listings with high quality videos of interior spaces, amenities and exterior features.

We expect to continue software development to improve the LoopNet marketing platform in 2014.

In some cases, when integrating and coordinating our services and assessing industry needs, we may decide, or may have previously decided, to combine, shift focus from, de-emphasize, phase out, or eliminate a service that overlaps or is redundant with other services we offer.

To further develop those initiatives, we introduced CoStar Suite in the U.K. during the fourth quarter of 2012 and no longer offered FOCUS to new clients beginning in 2013.

CoStar Suite is sold as a consistent international platform of service offerings consisting of CoStar Property Professional, CoStar COMPS Professional and CoStar Tenant and through the Company's mobile application, CoStarGo.

The International operating segment continues to experience improved financial performance and most recently, during the three months ended December 31, 2013, International EBITDA increased to a positive amount as a result of increased revenue and decreased operating expenses.

In 2014, we expect to expand further internationally by offering our services in Toronto, Canada.

CoStar's field research effort also includes creating high quality videos of interior spaces, amenities and exterior features of properties.

Our subscription-based information services consist primarily of CoStar SuiteTM and FOCUSTM services.

CoStar's core services are served from multiple data centers to support uninterrupted service for our customers.

- CoStar MultifamilyTM CoStar Multifamily information included as part of CoStar Property Professional provides subscribers a comprehensive multifamily property database combined with analytic and forecasting tools that enable them to make investment decisions about multifamily properties.

CoStar Multifamily provides information about buildings with 20 or more units including rents and occupancy rates, comparable sales transactions, construction locations, floor plans, high-resolution property images and detailed information on amenities and concessions.

- CoStar Lease AnalysisTM CoStar Lease Analysis is an integrated workflow tool that allows subscribers to incorporate CoStar data with their own data to perform in depth lease analyses.

CoStar Lease Analysis can be used to produce an understandable cash flow analysis as well as key metrics about any proposed or existing lease.

It combines financial modeling with CoStar’s comprehensive property information, enabling the subscriber to compare lease alternatives.

| CB Richard Ellis | | Citigroup Global Markets — U.K. | | ING Investment Management |

| Charles Dunn Company | | JP Morgan Chase Bank | | Manulife Financial |

| Coldwell Banker Commercial NRT | | Key Bank | | MetLife Real Estate Investment |

| Colliers | | Q10 Capital LLC | | NorthMarq Capital |

| Colliers International UK — U.K. | | Suntrust | | Progressive Casualty Insurance Co. |

| CRESA | | TD Bank | | Prudential |

| Cushman & Wakefield | | Wells Fargo | | Standard Life Investments — U.K. |

| Gerald Eve — U.K. | | Owners, Developers | | Appraisers, Accountants |

| GVA Grimley — U.K. | | Grosvenor Estate Holdings — U.K. | | Deloitte |

| HFF | | Hines | | Integra |

| Jones Lang LaSalle | | Industrial Developments | | KPMG |

We deliver our content to our U.S. customers primarily via an integrated suite of online service offerings that includes information about space available for lease, comparable sales information, tenant information, information about properties for sale, internet marketing services, analytical capabilities, information for clients’ websites, information about industry professionals and their business relationships, data integration and industry news.

Additionally, we introduced CoStar Property Professional, CoStar COMPS Professional, CoStar Tenant and CoStarGo in the U.K. in the fourth quarter of 2012.

Most recently, in April 2012, we acquired LoopNet; the LoopNet acquisition is described below under "LoopNet Acquisition."

LoopNet Acquisition

On April 30, 2012, we completed the acquisition of LoopNet.

The acquisition combines the research capabilities of CoStar with the marketing solutions offered by LoopNet.

We expect the acquisition will create efficiencies in operations and provide greater tools for the combined company's customers.

To acquire LoopNet, we paid stock and cash consideration with an aggregate value of approximately $883.4 million as of the closing date.

In connection with the LoopNet acquisition, we agreed to the terms of a consent order issued by the Federal Trade Commission (the “FTC”).

The consent order, which is publicly available on the FTC's website at www.ftc.gov, requires us to maintain certain business practices that the FTC believes will promote competition.

For example, the consent order requires us to maintain our customary practice of selling our products separately and on a market-by-market basis.

It also requires us to license our products to customers who have bought our competitors' products on a non-discriminatory basis, which we have always done in the past.

In addition, we are required to maintain our customary licensing practices with respect to the length of our contracts, to allow customers with multi-year contracts to cancel with one year's advance notice, and to agree to reduce the cost of any litigation with customers by offering to arbitrate certain disputes.

We funded the cash portion of the consideration payable to LoopNet stockholders in the merger through a combination of cash on hand, including the net proceeds of approximately $247.9 million from an equity offering we completed in June 2011 and the proceeds of a $175.0 million term loan facility available to us under a credit agreement (as amended, the “Credit Agreement”), dated February 16, 2012, by and among CoStar, as borrower, CoStar Realty Information, Inc. (“CoStar Realty”), as co-borrower, JPMorgan Chase Bank, N.A. (“J.P. Morgan Bank”), as administrative agent, and the other lenders thereto.

Examples of new tools and services that we are currently developing and expect to introduce to customers in the near future include upgrades to our suite of online service offerings – CoStar Property Professional, CoStar Tenant and CoStar COMPS Professional.

These upgrades are expected to include improvements to the search functionality as well as improvements to the reporting capabilities of the system.

We also plan improvements to property type specific searches included as part of CoStar Property Professional.

Planned improvements for CoStarGo include a multifamily search function and enhanced analytic capabilities.

We have incurred increased expenses associated with this marketing and sales campaign and expect to continue to incur additional expenses for the campaign during the first quarter of 2013.

We anticipate that these initiatives will position the company for revenue growth in 2013 and beyond.

Our investments in LoopNet, Virtual Premise, Resolve Technology, and PPR have increased, and may continue to increase; however our revenues have also increased as a result of these acquisitions, due to revenue from the acquired businesses, as well as our ability to take advantage of cross-selling opportunities among the customers of CoStar and the acquired companies.

In addition, we expect to continue our efforts to integrate the combined capabilities of CoStar's property and market-level information and PPR's analytics and forecasting expertise with Resolve Technology's real estate investment software expertise.

We plan to continue efforts to integrate CoStar's business with Virtual Premise's real estate and lease management solutions.

These integration efforts include providing additional tools that make our research and analytics even more valuable to subscribers.

In order to implement these initiatives, we have incurred, and expect to continue to incur, additional costs.

We also expect to continue to offer our core products and services individually.

We also intend to continue to expand the coverage of our service offerings within our International segment.

In December 2006, our U.K. subsidiary, CoStar Limited, acquired Grecam S.A.S., a provider of commercial property information and market-level surveys, studies and consulting services, located in Paris, France.

In February 2007, CoStar Limited also acquired Property Investment Exchange Limited, a provider of commercial property information and operator of an electronic platform that facilitates the exchange of investment property located in London, England.

We have recently begun to research commercial properties in Toronto, Canada and plan to introduce services covering this area in late 2013 or early 2014.

In addition, we intend to continue to upgrade our platform of services and to integrate our international operations more fully with those in the U.S. In furtherance of these initiatives, in the U.K. during the fourth quarter of 2012, we introduced a consistent international platform of service offerings, consisting of CoStarGo, our iPad application, CoStar Property Professional, CoStar COMPS Professional, and CoStar Tenant.

We believe the product launch was well received and a significant marketing and sales effort is currently underway.

We expect that development expenses incurred by the International segment will decrease in 2013.

In addition, many of our field researchers are photographers who take photographs of commercial real estate properties to add to CoStar’s database of digital images.

Most recently, on November 5, 2012, we introduced CoStar Suite and CoStarGo in the U.K.

Our encrypted virtual private network provides remote researchers and salespeople secure access to CoStar applications and network resources.

| CB Richard Ellis — U.K. | | JP Morgan Chase Bank | | MetLife Real Estate Investment |

| Charles Dunn Company, Inc. | | Key Bank | | NorthMarq Capital |

| Coldwell Banker Commercial NRT | | Q10 Capital LLC | | Progressive Casualty Insurance Co. |

| Colliers | | Suntrust | | Prudential |

For the fiscal year ended December 31, [removed: 2012][added: 2013]

| [removed: | ] [added: ] |

Based on the closing price of the common stock on June [removed: 29, 2012] [added: 28, 2013] on the Nasdaq Stock Market, Nasdaq Global Select Market, the aggregate market value of registrant’s common stock held by non-affiliates of the registrant was approximately [removed: $2.2] [added: $3.5] billion.

As of February [removed: 22, 2013,] [added: 14, 2014,] there were [removed: 28,339,028] [added: 28,853,559] shares of the registrant’s common stock outstanding.

Portions of the registrant’s definitive proxy statement, which is expected to be filed with the Securities and Exchange Commission within 120 days after the end of the registrant’s fiscal year ended December 31, [removed: 2012,] [added: 2013,] are incorporated by reference into Part III of this Report.

| Item 1. | [removed: [Business](#sC90F616D7B7EE1DF5A36C2E195B1C1D9)] [added: [Business](#sECF6B8D62A6F073AF74AFF4B735DBB09)] | [removed: [4](#sC90F616D7B7EE1DF5A36C2E195B1C1D9)] [added: [4](#sECF6B8D62A6F073AF74AFF4B735DBB09)] |

| Item 1A. | [Risk [removed: Factors](#s260986EF94099548012EC2E195E05E92)] [added: Factors](#sF2226646C231260BBD61FF4B737C525B)] | [removed: [17](#s260986EF94099548012EC2E195E05E92)] [added: [17](#sF2226646C231260BBD61FF4B737C525B)] |

| Item 1B. | [Unresolved Staff [removed: Comments](#s06D2EFB3983EC30F5C34C2E19603A4A7)] [added: Comments](#s1795FE0B4A0555D499F8FF4B73AB6EDC)] | [removed: [27](#s06D2EFB3983EC30F5C34C2E19603A4A7)] [added: [27](#s1795FE0B4A0555D499F8FF4B73AB6EDC)] |

| Item 2. | [removed: [Properties](#sAAD176B6B549B82BAD1EC2E1962553BE)] [added: [Properties](#s5AC01178AB9491E35A3AFF4B73CA016F)] | [removed: [27](#sAAD176B6B549B82BAD1EC2E1962553BE)] [added: [27](#s5AC01178AB9491E35A3AFF4B73CA016F)] |

| Item 3. | [Legal [removed: Proceedings](#s300BBBFE0E9AF7F77A91C2E196591146)] [added: Proceedings](#sD02FAC9E5DDA7E47F724FF4B73F9BD3A)] | [removed: [28](#s300BBBFE0E9AF7F77A91C2E196591146)] [added: [27](#sD02FAC9E5DDA7E47F724FF4B73F9BD3A)] |

| Item 4. | [Mine Safety [removed: Disclosures](#sFE9F66BAC93F34DF556AC2E1967A3E5C)] [added: Disclosures](#s14284DE857F8646F2A2DFF4B742868C9)] | [removed: [28](#sFE9F66BAC93F34DF556AC2E1967A3E5C)] [added: [27](#s14284DE857F8646F2A2DFF4B742868C9)] |

| Item 5. | [Market for the Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity [removed: Securities](#s252B13515B4930AE0FCCC2E191C04CD0)] [added: Securities](#s07EC8C24B1F0B6F01E11FF4B63856533)] | [removed: [29](#s252B13515B4930AE0FCCC2E191C04CD0)] [added: [28](#s07EC8C24B1F0B6F01E11FF4B63856533)] |

| Item 6. | [Selected Consolidated Financial and Operating [removed: Data](#sA6797F6D13DBAD1B6179C2E1919C99F4)] [added: Data](#s0ED81D6D6DED1C33CD6DFF4B5E86ABAA)] | [removed: [31](#sA6797F6D13DBAD1B6179C2E1919C99F4)] [added: [30](#s0ED81D6D6DED1C33CD6DFF4B5E86ABAA)] |

| Item 7. | [Management’s Discussion and Analysis of Financial Condition and Results of [removed: Operations](#sF01F77E8956855B305DCC2E197206BF6)] [added: Operations](#s7336E5A834AFC4057748FF4B74C4D098)] | [removed: [32](#sF01F77E8956855B305DCC2E197206BF6)] [added: [31](#s7336E5A834AFC4057748FF4B74C4D098)] |

| Item 7A. | [Quantitative and Qualitative Disclosures about Market [removed: Risk](#s867E1286DEF9855FE453C2E19A0FDD72)] [added: Risk](#s2E71F100CDF7B697BBD5FF4B77929EC5)] | [removed: [50](#s867E1286DEF9855FE453C2E19A0FDD72)] [added: [48](#s2E71F100CDF7B697BBD5FF4B77929EC5)] |

| Item 8. | [Financial Statements and Supplementary [removed: Data](#sEED15B714B3AC2D5A1C3C2E19A41F630)] [added: Data](#sB863684C8E7208A14BD0FF4B77B18B92)] | [removed: [51](#sEED15B714B3AC2D5A1C3C2E19A41F630)] [added: [49](#sB863684C8E7208A14BD0FF4B77B18B92)] |

| Item 9. | [Changes in and Disagreements with Accountants on Accounting and Financial [removed: Disclosure](#s60C265FF17350F9913C8C2E19A618686)] [added: Disclosure](#s9955490078D243556FEBFF4B77EFC637)] | [removed: [51](#s60C265FF17350F9913C8C2E19A618686)] [added: [49](#s9955490078D243556FEBFF4B77EFC637)] |

| Item 9A. | [Controls and [removed: Procedures](#sED0E3DCB143C52B3DA18C2E19A943407)] [added: Procedures](#s49C5A85B9091A9492D27FF4B780E050C)] | [removed: [51](#sED0E3DCB143C52B3DA18C2E19A943407)] [added: [49](#s49C5A85B9091A9492D27FF4B780E050C)] |

| Item 9B. | [Other [removed: Information](#s549A9FDCCE20F7F7CA55C2E19AB53477)] [added: Information](#s394C55C43D9870A4E0E5FF4B783DECD6)] | [removed: [52](#s549A9FDCCE20F7F7CA55C2E19AB53477)] [added: [50](#s394C55C43D9870A4E0E5FF4B783DECD6)] |

| Item 10. | [Directors, Executive Officers and Corporate [removed: Governance](#sD5B303027A46CE454F72C2E19B09E056)] [added: Governance](#s9F185E0DC76DDF30B212FF4B788BB1FF)] | [removed: [53](#sD5B303027A46CE454F72C2E19B09E056)] [added: [51](#s9F185E0DC76DDF30B212FF4B788BB1FF)] |

| Item 11. | [Executive [removed: Compensation](#s0AB86737C7FD205954A6C2E19B3BBA00)] [added: Compensation](#sF893455D12307DD780EBFF4B78AA444A)] | [removed: [53](#s0AB86737C7FD205954A6C2E19B3BBA00)] [added: [51](#sF893455D12307DD780EBFF4B78AA444A)] |

| Item 12. | [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder [removed: Matters](#sBCEE8985C1E3AA9892DEC2E19B5C3CF6)] [added: Matters](#s7B0315F4B1875696DFB3FF4B78E92DB0)] | [removed: [53](#sBCEE8985C1E3AA9892DEC2E19B5C3CF6)] [added: [51](#s7B0315F4B1875696DFB3FF4B78E92DB0)] |

| Item 13. | [Certain Relationships and Related Transactions, and Director [removed: Independence](#sFA22E891C7122F4FEC09C2E19B8EB3B0)] [added: Independence](#s2AF3BDB0BF614EED7EC7FF4B790881AF)] | [removed: [53](#sFA22E891C7122F4FEC09C2E19B8EB3B0)] [added: [51](#s2AF3BDB0BF614EED7EC7FF4B790881AF)] |

| Item 14. | [Principal Accountant Fees and [removed: Services](#s890718C41C7BBC733CEAC2E19BAFD469)] [added: Services](#s2E54957E78D8EE848FA1FF4B79373BCC)] | [removed: [53](#s890718C41C7BBC733CEAC2E19BAFD469)] [added: [51](#s2E54957E78D8EE848FA1FF4B79373BCC)] |

| Item 15. | [Exhibits and Financial Statement [removed: Schedules](#sEC0A1B9530F53EC6BD5AC2E19C030221)] [added: Schedules](#s071D5B1C278334629397FF4B56C98ECE)] | [removed: [54](#sEC0A1B9530F53EC6BD5AC2E19C030221)] [added: [52](#s071D5B1C278334629397FF4B56C98ECE)] |

| | [Index to [removed: Exhibits](#s800E560927A7D492DB87C2E19C56D814)] [added: Exhibits](#sBC442ED122F3AF6F26B7FF4B79E22D48)] | [removed: [57](#s800E560927A7D492DB87C2E19C56D814)] [added: [55](#sBC442ED122F3AF6F26B7FF4B79E22D48)] |

| | [Index to Consolidated Financial [removed: Statements](#sB5899BFC2128F6E0033FC2E19C88CA00)] [added: Statements](#sAD7B8196741763E85C42FF4B7A02E47B)] | [removed: [F-1](#sB5899BFC2128F6E0033FC2E19C88CA00)] [added: [F-1](#sAD7B8196741763E85C42FF4B7A02E47B)] |

10-K 1 csgp20131231-10k.htm 2013 10-K

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| --- |

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| | [Signatures](#sA23C2D2E995D652B8EA2FF4B79A4C49F) | [53](#sA23C2D2E995D652B8EA2FF4B79A4C49F) |

10-K 1 csgp20121231-10k.htm 2012 10-K

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| --- | --- |

| | [Signatures](#s19D6424C4EA6106B7C0DC2E19C3492DF) | [55](#s19D6424C4EA6106B7C0DC2E19C3492DF) |

Our principal facility in the U.K. is located in London, England, where we occupy approximately [removed: 11,000] [added: 7,000] square feet of office space.

Our lease for this facility has a maximum term ending [removed: October 20, 2018,] [added: July 8, 2023,] with early termination at our option on [removed: October 21, 2013,] [added: July 9, 2018,] with advance notice.

In addition to our [added: two] downtown Washington, DC [added: leased facilities] and [added: our] London, England [removed: facilities,] [added: facility,] our research operations are principally run out of leased spaces in San Diego, California; Columbia, Maryland; [added: Atlanta, Georgia;] Glasgow, Scotland; and Paris, France.

These locations include, without limitation, the following: New York; Los Angeles; Chicago; San Francisco; Sacramento; Boston; [removed: Manchester, England;] Orange County, California; Philadelphia; Houston; [removed: Atlanta;] Phoenix; [removed: Tucson;] Detroit; Pittsburgh; [removed: Fort Lauderdale;] [added: Miami; Orlando;] Denver; Dallas; Kansas City; Cleveland; Cincinnati; Indianapolis; Austin; Salt Lake City; [added: Las Vegas;] Seattle; Portland; St. Louis; Glendora, California; San Luis Obispo, California; [removed: and] [added: Charlotte;] Durham, North [removed: Carolina.][added: Carolina; Manchester, England and Toronto, Canada.]

Our headquarters is located at 1331 L Street, NW, in downtown Washington, DC, where we occupy approximately 149,500 square feet of office space.

Our lease for our headquarters expires May 31, 2025 (with two 5-year renewal options).

On February 5, 2010, we purchased a 169,429 square-foot office building located at 1331 L Street, NW, in downtown Washington, DC, through our wholly owned subsidiary, 1331 L Street Holdings, LLC (“Holdings”), for use as our new headquarters and have since relocated to this location.

This facility is used primarily by our U.S. segment.

The lease for our previous headquarters in Bethesda, MD expired on October 15, 2010.

On February 2, 2011, Holdings and GLL L-Street 1331, LLC (“GLL”), an affiliate of Munich-based GLL Real Estate Partners GmbH, entered into a purchase and sale agreement pursuant to which (i) Holdings agreed to sell to GLL its interest in the office building located at 1331 L Street, NW, in downtown Washington, DC, and (ii) CoStar Realty Information, Inc. (“CoStar Realty”), our wholly owned subsidiary, agreed to enter into a lease expiring May 31, 2025 (with two 5-year renewal options) with GLL to lease back 149,514 square feet of the office space located in this building, which we continue to use as our corporate headquarters.

The closing of the sale took place on February 18, 2011.

| Year Ended December 31, [removed: 2011] [added: 2013] | | | | | | | |

As of February [removed: 1, 2013,] [added: 3, 2014,] there were [removed: 695] [added: 797] holders of record of our common stock.

We did not issue any unregistered securities during the year ended December 31, [removed: 2012.][added: 2013.]

The following table is a summary of our repurchases of common stock during each of the three months in the quarter ended December 31, [removed: 2012:][added: 2013:]

| Month, [removed: 2012] [added: 2013] | | Total Number of Shares Purchased | | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs |

The comparison covers the period beginning December 31, [removed: 2007,] [added: 2008,] and ending on December 31, [removed: 2012,] [added: 2013,] and assumes the reinvestment of any dividends.

[removed: ][added: ]

| Company / Index | | [removed: 12/31/07 | | |] 12/31/08 | | | 12/31/09 | | | 12/31/10 | | | 12/31/11 | | | 12/31/12 | | [added: | 12/31/13 | |]

| First Quarter | $ | 109.46 | | | $ | 89.28 | |

| Second Quarter | $ | 129.51 | | | $ | 105.73 | |

| Third Quarter | $ | 170.09 | | | $ | 131.03 | |

| Fourth Quarter | $ | 186.62 | | | $ | 161.29 | |

Our Credit Agreement includes covenants that, subject to certain exceptions, restrict our ability and the ability of our subsidiaries to pay dividends or distributions.

| December 1 through 31 | | 4,948 | | | $183.12 | | — | | — |

| Total | | 4,948 | (1) | | $183.12 | | — | | — |

| CoStar Group, Inc. | | 100 | | | 126.81 | | | 174.74 | | | 202.58 | | | 271.31 | | | 560.35 | |

| S&P 500 Index | | 100 | | | 126.46 | | | 145.51 | | | 148.59 | | | 172.37 | | | 228.19 | |

| S&P 500 Internet Software & Services Index | | 100 | | | 184.67 | | | 189.39 | | | 199.35 | | | 238.88 | | | 355.42 | |

| First Quarter | $ | 62.89 | | | $ | 55.58 | |

| Second Quarter | $ | 72.84 | | | $ | 55.86 | |

| Third Quarter | $ | 59.50 | | | $ | 46.70 | |

| Fourth Quarter | $ | 68.39 | | | $ | 49.22 | |

| December 1 through 31 | | 4,485 | | | $86.47 | | — | | — |

| Total | | 4,485 | (1) | | $86.47 | | — | | — |

| | |

| --- | --- |

| • | An equal investment in the S&P 500 Application Software Index. |

As a result of the evolving nature of our business and our acquisition of LoopNet, on April 30, 2012, the company's Global Industry Classification Standard ("GICS") code was re-assigned by Standard & Poor's as Internet Software & Services.

Therefore, we now use the S&P 500 Internet Software & Services Index instead of the S&P 500 Application Software Index presented in prior years as an industry index for comparison against our total return.

In general, a comparable S&P 500 Index may change whenever there is a major corporate action.

SEC rules require that if an index is selected which is different from the index used in the immediately preceding fiscal year, the total return must be compared with both the newly selected index and the index used in the prior year.

As a result, a comparison of our total return to that of the S&P 500 Internet Software & Services Index and the S&P 500 Application Software Index is presented below.

We believe that the S&P 500 Internet Software & Services Index is an appropriate index to compare us with other companies in our industry and that it is a widely recognized and used index for which components and total return information are readily accessible to our stockholders to assist in their understanding of our performance relative to other companies in our industry.

| CoStar Group, Inc. | | 100 | | | 69.71 | | | 88.40 | | | 121.82 | | | 141.23 | | | 189.14 | |

| S&P 500 Index | | 100 | | | 63.00 | | | 79.67 | | | 91.68 | | | 93.61 | | | 108.59 | |

| S&P 500 Internet Software & Services Index | | 100 | | | 45.41 | | | 83.86 | | | 86.01 | | | 90.53 | | | 108.48 | |

| S&P 500 Application Software Index | | 100 | | | 54.67 | | | 87.37 | | | 117.42 | | | 103.20 | | | 133.32 | |

The following table provides selected consolidated financial and other operating data for the five years ended December 31, [removed: 2012.][added: 2013.]

The consolidated statement of operations data shown below for each of the three years ended December 31, [removed: 2010,] 2011, [added: 2012,] and [removed: 2012] [added: 2013] and the consolidated balance sheet data as of December 31, [removed: 2011 and] 2012 [added: and 2013] are derived from audited consolidated financial statements that are included in this report.

The consolidated statement of operations data for each of the years ended December 31, [removed: 2008 and] 2009 and [added: 2010 and] the consolidated balance sheet data as of December 31, [removed: 2008,] 2009, [added: 2010,] and [removed: 2010] [added: 2011] shown below are derived from audited consolidated financial statements for those years that are not included in this report.

| Consolidated Statement of Operations Data: | [removed: 2008 | | | |] 2009 | | | | 2010 | | | | 2011 | | | | 2012 | | | [added: | 2013 | | |]

| Revenues | $ | [removed: 212,428] [added: 209,659] | | | $ | [removed: 209,659] [added: 226,260] | | | $ | [removed: 226,260] [added: 251,738] | | | $ | [removed: 251,738] [added: 349,936] | | | $ | [removed: 349,936] [added: 440,943] | |

| Cost of revenues | [removed: 73,408 | | | |] 73,714 | | | | 83,599 | | | | 88,167 | | | | 114,866 | | | [added: | 129,185 | | |]

| Gross margin | [removed: 139,020 | | | |] 135,945 | | | | 142,661 | | | | 163,571 | | | | 235,070 | | | [added: | 311,758 | | |]

| Operating expenses | [removed: 99,232 | | | |] 104,110 | | | | 119,886 | | | | 141,800 | | | | 207,630 | | | [added: | 257,604 | | |]

| Income from operations | [removed: 39,788 | | | |] 31,835 | | | | 22,775 | | | | 21,771 | | | | 27,440 | | | [added: | 54,154 | | |]

| Interest and other income | [removed: 4,914 | | | |] 1,253 | | | | 735 | | | | 798 | | | | 526 | | | [added: | 326 | | |]

| Interest and other expense | — | | | | — | | | | — | | | | [removed: —] [added: (4,832] | | [added: )] | | [removed: (4,832] [added: (6,943] | | ) |

| Income before income taxes | [removed: 44,702 | | | |] 33,088 | | | | 23,510 | | | | 22,569 | | | | 23,134 | | | [added: | 47,537 | | |]

| Income tax expense, net | [removed: 20,079 | | | |] 14,395 | | | | 10,221 | | | | 7,913 | | | | 13,219 | | | [added: | 17,803 | | |]

| Net income | $ | [removed: 24,623] [added: 18,693] | | | $ | [removed: 18,693] [added: 13,289] | | | $ | [removed: 13,289] [added: 14,656] | | | $ | [removed: 14,656] [added: 9,915] | | | $ | [removed: 9,915] [added: 29,734] | |

| Net income per share — basic | $ | [removed: 1.27] [added: 0.95] | | | $ | [removed: 0.95] [added: 0.65] | | | $ | [removed: 0.65] [added: 0.63] | | | $ | [removed: 0.63] [added: 0.37] | | | $ | [removed: 0.37] [added: 1.07] | |

| Net income per share — diluted | $ | [removed: 1.26] [added: 0.94] | | | $ | [removed: 0.94] [added: 0.64] | | | $ | [removed: 0.64] [added: 0.62] | | | $ | [removed: 0.62] [added: 0.37] | | | $ | [removed: 0.37] [added: 1.05] | |

| Weighted average shares outstanding — basic | [removed: 19,372 | | | |] 19,780 | | | | 20,330 | | | | 23,131 | | | | 26,533 | | | [added: | 27,670 | | |]

| Weighted average shares outstanding — diluted | [removed: 19,550 | | | |] 19,925 | | | | 20,707 | | | | 23,527 | | | | 26,949 | | | [added: | 28,212 | | |]

| Consolidated Balance Sheet Data: | [removed: 2008 | | | |] 2009 | | | | 2010 | | | | 2011 | | | | 2012 | | | [added: | 2013 | | |]

| Cash, cash equivalents, short-term and long-term investments | $ | [removed: 224,590] [added: 255,698] | | | $ | [removed: 255,698] [added: 239,316] | | | $ | [removed: 239,316] [added: 573,379] | | | $ | [removed: 573,379] [added: 177,726] | | | $ | [removed: 177,726] [added: 277,943] | |

| Working capital | [removed: 183,347 | | | |] 203,660 | | | | 188,279 | | | | 521,401 | | | | 97,925 | | | [added: | 196,913 | | |]

| Total assets | [removed: 334,384 | | | |] 404,579 | | | | 439,648 | | | | 771,035 | | | | 1,165,139 | | | [added: | 1,256,982 | | |]

| Total long-term liabilities | [removed: 1,827 | | | |] 1,826 | | | | 7,252 | | | | 50,076 | | | | 237,158 | | | [added: | 217,567 | | |]

| Stockholders’ equity | [removed: 303,421 | | | |] 359,006 | | | | 381,502 | | | | 659,177 | | | | 826,343 | | | [added: | 927,862 | | |]

Information about prior period acquisitions that may affect the comparability of the selected financial information presented below is included in "Item 1.

Business."

Supplementary data is set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the caption “Consolidated Results of [removed: Operations.”][added: Operations” and "Consolidated Quarterly Results of Operations."]

As of December 31, [removed: 2012,] [added: 2013,] we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures.

In connection with the preparation of the Company's annual financial statements, management of the Company has undertaken an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, [removed: 2012] [added: 2013] based on criteria established in Internal Control – Integrated Framework [added: (1992 framework)] issued by the Committee of Sponsoring Organizations of the Treadway Commission (“the COSO Framework”).

Based on this assessment, management did not identify any material weakness in the Company's internal control, and management has concluded that the Company's internal control over financial reporting was effective as of December 31, [removed: 2012.][added: 2013.]

The [added: remaining] information required by this Item is incorporated by reference to our Proxy Statement for our [removed: 2013] [added: 2014] annual meeting of stockholders.

CoStar has adopted a Code of Conduct for its directors.

In addition, CoStar has adopted a separate Code of Conduct for its officers and employees, including its principal executive, financial and accounting officers, or persons performing similar functions.

Copies of each of these codes may be found in the “Investors” section of the Company’s website at www.CoStar.com/Investors/Corpgovernance.aspx.

We intend to disclose future amendments to certain provisions of our Codes, or waivers of such provisions granted to executive officers and directors, as required by SEC rules on the website within four business days following the date of such amendment or waiver.

The information required by this Item is incorporated by reference to our Proxy Statement for our [removed: 2013] [added: 2014] annual meeting of stockholders.

The information required by this Item is incorporated by reference to our Proxy Statement for our [removed: 2013] [added: 2014] annual meeting of stockholders.

The information required by this Item is incorporated by reference to our Proxy Statement for our [removed: 2013] [added: 2014] annual meeting of stockholders.

The information required by this Item is incorporated by reference to our Proxy Statement for our [removed: 2013] [added: 2014] annual meeting of stockholders.

Years Ended December 31, [removed: 2010,] 2011, [added: 2012,] and [removed: 2012] [added: 2013] (in thousands):

Pursuant to the requirements of Section 13 of the Securities Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Washington, District of Columbia, on the [removed: 28th] [added: 20th] day of February [removed: 2013.][added: 2014.]

| /s/ Michael R. Klein | | Chairman of the Board | | February [removed: 28, 2013] [added: 20, 2014] |

| /s/ Andrew C. Florance | | Chief Executive Officer and | | February [removed: 28, 2013] [added: 20, 2014] |

| /s/ Brian J. Radecki | | Chief Financial Officer | | February [removed: 28, 2013] [added: 20, 2014] |

| /s/ David Bonderman | | Director | | February [removed: 28, 2013] [added: 20, 2014] |

| /s/ Warren H. Haber | | Director | | February [removed: 21, 2013] [added: 18, 2014] |

| /s/ Christopher J. Nassetta | | Director | | February [removed: 21, 2013] [added: 17, 2014] |

| /s/ Michael J. Glosserman | | Director | | February [removed: 26, 2013] [added: 20, 2014] |

| /s/ David J. Steinberg | | Director | | February [removed: 25, 2013] [added: 17, 2014] |

| /s/ John W. Hill | | Director | | February [removed: 25, 2013] [added: 19, 2014] |

| 3.1 | | [added: Third] Amended and Restated Certificate of Incorporation (Incorporated by reference to Exhibit 3.1 to the Registrant's Current Report on Form 8-K filed with the Commission on June [removed: 8, 2012).] [added: 6, 2013).] |

| 3.2 | | [added: Third] Amended and Restated By-Laws (Incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed [removed: April 6, 2011).] [added: with the Commission on September 24, 2013).] |

| [removed: *10.8] [added: *10.9] | | Form of 2007 Plan Incentive Stock Option Grant Agreement between the Registrant and certain of its officers and employees (Incorporated by reference to Exhibit 10.8 to the Registrant’s Report on Form 10-K for the year ended December 31, 2008). |

| [removed: *10.9] [added: *10.10] | | Form of 2007 Plan Incentive Stock Option Grant Agreement between the Registrant and Andrew C. Florance (Incorporated by reference to Exhibit 10.9 to the Registrant’s Report on Form 10-K for the year ended December 31, 2008). |

| [removed: *10.10] [added: *10.11] | | Form of 2007 Plan Nonqualified Stock Option Grant Agreement between the Registrant and certain of its officers and employees (Incorporated by reference to Exhibit 10.10 to the Registrant’s Report on Form 10-K for the year ended December 31, 2008). |

| [removed: *10.11] [added: *10.12] | | Form of 2007 Plan Nonqualified Stock Option Grant Agreement between the Registrant and certain of its directors (Incorporated by reference to Exhibit 10.11 to the Registrant’s Report on Form 10-K for the year ended December 31, 2008). |

| [removed: *10.12] [added: *10.13] | | Form of 2007 Plan Nonqualified Stock Option Grant Agreement between the Registrant and Andrew C. Florance (Incorporated by reference to Exhibit 10.12 to the Registrant’s Report on Form 10-K for the year ended December 31, 2008). |

| [removed: *10.13] [added: *10.14] | | Form of 2007 Plan French Sub-Plan Restricted Stock Agreement between the Registrant and certain of its employees (Incorporated by reference to Exhibit 10.10 to the Registrant’s Report on Form 10-K for the year ended December 31, 2007). |

| [removed: *10.14] [added: *10.15] | | CoStar Group, Inc. 2011 Incentive Bonus Plan (Incorporated by referenced to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K filed June 8, 2011). |

| [removed: *10.15] [added: *10.16] | | CoStar Group, Inc. Employee Stock Purchase Plan, as amended (Incorporated by reference to Exhibit 10.14 to the Registrant’s Report on Form 10-K for the year ended December 31, 2010). |

| [removed: *10.16] [added: *10.18] | | Employment Agreement for Andrew C. Florance (Incorporated by reference to Exhibit 10.2 to Amendment No. 1 to the Registration Statement on Form S-1 of the Registrant (Reg. No. 333-47953) filed with the Commission on April 27, 1998). |

| [removed: *10.17] [added: *10.19] | | First Amendment to Andrew C. Florance Employment Agreement, effective January 1, 2009 (Incorporated by reference to Exhibit 10.16 to the Registrant’s Report on Form 10-K for the year ended December 31, 2008). |

| [removed: *10.18] [added: *10.20] | | Executive Service Contract dated February 16, 2007, between Property Investment Exchange Limited and Paul Marples (Incorporated by reference to Exhibit 10.14 to the Registrant’s Report on Form 10-K for the year ended December 31, 2007). |

| [removed: *10.19] [added: *10.21] | | Leaving Agreement dated February 27, 2013, between CoStar U.K. Limited and Paul Marples [removed: (filed herewith).] [added: (Incorporated by reference to Exhibit 10.19 to the Registrant's Report on Form 10-K for the year ended December 31, 2012).] |

| [removed: 10.20] [added: 10.23] | | Form of Indemnification Agreement between the Registrant and each of its officers and directors (Incorporated by reference to Exhibit 10.1 to the Registrant’s Report on Form 10-Q for the quarter ended March 31, 2004). |

| [removed: 10.21] [added: 10.24] | | Agreement for Lease between CoStar UK Limited and Wells Fargo & Company, dated August 25, 2009 (Incorporated by reference to Exhibit 10.26 to the Registrant’s Report on Form 10-K for the year ended December 31, 2009). |

| [removed: 10.22] [added: 10.25] | | Sub-Underlease between CoStar UK Limited and Wells Fargo & Company, dated November 18, 2009 (Incorporated by reference to Exhibit 10.28 to the Registrant’s Report on Form 10-K for the year ended December 31, 2009). |

| [removed: 10.23] [added: 10.26] | | Deed of Office Lease by and between GLL L-Street 1331, LLC and CoStar Realty Information, Inc., dated February 18, 2011, and made effective as of June 1, 2010 (Incorporated by reference to Exhibit 10.1 to the Registrant’s Report on form 10-Q for the quarter ended March 31, 2011). |

| [removed: 10.26] [added: 10.27] | | Credit Agreement dated February 16, 2012, by and among the Registrant, as Borrower, CoStar Realty Information, Inc., as Co-Borrower, the Lenders from time to time party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent (Incorporated by reference to Exhibit 10.1 to the Registrant's Report on Form 10-Q for the quarter ended March 31, 2012). |

| [removed: 10.27] [added: 10.28] | | First Amendment dated as of April 25, 2012, to the Credit Agreement dated as of February 16, 2012, among the Registrant, CoStar Realty Information, Inc., the Lenders from time to time party thereto and JPMorgan Chase Bank N.A., as Administrative Agent (Incorporated by referenced to Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed April 30, 2012). |

| [removed: 101] [added: 101] | | The following materials from CoStar Group, Inc.’s Annual Report on Form 10-K for the year ended [removed: December, 2012,] [added: December 31, 2013,] formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Statement of Operations for the years ended December 31, [removed: 2010, 2011] [added: 2011, 2012] and [removed: 2012,] [added: 2013,] respectively; (ii) Consolidated Statements of Comprehensive Income for the years ended December 31, [removed: 2010, 2011] [added: 2011, 2012] and [removed: 2012,] [added: 2013,] respectively; (iii) Consolidated Balance Sheets at December 31, [removed: 2011] [added: 2012] and December 31, [removed: 2012,] [added: 2013,] respectively; [removed: (vi)] [added: (iv)] Consolidated Statements of Stockholders’ Equity for the years ended December 31, [removed: 2010, 2011] [added: 2011, 2012] and [removed: 2012,] [added: 2013,] respectively; [removed: (iv)] [added: (v)] Consolidated Statements of Cash Flows for [added: the] years ended December 31, [removed: 2010, 2011] [added: 2011, 2012] and [removed: 2012,] [added: 2013,] respectively; [removed: (v)] [added: (vi)] Notes to the Consolidated Financial Statements that have been detail tagged; and [removed: (vi)] [added: (vii)] Schedule II – Valuation and Qualifying Accounts (submitted electronically with this report). |

| Reports of Independent Registered Public Accounting Firm | [removed: [F-2](#sDC5E3EBB6E43C704192CC2E19CA96BEB)] [added: [F-2](#sDE1D7819C556725ABBA8FF4B7A30F753)] |

| Consolidated Statements of Operations for the years ended December 31, [removed: 2010, 2011 and] [added: 2011,] 2012 [added: and 2013] | [removed: [F-4](#s2C48429DB29CD2B25000C2E1919E7F80)] [added: [F-4](#s2DEB1F44C1B1E13EBC27FF4B56C90364)] |

| Consolidated Statements of Comprehensive Income for the years ended December 31, [removed: 2010, 2011 and] [added: 2011,] 2012 [added: and 2013] | [removed: [F-5](#s70C931B83EFD78120B7ED6C794BD00BE)] [added: [F-5](#s966A8CAEFC5D9B7E2026FF4B5717351F)] |

| Consolidated Balance Sheets as of December 31, [removed: 2011 and] 2012 [added: and 2013] | [removed: [F-6](#sB961206715709D5973EBC2E191B001E3)] [added: [F-6](#s3CC94A9B5B7EF1D3C1DFFF4B56F779C4)] |

| Consolidated Statements of Stockholders’ Equity for the years ended December 31, [removed: 2010, 2011 and] [added: 2011,] 2012 [added: and 2013] | [removed: [F-7](#s72DAB101BE737FA53B07C2E1919ADB23)] [added: [F-7](#sB4031CD45EF284FE97D5FF4B5736D4C0)] |

| Consolidated Statements of Cash Flows for the years ended December 31, [removed: 2010, 2011 and] [added: 2011,] 2012 [added: and 2013] | [removed: [F-8](#s80F87443A0D7D4414B4CC2E1919DA0FA)] [added: [F-8](#s69EF73FA91DAE8268836FF4B5726DEC3)] |

| Notes to Consolidated Financial Statements | [removed: [F-9](#sE1B2D62B8364039A5B13C2E19D81E43E)] [added: [F-9](#sEFB64F90AF60E14172C4FF4B7B597D4C)] |

The Board of Directors and [removed: Shareholders] [added: Stockholders] of CoStar Group, Inc.

| Year ended December 31, 2013 | | $ | 2,935 | | | $ | 2,317 | | | $ | — | | | $ | 1,855 | | | $ | 3,397 | |

| *10.8 | | Form of 2007 Plan Restricted Stock Unit Agreement between the Registrant and certain of its officers and employees (filed herewith). |

| *10.17 | | Summary of Non-Employee Director Compensation (Incorporated by reference to Exhibit 10.1 to the Registrant's Report on Form 10-Q for the quarter ended September 30, 2013). |

| *10.22 | | Separation Agreement and General Release dated October 6, 2013, between CoStar Realty Information, Inc. and Jennifer Kitchen (filed herewith). |

February 20, 2014

The Board of Directors and Stockholders of CoStar Group, Inc.

February 20, 2014

| Cash and cash equivalents | $ | 156,027 | | | $ | 255,953 | |

| Employee stock purchase plan | 8 | | | — | | | | 452 | | | | — | | | | — | | | | 452 | | |

| Employee stock purchase plan | 10 | | | — | | | | 749 | | | | — | | | | — | | | | 749 | | |

| Net decrease in unrealized loss on investments | — | | | — | | | | — | | | | 378 | | | | — | | | | 378 | | |

| Exercise of stock options | 409 | | | 3 | | | | 16,820 | | | | — | | | | — | | | | 16,823 | | |

| Employee stock purchase plan | 11 | | | — | | | | 1,455 | | | | — | | | | — | | | | 1,455 | | |

| Excess tax benefit from stock-based compensation | — | | | — | | | | 19,585 | | | | — | | | | — | | | | 19,585 | | |

| Balance at December 31, 2013 | 28,848 | | | $ | 288 | | | $ | 863,780 | | | $ | (5,530 | ) | | $ | 69,324 | | | $ | 927,862 | |

| Net income | $ | 14,656 | | | $ | 9,915 | | | $ | 29,734 | |

| Income taxes payable | 7,992 | | | | 7,598 | | | | 29,295 | | |

| Payments of deferred consideration | (2,100 | | ) | | — | | | | (1,344 | | ) |

December 31, 2013

| | 2012 | | | | 2013 | | |

There were no amounts reclassified out of accumulated other comprehensive loss to the consolidated statements of operations for the years ended December 31, 2011, 2012 and 2013, respectively.

In 2012, the Company granted performance-based restricted common stock awards that vest upon the Company's achievement of $90.0 million of cumulative net income before interest, income taxes, depreciation and amortization ("EBITDA") over a period of four consecutive calendar quarters if such performance is achieved by March 31, 2017, subject to certain approvals under the CoStar Group, Inc. 2007 Stock Incentive Plan.

As of December 31, 2013, the Company reassessed the probability of achieving this performance condition and determined that it was still probable that the performance condition for these awards would be met by the March 31, 2017 forfeiture date.

As a result, the Company recorded a total of approximately $21.8 million of stock-based compensation expense related to performance-based restricted common stock for the year ended December 31, 2013.

There was no stock-based compensation expense related to performance-based restricted common stock recorded for the years ended December 31, 2011 and December 31, 2012.

The Company expects to record additional estimated unrecognized stock-based compensation expense related to performance-based restricted common stock of approximately $2.1 million in 2014.

In February 2013, the FASB issued authoritative guidance to improve the reporting of reclassifications out of accumulated other comprehensive income.

This guidance requires a company to present, either on the consolidated statements of operations or in the notes to the consolidated financial statements, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income, but only if the amount reclassified is required under GAAP to be reclassified in its entirety to net income.

For other amounts that are not required under GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under GAAP that provide additional detail about those amounts.

| 3. | ACQUISITION |

| 3. | ACQUISITION — (CONTINUED) |

There were no acquisition-related costs recorded for the year ended December 31, 2013 related to the LoopNet acquisition.

Short-term investments consisted of government/federal notes and bonds with maturities greater than 90 days at the time of purchase.

Available-for-sale short-term investments with contractual maturities beyond one year were classified as current in the Company’s consolidated balance sheets because they represented the investment of cash that was available for current operations.

| 2015 — 2018 | | 853 | | |

| 2019 — 2023 | | — | | |

| 2024 and thereafter | | 21,137 | | |

| Auction rate securities | $ | 23,517 | | | $ | 411 | | | $ | (1,938 | ) | | $ | 21,990 | |

| Available-for-sale investments | $ | 23,517 | | | $ | 411 | | | $ | (1,938 | ) | | $ | 21,990 | |

| | 2012 | | | | | | | | 2013 | | | | | | |

| Year ended December 31, 2010 | | $ | 2,863 | | | $ | 1,471 | | | $ | — | | | $ | 1,919 | | | $ | 2,415 | |

| | |

| --- | --- |

| 10.24 | | Purchase and Sale Agreement by and between 1331 L Street Holdings, LLC and GLL L-Street 1331, LLC, dated February 2, 2011 (Incorporated by reference to Exhibit 10.1 to the Registrant’s Report on form 10-Q for the quarter ended March 31, 2011). |

| 10.25 | | Voting and Support Agreement, dated as of April 27, 2011, by and among the Registrant, LoopNet, Inc., the holders of Series A convertible preferred stock of LoopNet, Inc., certain executive officers and the directors of LoopNet, Inc. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on April 28, 2011). |

Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

COSTAR GROUP, INC.

These financial statements and schedule are the responsibility of the Company's management.

February 28, 2013

| | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- |

| Deferred rent | 16,592 | | | | 17,305 | | |

| Deferred income taxes, net | — | | | | 34,071 | | |

| Balance at December 31, 2009 | 20,617 | | | $ | 206 | | | $ | 364,635 | | | $ | (7,565 | ) | | $ | 1,730 | | | $ | 359,006 | |

| Exercise of stock options | 138 | | | 2 | | | | 3,720 | | | | — | | | | — | | | | 3,722 | | |

| ESPP | 8 | | | — | | | | 360 | | | | — | | | | — | | | | 360 | | |

| Excess tax benefit for exercised stock options | — | | | — | | | | 902 | | | | — | | | | — | | | | 902 | | |

| Net change in unrealized gain on investments | — | | | — | | | | — | | | | 113 | | | | — | | | | 113 | | |

| ESPP | 8 | | | — | | | | 452 | | | | — | | | | — | | | | 452 | | |

| ESPP | 10 | | | — | | | | 749 | | | | — | | | | — | | | | 749 | | |

| Interest receivable | 70 | | | | 4 | | | | 33 | | |

| Income taxes payable | (4,994 | | ) | | 5,451 | | | | 7,400 | | |

| Cash and cash equivalents at beginning of year | 205,786 | | | | 206,405 | | | | 545,280 | | |

Significant Customers

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)

| | Year Ended December 31, | | | | | | |

| Building | | Thirty-nine years |

Goodwill, Intangibles and Other Assets — (Continued)

In June 2011, the FASB issued authoritative guidance to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income.

This guidance requires changes in stockholders’ equity to be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements.

Under the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present the components of other comprehensive income, total other comprehensive income and the total of comprehensive income.

| 3. | ACQUISITIONS |

Virtual Premise, Inc.

On October 25, 2011, the Company acquired Virtual Premise, Inc. (“Virtual Premise”), a Software as a Service (“SaaS”) provider of real estate and lease management solutions.

Pursuant to the terms of the acquisition agreement, the Company paid approximately $17.2 million in cash, approximately 80% of which was paid on the closing date and the remaining 20% of which was held in escrow for approximately 270 days after the closing date.

The funds held in escrow were subject to the prior use of such funds to satisfy any post-closing net working capital adjustments or indemnification claims made prior to the date the funds were released.

The purchase price was reduced by approximately $200,000 after taking into account post-closing purchase price adjustments and this amount was paid to the Company from the escrow fund on March 1, 2012.

The remaining escrowed funds were released to the former Virtual Premise stockholders on July 23, 2012.

The purchase price for the Virtual Premise acquisition was allocated as follows (in thousands):

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