Item 15. Exhibits and Financial Statement Schedules

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Item 15. Exhibits and Financial Statement Schedules

(a)(1) The following financial statements are filed as a part of this report: CoStar Group, Inc. Consolidated Financial Statements.

(a)(2) Financial statement schedules:

Schedule II – Valuation and Qualifying Accounts

Years Ended December 31, 2011, 2012, and 2013 (in thousands):



Allowance for doubtful accounts and billing adjustments (1)	Balance at Beginning of Year		Charged to Expense		Charged to Other Accounts (2)		Write-offs, Net of Recoveries		Balance at End of Year
Year ended December 31, 2011	$	2,415	$	1,525	$	—	$	1,416	$	2,524
Year ended December 31, 2012	$	2,524	$	1,456	$	475	$	1,520	$	2,935
Year ended December 31, 2013	$	2,935	$	2,317	$	—	$	1,855	$	3,397


(1)	Additions to the allowance for doubtful accounts are charged to bad debt expense.


(2)	Amounts represent opening balances from acquired businesses.

Additional financial statement schedules are omitted because they are not applicable or not required or because the required information is incorporated herein by reference or included in the financial statements or related notes included elsewhere in this report.

(a)(3) The documents required to be filed as exhibits to this Report under Item 601 of Regulation S-K are listed in the Exhibit Index included elsewhere in this report, which list is incorporated herein by reference.

SIGNATURES

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



	COSTAR GROUP, INC.

	By:	/s/ Andrew C. Florance
		Andrew C. Florance
		President and Chief Executive Officer

KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature appears below constitutes and appoints Andrew C. Florance and Brian J. Radecki, and each of them individually, as their true and lawful attorneys-in-fact and agents, with full power of substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this report, and to file the same, with all exhibits thereto and to all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, herein by ratifying and confirming all that said attorneys-in-fact and agents or any of them, or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1934, as amended, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.



Signature	Capacity	Date


/s/ Michael R. Klein	Chairman of the Board	February 20, 2014
Michael R. Klein

/s/ Andrew C. Florance	Chief Executive Officer and	February 20, 2014
Andrew C. Florance	President and a Director
	(Principal Executive Officer)

/s/ Brian J. Radecki	Chief Financial Officer	February 20, 2014
Brian J. Radecki	(Principal Financial and Accounting Officer)

/s/ David Bonderman	Director	February 20, 2014
David Bonderman

/s/ Michael J. Glosserman	Director	February 20, 2014
Michael J. Glosserman

/s/ Warren H. Haber	Director	February 18, 2014
Warren H. Haber

/s/ John W. Hill	Director	February 19, 2014
John W. Hill

/s/ Christopher J. Nassetta	Director	February 17, 2014
Christopher J. Nassetta

/s/ David J. Steinberg	Director	February 17, 2014
David J. Steinberg

INDEX TO EXHIBITS



Exhibit No.		Description

2.1		Agreement and Plan of Merger, dated as of April 27, 2011, by and among CoStar Group, Inc., Lonestar Acquisition Sub, Inc. and LoopNet, Inc. (Incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on April 28, 2011).
2.2		Amendment No. 1 to the Agreement and Plan of Merger, dated as of May 20, 2011, among LoopNet, Inc., the Registrant and Lonestar Acquisition Sub, Inc. (Incorporated by referenced to Exhibit 2.1 to Registrant’s Current Report on Form 8-K filed May 23, 2011).
3.1		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 6, 2013).
3.2		Third Amended and Restated By-Laws (Incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on September 24, 2013).
4.1		Specimen Common Stock Certificate (Incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-4 of the Registrant (Reg. No. 333-174214) filed with the Commission on June 3, 2011).
*10.1		CoStar Group, Inc. 1998 Stock Incentive Plan, as amended (Incorporated by reference to Exhibit 10.1 to the Registrant’s Report on Form 10-Q for the quarter ended September 30, 2005).
*10.2		CoStar Group, Inc. 2007 Stock Incentive Plan, as amended (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed June 8, 2012).
*10.3		CoStar Group, Inc. 2007 Stock Incentive Plan French Sub-Plan (Incorporated by reference to Exhibit 10.3 to the Registrant’s Report on Form 10-K for the year ended December 31, 2007).
*10.4		Form of Stock Option Agreement between the Registrant and certain of its officers, directors and employees (Incorporated by reference to Exhibit 10.8 to the Registrant’s Report on Form 10-K for the year ended December 31, 2004).
*10.5		Form of Stock Option Agreement between the Registrant and Andrew C. Florance (Incorporated by reference to Exhibit 10.8.1 to the Registrant’s Report on Form 10-K for the year ended December 31, 2004).
*10.6		Form of Restricted Stock Agreement between the Registrant and certain of its officers, directors and employees (Incorporated by reference to Exhibit 10.9 to the Registrant’s Report on Form 10-K for the year ended December 31, 2004).
*10.7		Form of 2007 Plan Restricted Stock Grant Agreement between the Registrant and certain of its officers, directors and employees (Incorporated by reference to Exhibit 99.1 to the Registrant’s Report on Form 8-K filed June 22, 2007).
*10.8		Form of 2007 Plan Restricted Stock Unit Agreement between the Registrant and certain of its officers and employees (filed herewith).
*10.9		Form of 2007 Plan Incentive Stock Option Grant Agreement between the Registrant and 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).
*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).
*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).
*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).
*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).
*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).
*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).
*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).
*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).

INDEX TO EXHIBITS — (CONTINUED)



Exhibit No.		Description
*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).
*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).
*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).
*10.21		Leaving Agreement dated February 27, 2013, between CoStar U.K. Limited and Paul Marples (Incorporated by reference to Exhibit 10.19 to the Registrant's Report on Form 10-K for the year ended December 31, 2012).
*10.22		Separation Agreement and General Release dated October 6, 2013, between CoStar Realty Information, Inc. and Jennifer Kitchen (filed herewith).
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).
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).
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).
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).
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).
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).
21.1		Subsidiaries of the Registrant (filed herewith).
23.1		Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm (filed herewith).
31.1		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
31.2		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32.1		Certification of Principal Executive Officer pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32.2		Certification of Principal Financial Officer pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
101		The following materials from CoStar Group, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2013, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Statement of Operations for the years ended December 31, 2011, 2012 and 2013, respectively; (ii) Consolidated Statements of Comprehensive Income for the years ended December 31, 2011, 2012 and 2013, respectively; (iii) Consolidated Balance Sheets at December 31, 2012 and December 31, 2013, respectively; (iv) Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2011, 2012 and 2013, respectively; (v) Consolidated Statements of Cash Flows for the years ended December 31, 2011, 2012 and 2013, respectively; (vi) Notes to the Consolidated Financial Statements that have been detail tagged; and (vii) Schedule II – Valuation and Qualifying Accounts (submitted electronically with this report).

Management Contract or Compensatory Plan or Arrangement.

COSTAR GROUP, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



Reports of Independent Registered Public Accounting Firm	F-2
Consolidated Statements of Operations for the years ended December 31, 2011, 2012 and 2013	F-4
Consolidated Statements of Comprehensive Income for the years ended December 31, 2011, 2012 and 2013	F-5
Consolidated Balance Sheets as of December 31, 2012 and 2013	F-6
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2011, 2012 and 2013	F-7
Consolidated Statements of Cash Flows for the years ended December 31, 2011, 2012 and 2013	F-8
Notes to Consolidated Financial Statements	F-9

F-1

Report of Independent Registered Public Accounting Firm

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

We have audited the accompanying consolidated balance sheets of CoStar Group, Inc. as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2013. Our audits also included the financial statement schedule listed in the Index at Item 15(a).These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of CoStar Group, Inc. at December 31, 2013 and 2012, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), CoStar Group, Inc.'s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) and our report dated February 20, 2014 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

McLean, Virginia

February 20, 2014

F-2

Report of Independent Registered Public Accounting Firm

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

We have audited CoStar Group, Inc.’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) (the COSO criteria). CoStar Group, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, CoStar Group, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of CoStar Group, Inc. as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2013 and our report dated February 20, 2014 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

McLean, Virginia

February 20, 2014

F-3

COSTAR GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)



	Year Ended December 31,
	2011		2012			2013

Revenues	$	251,738	$	349,936		$	440,943
Cost of revenues	88,167		114,866			129,185
Gross margin	163,571		235,070			311,758

Operating expenses:
Selling and marketing	61,164		84,113			98,708
Software development	20,037		32,756			46,757
General and administrative	58,362		77,154			96,956
Purchase amortization	2,237		13,607			15,183
	141,800		207,630			257,604
Income from operations	21,771		27,440			54,154
Interest and other income	798		526			326
Interest and other expense	—		(4,832		)	(6,943		)
Income before income taxes	22,569		23,134			47,537
Income tax expense, net	7,913		13,219			17,803
Net income	$	14,656	$	9,915		$	29,734

Net income per share — basic	$	0.63	$	0.37		$	1.07
Net income per share — diluted	$	0.62	$	0.37		$	1.05

Weighted average outstanding shares — basic	23,131		26,533			27,670
Weighted average outstanding shares — diluted	23,527		26,949			28,212

See accompanying notes.

F-4

COSTAR GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)



	Year Ended December 31,
	2011		2012		2013
Net income	$	14,656	$	9,915	$	29,734
Other comprehensive income, net of tax
Foreign currency translation adjustment	25		1,277		610
Net decrease in unrealized loss on investments	113		773		378
Total other comprehensive income	138		2,050		988
Total comprehensive income	$	14,794	$	11,965	$	30,722

See accompanying notes.

F-5

COSTAR GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)



	December 31,
	2012			2013
ASSETS
Current assets:
Cash and cash equivalents	$	156,027		$	255,953
Short-term investments	37			—
Accounts receivable, less allowance for doubtful accounts of approximately $2,935 and $3,397 as of December 31, 2012 and 2013, respectively	16,392			20,761
Deferred income taxes, net	9,256			22,506
Income tax receivable	5,357			—
Prepaid expenses and other current assets	9,560			6,597
Debt issuance costs, net	2,934			2,649
Total current assets	199,563			308,466

Long-term investments	21,662			21,990
Property and equipment, net	46,308			57,719
Goodwill	718,078			718,587
Intangibles and other assets, net	170,632			144,472
Deposits and other assets	2,274			1,855
Debt issuance costs, net	6,622			3,893
Total assets	$	1,165,139		$	1,256,982
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	17,500		$	24,063
Accounts payable	6,234			4,939
Accrued wages and commissions	23,831			20,104
Accrued expenses	19,002			23,200
Deferred gain on the sale of building	2,523			2,523
Income taxes payable	—			2,362
Deferred revenue	32,548			34,362
Total current liabilities	101,638			111,553

Long-term debt, less current portion	153,125			129,062
Deferred gain on the sale of building	28,809			26,286
Deferred rent	17,305			22,828
Deferred income taxes, net	34,071			34,582
Income taxes payable	2,818			4,809
Other long-term liabilities	1,030			—
Total liabilities	338,796			329,120

Commitments and contingencies

Stockholders’ equity:
Preferred stock, $0.01 par value; 2,000 shares authorized; none outstanding	—			—
Common stock, $0.01 par value; 60,000 shares authorized; 28,348 and 28,848 issued and outstanding as of December 31, 2012 and 2013, respectively	283			288
Additional paid-in capital	792,988			863,780
Accumulated other comprehensive loss	(6,518		)	(5,530		)
Retained earnings	39,590			69,324
Total stockholders’ equity	826,343			927,862
Total liabilities and stockholders’ equity	$	1,165,139		$	1,256,982

See accompanying notes.

F-6

COSTAR GROUP, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)



	Common Stock				Additional Paid-In Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings		Total Stockholders’ Equity
	Shares		Amount
Balance at December 31, 2010	20,773		$	208	$	374,981		$	(8,706	)	$	15,019	$	381,502
Net income	—		—		—			—			14,656		14,656
Foreign currency translation adjustment	—		—		—			25			—		25
Net decrease in unrealized loss on investments	—		—		—			113			—		113
Exercise of stock options	198		2		6,212			—			—		6,214
Restricted stock grants	197		1		—			—			—		1
Restricted stock grants surrendered	(63	)	—		(2,307		)	—			—		(2,307		)
Stock compensation expense, net of forfeitures	—		—		8,056			—			—		8,056
Stock issued for equity offering	4,313		43		247,881			—			—		247,924
Employee stock purchase plan	8		—		452			—			—		452
Excess tax benefit from stock-based compensation	—		—		2,541			—			—		2,541
Balance at December 31, 2011	25,426		254		637,816			(8,568		)	29,675		659,177
Net income	—		—		—			—			9,915		9,915
Foreign currency translation adjustment	—		—		—			1,277			—		1,277
Net decrease in unrealized loss on investments	—		—		—			773			—		773
Exercise of stock options	273		2		9,194			—			—		9,196
Restricted stock grants	855		8		(8		)	—			—		—
Restricted stock grants surrendered	(96	)	—		(4,204		)	—			—		(4,204		)
Stock compensation expense, net of forfeitures	—		—		12,207			—			—		12,207
Employee stock purchase plan	10		—		749			—			—		749
Consideration for LoopNet, Inc.	1,880		19		137,036			—			—		137,055
Excess tax benefit from stock-based compensation	—		—		198			—			—		198
Balance at December 31, 2012	28,348		283		792,988			(6,518		)	39,590		826,343
Net income	—		—		—			—			29,734		29,734
Foreign currency translation adjustment	—		—		—			610			—		610
Net decrease in unrealized loss on investments	—		—		—			378			—		378
Exercise of stock options	409		3		16,820			—			—		16,823
Restricted stock grants	238		2		(2		)	—			—		—
Restricted stock grants surrendered	(158	)	—		(8,469		)	—			—		(8,469		)
Stock compensation expense, net of forfeitures	—		—		41,403			—			—		41,403
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

See accompanying notes.

F-7

COSTAR GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



	Year Ended December 31,
	2011			2012			2013
Operating activities:
Net income	$	14,656		$	9,915		$	29,734
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	8,435			10,053			12,495
Amortization	4,417			22,699			27,563
Amortization of debt issuance costs	—			1,989			3,014
Property and equipment write-off	628			122			104
Excess tax benefit from stock-based compensation	(2,541		)	(198		)	(19,585		)
Stock-based compensation expense	8,103			12,282			41,549
Deferred consideration settlement	(1,207		)	—			—
Deferred income tax expense (benefit), net	(17,104		)	13,643			(12,740		)
Provision for losses on accounts receivable	1,525			1,456			2,317
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable	(4,573		)	1,295			(6,607		)
Income taxes payable	7,992			7,598			29,295
Prepaid expenses and other current assets	1,046			(3,316		)	2,934
Deposits and other assets	(154		)	1,172			399
Accounts payable and other liabilities	2,228			1,629			(3,882		)
Deferred revenue	4,334			5,787			1,708
Net cash provided by operating activities	27,785			86,126			108,298

Investing activities:
Proceeds from sale and settlement of investments	4,911			15,365			76
Proceeds from sale of building, net	83,553			—			—
Purchases of property and equipment and other assets	(15,013		)	(14,834		)	(19,042		)
Acquisitions, net of cash acquired	(15,085		)	(640,929		)	—
Net cash provided by (used in) investing activities	58,366			(640,398		)	(18,966		)

Financing activities:
Proceeds from long-term debt	—			175,000			—
Payments of long-term debt	—			(4,375		)	(17,500		)
Payments of debt issuance costs	—			(11,546		)	—
Payments of deferred consideration	(2,100		)	—			(1,344		)
Excess tax benefit from stock-based compensation	2,541			198			19,585
Repurchase of restricted stock to satisfy tax withholding obligations	(2,307		)	(4,204		)	(8,469		)
Proceeds from equity offering, net of transaction costs	247,924			—			—
Proceeds from exercise of stock options and employee stock purchase plan	6,622			9,868			18,133
Net cash provided by financing activities	252,680			164,941			10,405

Effect of foreign currency exchange rates on cash and cash equivalents	44			78			189
Net increase (decrease) in cash and cash equivalents	338,875			(389,253		)	99,926
Cash and cash equivalents at beginning of year	206,405			545,280			156,027
Cash and cash equivalents at end of year	$	545,280		$	156,027		$	255,953

See accompanying notes.

F-8

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2013


1.	ORGANIZATION

CoStar Group, Inc. (the “Company” or “CoStar”) provides information, analytics and marketing services to the commercial real estate and related business community through its comprehensive, proprietary database of commercial real estate information covering the United States (“U.S.”) and parts of the United Kingdom ("U.K.") and France, as well as its complementary online marketplace of commercial real estate listings. The Company operates within two operating segments, U.S. and International, and its services are typically distributed to its clients under subscription-based license agreements that renew automatically, a majority of which have a term of one year.


2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Accounting policies are consistent for each operating segment.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Reclassifications

Certain previously reported amounts in the consolidated statements of cash flows have been reclassified to conform to the Company’s current presentation.

Revenue Recognition

The Company primarily derives revenues by providing access to its proprietary database of commercial real estate information. The Company generally charges a fixed monthly amount for its subscription-based services. Subscription contract rates are based on the number of sites, number of users, organization size, the client’s business focus, geography and the number of services to which a client subscribes. A majority of the subscription-based license agreements typically have a term of one year and renew automatically.

Revenue is recognized when (1) there is persuasive evidence of an arrangement, (2) the fee is fixed and determinable, (3) services have been rendered and payment has been contractually earned and (4) collectability is reasonably assured.

Revenues from subscription-based services are recognized on a straight-line basis over the term of the agreement. Deferred revenue results from advance cash receipts from customers or amounts billed in advance to customers from the sales of subscription licenses and is recognized over the term of the license agreement.

Cost of Revenues

Cost of revenues principally consists of salaries and related expenses for the Company’s researchers who collect and analyze the commercial real estate data that is the basis for the Company’s information, analytics and marketing services. Additionally, cost of revenues includes the cost of data from third party data sources, credit card and other transaction fees relating to processing customer transactions, which are expensed as incurred, and the amortization of acquired trade names and database technology.

F-9

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)


2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (CONTINUED)

Foreign Currency Translation

The Company’s functional currency in its foreign locations is the local currency. Assets and liabilities are translated into U.S. dollars as of the balance sheet dates. Revenues, expenses, gains and losses are translated at the average exchange rates in effect during each period. Gains and losses resulting from translation are included in accumulated other comprehensive income (loss). Net gains or losses resulting from foreign currency exchange transactions are included in the consolidated statements of operations. There were no material gains or losses from foreign currency exchange transactions for the years ended December 31, 2011, 2012 and 2013.

Accumulated Other Comprehensive Loss

The components of accumulated other comprehensive loss were as follows (in thousands):



	Year Ended December 31,
	2012			2013
Foreign currency translation adjustment	$	(4,613	)	$	(4,003	)
Accumulated net unrealized loss on investments, net of tax	(1,905		)	(1,527		)
Total accumulated other comprehensive loss	$	(6,518	)	$	(5,530	)

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.

Advertising Costs

The Company expenses advertising costs as incurred. E-commerce advertising expenses were approximately $2.5 million, $4.4 million and $5.7 million for the years ended December 31, 2011, 2012 and 2013, respectively.

Income Taxes

Deferred income taxes result from temporary differences between the tax basis of assets and liabilities and the basis reported in the Company’s consolidated financial statements. Deferred tax liabilities and assets are determined based on the difference between the financial statement and the tax basis of assets and liabilities using enacted rates expected to be in effect during the year in which the differences reverse. Valuation allowances are provided against assets, including net operating losses, if it is anticipated that some or all of an asset may not be realized through future taxable earnings or implementation of tax planning strategies. Interest and penalties related to income tax matters are recognized in income tax expense.

Net Income Per Share

Net income per share is computed by dividing net income by the weighted average number of common shares outstanding during the period on a basic and diluted basis. The Company’s potentially dilutive securities include stock options and restricted stock. Diluted net income per share considers the impact of potentially dilutive securities except in periods in which there is a net loss, as the inclusion of the potentially dilutive common shares would have an anti-dilutive effect.

Stock-Based Compensation

Equity instruments issued in exchange for employee services are accounted for using a fair-value based method and the fair value of such equity instruments is recognized as expense in the consolidated statements of operations.

F-10

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)


2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (CONTINUED)

Stock-Based Compensation — (Continued)

Stock-based compensation expense is measured at the grant date of the stock-based awards that vest over set time periods based on their fair values, and is recognized on a straight line basis as expense over the vesting periods of the awards, net of an estimated forfeiture rate. For equity instruments that vest based on performance, the Company assesses the probability of the achievement of the performance conditions at the end of each reporting period, or more frequently based upon the occurrence of events that may change the probability of whether the performance conditions would be met. If the Company's initial estimates of the achievement of the performance conditions change, the related stock-based compensation expense and timing of recognition may fluctuate from period to period based on those estimates. If the performance conditions are not met, no stock-based compensation expense will be recognized and any previously recognized stock-based compensation expense will be reversed.

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 March 31, 2013, the Company initially determined that it was probable that the performance condition for these performance-based restricted common stock awards would be met by the March 31, 2017 forfeiture date. 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.

Cash flows resulting from excess tax benefits are classified as part of cash flows from operating and financing activities. Excess tax benefits represent tax benefits related to stock-based compensation in excess of the associated deferred tax asset for such equity compensation. Net cash proceeds from the exercise of stock options and the purchase of shares under the Employee Stock Purchase Plan (“ESPP”) were approximately $6.6 million, $9.9 million and $18.1 million for the years ended December 31, 2011, 2012 and 2013, respectively. There were approximately $2.5 million, $198,000 and $19.6 million of excess tax benefits realized from stock options exercised and restricted stock awards vested for the years ended December 31, 2011, 2012 and 2013, respectively.

Stock-based compensation expense for stock options and restricted stock issued under equity incentive plans and stock purchases under the ESPP included in the Company's results of operations were as follows (in thousands):



	Year Ended December 31,
	2011		2012		2013
Cost of revenues	$	1,635	$	2,556	$	4,553
Selling and marketing	1,339		1,966		4,954
Software development	1,130		2,241		7,244
General and administrative	3,999		5,519		24,798
Total stock-based compensation	$	8,103	$	12,282	$	41,549

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash equivalents consist of money market fund investments and commercial paper. As of December 31, 2012 and 2013, cash of approximately $0 and $105,000, respectively, was held to support letters of credit for security deposits.

F-11

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)


2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (CONTINUED)

Investments

The Company determines the appropriate classification of debt and equity investments at the time of purchase and re-evaluates such designation as of each balance sheet date. The Company considers all of its investments to be available-for-sale. Short-term investments 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 is available for current operations. Long-term investments consist of variable rate debt instruments with an auction reset feature, referred to as auction rate securities (“ARS”). Investments are carried at fair value.

Concentration of Credit Risk and Financial Instruments

The Company performs ongoing credit evaluations of its customers’ financial condition and generally does not require that its customers’ obligations to the Company be secured. The Company maintains reserves for estimated inherent credit losses, and such losses have been within management’s expectations. The large size and widespread nature of the Company’s customer base and the Company’s lack of dependence on any individual customer mitigates the risk of nonpayment of the Company’s accounts receivable. No single customer accounted for more than 5% of the Company’s revenues for each of the years ended December 31, 2011, 2012 and 2013. The carrying amount of the accounts receivable approximates the net realizable value. The carrying value of the accounts receivable, accounts payable, accrued expenses and long-term debt approximates fair value.

Accounts Receivable, Net of Allowance for Doubtful Accounts

Accounts receivable are recorded at the invoiced amount. Accounts receivable payment terms vary and amounts due from customers are stated in the financial statements net of an allowance for doubtful accounts. The allowance for doubtful accounts is based on the Company’s assessment of the collectability of customer accounts. The Company regularly reviews the allowance by considering factors such as historical experience, the aging of the balances, and current economic conditions that may affect a customer’s ability to pay.

Property and Equipment

Property and equipment are stated at cost. All repairs and maintenance costs are expensed as incurred. Depreciation and amortization are calculated on a straight-line basis over the following estimated useful lives of the assets:



Leasehold improvements		Shorter of lease term or useful life
Furniture and office equipment		Five to ten years
Research vehicles		Five years
Computer hardware and software		Two to five years

Qualifying internal-use software costs incurred during the application development stage, which consists primarily of outside services, purchased software license costs and internal product development costs are capitalized and amortized over the estimated useful life of the asset. All other costs are expensed as incurred.

F-12

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)


2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (CONTINUED)

Goodwill, Intangibles and Other Assets

Goodwill represents the excess of costs over the fair value of assets of acquired businesses. Goodwill and intangible assets acquired in a business combination and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually by reporting unit. The Company’s operating segments, U.S. and International, are the reporting units tested for potential impairment. To determine whether it is necessary to perform the two-step goodwill impairment test, the Company may first assess qualitative factors to evaluate whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the Company concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount or if the Company elects not to assess qualitative factors, then the Company performs the two-step process. The first step is to determine the fair value of each reporting unit. The estimate of the fair value of each reporting unit is based on a projected discounted cash flow model that includes significant assumptions and estimates including the Company's discount rate, growth rate and future financial performance. Assumptions about the discount rate are based on a weighted average cost of capital for comparable companies. Assumptions about the growth rate and future financial performance of a reporting unit are based on the Company's forecasts, business plans, economic projections and anticipated future cash flows. The fair value of each reporting unit is compared to the carrying amount of the reporting unit. If the carrying value of the reporting unit exceeds the fair value, then the second step of the process is performed to measure the impairment loss. The impairment loss is measured based on a projected discounted cash flow method using a discount rate determined by the Company’s management to be commensurate with the risk in its current business model.

To determine whether it is necessary to perform the quantitative impairment test for indefinite-lived intangible assets, the Company may first assess qualitative factors to evaluate whether it is more likely than not that the fair value of the indefinite-lived intangible assets is less than the carrying amount. If the Company concludes that it is more likely than not that the fair value of the indefinite-lived intangible assets is less than the carrying amount or if the Company elects not to assess qualitative factors, then the Company performs the quantitative impairment test similar to the test performed on goodwill discussed above.

Intangible assets with estimable useful lives that arose from acquisitions on or after July 1, 2001 are amortized over their respective estimated useful lives using a method of amortization that reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise used up, and are reviewed at least annually for impairment.

Acquired database technology, customer base and trade names and other are related to the Company’s acquisitions (see Notes 3, 7 and 8). With the exception of the acquired trade name recorded in connection with the acquisition of LoopNet, acquired database technology and trade names and other are amortized on a straight-line basis over periods ranging from two to ten years. The acquired trade name recorded in connection with the LoopNet acquisition has an indefinite estimated useful life and is not amortized, but is subject to annual impairment tests. The acquired intangible asset characterized as customer base consists of one distinct intangible asset composed of acquired customer contracts and the related customer relationships. Acquired customer bases are typically amortized on an accelerated basis related to the expected economic benefit of the intangible asset. The cost of capitalized building photography is amortized on a straight-line basis over five years.

Long-Lived Assets

Long-lived assets, such as property, plant, and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset or asset group. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset.

Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and would no longer be depreciated. The assets and liabilities of a disposal group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet.

F-13

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)


2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (CONTINUED)

Capitalized Product Development Costs

Product development costs are expensed as incurred until technological feasibility has been established, at which time such costs are capitalized. Costs are capitalized, to the extent that the capitalizable costs do not exceed the realizable value of such costs, until the product is available for general release to customers. The Company defines the establishment of technological feasibility as the completion of all planning, designing, coding and testing activities that are necessary to establish products that meet design specifications including functions, features and technical performance requirements. The Company’s capitalized product development costs had a total net book value of approximately $302,000 and $111,000 as of December 31, 2012 and 2013, respectively. These capitalized product development costs are included in intangible and other assets in the Company’s consolidated balance sheets. Amortization is computed using a straight-line method over the remaining estimated economic life of the product, typically three to five years after the software is ready for its intended use. The Company amortized capitalized product development costs of approximately $80,000, $191,000 and $191,000 for the years ended December 31, 2011, 2012 and 2013, respectively.

Debt Issuance Costs

Costs incurred in connection with the issuance of long-term debt are capitalized and amortized as interest expense over the term of the related debt using the effective interest method. The Company had capitalized debt issuance costs of approximately $9.6 million and $6.5 million as of December 31, 2012 and 2013, respectively. The debt issuance costs are associated with the financing commitment received from JPMorgan Chase Bank, N.A. (“J.P. Morgan Bank”) on April 27, 2011 and the subsequent term loan facility and revolving credit facility established under a credit agreement dated February 16, 2012 (the “Credit Agreement”). See Note 9 for additional information regarding the financing commitment with J.P. Morgan Bank and the Credit Agreement. No amortization expense for debt issuance costs was recognized by the Company for the year ended December 31, 2011. The Company amortized debt issuance costs of approximately $2.0 million and $3.0 million for the years ended December 31, 2012 and 2013, respectively.

Recent Accounting Pronouncements

In July 2012, the Financial Accounting Standards Board ("FASB") issued authoritative guidance to simplify how companies test indefinite-lived intangible assets for impairment. The guidance permits a company to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test. This guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. This guidance did not have a material impact on the Company's results of operations or financial position.

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. This guidance is effective prospectively for financial statements issued for interim and annual periods beginning after December 15, 2012. This guidance did not have a material impact on the Company's results of operations or financial position, but the Company provided additional disclosures in its financial statements.

There are no accounting pronouncements that have been recently issued but not yet adopted by the Company that would have a material impact on the Company’s results of operations or financial position.

F-14

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)


3.	ACQUISITION

On April 30, 2012, the Company acquired 100% of the outstanding stock of LoopNet pursuant to an Agreement and Plan of Merger dated April 27, 2011, as amended May 20, 2011 (the “Merger Agreement”). LoopNet owns and operates an online marketplace for commercial real estate in the U.S. The online marketplace enables commercial real estate agents, working on behalf of property owners and landlords, to list properties for sale or for lease and submit detailed information on property listings to find a buyer or tenant. The acquisition combines the research capabilities of the Company with the marketing solutions offered by LoopNet to create efficiencies in operations and provide more opportunities for the combined company's customers.

The following table summarizes the consideration paid for LoopNet (in thousands except share and per share data):



Cash	$	746,393
Equity interest (1,880,300 shares at $72.89)	137,055
Fair value of total consideration transferred	$	883,448

The Company has applied the acquisition method to account for the LoopNet transaction, which requires that, among other things, assets acquired and liabilities assumed be recorded at their fair values as of the acquisition date. The following table summarizes the amounts for acquired assets and liabilities recorded at their fair values as of the acquisition date (in thousands):



Cash and cash equivalents	$	105,464
Accounts receivable	3,021
Goodwill	625,174
Acquired trade names and other	48,700
Acquired customer base	71,500
Acquired database technology	52,100
Deferred income taxes, net	(32,623		)
Other assets and liabilities	10,112
Fair value of identifiable net assets acquired	$	883,448

The net assets of LoopNet were recorded at their estimated fair value. In valuing acquired assets and liabilities, fair value estimates are based on, but are not limited to, future expected cash flows, expected holding period of investments, market rate assumptions for contractual obligations, and appropriate discount rates.

The acquired customer base for the acquisition consists of one distinct intangible asset, is composed of acquired customer contracts and the related customer relationships, and has an estimated useful life of 10 years. The acquired database technology has an estimated useful life of 5 years and the acquired trade names have an indefinite estimated useful life. Amortization of the acquired customer base is recognized on an accelerated basis related to the expected economic benefit of the intangible asset, while amortization of the acquired database technology is recognized on a straight-line basis over the estimated useful life. The acquired trade names recorded in connection with this acquisition are not amortized, but are subject to annual impairment tests.

Goodwill recorded in connection with this acquisition is not amortized, but is subject to annual impairment tests. The $625.2 million of goodwill recorded as part of the acquisition is associated with the Company's U.S. operating segment. None of the goodwill recognized is deductible for income tax purposes.

Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Specifically, the goodwill recorded as part of the LoopNet acquisition includes: (i) the expected synergies and other benefits that the Company believes will result from combining its operations with LoopNet's operations; and (ii) any intangible assets that do not qualify for separate recognition, such as the assembled workforce.

F-15

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)


3.	ACQUISITION — (CONTINUED)

As a result of the LoopNet acquisition, the Company recorded approximately $14.2 million and $5.2 million in acquisition-related costs for the years ended December 31, 2011 and 2012, respectively. These costs were directly related to acquiring LoopNet and were expensed as incurred and recorded in general and administrative expense. There were no acquisition-related costs recorded for the year ended December 31, 2013 related to the LoopNet acquisition.

Prior to completion of the LoopNet acquisition, on April 26, 2012, the Federal Trade Commission (the “FTC”) accepted a consent order in connection with the LoopNet merger that was previously agreed to by the Company and LoopNet. 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, required, among other things, that the Company and LoopNet divest LoopNet's minority interest in Xceligent. On March 28, 2012, the Company and LoopNet entered into an agreement to sell LoopNet's interest in Xceligent to DMG Information (“DMGI”). The parties closed the sale of LoopNet's interest in Xceligent to DMGI on May 3, 2012. The Company received $4.2 million in proceeds from the sale, which reflected the fair value of the investment at the time of sale and resulted in no gain on the sale of the investment.


4.	INVESTMENTS

The Company determines the appropriate classification of debt and equity investments at the time of purchase and re-evaluates such designation as of each balance sheet date. The Company considers all of its investments to be available-for-sale. Short-term investments 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. Long-term investments consist of variable rate debt instruments with an auction reset feature, referred to as ARS. Investments are carried at fair market value.

Scheduled maturities of investments classified as available-for-sale as of December 31, 2013 are as follows (in thousands):



Maturity	Fair Value
Due in:
2014	$	—
2015 — 2018	853
2019 — 2023	—
2024 and thereafter	21,137
Available-for-sale investments	$	21,990

The Company had no realized gains on its investments for the years ended December 31, 2011, 2012 and 2013, respectively. The Company had no realized losses on its investments for the years ended December 31, 2011, 2012 and 2013, respectively. Realized gains and losses from the sale of available-for-sale securities are determined on a specific-identification basis.

Changes in unrealized holding gains and losses, net of the related tax effect, on available-for-sale securities are excluded from earnings and are reported as a separate component of accumulated other comprehensive income (loss) in stockholders’ equity until realized. A decline in market value of any available-for-sale security below cost that is deemed to be other-than-temporary results in a reduction in carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established. Dividend and interest income are recognized when earned.

As of December 31, 2013, the amortized cost basis and fair value of investments classified as available-for-sale were as follows (in thousands):



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Auction rate securities	$	23,517	$	411	$	(1,938	)	$	21,990
Available-for-sale investments	$	23,517	$	411	$	(1,938	)	$	21,990

F-16

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)


4.	INVESTMENTS — (CONTINUED)

As of December 31, 2012, the amortized cost basis and fair value of investments classified as available-for-sale were as follows (in thousands):



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Government-sponsored enterprise obligations	$	37	$	—	$	—		$	37
Auction rate securities	23,567		101		(2,006		)	21,662
Available-for-sale investments	$	23,604	$	101	$	(2,006	)	$	21,699

The unrealized losses on the Company’s investments as of December 31, 2012 and 2013 were generated primarily from changes in interest rates. The losses are considered temporary, as the contractual terms of these investments do not permit the issuer to settle the security at a price less than the amortized cost of the investment. Because the Company does not intend to sell these instruments and it is more likely than not that the Company will not be required to sell these instruments prior to anticipated recovery, which may be at maturity, the Company does not consider these investments to be other-than-temporarily impaired as of December 31, 2012 and 2013. See Note 5 for further discussion of the fair value of the Company’s financial assets.

The components of the Company’s investments in an unrealized loss position for more than twelve months were as follows (in thousands):



	December 31,
	2012					2013
	Aggregate Fair Value		Gross Unrealized Losses			Aggregate Fair Value		Gross Unrealized Losses
Government-sponsored enterprise obligations	$	37	$	—		$	—	$	—
Auction rate securities	21,119		(2,006		)	21,137		(1,938		)
Investments in an unrealized loss position	$	21,156	$	(2,006	)	$	21,137	$	(1,938	)

The Company did not have any investments in an unrealized loss position for less than twelve months as of December 31, 2012 and 2013, respectively.


5.	FAIR VALUE

Fair value is defined as the price that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. There is a three-tier fair value hierarchy, which categorizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets for identical assets or liabilities; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.

F-17

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)


5.	FAIR VALUE — (CONTINUED)

The following table represents the Company's fair value hierarchy for its financial assets (cash, cash equivalents and investments) and liabilities measured at fair value on a recurring basis as of December 31, 2013 (in thousands):



	Level 1		Level 2		Level 3		Total
Assets:
Cash	$	134,989	$	—	$	—	$	134,989
Money market funds	50,593		—		—		50,593
Commercial paper	70,371		—		—		70,371
Auction rate securities	—		—		21,990		21,990
Total assets measured at fair value	$	255,953	$	—	$	21,990	$	277,943
Liabilities:
Deferred consideration	$	—	$	—	$	1,344	$	1,344
Total liabilities measured at fair value	$	—	$	—	$	1,344	$	1,344



	Level 1		Level 2		Level 3		Total
Assets:
Cash	$	135,232	$	—	$	—	$	135,232
Money market funds	20,775		—		—		20,775
Commercial paper	20		—		—		20
Government-sponsored enterprise obligations	—		37		—		37
Auction rate securities	—		—		21,662		21,662
Total assets measured at fair value	$	156,027	$	37	$	21,662	$	177,726
Liabilities:
Deferred consideration	$	—	$	—	$	2,304	$	2,304
Total liabilities measured at fair value	$	—	$	—	$	2,304	$	2,304

The Company’s Level 2 assets consisted of government-sponsored enterprise obligations, which did not have directly observable quoted prices in active markets. The Company’s Level 2 assets were valued using matrix pricing.

The Company’s Level 3 assets consist of ARS, whose underlying assets are primarily student loan securities supported by guarantees from the Federal Family Education Loan Program (“FFELP”) of the U.S. Department of Education.

F-18

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)


5.	FAIR VALUE — (CONTINUED)

The following table summarizes changes in fair value of the Company’s Level 3 assets from December 31, 2007 to December 31, 2013 (in thousands):



	Auction Rate Securities
Balance at December 31, 2007	$	53,975
Increase in unrealized loss included in accumulated other comprehensive loss	(3,710		)
Settlements	(20,925		)
Balance at December 31, 2008	29,340
Decrease in unrealized loss included in accumulated other comprehensive loss	684
Settlements	(300		)
Balance at December 31, 2009	29,724
Decrease in unrealized loss included in accumulated other comprehensive loss	40
Settlements	(575		)
Balance at December 31, 2010	29,189
Decrease in unrealized loss included in accumulated other comprehensive loss	245
Settlements	(4,850		)
Balance at December 31, 2011	24,584
Auction rate securities upon acquisition	442
Decrease in unrealized loss included in accumulated other comprehensive loss	836
Settlements	(4,200		)
Balance at December 31, 2012	21,662
Decrease in unrealized loss included in accumulated other comprehensive loss	378
Settlements	(50		)
Balance at December 31, 2013	$	21,990

ARS are variable rate debt instruments whose interest rates are reset approximately every 28 days. The majority of the underlying securities have contractual maturities greater than twenty years. The ARS are recorded at fair value.

As of December 31, 2013, the Company held ARS with $24.3 million par value, all of which failed to settle at auction. The majority of these investments are of high credit quality with AAA credit ratings and are primarily student loan securities supported by guarantees from the FFELP of the U.S. Department of Education. The Company may not be able to liquidate and fully recover the carrying value of the ARS in the near term. As a result, these securities are classified as long-term investments in the Company’s consolidated balance sheet as of December 31, 2013.

While the Company continues to earn interest on its ARS investments at the contractual rate, these investments are not currently actively trading and therefore do not currently have a readily determinable market value. The estimated fair value of the ARS no longer approximates par value. The Company used a discounted cash flow model to determine the estimated fair value of its investment in ARS as of December 31, 2013. The assumptions used in preparing the discounted cash flow model include estimates for interest rates, credit spreads, timing and amount of contractual cash flows, liquidity risk premiums, expected holding periods and default risk. The Company updates the discounted cash flow model on a quarterly basis to reflect any changes in the assumptions used in the model and settlements of ARS investments that occurred during the period.

The only significant unobservable input in the discounted cash flow model is the discount rate. The discount rate used represents the Company's estimate of the yield expected by a market participant from the ARS investments. The weighted average discount rate used in the discounted cash flow model as of December 31, 2012 and 2013 was approximately 5.1% and 4.9%, respectively. Selecting another discount rate within the range used in the discounted cash flow model would not result in a significant change to the fair value of the ARS.

F-19

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)


5.	FAIR VALUE — (CONTINUED)

Based on this assessment of fair value, as of December 31, 2013, the Company determined there was a decline in the fair value of its ARS investments of approximately $1.5 million. The decline was deemed to be a temporary impairment and recorded as an unrealized loss in accumulated other comprehensive loss in stockholders’ equity. In addition, while a majority of the ARS are currently rated AAA, if the issuers are unable to successfully close future auctions and/or their credit ratings deteriorate, the Company may be required to record additional unrealized losses in accumulated other comprehensive loss or an other-than-temporary impairment charge to earnings on these investments.

As of December 31, 2013, the Company held Level 3 liabilities for deferred consideration that it acquired as a result of the April 30, 2012 acquisition of LoopNet. The deferred consideration totaled $1.3 million as of December 31, 2013 and included deferred cash payments in connection with acquisitions LoopNet completed in 2010 including: (i) deferred cash payments due to the sellers of LandsofAmerica.com, LLC ("LandsofAmerica") on March 31, 2014 based on LandsofAmerica's achievement of financial and operational milestones, resulting in undiscounted deferred consideration as of December 31, 2013 of approximately $1.0 million; and (ii) deferred cash payments due to the sellers of Reaction Corp. ("Reaction Web") on March 31, 2014 based on Reaction Web's achievement of revenue milestones, resulting in undiscounted deferred consideration as of December 31, 2013 of approximately $344,000. On March 28, 2013, the Company made a payment of $1.0 million to the sellers of LandsofAmerica based on the achievement of financial and operational milestones in 2012 and a payment of approximately $344,000 to the sellers of Reaction Web based on the achievement of revenue milestones in 2012.

The following table summarizes changes in fair value of the Company’s Level 3 liabilities from December 31, 2011 to December 31, 2013 (in thousands):



	Deferred Consideration
Balance at December 31, 2011	$	—
Deferred consideration upon acquisition	2,011
Accretion for 2012	293
Balance at December 31, 2012	2,304
Accretion for 2013	384
Payments made in 2013	(1,344		)
Balance at December 31, 2013	$	1,344

The Company used a discounted cash flow model to determine the estimated fair value of its Level 3 liabilities. The assumptions used in preparing the discounted cash flow model include the discount rate and probabilities for completion of financial and operational milestones.

The only significant unobservable input in the discounted cash flow model used to determine the estimated fair value of the Company's Level 3 liabilities is the discount rate. The discount rate used represents LoopNet's cost of equity at the time of each acquisition plus a margin for counterparty risk. The weighted average discount rate used as of December 31, 2012 was approximately 23.5%. As of December 31, 2013, the Company recorded a liability for the entire amount of undiscounted deferred consideration to be paid on March 31, 2014. Selecting another discount rate within the range used in the discounted cash flow model in 2012 would not result in a significant change to the fair value of the deferred consideration.

F-20

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)


6.	PROPERTY AND EQUIPMENT

Property and equipment consists of the following (in thousands):



	December 31,
	2012			2013
Leasehold improvements	$	28,527		$	36,933
Furniture, office equipment and research vehicles	25,837			27,395
Computer hardware and software	36,688			36,391
	91,052			100,719
Accumulated depreciation and amortization	(44,744		)	(43,000		)
Property and equipment, net	$	46,308		$	57,719

Depreciation expense for property and equipment was approximately $8.4 million, $10.1 million and $12.5 million for the years ended December 31, 2011, 2012 and 2013, respectively.


7.	GOODWILL

The changes in the carrying amount of goodwill by operating segment consist of the following (in thousands):



	United States		International		Total
Goodwill, December 31, 2011	$	67,465	$	24,319	$	91,784
Acquisitions	625,174		—		625,174
Effect of foreign currency translation	—		1,120		1,120
Goodwill, December 31, 2012	692,639		25,439		718,078
Effect of foreign currency translation	—		509		509
Goodwill, December 31, 2013	$	692,639	$	25,948	$	718,587

The Company recorded goodwill of approximately $625.2 million in connection with the April 30, 2012 acquisition of LoopNet.

During the fourth quarters of 2011, 2012 and 2013, the Company completed the annual impairment test of goodwill and concluded that goodwill was not impaired.

F-21

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)


8.	INTANGIBLES AND OTHER ASSETS

Intangibles and other assets consist of the following (in thousands, except amortization period data):



	December 31,						Weighted- Average Amortization Period (in years)
	2012			2013
Capitalized product development cost	$	2,140		$	2,140		4
Accumulated amortization	(1,838		)	(2,029		)
Capitalized product development cost, net	302			111

Building photography	12,474			13,743			5
Accumulated amortization	(11,639		)	(12,005		)
Building photography, net	835			1,738

Acquired database technology	77,328			77,368			5
Accumulated amortization	(29,673		)	(41,073		)
Acquired database technology, net	47,655			36,295

Acquired customer base	130,683			130,960			10
Accumulated amortization	(59,218		)	(74,734		)
Acquired customer base, net	71,465			56,226

Acquired trade names and other (1)	59,255			59,336			7
Accumulated amortization	(8,880		)	(9,234		)
Acquired trade names and other, net	50,375			50,102

Intangibles and other assets, net	$	170,632		$	144,472

(1) The weighted-average amortization period for acquired trade names excludes $48.7 million for acquired trade names recorded in connection with the LoopNet acquisition on April 30, 2012, which amount is not amortized, but is subject to annual impairment tests.

Amortization expense for intangibles and other assets was approximately $4.4 million, $22.7 million and $27.6 million for the years ended December 31, 2011, 2012 and 2013, respectively.

In the aggregate, amortization for intangibles and other assets existing as of December 31, 2013 for future periods is expected to be approximately $23.5 million, $20.8 million, $18.9 million, $10.0 million and $5.1 million for the years ending December 31, 2014, 2015, 2016, 2017 and 2018, respectively.

During the fourth quarter of 2013, the Company completed the annual impairment test of the acquired trade name recorded in connection with the LoopNet acquisition and concluded that this indefinite-lived intangible asset was not impaired.

F-22

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)


9.	LONG-TERM DEBT

On February 16, 2012, the Company entered into a term loan facility and revolving credit facility pursuant to the Credit Agreement dated February 16, 2012, by and among the Company, as borrower, CoStar Realty Information, Inc. ("CoStar Realty"), as co-borrower, J.P. Morgan Bank, as administrative agent, and the other lenders thereto. The Credit Agreement provides for a $175.0 million term loan facility and a $50.0 million revolving credit facility, each with a term of five years. On April 30, 2012, the Company borrowed $175.0 million under the term loan facility and used those proceeds, together with net proceeds from the Company's equity offering conducted in June 2011, to pay a portion of the merger consideration and transaction costs related to the LoopNet merger. The carrying value of the term loan facility approximates fair value and can be estimated through Level 3 unobservable inputs using an expected present value technique based on expected cash flows discounted using the current credit-adjusted risk-free rate, which approximates the rate of interest on the term loan facility at the origination.

The revolving credit facility includes a subfacility for swingline loans of up to $5.0 million and up to $10.0 million of the revolving credit facility is available for the issuances of letters of credit. The term loan facility amortizes in quarterly installments in amounts resulting in an annual amortization of 5% during the first year, 10% during the second year, 15% during the third year, 20% during the fourth year and 50% during the fifth year after the closing date. The loans under the Credit Agreement bear interest, at the Company's option, either (i) during any interest period selected by the Company, at the London interbank offered rate for deposits in U.S. dollars with a maturity comparable to such interest period, adjusted for statutory reserves (“LIBOR”), plus a spread of 2.00% per annum, or (ii) at the greatest of (x) the prime rate from time to time announced by J.P. Morgan Bank, (y) the federal funds effective rate plus ½ of 1.00% and (z) LIBOR for a one-month interest period plus 1.00%, plus a spread of 1.00% per annum. If an event of default occurs under the Credit Agreement, the interest rate on overdue amounts will increase by 2.00% per annum. The obligations under the Credit Agreement are guaranteed by all material subsidiaries of the Company and secured by a lien on substantially all of the assets of the Company and its material subsidiaries, in each case subject to certain exceptions.

The Credit Agreement requires the Company to maintain a Debt Service Coverage Ratio (as defined in the Credit Agreement) of at least 1.5 to 1.0 and a Total Leverage Ratio (as defined in the Credit Agreement) that does not exceed 2.75 to 1.00 during each of the three months ending December 31, 2013, March 31, 2014 and June 30, 2014; and 2.50 to 1.00 thereafter. The Credit Agreement also includes other covenants that were effective as of April 30, 2012, including covenants that, subject to certain exceptions, restrict the ability of the Company and its subsidiaries (i) to incur additional indebtedness, (ii) to create, incur, assume or permit to exist any liens, (iii) to enter into mergers, consolidations or similar transactions, (iv) to make investments and acquisitions, (v) to make certain dispositions of assets, (vi) to make dividends, distributions and prepayments of certain indebtedness, and (vii) to enter into certain transactions with affiliates. The Company was in compliance with the covenants in the Credit Agreement as of December 31, 2013.

Commencing with the fiscal year ended December 31, 2012, the Credit Agreement requires the Company to make an annual prepayment of the term loan facility equal to a percentage of Excess Cash Flow (as defined in the Credit Agreement) to reduce the principal amount outstanding under the term loan facility. The prepayment percentage is 50% when the Total Leverage Ratio exceeds 3.00 to 1.00; 25% when the Total Leverage Ratio is greater than 2.50 to 1.00 but equal to or less than 3.00 to 1.00; and 0% when the Total Leverage Ratio is equal to or less than 2.50 to 1.00. This prepayment requirement is reduced by the amount of prior voluntary prepayments during the respective fiscal year, subject to certain exceptions set forth in the Credit Agreement. The Excess Cash Flow payment, if required, is due within ten business days of the date on which the annual financial statements are delivered or required to be delivered to the lenders pursuant to the Credit Agreement. For the fiscal year ended December 31, 2013, the Company was not required to make an Excess Cash Flow payment.

In connection with obtaining the term loan facility and revolving credit facility, the Company incurred approximately $11.5 million in debt issuance costs, which were capitalized and are being amortized as interest expense over the term of the Credit Agreement using the effective interest method. The debt issuance costs are comprised of approximately $9.2 million in underwriting fees and approximately $2.3 million primarily related to legal fees associated with the debt issuance.

As of December 31, 2012 and 2013, no amounts were outstanding under the revolving credit facility. Total interest expense for the term loan facility was approximately $0, $4.8 million and $6.9 million for the years ended December 31, 2011, 2012 and 2013, respectively. Interest expense included amortized debt issuance costs of approximately $0, $2.0 million and $3.0 million for the years ended December 31, 2011, 2012 and 2013, respectively. Total interest paid for the term loan facility was approximately $0, $2.5 million and $4.3 million for the years ended December 31, 2011, 2012 and 2013, respectively.

F-23

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)


9.	LONG-TERM DEBT — (CONTINUED)

Maturities of the Company's borrowings under the Credit Agreement for each of the next four years as of December 31, 2013 are as follows (in thousands):



Year ending December 31,	Maturities
Due in:
2014	$	24,063
2015	32,812
2016	61,250
2017	35,000
Long-term debt, including current maturities	$	153,125


10.	INCOME TAXES

The components of the provision (benefit) for income taxes attributable to operations consist of the following (in thousands):



	Year Ended December 31,
	2011			2012			2013
Current:
Federal	$	22,779		$	(2,260	)	$	26,516
State	2,226			1,974			3,996
Foreign	12			55			31
Total current	25,017			(231		)	30,543
Deferred:
Federal	(14,661		)	15,512			(10,919		)
State	(2,425		)	(2,067		)	(1,849		)
Foreign	(18		)	5			28
Total deferred	(17,104		)	13,450			(12,740		)
Total provision for income taxes	$	7,913		$	13,219		$	17,803

F-24

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)


10.	INCOME TAXES — (CONTINUED)

The components of deferred tax assets and liabilities consists of the following (in thousands):



	December 31,
	2012			2013
Deferred tax assets:
Reserve for bad debts	$	1,106		$	1,274
Accrued compensation	4,830			6,725
Stock compensation	4,946			13,381
Net operating losses	20,431			17,457
Accrued reserve and other	6,007			4,284
Unrealized loss on securities	928			786
Deferred rent	1,845			4,329
Deferred revenue	1,220			1,538
Deferred gain from sale of building	12,386			11,499
Total deferred tax assets	53,699			61,273

Deferred tax liabilities:
Prepaids	(1,433		)	(1,096		)
Depreciation	(3,676		)	(6,033		)
Intangibles	(62,915		)	(55,284		)
Total deferred tax liabilities	(68,024		)	(62,413		)

Net deferred tax liabilities, prior to valuation allowance	(14,325		)	(1,140		)
Valuation allowance	(10,490		)	(10,936		)
Net deferred tax liabilities	$	(24,815	)	$	(12,076	)

As of December 31, 2012 and 2013, a valuation allowance has been established for certain deferred tax assets due to the uncertainty of realization. The valuation allowance as of December 31, 2012 and 2013 includes an allowance for unrealized losses on ARS investments, foreign deferred tax assets and certain state net operating loss carryforwards. The valuation allowance for the deferred tax asset for unrealized losses on ARS has been recorded as an adjustment to accumulated other comprehensive loss.

The Company established the valuation allowance because it is more likely than not that a portion of the deferred tax asset for certain items will not be realized based on the weight of available evidence. A valuation allowance was established for the unrealized losses on securities as the Company has not historically generated capital gains, and it is uncertain whether the Company will generate sufficient capital gains in the future to absorb the capital losses. In 2011, the Company sold the office building located at 1331 L Street, NW, in downtown Washington, DC (the “DC Office Building") and the sale generated capital gains, but the Company does not expect to engage in similar transactions on a regular basis. The Company continues to maintain a valuation allowance as of December 31, 2013, for the unrealized losses on securities because it is uncertain as to whether the losses will be realized in a year such that the losses could be carried back to offset the gain from the Company’s sale of the DC Office Building. A valuation allowance was established for the foreign deferred tax assets due to the cumulative loss in recent years in those jurisdictions. The Company has not had sufficient taxable income historically to utilize the foreign deferred tax assets, and it is uncertain whether the Company will generate sufficient taxable income in the future to utilize the deferred tax assets. Similarly, the Company has established a valuation allowance for net operating losses in certain states where it is uncertain whether the Company will generate sufficient taxable income to utilize the net operating losses before they expire.

The Company’s change in valuation allowance was an increase of approximately $5.2 million for the year ended December 31, 2012 and an increase of approximately $446,000 for the year ended December 31, 2013. The increase for the year ended December 31, 2013 is primarily due to the increase in the valuation allowance for foreign deferred tax assets of approximately $765,000 partially offset by a decrease in the valuation allowance for deferred tax assets of approximately $319,000 primarily related to state net operating loss carryforwards.

F-25

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)


10.	INCOME TAXES — (CONTINUED)

The Company had U.S. income before income taxes of approximately $29.1 million, $36.1 million and $53.2 million for the years ended December 31, 2011, 2012 and 2013, respectively. The Company had foreign losses of approximately $6.6 million, $13.0 million and $5.6 million for the years ended December 31, 2011, 2012 and 2013, respectively.

The Company’s provision for income taxes resulted in effective tax rates that varied from the statutory federal income tax rate as follows (in thousands):



	Year Ended December 31,
	2011			2012			2013
Expected federal income tax provision at statutory rate	$	7,899		$	8,097		$	16,638
State income taxes, net of federal benefit	(123		)	(1,360		)	885
Foreign income taxes, net effect	(961		)	(2,971		)	(724		)
Stock compensation	(143		)	(313		)	(116		)
Increase in valuation allowance	643			2,978			588
Nondeductible compensation	448			656			431
Nondeductible transaction costs	—			5,829			—
Other adjustments	150			303			101
Income tax expense, net	$	7,913		$	13,219		$	17,803

The Company’s U.K. subsidiaries with foreign losses are disregarded entities for U.S. income tax purposes. Accordingly, the losses from these disregarded entities are included in the Company’s consolidated federal income tax provision at the statutory rate. Federal income taxes attributable to income from these disregarded entities are reduced by foreign taxes paid by those disregarded entities.

The Company paid approximately $19.5 million, $2.6 million, and $6.5 million in income taxes for the years ended December 31, 2011, 2012 and 2013, respectively.

The Company has net operating loss carryforwards for international income tax purposes of approximately $31.2 million, which do not expire. The Company has federal net operating loss carryforwards of approximately $13.5 million that begin to expire in 2020, state net operating loss carryforwards with a tax value of approximately $4.9 million that begin to expire in 2020 and state income tax credit carryforwards with a tax value of approximately $1.8 million that begin to expire in 2020. The Company realized a cash benefit relating to the use of its tax loss carryforwards of approximately $12.2 million and $4.2 million in 2012 and 2013, respectively.

The following tables summarize the activity related to the Company’s unrecognized tax benefits (in thousands):



Unrecognized tax benefit as of December 31, 2010	$	1,766
Increase for current year tax positions	1,243
Increase for prior year tax positions	445
Expiration of the statute of limitation for assessment of taxes	(107		)
Unrecognized tax benefit as of December 31, 2011	3,347
Increase for current year tax positions	792
Decrease for prior year tax positions	(161		)
Expiration of the statute of limitation for assessment of taxes	(69		)
Unrecognized tax benefit as of December 31, 2012	3,909
Increase for current year tax positions	66
Increase for prior year tax positions	2,037
Expiration of the statute of limitation for assessment of taxes	(55		)
Unrecognized tax benefit as of December 31, 2013	$	5,957

F-26

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)


10.	INCOME TAXES — (CONTINUED)

Approximately $1.6 million of the unrecognized tax benefit as of each of December 31, 2012 and 2013, would favorably affect the annual effective tax rate, if recognized in future periods. The Company recognized $39,000, $58,000 and $62,000 for interest and penalties in its consolidated statements of operations for the years ended December 31, 2011, 2012 and 2013, respectively. The Company had liabilities of $284,000, $342,000 and $404,000 for interest and penalties in its consolidated balance sheets as of December 31, 2011, 2012 and 2013, respectively. The Company does not anticipate the amount of the unrecognized tax benefits to change significantly over the next twelve months.

The Company’s federal and state income tax returns for tax years 2010 through 2012 remain open to examination. The Company’s U.K. income tax returns for tax years 2007 through 2012 remain open to examination.

The Company is subject to taxation in the U.S. and various states and foreign jurisdictions. The Company is currently under Internal Revenue Service ("IRS") audit in the U.S. for tax year 2010 and its subsidiary LoopNet is under IRS audit for tax years 2009, 2010, 2011 and the four months ended April 30, 2012. While no formal assessments have been received, the Company believes it has provided adequate reserves related to all matters in the tax periods open to examination. Although the timing of income tax audit resolutions and negotiations with taxing authorities is highly uncertain, the Company does not anticipate a significant change to the total amount of unrecognized income tax benefits within the next 12 months.


11.	COMMITMENTS AND CONTINGENCIES

The Company leases office facilities and office equipment under various non-cancelable operating leases. The leases contain various renewal options. Rent expense for the years ended December 31, 2011, 2012 and 2013 was approximately $13.3 million, $16.7 million and $18.3 million, respectively.

Future minimum lease payments as of December 31, 2013 are as follows (in thousands):



2014	$	17,004
2015	15,128
2016	14,104
2017	14,317
2018	13,916
2019 and thereafter	69,475
Total future minimum lease payments	$	143,944

On February 16, 2012, the Company entered into the Credit Agreement. The Credit Agreement provides for a $175.0 million term loan facility and a $50.0 million revolving credit facility, each with a term of five years. See Note 9 for additional information regarding the Credit Agreement.

In May 2011, LoopNet, the Board of Directors of LoopNet (“the LoopNet Board”) and/or the Company were named as defendants in three purported class action lawsuits brought by alleged LoopNet stockholders challenging LoopNet's proposed merger with the Company. The stockholder actions alleged, among other things, that (i) each member of the LoopNet Board breached his fiduciary duties to LoopNet and its stockholders in authorizing the sale of LoopNet to the Company, (ii) the merger did not maximize value to LoopNet stockholders, (iii) LoopNet and the Company made incomplete or materially misleading disclosures about the transaction and (iv) LoopNet and the Company aided and abetted the breaches of fiduciary duty allegedly committed by the members of the LoopNet Board. The stockholder actions sought class action certification and equitable relief, including an injunction against consummation of the merger. The parties stipulated to the consolidation of the actions, and to permit the filing of a consolidated complaint. In June 2011, counsel for the parties entered into a memorandum of understanding in which they agreed on the terms of a settlement of this litigation, which could result in a loss to the Company of approximately $200,000. On March 20, 2013, the California Superior Court declined to grant preliminary approval to the proposed settlement and issued an order scheduling a hearing on June 11, 2013 to show good cause why the case should not be dismissed. Shortly before the hearing plaintiffs filed a third supplemental submission in support of their motion for preliminary approval of the proposed settlement, and the Court rescheduled the show cause hearing for February 11, 2014, and then rescheduled it again for May 13, 2014.

F-27

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)


11.	COMMITMENTS AND CONTINGENCIES — (CONTINUED)

On January 3, 2012, LoopNet, the Company’s wholly owned subsidiary, was sued by CIVIX-DDI, LLC (“Civix”) in the U.S. District Court for the Eastern District of Virginia for alleged infringement of U.S. Patent Nos. 6,385,622 and 6,415,291. The complaint seeks unspecified damages, attorneys' fees and costs. On February 16, 2012, LoopNet filed an answer to Civix’s complaint and filed counterclaims against Civix seeking, among other things, declaratory relief that the asserted patents are invalid, not infringed, and that Civix committed inequitable conduct during the prosecution and re-examination of the asserted patents. On or about May 14, 2012, Civix filed a motion for leave to amend its complaint against LoopNet in the U.S. District Court for the Eastern District of Virginia seeking to add the Company as a defendant, alleging that the Company's products also infringe Civix's patents. The Company filed a motion opposing Civix's motion, and on June 21, 2012, the district court denied Civix's motion to amend its complaint. On June 21, 2012, the Company filed an action in the U.S. District Court for the Northern District of Illinois seeking a declaratory judgment of non-infringement and invalidity against Civix. On August 14, 2012, the Company amended its complaint against Civix to assert an affirmative claim against Civix for breach of contract, alleging Civix viloated its license agreement and covenant not to sue with one of the Company's technology licensors. On August 30, 2012, the Eastern District of Virginia transferred Civix's case against LoopNet to the Northern District of Illinois, where both cases are now pending. On October 29, 2012, Civix filed a separate action against LoopNet in the Northern District of Illinois alleging infringement of U.S. Patent No. 8,296,335. That case was later consolidated with Civix's original lawsuit against LoopNet. Civix amended its complaint against the Company on November 8, 2012 to add claims under Patent No. 8,296,335 as well. On November 15, 2012, LoopNet filed an amended answer and counterclaim against Civix, asserting an affirmative claim against Civix for breach of contract, alleging Civix violated its license agreement and covenant not to sue with one of LoopNet's technology licensors. The U.S. District Court for the Northern District of Illinois construed the language of the patent on September 23, 2013, and has issued a schedule providing for expert discovery and dispositive motions in this case through April 2014, but no trial date has been set. On November 25, 2013, Civix submitted its expert’s report of damages, which estimated the payment it deemed appropriate in the event that the Company is found liable of infringement. The Company believes that Civix’s calculation of damages is based on improper assumptions and miscalculations, and is otherwise unsupported. The Company submitted its own expert’s report of damages, which concluded that the appropriate payment to be made in the event that the Company is found liable of infringement is significantly less than Civix’s estimate of appropriate damages. Moreover, the Company’s expert's report of damages concluded that while Civix’s calculation of damages was fundamentally flawed and should not be used to determine damages, simply applying certain necessary adjustments to Civix's calculation as outlined in the Company’s report resulted in a significant reduction in Civix’s calculation of damages to approximately $3.7 million. On November 5, 2013 the Company offered to settle all outstanding litigation with Civix for $600,000. At this time the Company cannot predict the outcome of its litigation with Civix, but the Company intends to vigorously defend itself against Civix’s claims. While the Company believes it has meritorious defenses against Civix’s claims, the Company estimates that, based on the Company’s adjusted calculation of Civix’s alleged damages, the matter could result in a loss of up to $3.1 million in excess of the amount accrued.

Currently, and from time to time, the Company is involved in litigation incidental to the conduct of its business. In accordance with GAAP, the Company records a provision for a liability when it is both probable that a liability has been incurred and the amount can be reasonably estimated. At the present time, while it is reasonably possible that an unfavorable outcome may occur as a result of one or more of the Company’s current litigation matters, management has concluded that it is not probable that a loss has been incurred in connection with the Company’s current litigation other than as described above. In addition, other than as described above, the Company is unable to estimate the possible loss or range of loss that could result from an unfavorable outcome in the Company’s current litigation and accordingly, the Company has not recognized any liability in the consolidated financial statements for unfavorable results, if any, other than described above. Legal defense costs are expensed as incurred.

F-28

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)


12.	SEGMENT REPORTING

The Company manages its business geographically in two operating segments, with the primary areas of measurement and decision-making being the U.S. and International, which includes the U.K. and France. The Company’s subscription-based information services consist primarily of CoStar SuiteTM and FOCUSTM services. CoStar Suite is sold as a platform of service offerings consisting of CoStar Property Professional®, CoStar COMPS Professional® and CoStar Tenant® and through the Company's mobile application, CoStarGo®. CoStar Suite is the Company’s primary service offering in the U.S. operating segment. FOCUS is the Company’s primary service offering in the International operating segment. Additionally, the Company introduced CoStar Suite in the U.K. in the fourth quarter of 2012 and no longer offered FOCUS to new clients beginning in 2013. CoStar's and its subsidiaries' subscription-based services consist primarily of similar services offered over the Internet to commercial real estate industry and related professionals. Management relies on an internal management reporting process that provides revenue and operating segment EBITDA, which is the Company’s net income before interest, income taxes, depreciation and amortization. Management believes that operating segment EBITDA is an appropriate measure for evaluating the operational performance of the Company’s operating segments. EBITDA is used by management to internally measure operating and management performance and to evaluate the performance of the business. However, this measure should be considered in addition to, not as a substitute for or superior to, income from operations or other measures of financial performance prepared in accordance with GAAP.

Summarized information by operating segment was as follows (in thousands):



	Year Ended December 31,
	2011			2012			2013
Revenues
United States	$	233,381		$	330,805		$	420,817
International
External customers	18,357			19,131			20,126
Intersegment revenue	1,140			1,514			339
Total international revenue	19,497			20,645			20,465
Intersegment eliminations	(1,140		)	(1,514		)	(339		)
Total revenues	$	251,738		$	349,936		$	440,943

EBITDA
United States	$	38,099		$	70,199		$	97,348
International	(3,476		)	(10,007		)	(3,136		)
Total EBITDA	$	34,623		$	60,192		$	94,212



Reconciliation of EBITDA to net income
EBITDA	$	34,623		$	60,192		$	94,212
Purchase amortization in cost of revenues	(1,353		)	(8,634		)	(11,883		)
Purchase amortization in operating expenses	(2,237		)	(13,607		)	(15,183		)
Depreciation and other amortization	(9,262		)	(10,511		)	(12,992		)
Interest income	798			526			326
Interest expense	—			(4,832		)	(6,943		)
Income tax expense, net	(7,913		)	(13,219		)	(17,803		)
Net income	$	14,656		$	9,915		$	29,734

Intersegment revenue is attributable to services performed for the Company’s wholly owned subsidiary, Property and Portfolio Research (“PPR”) by Property and Portfolio Research Ltd., a wholly owned subsidiary of PPR. Intersegment revenue is recorded at an amount the Company believes approximates fair value. U.S. EBITDA includes a corresponding cost for the services performed by Property and Portfolio Research Ltd. for PPR.

F-29

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)


12.	SEGMENT REPORTING — (CONTINUED)

There were no costs allocated to U.S. EBITDA for the years ended December 31, 2011 and 2012. U.S. EBITDA includes an allocation of approximately $800,000 for the year ended December 31, 2013. This allocation represents costs incurred for International employees involved in development activities of the Company's U.S. operating segment.

International EBITDA includes a corporate allocation of approximately $800,000, $5.3 million and $400,000 for the years ended December 31, 2011, 2012 and 2013, respectively. This allocation represents costs incurred for U.S. employees involved in management and expansion activities of the Company’s International operating segment.

Summarized information by operating segment consists of the following (in thousands):



	December 31,
	2012			2013
Property and equipment, net
United States	$	42,480		$	53,733
International	3,828			3,986
Total property and equipment, net	$	46,308		$	57,719

Goodwill
United States	$	692,639		$	692,639
International	25,439			25,948
Total goodwill	$	718,078		$	718,587

Assets
United States	$	1,215,949		$	1,311,292
International	40,933			43,464
Total operating segment assets	$	1,256,882		$	1,354,756

Reconciliation of operating segment assets to total assets
Total operating segment assets	$	1,256,882		$	1,354,756
Investment in subsidiaries	(18,344		)	(18,344		)
Intersegment receivables	(73,399		)	(79,430		)
Total assets	$	1,165,139		$	1,256,982

Liabilities
United States	$	335,855		$	324,626
International	70,108			79,266
Total operating segment liabilities	$	405,963		$	403,892

Reconciliation of operating segment liabilities to total liabilities
Total operating segment liabilities	$	405,963		$	403,892
Intersegment payables	(67,167		)	(74,772		)
Total liabilities	$	338,796		$	329,120

F-30

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)


13.	STOCKHOLDERS’ EQUITY

Preferred Stock

The Company has 2,000,000 shares of preferred stock, $0.01 par value, authorized for issuance as of December 31, 2013. The Board of Directors may issue the preferred stock from time to time as shares of one or more classes or series.

Common Stock

The Company has 60,000,000 shares of common stock, $0.01 par value, authorized for issuance. On June 5, 2012, the Company amended and restated its Restated Certificate of Incorporation to increase the authorized shares of common stock by 30,000,000 shares to 60,000,000 shares. Dividends may be declared and paid on the common stock, subject in all cases to the rights and preferences of the holders of preferred stock and authorization by the Board of Directors. In the event of liquidation or winding up of the Company and after the payment of all preferential amounts required to be paid to the holders of any series of preferred stock, any remaining funds shall be distributed among the holders of the issued and outstanding common stock.


14.	NET INCOME PER SHARE

The following table sets forth the calculation of basic and diluted net income per share (in thousands except per share data):



	Year Ended December 31,
	2011		2012		2013
Numerator:
Net income	$	14,656	$	9,915	$	29,734
Denominator:
Denominator for basic net income per share — weighted-average outstanding shares	23,131		26,533		27,670
Effect of dilutive securities:
Stock options and restricted stock	396		416		542
Denominator for diluted net income per share — weighted-average outstanding shares	23,527		26,949		28,212

Net income per share — basic	$	0.63	$	0.37	$	1.07
Net income per share — diluted	$	0.62	$	0.37	$	1.05

Employee stock options with exercise prices greater than the average market price of the Company’s common stock for the period are excluded from the calculation of diluted net income per share as their inclusion would be anti-dilutive. Stock options to purchase approximately 2,300 shares that were outstanding as of December 31, 2011 were not included in the computation of diluted net income per share because the exercise price of the stock options was greater than the average share price of the common shares during the period. No stock options to purchase shares were excluded from the calculation of diluted net income per share for the years ended December 31, 2012 and 2013. Additionally, shares of restricted common stock that vest based on Company performance conditions that have not been achieved as of the end of the period are not included in the computation of basic or diluted earnings per share.

F-31

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)


15.	EMPLOYEE BENEFIT PLANS

Stock Incentive Plans

In June 1998, the Company’s Board of Directors adopted the 1998 Stock Incentive Plan (as amended, the “1998 Plan”) prior to consummation of the Company’s initial public offering. In April 2007, the Company’s Board of Directors adopted the CoStar Group, Inc. 2007 Stock Incentive Plan (as amended, the “2007 Plan”), subject to stockholder approval, which was obtained on June 7, 2007. All shares of common stock that were authorized for issuance under the 1998 Plan that, as of June 7, 2007, remained available for issuance under the 1998 Plan (excluding shares subject to outstanding awards) were rolled into the 2007 Plan and, as of that date, no shares of common stock were available for new awards under the 1998 Plan. The 1998 Plan continues to govern unexercised and unexpired awards issued under the 1998 Plan prior to June 7, 2007. The 1998 Plan provided for the grant of stock and stock options to officers, directors and employees of the Company and its subsidiaries. Stock options granted under the 1998 Plan could be incentive or non-qualified, and the exercise price for an incentive stock option may not be less than the fair market value of the Company’s common stock on the date of grant. The vesting period of the options and restricted stock grants under the 1998 Plan was determined by the Board of Directors or a committee thereof and was generally three to four years. Upon the occurrence of a Change of Control, as defined in the 1998 Plan, all outstanding unexercisable options and restricted stock grants under the 1998 Plan immediately become exercisable.

The 2007 Plan provides for the grant of stock options, restricted stock, restricted stock units, and stock appreciation rights to officers, employees, directors and consultants of the Company and its subsidiaries. Stock options granted under the 2007 Plan may be non-qualified or may qualify as incentive stock options. Except in limited circumstances related to a merger or other acquisition, the exercise price for an option may not be less than the fair market value of the Company’s common stock on the date of grant. The vesting period for each grant of options, restricted stock, restricted stock units and stock appreciation rights under the 2007 Plan is determined by the Board of Directors or a committee thereof and is generally three to four years, subject to minimum vesting periods for restricted stock and restricted stock units of at least one year. In some cases, vesting of awards under the 2007 Plan may be based on performance conditions. The Company has issued and/or reserved the following shares of common stock for issuance under the 2007 Plan (including an increase of 1,300,000 shares of common stock pursuant to an amendment to the 2007 Plan approved by the Company’s stockholders on June 2, 2010 and an increase of 900,000 shares of common stock pursuant to an amendment to the 2007 Plan approved by the Company’s stockholders on June 5, 2012): (a) 3,200,000 shares of common stock, plus (b) 121,875 shares of common stock that were authorized for issuance under the 1998 Plan that, as of June 7, 2007, remained available for issuance under the 1998 Plan (not including any Shares that were subject as of such date to outstanding awards under the 1998 Plan), and (c) any shares of common stock subject to outstanding awards under the 1998 Plan as of June 7, 2007, that on or after such date cease for any reason to be subject to such awards (other than by reason of exercise or settlement of the awards to the extent they are exercised for or settled in vested and nonforfeitable shares). Unless terminated sooner, the 2007 Plan will terminate in April 2017, but will continue to govern unexercised and unexpired awards issued under the 2007 Plan prior to that date. Approximately 1.4 million and 1.2 million shares were available for future grant under the 2007 Plan as of December 31, 2012 and 2013, respectively.

In February 2012, the Compensation Committee (the “Committee”) of the Board of Directors of the Company approved grants of restricted common stock to the executive officers that vest based on the achievement of Company performance conditions. These awards support the Committee’s goals of aligning executive incentives with long-term stockholder value and ensuring that executive officers have a continuing stake in the long-term success of the Company. In May and December of 2012, the Company granted additional shares of restricted common stock that vest based on the achievement of the Company's performance conditions to other employees. These shares of performance-based restricted common stock vest upon the Company’s achievement of $90.0 million of cumulative 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. The Company granted a total of 399,413 shares of performance-based restricted common stock during the year ended December 31, 2012. There were no shares of performance-based restricted common stock granted by the Company during the year ended December 31, 2013. All of the awards were made under the 2007 Plan and pursuant to the Company’s standard form of restricted stock grant agreement. The number of shares granted was based on the fair market value of the Company’s common stock on the grant date. As of March 31, 2013, the Company initially determined that it was probable that the performance condition for these performance-based restricted common stock awards would be met by the March 31, 2017 forfeiture date. 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, subject to certain approvals under the 2007 Plan. 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 2012.

F-32

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)


15.	EMPLOYEE BENEFIT PLANS — (CONTINUED)

Stock Incentive Plans — (Continued)

Option activity was as follows:



	Number of Shares		Range of Exercise Price	Weighted- Average Exercise Price		Weighted- Average Remaining Contract Life (in years)	Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2010	945,696		$17.34 - $55.07	$	36.10
Granted	111,470		$57.16 - $60.23	$	57.28
Exercised	(198,132	)	$17.97 - $54.51	$	31.37
Canceled or expired	(11,932	)	$36.48 - $54.51	$	40.65
Outstanding at December 31, 2011	847,102		$17.34 - $60.23	$	39.93
Granted	102,000		$58.95 - $58.95	$	58.95
Exercised	(274,842	)	$17.34 - $57.16	$	34.04
Canceled or expired	(541	)	$54.51 - $54.51	$	54.51
Outstanding at December 31, 2012	673,719		$25.00 - $60.23	$	45.20
Granted	126,800		$102.16 - $102.16	$	102.16
Exercised	(409,799	)	$25.00 - $58.95	$	41.05
Canceled or expired	(16,380	)	$36.48 - $58.95	$	47.54
Outstanding at December 31, 2013	374,340		$36.48 - $102.16	$	68.94	7.34	$	43,289

Exercisable at December 31, 2011	558,849		$17.34 - $55.07	$	37.15
Exercisable at December 31, 2012	432,196		$25.00 - $60.23	$	40.22
Exercisable at December 31, 2013	146,161		$36.48 - $60.23	$	47.72	5.44	$	20,004

The aggregate intrinsic value is calculated as the difference between (i) the closing price of the common stock at December 31, 2011, 2012 and 2013 and (ii) the exercise prices of the underlying awards, multiplied by the shares underlying options as of December 31, 2011, 2012 and 2013, that had an exercise price less than the closing price on that date. Options to purchase 198,132, 274,842 and 409,799 shares were exercised for the years ended December 31, 2011, 2012, and 2013, respectively. The aggregate intrinsic value of options exercised, determined as of the date of option exercise, was $6.1 million, $11.9 million and $39.0 million for the years ended December 31, 2011, 2012, and 2013, respectively.

At December 31, 2013, there was $38.6 million of unrecognized compensation cost related to stock-based payments, net of forfeitures, which is expected to be recognized over a weighted-average-period of 2.4 years. The $38.6 million of unrecognized compensation cost at December 31, 2013 included approximately $2.1 million of unrecognized compensation costs related to shares of restricted common stock that vest based on the achievement of Company performance conditions.

The weighted-average grant date fair value of each option granted during the years ended December 31, 2011, 2012 and 2013 using the Black-Scholes option-pricing model was $21.57, $20.99 and $34.10 respectively.

F-33

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)


15.	EMPLOYEE BENEFIT PLANS — (CONTINUED)

Stock Incentive Plans — (Continued)

The Company estimated the fair value of each option granted on the date of grant using the Black-Scholes option-pricing model, using the assumptions noted in the following table:



	Year Ended December 31,
	2011		2012		2013
Dividend yield	0	%	0	%	0	%
Expected volatility	40	%	40	%	37	%
Risk-free interest rate	2.2	%	0.9	%	0.9	%
Expected life (in years)	5		5		5

The assumptions above and the estimation of expected forfeitures are based on multiple facts, including historical employee behavior patterns of exercising options and post-employment termination behavior, expected future employee option exercise patterns, and the historical volatility of the Company’s stock price.

The following table summarizes information regarding options outstanding at December 31, 2013:



	Options Outstanding				Options Exercisable
Range of Exercise Price	Number of Shares	Weighted-Average Remaining Contractual Life (in years)	Weighted- Average Exercise Price		Number of Shares	Weighted- Average Exercise Price
$36.48 - $41.21	16,991	4.94	$	37.84	16,991	$	37.84
$41.22 - $42.50	45,900	6.19	$	42.29	45,900	$	42.29
$42.51 - $53.22	38,296	2.33	$	46.14	36,037	$	46.35
$53.23 - $55.83	4,054	6.92	$	54.51	3,243	$	54.51
$55.84 - $57.61	61,198	7.17	$	57.16	28,930	$	57.16
$57.62 - $58.51	745	7.09	$	58.06	—	$	—
$58.52 - $59.59	78,036	8.14	$	58.95	13,900	$	58.95
$59.60 - $81.19	2,320	7.42	$	60.23	1,160	$	60.23
$81.20 - $102.16	126,800	9.19	$	102.16	—	$	—
$36.48 - $102.16	374,340	7.34	$	68.94	146,161	$	47.72

F-34

COSTAR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)


15.	EMPLOYEE BENEFIT PLANS — (CONTINUED)

Stock Incentive Plans — (Continued)

The following table presents unvested restricted stock awards activity for the year ended December 31, 2013:



	Number of Shares		Weighted-Average Grant Date Fair Value per Share
Unvested restricted stock at December 31, 2012	1,020,673		$	66.17
Granted	238,314		$	119.84
Vested	(206,248	)	$	58.64
Canceled	(84,469	)	$	71.51
Unvested restricted stock at December 31, 2013	968,270		$	80.52

Employee 401(k) Plan

The Company maintains a 401(k) Plan (the “401(k)”) as a defined contribution retirement plan for all eligible employees. The 401(k) provides for tax-deferred contributions of employees’ salaries, limited to a maximum annual amount as established by the Internal Revenue Service. In 2011 and 2012, the Company matched 50% of employee contributions up to a maximum of 6% of total compensation. In 2013, the Company matched 100% of employee contributions up to a maximum of 4% of total compensation. Amounts contributed to the 401(k) by the Company to match employee contributions for the years ended December 31, 2011, 2012 and 2013 were approximately $1.9 million, $2.7 million and $5.1 million, respectively. The Company had no administrative expenses in connection with the 401(k) plan for the years ended December 31, 2011, 2012 and 2013, respectively.

Employee Pension Plan

The Company maintains a company personal pension plan for all eligible employees in the Company’s U.K. offices. The plan is a defined contribution plan. Employees are eligible to contribute a portion of their salaries, subject to a maximum annual amount as established by Her Majesty's Revenue and Customs. In 2011 and 2012, the Company matched 50% of employee contributions up to a maximum of 6% of total compensation. In 2013, the Company's matching contribution was based on the percentage contributed by the employee, up to a maximum of 6% of total compensation. Amounts contributed to the plan by the Company to match employee contributions for the years ended December 31, 2011, 2012 and 2013 were approximately $160,000, $180,000 and $280,000, respectively.

Employee Stock Purchase Plan

As of August 1, 2006, the Company introduced an Employee Stock Purchase Plan (“ESPP”), pursuant to which eligible employees participating in the plan authorize the Company to withhold specified amounts from the employees’ compensation and use the withheld amounts to purchase shares of the Company's common stock at 90% of the market price. Participating employees are able to purchase common stock under this plan during each offering period. An offering period begins the second Saturday before each of the Company’s regular pay dates and ends on each of the Company’s regular pay dates. There were 46,186 and 34,895 shares available for purchase under the ESPP as of December 31, 2012 and 2013, respectively and approximately 10,153 and 11,291 shares of the Company’s common stock were purchased under the ESPP during 2012 and 2013, respectively.

F-35

Previous: Item 14. Principal Accountant Fees and Services