Form 8-K/A

0001193125-14-222425.txt : 20140623 0001193125-14-222425.hdr.sgml : 20140623 20140602164736 ACCESSION NUMBER: 0001193125-14-222425 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20140401 ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20140602 DATE AS OF CHANGE: 20140602 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COSTAR GROUP INC CENTRAL INDEX KEY: 0001057352 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 522091509 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-24531 FILM NUMBER: 14884704 BUSINESS ADDRESS: STREET 1: 1331 L STREET NW CITY: WASHINGTON STATE: DC ZIP: 20005 BUSINESS PHONE: 2023466500 MAIL ADDRESS: STREET 1: 1331 L STREET NW CITY: WASHINGTON STATE: DC ZIP: 20005 8-K/A 1 d730969d8ka.htm FORM 8-K/A Form 8-K/A

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K/A

CURRENT REPORT

Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): June 2, 2014 (April 1, 2014)

COSTAR GROUP, INC.

(Exact name of registrant as specified in its charter)

Delaware

0-24531

52-2091509

(State or other jurisdiction

of incorporation)

(Commission

File Number)

(IRS Employer

Identification No.)


1331 L Street, NW, Washington, DC 20005		20005
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (202) 346-6500

Not Applicable

(Former name or former address, if changed since last report.)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Introductory Note

On April 1, 2014, CoStar Group, Inc. (“CoStar”) filed with the Securities and Exchange Commission a Current Report on Form 8-K (the “Original Form 8-K”) in connection with the completion of its acquisition of certain assets and assumption of certain liabilities, in each case, relating to the Apartments.com business of Classified Ventures, LLC (“Apartments” and such acquisition, the “Acquisition”), pursuant to an Asset Purchase Agreement dated February 28, 2014, by and between Classified Ventures, LLC and CoStar. This Current Report on Form 8-K/A amends Item 9.01 of the Original Form 8-K to present certain financial statements of Apartments and to present certain unaudited pro forma financial information in connection with the Acquisition, which financial statements and unaudited pro forma financial information are filed as exhibits hereto.

Item 9.01. Financial Statements and Exhibits.

(a) Financial Statements of Businesses Acquired.

The audited balance sheets of Apartments as of December 31, 2013 and December 31, 2012, the audited statements of operations and cash flows of Apartments for the years ended December 31, 2013, December 31, 2012 and December 31, 2011, and the notes related thereto are filed as Exhibit 99.1 to this Current Report on Form 8-K/A and are incorporated by reference herein.

The unaudited balance sheet of Apartments as of March 31, 2014, the unaudited statements of operations and cash flows of Apartments for the three-month periods ended March 31, 2014 and March 31, 2013, and the notes related thereto, are filed as Exhibit 99.2 to this Current Report on Form 8-K/A and are incorporated by reference herein.

(b) Pro Forma Financial Information.

The unaudited pro forma condensed combined financial information of CoStar as of, and for the three months ended March 31, 2014, and for the fiscal year ended December 31, 2013, giving effect to the Acquisition, are filed as Exhibit 99.3 to this Current Report on Form 8-K/A and are incorporated by reference herein.

(d) Exhibits.


Exhibit No.		Description

23.1		Consent of Independent Accountants, dated June 2, 2014.

99.1		Audited balance sheets of Apartments as of December 31, 2013 and December 31, 2012, the audited statements of operations and cash flows of Apartments for the years ended December 31, 2013, December 31, 2012 and December 31, 2011, and the notes related thereto.

99.2		Unaudited balance sheet of Apartments as of March 31, 2014, the unaudited statements of operations and cash flows of Apartments for the three-month periods ended March 31, 2014 and March 31, 2013, and the notes related thereto.

99.3		Unaudited pro forma condensed combined financial information of CoStar as of, and for the three months ended March 31, 2014, and for the year ended December 31, 2013, giving effect to the Acquisition.

SIGNATURES

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


	COSTAR GROUP, INC.

	By:

Date: June 2, 2014	/s/ Brian J. Radecki

	Name:	Brian J. Radecki
	Title:	Chief Financial Officer

Exhibit Index


Exhibit No.		Description

23.1		Consent of Independent Accountants, dated June 2, 2014.

99.1		Audited balance sheets of Apartments as of December 31, 2013 and December 31, 2012, the audited statements of operations and cash flows of Apartments for the years ended December 31, 2013, December 31, 2012 and December 31, 2011, and the notes related thereto.

99.2		Unaudited balance sheet of Apartments as of March 31, 2014, the unaudited statements of operations and cash flows of Apartments for the three-month periods ended March 31, 2014 and March 31, 2013, and the notes related thereto.

99.3		Unaudited pro forma condensed combined financial information of CoStar as of, and for the three months ended March 31, 2014, and for the year ended December 31, 2013, giving effect to the Acquisition.

EX-23.1 2 d730969dex231.htm EX-23.1 EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Registration Statement on Forms S-8 (333-82599, 333-92165, 333-45770, 333-69548, 333-135709, 333-143968, 333-167424, and 333-182377) and on Form S-3 (No. 333-174407) of CoStar Group Inc. of our report dated March 28, 2014, relating to the financial statements of Apartments.com, which appears in this Form 8-K/A of CoStar Group, Inc. dated June 2, 2014.

/s/ PricewaterhouseCoopers LLP

Chicago, Illinois

June 2, 2014

EX-99.1 3 d730969dex991.htm EX-99.1 EX-99.1

Exhibit 99.1

Apartments.com

(A Business Unit of Classified Ventures, LLC)

Financial Statements

As of December 31, 2013 and 2012

and For the Years Ended December 31,

2013, 2012 and 2011

Apartments.com

(A Business Unit of Classified Ventures, LLC)

Index

December 31, 2013, 2012 and 2011


	Page(s)

Independent Auditor’s Report

Financial Statements

Balance Sheets		1

Statements of Operations		2

Statements of Cash Flows		3

Statements of Changes in the Net Investment of Parent		4

Notes to Financial Statements		5-16

Independent Auditor’s Report

To the Board of Directors and Members of

Classified Ventures, LLC

We have audited the accompanying financial statements of Apartments.com, a Business Unit of Classified Ventures, LLC, which comprise the balance sheets as of December 31, 2013 and December 31, 2012, and the related statements of operations, of cash flows, and of changes in the net investment of parent for each of the three years in the period ended December 31, 2013.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on the financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Company’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Apartments.com at December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2013 in accordance with accounting principles generally accepted in the United States of America.

Emphasis of Matter

As discussed in Note 8 to the financial statements, the Company has entered into significant transactions with Investor Affiliates of Classified Ventures, LLC, all related parties.

/s/ PricewaterhouseCoopers LLP

Chicago, Illinois

March 28, 2014

Apartments.com

(A Business Unit of Classified Ventures, LLC)

Balance Sheets

December 31, 2013 and 2012


(In thousands of dollars)	2013		2012

Assets
Current assets
Marketable securities held in trust	$	633	$	743

Accounts receivable, net of allowance for doubtful accounts of $365, $418, and $320, respectively		10,416		11,358
Affiliate Investor accounts receivable		524		160
Prepaid expenses & other current assets		1,680		1,419

Total current assets		13,253		13,680

Property and equipment, net of accumulated depreciation		1,533		1,393
Marketable securities held in trust, less current portion		1,544		1,788
Goodwill		3,440		3,440
Investment		183		—
Definite lived intangible assets		—		9


Total assets	$	19,953	$	20,310


Liabilities and Net Investment of Parent
Current liabilities
Accounts payable	$	1,781	$	809
Accrued compensation and related costs		2,656		2,173
Accrued expenses & other current liabilities		2,797		2,326
Deferred revenue		595		503
Current portion deferred incentive plans		633		743

Total current liabilities		8,462		6,554

Deferred incentive plans, less current portion		2,699		1,722

Total liabilities		11,161		8,276

Commitments and contingencies (Note 15)

Net investment of Parent		8,792		12,034


Total liabilities and net investment of Parent	$	19,953	$	20,310

The accompanying notes are an integral part of these financial statements.

Apartments.com

(A Business Unit of Classified Ventures, LLC)

Statements of Operations

Years ended December 31, 2013, 2012 and 2011


(In thousands of dollars)	2013		2012		2011

Operating revenue
Net revenue	$	78,542	$	68,671	$	62,319
Net revenue Affiliate Investor		7,325		7,961		8,071

Total net operating revenue		85,867		76,632		70,391

Operating expenses
Product support, technology and operations		18,497		15,924		14,410
Marketing and sales		29,215		26,692		24,619
General and administrative		8,201		6,657		6,801
Professional fees for sale		1,348		—		—
Affiliate revenue share		4,807		3,528		2,557

Total operating expenses		62,068		52,801		48,386

Operating income		23,799		23,831		22,004

Other income
Interest income		—		—		4
Gain on investments		399		153		14

Net income	$	24,198	$	23,984	$	22,022

The accompanying notes are an integral part of these financial statements.

Apartments.com

(A Business Unit of Classified Ventures, LLC)

Statement of Cash Flows

For the year ended December 31, 2013, 2012 and 2011


(In thousands of dollars)	2013			2012			2011

Cash flows from operating activities
Net income	$	24,198		$	23,984		$	22,022
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		635			697			772
Loss on disposition of property and equipment		107			—			—
Provision for accounts receivable		632			634			375
Change in operating assets and liabilities
Accounts receivable		(54	)		(3,000	)		(664	)
Prepaid expenses and other current assets		(261	)		(334	)		303
Investment		(183	)		—			—
Deferred compensation, net of funding		1,221			231			(40	)
Accounts payable		846			146			(353	)
Accrued expenses and other current liabilities		978			743			47
Deferred revenue		92			77			(37	)

Net cash provided by operating activities		28,211			23,178			22,425


Cash flows from investing activities
Purchase of property and equipment		(771	)		(892	)		(469	)

Net cash used in investing activities		(771	)		(892	)		(469	)


Cash flows from financing activities
Net transfer to Parent		(27,440	)		(22,286	)		(21,956	)

Net cash used in financing activities		(27,440	)		(22,286	)		(21,956	)


Increase in cash		—			—			—

Cash
Beginning of year		—			—			—

End of year	$	—		$	—		$	—


Supplemental disclosure of noncash investing and financing activities
Purchases of property, plant and equipment in accrued liabilities and accounts payables at the end of the year	$	131		$	30		$	13

The accompanying notes are an integral part of these financial statements.

Apartments.com

(A Business Unit of Classified Ventures, LLC)

Statements of Changes in the Net Investment of Parent

Years ended December 31, 2013, 2012 and 2011


(In thousands of dollars)
Net Investment of Parent	2013			2012			2011

Beginning Balance	$	12,034		$	10,112		$	10,030
Net income		24,198			23,984			22,022
Net transfer to Parent		(27,440	)		(22,062	)		(21,940	)

Ending Balance	$	8,792		$	12,034		$	10,112

The accompanying notes are an integral part of these financial statements.

Apartments.com

(A Business Unit of Classified Ventures, LLC)

Notes to Financial Statements

1.	Nature of Business

Apartments.com is a division of Classified Ventures, LLC (hereafter referred to as the “Parent”), managed and operated as a business by a single management team. The accompanying financial statements reflect the assets, liabilities, revenue and expenses directly attributable to the Apartments.com business (hereafter referred to as the “Business”) as well as certain allocations from the Parent.

Parent is a strategic joint venture among five large media partners whose objectives are to collectively capitalize on revenue growth in the online classified categories of automotive, rentals and real estate. The strategic partners are Gannett Co., Inc., The McClatchy Company, Tribune Company, The Washington Post Company and A.H. Belo Corporation (the “Investors”).

Apartments.com is a national online rentals guide and relocation resource that helps renters find available apartment and home rentals that meet their needs through its websites, including Apartments.com, ApartmentHomeLiving.com and RentalHomesPlus.com. The online services in the classified advertising marketplace that Apartments.com provides builds upon the local capabilities and expertise of its investor owned affiliated network of approximately 90 newspapers (the “Affiliates”).

2.	Summary of Significant Accounting Policies

Basis of Presentation

These financial statements reflect the historical financial position, results of operations, net investments of Parent and cash flows of the Business for the periods presented. The historical financial statements reflect the amounts that have been “carved-out” from the Parent’s consolidated financial statements prepared in accordance with U.S. general accepted accounting principles and reflect allocations of corporate and other expenses based on estimated usage of such services and expenses. The statements do not include adjustments necessary to depict the Business on a stand-alone basis. As a result, the financial statements included herein may not necessarily be indicative of the Business’s financial position, results of operations, or cash flows had the Business operated as a stand-alone entity during the period presented.

The financial statements were prepared using the historical records of the assets and liabilities of the Parent, and all sales, costs, assets and liabilities directly attributable to the Business. In addition, certain expenses reflected in the financial statements include allocations of corporate and other expenses from the Parent, which in the opinion of management are reasonable (refer to Note 8).

All such allocated costs and expenses have been deemed to have been paid by the Business to Parent in the period in which the costs were incurred.

Use of Estimates and Assumptions

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates are used for, but are not limited to, the accounting

Apartments.com

(A Business Unit of Classified Ventures, LLC)

Notes to Financial Statements

for: allowance for uncollectible accounts receivable, depreciation and amortization, useful lives of definite-lived assets, accrued expenses, goodwill, commitments and contingencies, allocations of corporate and other expenses, among others.

Concentration of Credit Risk

Credit risk represents the accounting loss that would be recognized at the reporting date if counterparties failed to perform as contracted. The Business believes the likelihood of incurring material losses due to concentration of credit risk is remote. The principal financial instruments subject to credit risk are as follows:

Accounts Receivable – The Business’s credit policies and credit lines limit credit risk. Based on historical trends and experiences, the allowance for doubtful accounts is adequate to cover potential credit risk losses.

Accounts receivable are carried at their face value less an allowance for doubtful accounts. To date, accounts receivable have primarily been derived from advertising fees billed to Affiliates, property managers, private parties, and banner and sponsorship advertising clients. At December 31, 2013 and 2012, net accounts receivable from Affiliates was $0.5 million excluding credit balances and $0.2 million, respectively, which represented 5% and 1%, respectively, of the net accounts receivable. No Affiliate individually had accounts receivable greater than 10% of the overall total.

The Business requires no collateral to support accounts receivable and maintains reserves for potential credit losses. Historically, such losses have been within management’s expectations. The Business maintains reserves based upon the expected collectability of accounts receivable and establishes specific reserves when appropriate. No individual customer had a significant revenue concentration.

Changes in the allowance for doubtful accounts are as follows:


	2013			2012			2011

Balance at January 1	$	418		$	320		$	430
Charges to expenses		632			634			375
Write-offs, net of recoveries		(685	)		(536	)		(485	)

Balance at December 31	$	365		$	418		$	320

Centrally Pooled Cash – As the Parent uses a centralized cash management system, there is no cash held locally by the Business. Transactions between the Parent and the Business are accounted for through the Parent company investment. Therefore, no cash is included in the balance sheet.

Marketable Securities Held in Trust

The Business’s marketable securities held in trust relate to the deferred compensation plan (see Note 13) and are classified as trading securities, with unrealized gains and losses included in the statement of operations of the Business. The marketable securities held in trust were $2.2 million and $2.5 million as of December 31, 2013 and 2012, respectively.

Apartments.com

(A Business Unit of Classified Ventures, LLC)

Notes to Financial Statements

Property and Equipment

Property and equipment are stated at cost and depreciated on a straight-line basis over the estimated useful lives as follows:


Computer software and hardware		3-5 years
Furniture and fixtures		7-12 years
Leasehold improvements		shorter of lease term or estimated useful life

Normal repairs and maintenance are expensed as incurred. The costs and related accumulated depreciation of assets sold or disposed are removed from the balance sheet and any resulting gain or loss is included in the statement of operations.

Goodwill

Goodwill represents the excess of the total purchase price of acquisitions over the fair value of the acquired assets. Goodwill is not amortized, but is subject to an impairment review annually and whenever indicators of impairment exist. Starting in 2012, the option was available to the Business to use the qualitative assessment of impairment. The Business chose to test for goodwill impairment, at the reporting unit level, using the two-step process. The first step involves a comparison of the estimated fair value of each reporting unit with its carrying value. Fair value is estimated using discounted cash flows of the reporting unit based on planned growth rates, and estimates of discount rates and residual values. If the carrying value exceeds the fair value, the second step of the process is necessary. The second step measures the difference between the carrying value and implied fair value of goodwill. If the carrying value exceeds fair value, goodwill is considered impaired and is reduced to fair value. See Note 6 for additional goodwill disclosures.

Valuation of Long-Lived Assets

The Business evaluates the carrying value of long-lived assets to be held and used whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The carrying value of long-lived group of assets is considered impaired when the projected undiscounted cash flows are less than the carrying value. No impairment losses were incurred in 2013, 2012 and 2011.

Website and Product Development Costs

Website product development costs are capitalized based upon the nature of the costs incurred and the stage of the website’s development.

For software developed or obtained for internal use, the Business capitalizes costs based upon the nature of the costs incurred and the stage of software development. There were no internal-use software costs capitalized in 2013, 2012 and 2011.

Fair Value of Financial Instruments

The Business’s financial instruments include accounts receivable, accounts payable and accrued liabilities. Due to the short-term nature of these items, the carrying values are deemed to approximate fair value. For the fair value of marketable securities refer to the Note 11.

Apartments.com

(A Business Unit of Classified Ventures, LLC)

Notes to Financial Statements

Revenue Recognition

The primary source of revenue for the Business is from the sale of online subscription advertising products for the rentals industry segment. Online advertising sales to Affiliates, property managers, and private parties are recognized as the service is delivered. Revenue is recorded net of credits.

The Business also sells banner and sponsorship advertising on its websites, pursuant to fixed fee or transaction based contracts. The customers are billed for impressions delivered or click-throughs on their advertisements. An impression is the display of an advertisement to an end-user on the website and is a measure of volume. A click-through occurs when an end-user clicks on an impression. Revenue is recognized evenly over the contract term for fixed fee contracts where a minimum number of impressions or click-throughs is not guaranteed. Revenue is recognized as the service is delivered for transaction based contracts. If the impressions or click-throughs delivered are less than the amount billed, the difference is recorded as deferred revenue and recognized as earned.

Advertising Expenses

The Business expenses all advertising costs as incurred. Total advertising expense was $11.2 million, $9.8 million, and $9.0 million for the years ended December 31, 2013, 2012 and 2011, respectively.

Income Taxes

As a limited liability company, the Parent is generally not subject to income taxes. Accordingly, no income taxes have been recognized by the Business.

3.	Recently Issued Pronouncements

In December 2013, the FASB issued Accounting Standards Update No. 2013-12, Definition of a Public Business Entity. This ASU defines public business entity. The definition of a public business entity will be used in considering the scope of new financial guidance and will identify whether the guidance does or does not apply to public business entities. The term public business entity will be used in Accounting Standards Updates issued beginning in 2014. As of December 31, 2013 this guidance did not impact the Business’s financial statements. The Business is still evaluating the impact on the financial statements prospectively.

4.	Operating Leases

The Business is obligated as a lessee under a certain non-cancelable operating lease for the office space in Austin, Texas and is also obligated to pay for insurance, maintenance and other executory costs associated with the lease. The Parent has operating leases for the office space in Chicago, Illinois and charged the Business $0.8 million, $0.7 million, and $0.7 million during 2013, 2012 and 2011, respectively, as part of allocated corporate expenses (see Note 8).

Future minimum operating lease payments for the Business, excluding allocated expenses from the Parent, at December 31, 2013 are as follows:


2014	$	54
2015		42

Total	$	96

Apartments.com

(A Business Unit of Classified Ventures, LLC)

Notes to Financial Statements

Rental expense, excluding an allocation of expenses from the Parent, was $0.1 million, $0.1 million and $0.1 million for the year ended December 31, 2013, 2012 and 2011, respectively. Allocations from the Parent include $0.8 million, $0.7 million and $0.7 million of rental expense related to the Chicago office space for 2013, 2012 and 2011, respectively.

5.	Property and Equipment

Property and equipment at December 31, 2013 and 2012 consisted of the following:


	2013			2012

Computer software and hardware	$	3,607		$	3,654
Furniture and equipment		902			711

		4,509			4,365
Less accumulated depreciation		(2,976	)		(2,972	)

Total	$	1,533		$	1,393

Depreciation expense, excluding an allocation of expenses from the Parent, was $0.6 million, $0.6 million and $0.7 million for the years ended December 31, 2013, 2012 and 2011, respectively. Allocations from the Parent for the years ended December 31, 2013, 2012 and 2011 include $1.1 million, $0.8 million and $0.8 million, respectively, of depreciation expense primarily related to shared data center, computer software and hardware and network equipment (see Note 8).

6.	Goodwill

Apartments.com has $3.4 million of goodwill as a result of the acquisition of ApartmentHomeLiving.com in February 2009. The Business purchased ApartmentHomeLiving.com, an online classified listing site for apartment rental properties based in Austin, Texas, for a cash payment of $2.0 million. The agreement also provided for additional payments to be made if certain earnings and traffic targets were met in the future, such payments totaled $1.5 million in 2010 and $1.7 million in 2009.

The Business performs the required annual impairment assessment of its goodwill in the fourth quarter. Management determined that the fair value of the Business exceeded the respective carrying value significantly and accordingly, goodwill within the reporting unit was not determined to be impaired. Management will continue to evaluate for impairment of goodwill, if any, based on any declines in the real estate rental market or other impairment triggers.

Apartments.com

(A Business Unit of Classified Ventures, LLC)

Notes to Financial Statements

7.	Definite Lived Intangible Assets

The Business has definite lived intangible assets from recent acquisitions which consist primarily of unamortized assets that became fully amortized in the year 2013. The following table sets forth balance sheet information for intangible assets subject to amortization, excluding goodwill:


	URL/Domain						Vendor &
	and Trade			Customer			Affiliate			Overall
	Names			Relationships			Relationships			Technology			Total

At December 31, 2013
Gross intangible assets	$	40		$	90		$	10		$	400		$	540
Accumulated amortization		(40	)		(90	)		(10	)		(400	)		(540	)

Intangible assets, net	$	—		$	—		$	—		$	—		$	—


	URL/Domain						Vendor &
	and Trade			Customer			Affiliate			Overall
	Names			Relationships			Relationships			Technology			Total

At December 31, 2012
Gross intangible assets	$	40		$	90		$	10		$	400		$	540
Accumulated amortization		(39	)		(90	)		(10	)		(392	)		(531	)

Intangible assets, net	$	1		$	—		$	—		$	8		$	9

Amortization expense was immaterial for 2013 and $0.1 million and $0.1 million in 2012 and 2011, respectively. Based upon the current amount of intangibles subject to amortization, there is no estimated amortization expense for 2014. The useful lives range from 1.5 - 4 years.

8.	Related Party Transactions

Net sales to Investor Affiliates totaled $7.3 million, $8.0 million and $8.1 million for the years ended December 31, 2013, 2012 and 2011, respectively, and revenue share to the Affiliates totaled $4.8 million, $3.5 million and $2.6 million for the years ended December 31, 2013, 2012 and 2011, respectively. Net accounts receivable from Investor Affiliates totaled $0.5 million excluding credit balances and $0.2 million as of December 31, 2013 and 2012, respectively.

Pursuant to Affiliate Agreements between the Business and each of its Affiliates, Affiliates are assigned a sales territory to sell the Business’s products on a wholesale/retail basis. The Affiliate Agreements specify print and online promotion obligations of the Affiliate, bar the Affiliates from engaging in specified activities and identify performance obligations of the Business and the Affiliate. Each Investor owned Affiliate Agreement contains language requiring the Business to treat all similarly situated Investor Affiliates equally.

The financial statements include expense allocations from the Parent for certain functions, including but not limited to, general corporate and other expenses including finance, legal, information technology supporting data center and network infrastructure, human resources, insurance, and facilities. These expenses have been allocated to the Business on the basis of direct usage when identifiable, with the remainder allocated on the basis of headcount or other measures.

Apartments.com

(A Business Unit of Classified Ventures, LLC)

Notes to Financial Statements

During the years ended December 31, 2013, 2012 and 2011 the Business was allocated the following expenses which are included in the statement of operations as follows:


	2013		2012		2011

Product support, technology and operations	$	2,624	$	2,423	$	2,237
General and administrative		4,194		3,984		4,060

Total allocated	$	6,818	$	6,407	$	6,297

In addition to the allocations described above, the financial statements include expense reimbursements from the Parent for certain agreed upon employee costs performed for supporting Auto.com website and traffic maintenance beginning in 2012. These reimbursements have been allocated to the Business on the basis of time spent on the project. The benefit received by the Business totaled $0.7 million and $0.6 million for the years ended December 31, 2013 and 2012, respectively, and was recorded in product support, technology and operations expenses in the income statement.

The expense allocations have been determined on a basis that both the Parent and Business consider to be a reasonable reflection of the utilization of services provided or the benefit received by the Business during the periods presented.

9.	Net Investment of Parent

The Net Investment of Parent reflects the net assets of the Business, which is comprised of the retained earnings of the Business, net of contributions and distributions and transactions between the Business and the Parent.

All significant intercompany transactions between the Parent and the Business have been included in these financial statements and are considered to be effectively settled for cash at the time the transaction is recorded. The total net effect of the settlement of these intercompany transactions is reflected in the statement of cash flows as a financing activity and in the statement of changes in the Net Investment of Parent.

10.

Business Investment

Apartments.com has an investment in RentWiki Holdco, LLC, which has as its only asset an investment in Vertical Brands, Inc. Vertical Brands, Inc. operates a peer review and recommendation website called www.apartmentlist.com to find apartments across cities in the United States. In September 2013, the Business received preferred stock at an investment value of $0.2 million which represents less than 5% ownership in RentWiki Holdco, LLC. Each share of preferred stock carries the same voting rights as other classes of stock; however they have a substantive liquidation preference and are not actively traded. Therefore, the Business accounts for this investment under the cost method.

The aggregate carrying amount of the investment at December 31, 2013 was $0.2 million. The Business did not estimate the fair value of the investment because it did not identify any events or circumstances that may have had a significant adverse effect on the investment’s value.

Apartments.com

(A Business Unit of Classified Ventures, LLC)

Notes to Financial Statements

11.

Fair Value Measurements

The Business accounts for certain items using the fair market value method of accounting which establishes a fair value hierarchy for those items measured at fair value that distinguishes between assumptions based on market data (observable inputs) and the Business’s assumptions (unobservable inputs). The fair value hierarchy consists of the following three levels:

•

Level 1- Quoted prices in active markets that the Business has the ability to access for identical assets or liabilities;

•

Level 2 - Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuations in which all significant inputs are observable in the market; and

•

Level 3 - Valuations using significant inputs that are unobservable in the market and include the use of judgment by the Business’s management about the assumptions market participants would use in pricing the asset or liability.

The financial assets and liabilities of the Business that are carried at fair value on a recurring basis in the balance sheet include the Long Term Incentive Plan (“LTIP”) assets and liabilities and marketable securities (see Note 13).

The following table presents the LTIP investments carried at fair value as of December 31, 2013, by category on the balance sheet in accordance with the valuation hierarchy defined above:


	Level 1		Level 2		Level 3		Total

Mutual funds	$	2,105	$	—	$	—	$	2,105
Fixed income fund		—		72		—		72

	$	2,105	$	72	$	—	$	2,177

The following table presents the LTIP investments carried at fair value as of December 31, 2012, by category on the balance sheet in accordance with the valuation hierarchy defined above:


	Level 1		Level 2		Level 3		Total

Mutual funds	$	2,350	$	—	$	—	$	2,350
Fixed income fund		—		181		—		181

	$	2,350	$	181	$	—	$	2,531

The following is a description of the Business’s valuation methodologies for assets and liabilities measured at fair value.

Fair value for mutual funds is measured using quoted market prices at the reporting date multiplied by the quantity held.

Apartments.com

(A Business Unit of Classified Ventures, LLC)

Notes to Financial Statements

The Business has an investment in a commingled fund for which quoted market prices are not available. The value of the investment represents the net asset value as provided by the trustee. Management performs its own pricing diligence by reviewing the net asset value and by obtaining audited financial statements from the trustee.

12.

Retirement Plan

The Parent has a 401(k) Retirement Savings Plan, which is qualified under Section 401(k) of the Internal Revenue Code and for which all full-time Business employees are eligible. Participants are eligible on the first day of the quarter following the date of hire after one month of service and are allowed to make tax-deferred contributions up to 100% of annual compensation, subject to limitations specified by the Internal Revenue Code.

The Business match is 100% of the employee’s contribution up to 3% of the employee’s salary, and thereafter 50% of the employee’s contribution, until the employee’s contributions reach 5% of the employee’s salary. All employees are fully vested immediately. For the years ended December 31, 2013, 2012 and 2011, the Business expensed matching contributions in the amount of $0.6 million, $0.5 million and $0.4 million, respectively.

13.

Long-Term Incentive Plan

In June 2001, the Parent’s LTIP, in which the employees of the Business participate, was established. The Parent, at its discretion, may designate up to 60 key employees to participate in the LTIP and may make annual contributions to the participants’ account. The contributions are invested at the participant’s direction among investment options including mutual funds and money market funds. The Business contributed $0.1 million, $0.4 million and $0.4 million in 2013, 2012 and 2011, respectively. The total amount contributed by the Business is marked to market quarterly and any unrealized gains (losses) are recognized through the income statement.

The amounts contributed to participants’ accounts vest over a three-year period. One-third of the amount contributed in a plan year (and any increases or decreases in the account as a result of income, gains, losses or costs allocated to the account) vests and is payable on February 15^th of each of the three succeeding plan years after the plan year in which the contribution was made. Once a portion of an award vests, it is either deferred for one year or paid to the participant. This initial deferral election is made by the participant prior to the plan year for which the award was issued. One year following the vesting date, that same portion of the deferred award is either deferred for five years or paid to the participant. This subsequent deferral election is made not later than December 31^st of the plan year prior to the plan year for which the award was issued. If a participant is involuntarily terminated other than for cause as defined by the plan, the participant’s account becomes 100% vested and distributed. If a participant resigns, the vested portion of the participant’s account is distributed and the unvested portion is forfeited. The forfeited funds are retained within the Trust and used to offset future contributions. Forfeitures were less than $0.1 million for the year ended December 31, 2013, $0.4 million for the year ended December 31, 2012, and $0.1 million for the year ended December 31, 2011.

Apartments.com

(A Business Unit of Classified Ventures, LLC)

Notes to Financial Statements

The Business applies accounting guidance for stock appreciation rights and other variable stock option or award plans for the cash awarded under this deferred compensation plan. Deferred compensation expense, excluding an allocation of corporate expenses from the Parent, was $0.1 million, $0.2 million, and $0.4 for the year ended December 31, 2013, 2012 and 2011, respectively. Corporate allocations from the Parent include less than $0.1 million, $0.1 million, and $0.2 million of deferred compensation expense in 2013, 2012 and 2011, respectively (see Note 8). The deferred compensation liability was $2.1 million and $2.4 million at December 31, 2013 and 2012, respectively.

Additionally in 2012, the LTIP asset and liability increased due to mid-year transfers of employees into the Business from the Parent. Transfers were $2.0 million into the LTIP asset and $1.6 million into the LTIP liability in 2012.

14.

Share Appreciation Rights Plan

Effective as of January 1, 2012, the Parent established a Share Appreciation Rights (SAR) Plan, in which the employees of the Business participate. The Classified Ventures Share Appreciation Rights Plan is intended to motivate certain key employees of Classified Ventures, LLC to maximize their contributions to the long-term success of the Business and to encourage them to remain in the employ of the Business through awards of Share Appreciation Rights. The Compensation Committee of the Parent, at its discretion, may designate key employees to participate in the plan. Eligible participants will receive a number of stock appreciation rights annually that entitle the employee to receive the appreciation in the fair market value of a share from the date of grant up to a specified date or dates plus an amount equal to the distributions per share. Benefits paid under this plan will be made in cash, not common stock, at the end of the three-year vesting period from the original grant date. Expenses related to the Share Appreciation Rights Plan have been recorded in accordance with the accounting standards for share based payments. Due to the cash settlement at the end of the performance period, the awards are classified as a liability and are remeasured each reporting period at fair value.

Under the SARs Plan, deferred compensation is based upon award of share appreciation rights, the value of which is related to the appreciation in the value of the common units of the Parent. Awards granted in a given year vest to the participant over a three-year period and are settled in cash at the end of the three-year performance period. In 2013 and 2012, respectively, the Parent awarded 0.5 and 0.9 million of share appreciation rights to participants employed by the Business with a base price of $4.48 and $4.19 per right. The price was determined by a third party valuation analysis which based the business value on the combination of income and market approaches. Upon the settlement of vested rights, the participant receives a lump sum cash payment in an amount equal to (i) the value of a common unit as of the date of settlement less (ii) the grant price value of a common unit on the grant date, plus dividend distributions per unit.

Apartments.com

(A Business Unit of Classified Ventures, LLC)

Notes to Financial Statements

Appreciation rights outstanding and exercisable as of December 31, 2013 and changes during the year ended were as follows:


	Rights / Units			Weighted Avg. Grant Price		Remaining Avg. Contract Terms		Aggregate Intrinsic Value
	(in thousands)			(per right)		(in years)		(in thousands)
Rights outstanding as of December 31, 2012		508		$	4.19
Granted		457			4.48
Transfers		67			4.19
Exercised		—			—
Forfeited or terminated		(34	)		4.37

Rights outstanding as of December 31, 2013		998		$	4.32		1.5	$	1,940


Rights exercisable as of December 31, 2013		535		$	4.27		1.5	$	1,085

Appreciation rights outstanding and exercisable as of December 31, 2012 and changes during the year ended were as follows:


	Rights / Units			Weighted Avg. Grant Price		Remaining Avg. Contract Terms		Aggregate Intrinsic Value
	(in thousands)			(per right)		(in years)		(in thousands)
Rights outstanding as of December 31, 2011		—		$	—
Granted		852			4.19
Exercised		—			—
Forfeited or terminated		(344	)		4.19

Rights outstanding as of December 31, 2012		508		$	4.19		2.0	$	299


Rights exercisable as of December 31, 2012		169		$	4.19		2.0	$	100

The Business measures the cost associated with awards issued under the SARs Plan using a graded vesting intrinsic value method, which includes a price increase in market value and a dividend component. Under this method, the cost of services related to the SARs Plan reflects changes in the Parent common unit price and the relative vesting period of the rights.

SARs expense, excluding an allocation of corporate expenses from the Parent, was $1.3 million and $0.1 million for the year ended December 31, 2013 and 2012. Corporate allocations from the Parent include $0.3 million for 2013 and less than $0.1 million of SARs expense in 2012 (see Note 8). No SARs Plan expense was capitalized as part of an asset and no significant plan modifications impacted the recorded expense in any of the reported years. There was $1.2 million and $0.1 million of deferred compensation liability related to the SARs Plan at December 31, 2013 and 2012, respectively.

Apartments.com

(A Business Unit of Classified Ventures, LLC)

Notes to Financial Statements

The following table summarizes the aggregate intrinsic value, which includes a dividend component, related to vested SARs as of December 31:


	2013						2012
	Rights / Units		Increase in Intrinsic Value		Aggregate Intrinsic Value		Rights / Units		Increase in Intrinsic Value		Aggregate Intrinsic Value
	(in thousands)		(per right)		(in thousands)		(in thousands)		(per right)		(in thousands)
Exercised rights		—		—		—		—		—		—
Vested rights outstanding		535	$	2.03	$	1,085		169	$	0.59	$	100

Total unrecognized compensation cost related to nonvested SARs, which includes a dividend component, is estimated to be $0.8 million and $0.2 million at December 31, 2013 and 2012, respectively. This cost is expected to be recognized over a remaining average vesting period of 1.5 years.

15.

Commitments and Contingencies

The Business is party to lawsuits arising out of the normal course of business. Management believes the final outcome of such litigation will not have a material adverse effect on the Business’s financial position, results of operations or cash flows.

16.

Subsequent Events

The Business assessed events occurring subsequent to December 31, 2013 and through March 28, 2014, the date the financial statements were issued, for potential recognition and disclosure in the financial statements.

On March 3, 2014, the Parent announced that it has entered into an agreement to sell the Apartments.com business for $585 million. The sale is expected to be finalized in the second quarter of 2014.

EX-99.2 4 d730969dex992.htm EX-99.2 EX-99.2

Exhibit 99.2

Apartments.com

(A Business Unit of Classified Ventures, LLC)

Unaudited Financial Statements

Three Months Ended March 31, 2014 and 2013

Apartments.com

(A Business Unit of Classified Ventures, LLC)

Index

Three months ended March 31, 2014 and 2013


	Page(s)

Unaudited Financial Statements

Balance Sheet		1

Statements of Operations		2

Statements of Cash Flows		3

Notes to Unaudited Financial Statements		5-11

Apartments.com

(A Business Unit of Classified Ventures, LLC)

Balance Sheets (unaudited)

March 31, 2014 and December 31, 2013


(In thousands of dollars)	March 31, 2014		December 31, 2013
Assets
Current assets
Marketable securities held in trust	$	1,464	$	633
Accounts receivable, net of allowance for doubtful accounts of $411 and $365, respectively		10,361		10,416
Affiliate Investor accounts receivable		530		524
Prepaid expenses & other current assets		1,739		1,680

Total current assets		14,094		13,253

Property and equipment, net of accumulated depreciation		1,583		1,533
Marketable securities held in trust, less current portion		—		1,544
Goodwill		3,440		3,440
Investment		183		183


Total assets	$	19,300	$	19,953


Liabilities and Net Investment of Parent
Current liabilities
Accounts payable	$	1,957	$	1,781
Accrued compensation and related costs		2,059		2,656
Accrued expenses & other current liabilities		4,670		2,797
Deferred revenue		611		595
Current portion deferred incentive plans		5,264		633

Total current liabilities		14,561		8,462

Deferred incentive plans, less current portion		—		2,699

Total liabilities		14,561		11,161

Commitments and contingencies

Net investment of Parent		4,739		8,792


Total liabilities and net investment of Parent	$	19,300	$	19,953

The accompanying notes are an integral part of these financial statements.

Apartments.com

(A Business Unit of Classified Ventures, LLC)

Statements of Operations (unaudited)

Three months ended March 31, 2014 and 2013


	Three Months Ended
	March 31,
(In thousands of dollars)	2014		2013

Operating revenue
Net revenue	$	20,832	$	18,349
Net revenue Affiliate Investor		1,570		1,771

Total net operating revenue		22,402		20,120

Operating expenses
Product support, technology and operations		4,833		4,105
Marketing and sales		7,577		6,624
General and administrative		5,383		1,883
Professional Fees for Sale		2,350		—
Affiliate revenue share		1,496		1,159

Total operating expenses		21,639		13,771

Operating income		763		6,349

Other income
Gain on investments		4		54

Net income	$	767	$	6,403

The accompanying notes are an integral part of these financial statements.

Apartments.com

(A Business Unit of Classified Ventures, LLC)

Statement of Cash Flows (unaudited)

Three months ended March 31, 2014 and 2013


	Three Month Period
	March 31,
(In thousands of dollars)	2014			2013
Cash flows from operating activities
Net income	$	767		$	6,403
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		136			188
Provision for accounts receivable		183			202
Change in operating assets and liabilities
Accounts receivable		(134	)		645
Prepaid expenses and other current assets		(59	)		(141	)
Deferred compensation, net of funding		2,645			261
Accounts payable		293			(62	)
Accrued expenses and other current liabilities		1,276			(1,569	)
Deferred revenue		16			42

Net cash provided by operating activities		5,123			5,969

Cash flows from investing activities
Purchase of property and equipment		(321	)		(93	)

Net cash used in investing activities		(321	)		(93	)

Cash flows from financing activities
Net transfer to Parent		(4,802	)		(5,876	)

Net cash used in financing activities		(4,802	)		(5,876	)

Increase in cash		—			—

Cash
Beginning of period		—			—

End of period	$	—		$	—


Supplemental disclosure of noncash investing and financing activities
Purchases of property, plant and equipment in accrued liabilities and accounts payables at the end of the period	$	14		$	—

The accompanying notes are an integral part of these financial statements.

Apartments.com

(A Business Unit of Classified Ventures, LLC)

Notes to Unaudited Financial Statements

Three months ended March 31, 2014 and 2013

1.	Nature of Business

2.	Interim Financial Statements

The accompanying unaudited financial statements of the Business have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. In the opinion of the Business’s management, the financial statements reflect all adjustments necessary to present fairly the Business’s financial position at March 31, 2014, the results of its operations for the three months ended March 31, 2014 and 2013, and its cash flows for the three months ended March 31, 2014 and 2013. These adjustments are of a normal recurring nature. The year-end balance sheet was derived from audited financial statements, but does not include all disclosures required by U.S. generally accepted accounting principles (“U.S. GAAP”). These financial statements should be read in conjunction with the financial statements and notes thereto for the fiscal year ended December 31, 2013.

The results of operations for the three months ended March 31, 2014 are not necessarily indicative of future financial results.

3.	Summary of Significant Accounting Policies

Basis of Presentation

Apartments.com

(A Business Unit of Classified Ventures, LLC)

Notes to Unaudited Financial Statements

Three months ended March 31, 2014 and 2013

All such allocated costs and expenses have been deemed to have been paid by the Business to Parent in the period in which the costs were incurred.

As the Parent uses a centralized cash management system, there is no cash held locally by the Business. Transactions between the Parent and the Business are accounted for through the Parent company investment. Therefore, no cash is included in the balance sheet.

4.	Recently Issued Pronouncements

In December 2013, the FASB issued Accounting Standards Update No. 2013-12, Definition of a Public Business Entity. This ASU defines public business entity. The definition of a public business entity will be used in considering the scope of new financial guidance and will identify whether the guidance does or does not apply to public business entities. The term public business entity will be used in Accounting Standards Updates issued beginning in 2014. As of March 31, 2014 this guidance did not impact the Business’s financial statements.

In April 2014, the FASB issued Accounting Standards Update No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The ASU requires expanded disclosures for discontinued operations. The amendments also change the definition of discontinued operations by limiting discontinued operations reporting to disposals of components of an entity that represent strategic shifts that have a major effect on an entity’s operations and financial results. This update will be effective for the Business for annual periods beginning after December 15, 2014. The updated guidance is not expected to have a material impact on the Business’s financial statements.

5.	Related Party Transactions

Net sales to Investor Affiliates totaled $1.6 million and $1.8 million for the three months ended March 31, 2014 and 2013, respectively, and revenue share to the Affiliates totaled $1.5 million and $1.2 million for the three months ended March 31, 2014 and 2013, respectively. Net accounts receivable from Investor Affiliates totaled $0.5 million excluding credit balances as of March 31, 2014.

Agreements specify print and online promotion obligations of the Affiliate, bar the Affiliates from engaging in specified activities and identify performance obligations of the Business and the Affiliate. Each Investor owned Affiliate Agreement contains language requiring the Business to treat all similarly situated Investor Affiliates equally.

Apartments.com

(A Business Unit of Classified Ventures, LLC)

Notes to Unaudited Financial Statements

Three months ended March 31, 2014 and 2013


	Three Months Ended March 31,
	2014		2013

Product support, technology and operations	$	718	$	618
General and administrative		1,422		926

Total allocated	$	2,140	$	1,544

In addition to the allocations described above, the financial statements include expense reimbursements from the Parent for certain agreed upon employee costs performed for supporting Auto.com website and traffic maintenance beginning in 2012. These reimbursements have been allocated to the Business on the basis of time spent on the project. The benefit received by the Business totaled $0.2 million and $0.2 million for the three months ended March 31, 2014 and 2013, respectively, and was recorded in product support, technology and operations expenses in the income statement.

6.	Net Investment of Parent

7.	Fair Value Measurements

Apartments.com

(A Business Unit of Classified Ventures, LLC)

Notes to Unaudited Financial Statements

Three months ended March 31, 2014 and 2013

•

Level 1 - Quoted prices in active markets for identical assets or liabilities;

•

The following table presents the LTIP investments carried at fair value as of March 31, 2014, by category on the balance sheet in accordance with the valuation hierarchy defined above:


	Level 1		Level 2		Level 3		Total

Mutual funds	$	1,372	$	—	$	—	$	1,372
Fixed income fund		—		91		—		91

	$	1,372	$	91	$	—	$	1,463

The following is a description of the Business’s valuation methodologies for assets and liabilities measured at fair value.

Fair value for mutual funds is measured using quoted market prices at the reporting date multiplied by the quantity held.

8.	Long-Term Incentive Plan

In June 2001, the Parent’s LTIP, in which the employees of the Business participate, was established. The Parent, at its discretion, may designate up to 60 key employees to participate in the LTIP and may make annual contributions to the participants’ account. The contributions are invested at the participant’s direction among investment options including mutual funds and money market funds. The Business contributed $0.1 million and $0.1 million in the three months ended March 31, 2014 and 2013, respectively. The total amount contributed by the Business is marked to market quarterly and any unrealized gains (losses) are recognized through the income statement.

Apartments.com

(A Business Unit of Classified Ventures, LLC)

Notes to Unaudited Financial Statements

Three months ended March 31, 2014 and 2013

The Business applies accounting guidance for stock appreciation rights and other variable stock option or award plans for the cash awarded under this deferred compensation plan. Deferred compensation expense, excluding an allocation of corporate expenses from the Parent, was less than $0.1 million for the three months ended March 31, 2014 and 2013. Corporate allocations from the Parent include less than $0.1 million of deferred compensation expense in the three months ended March 31, 2014 and 2013 (see Note 5). The deferred compensation liability was $1.4 million at March 31, 2014.

9.	Share Appreciation Rights Plan

Under the SARs Plan, deferred compensation is based upon award of share appreciation rights, the value of which is related to the appreciation in the value of the common units of the Parent. The value of the common units is determined by a third party valuation analysis which bases the business value on the combination of income and market approaches. Awards granted in a given year vest to the participant over a three-year period and are settled in cash at the end of the three-year performance period. Upon the settlement of vested rights, the participant receives a lump sum cash payment in an amount equal to (i) the value of a common unit as of the date of settlement less (ii) the grant price value of a common unit on the grant date, plus dividend distributions per unit.

During Q1 2014, the Parent modified the awards granted to Apartments.com employees to vest the awards upon sale of the Business. This modification was considered to be probable at the time of the

Apartments.com

(A Business Unit of Classified Ventures, LLC)

Notes to Unaudited Financial Statements

Three months ended March 31, 2014 and 2013

modification and the fair value of the modified awards was to be recognized over the remaining service period which was the date of modification through the expected date of sale of the Business, April 1, 2014. The deferred compensation liability related to these modified awards was recorded as a current liability in the balance sheet as of March 31, 2014 based on the expected timing of the sale of the Business. The related marketable securities were presented as a current asset.

Appreciation rights outstanding and exercisable as of March 31, 2014 and changes during the three months ended March 31, 2014 were as follows:


					Remaining
			Weighted		Avg.		Aggregate
	Rights /		Avg. Grant		Contract		Intrinsic
	Units		Price		Terms		Value
	(in thousands)		(per right)		(in years)		(in thousands)

Rights outstanding as of December 31, 2013		998	$	4.32
Granted
Exercised		—		—
Forfeited or terminated		—		—

Rights outstanding as of March 31, 2014		998	$	4.32		—	$	3,769


Rights exercisable as of March 31, 2014		998	$	4.32		—	$	3,769

Although no appreciation rights were formally issued in 2014, the equivalent amount of targeted compensation for 2014 of less than $0.1 million was awarded as part of the sale.

SARs expense, excluding an allocation of corporate expenses from the Parent, was $2.6 million and $0.2 million for the three months ended March 31, 2014 and 2013, respectively. Corporate allocations from the Parent include $0.4 million and $0.1 million for the three months ended March 31, 2014 and 2013, respectively (see Note 5). No SARs Plan expense was capitalized as part of an asset and no significant plan modifications impacted the recorded expense in any of the reported years. There was $3.8 million of deferred compensation liability related to the SARs Plan at March 31, 2014.

The following table summarizes the aggregate intrinsic value, which includes a dividend component, related to vested SARs as of March 31 2014:

Increase

Aggregate

Rights /

Intrinsic

Units

Value

(in thousands)

(per right)

(in thousands)

Exercised rights

—

Vested rights outstanding

998

3.78

3,769

Apartments.com

(A Business Unit of Classified Ventures, LLC)

Notes to Unaudited Financial Statements

Three months ended March 31, 2014 and 2013

10.

Commitments and Contingencies

11.

Subsequent Events

The Business assessed events occurring subsequent to March 31, 2014 and through May 14, 2014, the date the financial statements were issued, for potential recognition and disclosure in the financial statements.

The Business determined other than disclosed below, that there were no subsequent events or transactions as of May 14, 2014 that required recognition or disclosure in the consolidated financial statements.

On April 1, 2014, the Parent sold substantially all of the assets and liabilities related to the Apartments.com business unit for $585 million, of which $29.3 million will be held in escrow until 2015.

EX-99.3 5 d730969dex993.htm EX-99.3 EX-99.3

Exhibit 99.3

Unaudited pro forma condensed combined financial

data of the Company and Apartments.com

The following unaudited pro forma condensed combined financial statements are based upon the historical consolidated financial data of CoStar Group, Inc. (“the Company”) and Apartments.com, a division of Classified Ventures, LLC, after giving effect to the acquisition of Apartments.com by the Company completed on April 1, 2014 and the related financing, and after applying the assumptions, reclassifications and adjustments described in the accompanying notes.

The unaudited pro forma condensed combined statements of income combine the historical consolidated statements of income of the Company and Apartments.com, giving effect to the acquisition, as if it had occurred on January 1, 2013. The unaudited pro forma condensed combined balance sheet combines the historical consolidated balance sheets of the Company and Apartments.com, giving effect to the acquisition as if it had occurred on March 31, 2014. The historical consolidated financial data has been adjusted in the unaudited pro forma condensed financial data to give effect to pro forma events that are (1) directly attributable to the acquisition, (2) factually supportable, and (3) with respect to the statement of income, expected to have a continuing impact on the combined results. The unaudited pro forma condensed combined financial data should be read in conjunction with the accompanying notes to the unaudited pro forma condensed combined financial data. In addition, the unaudited pro forma condensed combined financial data was based on and should be read in conjunction with the:

•

separate historical financial statements of the Company for the year ended December 31, 2013 and as of and for the quarterly period ended March 31, 2014 and the related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013 and the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2014, respectively, and

•

separate historical financial statements of Apartments.com for the year ended December 31, 2013 and as of and for the quarterly period ended March 31, 2014 and the related notes included in this Report on Form 8-K/A.

Certain items have been reclassified from Apartments.com’s historical financial statement information to align the presentation of those financials with the Company’s financial statement presentation. The unaudited pro forma condensed combined financial data has been presented for informational purposes only. The pro forma information is not necessarily indicative of what the combined company’s financial position or results of operations actually would have been had the acquisition been completed as of the dates indicated. In addition, the unaudited pro forma condensed combined financial data does not purport to project the future financial position or operating results of the combined company.

The unaudited pro forma condensed combined financial data has been prepared using the acquisition method of accounting under existing U.S. generally accepted accounting principles, or GAAP standards, which are subject to change and interpretation. The acquisition accounting is dependent upon certain valuations and other studies that have yet to progress to a stage where there is sufficient information for a definitive measurement. Accordingly, the pro forma adjustments are preliminary and have been made solely for the purpose of providing unaudited pro forma condensed combined financial data. Differences between these preliminary estimates and the final acquisition accounting will occur and these differences could have a material impact on the accompanying unaudited pro forma condensed combined financial data and the combined company’s future results of operations and financial position.

The unaudited pro forma condensed combined financial data does not reflect any cost savings, operating synergies or revenue enhancements that the combined company may achieve as a result of the acquisition or the costs to integrate the operations of the Company and Apartments.com or the costs necessary to achieve these cost savings, operating synergies and revenue enhancements.

Unaudited Pro Forma Condensed Combined Balance Sheet

As of March 31, 2014

(in thousands)


	Historical CoStar Group, Inc.			Historical Apartments.com		Pro Forma Adjustments			Pro Forma Combined
ASSETS
Current assets:
Cash and cash equivalents	$	223,443		$	—	$	(196,970	) (6a)	$	26,473
Short-term investments		—			1,464		(1,464	) (5i)		—
Accounts receivable, less allowance for doubtful accounts		32,286			10,891		—			43,177
Deferred and other income taxes, net		37,362			—		—			37,362
Prepaid expenses and other current assets		8,113			1,739		(575	) (5i)		9,277
Debt issuance costs, net		2,547			—		823	(6f)		3,370

Total current assets		303,751			14,094		(198,186	)		119,659

Long-term investments		22,168			183		—			22,351
Property and equipment, net		57,338			1,583		(428	) (5i)		58,493
Goodwill		718,824			3,440		438,194	(6b)		1,160,458
Intangibles and other assets, net		137,168			—		136,000	(6c)		273,168
Deposits and other assets		1,818			—		—			1,818
Debt issuance costs, net		3,729			—		8,701	(6f)		12,430

Total assets	$	1,244,796		$	19,300	$	384,281		$	1,648,377

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	26,250		$	—	$	(6,250	) (6f)	$	20,000
Accounts payable		3,943			1,957		—			5,900
Accrued wages and commissions		12,426			2,059		(1,662	) (5i)		12,823
Accrued expenses		26,208			4,670		(445	) (6f)
							(3,101	) (5i)		27,332
Deferred gain on sale of building		2,523			—		—			2,523
Deferred revenue		35,926			611		(611	) (5i)		35,926
Current portion of deferred incentive plan		—			5,264		(5,264	) (5i)		—

Total current liabilities		107,276			14,561		(17,333	)		104,504

Long-term debt, less current portion		122,500			—		407,500	(6f)		530,000
Deferred gain on the sale of building		25,655			—		—			25,655
Deferred rent		23,353			—		—			23,353
Deferred income taxes, net		31,390			—		—			31,390
Income taxes payable		4,829			—		—			4,829

Total liabilities		315,003			14,561		390,167			719,731

Commitments and contingencies							—			—

Stockholders’ equity:
Preferred stock		—			—		—			—
Common stock		288			—		—			288
Additional paid in capital		855,535			—		—			855,535
Accumulated other comprehensive loss		(5,093	)		—		—			(5,093	)
Retained earnings		79,063			4,739		(5,886	) (6h)		77,916

Total stockholders’ equity		929,793			4,739		(5,886	)		928,646

Total liabilities and stockholders’ equity	$	1,244,796		$	19,300	$	384,281		$	1,648,377

Unaudited Pro Forma Condensed Combined Statement of Operations

For the Year Ended December 31, 2013

(in thousands, except per share amounts)


	Historical CoStar Group, Inc.			Historical Apartments.com		Reclassifications to recast historical Apartments.com in CoStar’s presentation			Recast Historical Apartments.com		Pro Forma Adjustments			Pro Forma Combined
Revenues	$	440,943		$	85,867	$	—		$	85,867	$	—		$	526,810
Cost of revenues		129,185					6,742			6,742		17,429	(6c)		153,356

Gross margin		311,758					(6,742	)		79,125		(17,429	)		373,454

Operating expenses:
Selling and marketing		98,708			29,215		5,955			35,170		—			133,878
Software development		46,757			18,497		(6,446	)		12,051		—			58,808
General and administrative		96,956			8,201		(96	)		8,105		(1,348	) (6d)		103,713
Purchase amortization		15,183					—			—		12,799	(6c)		27,982
Other Apartments.com operating expenses					6,155		(6,155	)		—		—			—

		257,604			62,068		(6,742	)		55,326		11,451			324,381

Income (loss) from operations		54,154			23,799		—			23,799		(28,880	)		49,073
Interest and other income		326			399		—			399		(399	) (6e)		326
Interest and other expense		(6,943	)		—		—			—		(8,933	) (6f)		(15,876	)

Income (loss) before income taxes		47,537			24,198		—			24,198		(38,212	)		33,523
Income tax expense (benefit), net		17,803			—		—			—		(5,325	) (6g)		12,478

Net income (loss)	$	29,734		$	24,198	$	—		$	24,198	$	(32,887	)	$	21,045

Net income per share — basic	$	1.07												$	0.76

Net income per share — diluted	$	1.05												$	0.75

Weighted average outstanding shares — basic		27,670													27,670

Weighted average outstanding shares — diluted		28,212													28,212

Unaudited Pro Forma Condensed Combined Statement of Operations

For the Three Months Ended March 31, 2014

(in thousands, except per share amounts)


	Historical CoStar Group, Inc.			Historical Apartments.com		Reclassifications to recast historical Apartments.com in CoStar’s presentation			Recast Historical Apartments.com		Pro Forma Adjustments			Pro Forma Combined
Revenues	$	119,076		$	22,402	$	—		$	22,402	$	—		$	141,478
Cost of revenues		33,643					1,734			1,734		4,357	(6c)		39,734

Gross margin		85,433					(1,734	)		20,668		(4,357	)		101,744

Operating expenses:
Selling and marketing		27,745			7,577		2,659			10,236		—			37,981
Software development		12,351			4,833		(983	)		3,850		—			16,201
General and administrative		24,897			5,383		436			5,819		(3,464	) (6d)		27,252
Purchase amortization		3,299								—		2,810	(6c)		6,109
Other Apartments.com operating expenses					3,846		(3,846	)		—		—			—

		68,292			21,639		(1,734	)		19,905		(654	)		87,543

Income (loss) from operations		17,141			763		—			763		(3,703	)		14,201
Interest and other income		137			4		—			4		(4	) (6e)		137
Interest and other expense		(1,615	)		—		—			—		(2,273	) (6f)		(3,888	)

Income (loss) before income taxes		15,663			767		—			767		(5,980	)		10,450
Income tax expense (benefit), net		5,923			—		—			—		(1,981	) (6g)		3,942

Net income (loss)	$	9,740		$	767	$	—		$	767	$	(3,999	)	$	6,508

Net income per share — basic	$	0.34												$	0.23

Net income per share — diluted	$	0.34												$	0.23

Weighted average outstanding shares — basic		28,273													28,273

Weighted average outstanding shares — diluted		28,840													28,840

NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

1.	Description of Transaction

On April 1, 2014, the Company purchased from Classified Ventures, LLC (“CV”) certain assets and assumed certain liabilities, in each case, related to the Apartments.com business for $587.1 million in cash, subject to a customary working capital adjustment. The acquisition of the Apartments.com business is a business combination and will be accounted for as such.

2.	Basis of Presentation

The unaudited pro forma condensed combined financial statements were prepared using the acquisition method of accounting, under existing U.S. GAAP standards, which are subject to change and interpretation, and were based on the historical financial statements of the Company and Apartments.com.

These standards require, among other things, that assets acquired and liabilities assumed be recognized at their fair value as of the acquisition. These standards also require that consideration transferred be measured at the closing date of the acquisition at the then-current market price.

The accounting standards define the term “fair value” and set forth the valuation requirements for any asset or liability measured at fair value, and specify a hierarchy of valuation techniques based on the inputs used to develop the fair value measures. Fair value is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” This is an exit price concept for the valuation of the asset or liability. In addition, market participants are assumed to be buyers and sellers in the principal (or most advantageous) market for the asset or liability. Fair value measurements for an asset assume the highest and best use by these market participants. As a result, CoStar may be required to record assets which are not intended to be used or sold and/or to value assets at fair value measures that do not reflect CoStar’s intended use of those assets. Many of these fair value measurements can be highly subjective and it is also possible that other professionals, applying reasonable judgment to the same facts and circumstances, could develop and support a range of alternative estimated amounts.

Under the acquisition method of accounting, the assets acquired and liabilities assumed will be recorded as of the completion of the acquisition, primarily at their respective fair values and added to those of the Company. Financial statements and reported results of operations of the Company issued after completion of the purchase will reflect these values, but will not be retroactively restated to reflect the historical financial position or results of operations of Apartments.com.

Acquisition-related transaction costs (i.e. advisory, legal, valuation, other professional fees) and certain acquisition-related restructuring charges impacting Apartments.com are not included as a component of consideration transferred but are accounted for as expenses in the periods in which the costs are incurred. Total advisory, legal, regulatory and valuation costs expected to be incurred by the Company are estimated to be approximately $1.1 million and are reflected in these unaudited pro forma condensed combined financial statements as a reduction to cash and retained earnings.

3.	Accounting Policies

The Company will review Apartments.com’s accounting policies. As a result of that review, the Company may identify additional differences between the accounting policies of the two companies that, when conformed, could have a material impact on the combined financial statements. At this time, the Company is not aware of any differences that would have a material impact on the combined financial statements. Based on our preliminary analysis, the unaudited pro forma condensed combined financial statements do not assume any differences in accounting policies.

4.	Consideration Transferred

The consideration for the acquisition was $587.1 million of cash. This amount remains subject to a working capital adjustment and may not represent the final purchase price.

5.	Estimate of Assets Acquired and Liabilities Assumed

The following is a preliminary estimate of the assets acquired and the liabilities assumed by the Company in the acquisition, reconciled to the consideration transferred (in thousands):


Book value of Apartments.com net assets:	$	4,739
Adjusted for excluded assets and liabilities:
Short-term investments		(1,464	) (i)
Prepaid expense and other current assets		(575	) (i)
Property and equipment, net		(428	) (i)
Accrued wages and commissions		1,662	(i)
Accrued expenses		3,101	(i)
Deferred revenue		611	(i)
Current portion of deferred long-term incentive plan		5,264	(i)
Elimination of existing goodwill		(3,440	)

Adjusted book value of net assets acquired		9,470
Adjustments to:
Identifiable intangible assets		136,000	(ii)
Goodwill		441,634	(iii)

Total estimated consideration	$	587,104

(i)	Certain assets and liabilities including but not limited to deferred revenue and related capitalized costs, employee expenses, and internal use software costs have, in accordance with the asset purchase agreement, been excluded from the transaction and not acquired.

(ii)

Identifiable intangible assets are required to be measured at fair value. These acquired assets could include assets that are not intended to be used or sold or that are intended to be used in a manner other than their highest and best use. For purposes of these unaudited pro forma condensed combined financial statements, it is assumed that all assets will be used and that all assets will be used in a manner that represents the highest and best use of those assets, but it is not assumed that any market participant synergies will be achieved. The consideration of synergies has been excluded because they are not considered to be factually supportable, which is a required condition for these pro forma adjustments.

The fair value of identifiable intangible assets is determined primarily using the “income method,” which starts with a forecast of all expected future net cash flows. There were significant limitations regarding what CoStar could learn about the specifics of the Apartments.com intangible assets prior to the consummation of the transaction and any such process will take time to complete.

At this time, the Company does not have sufficient information as to the amount, timing and risk of cash flows of these intangible assets. Some of the more significant assumptions inherent in the development of intangible asset values, from the perspective of a market participant include: the amount and timing of projected future cash flows (including revenue, cost of sales, research and development costs, sales and marketing expenses, and working capital/contributory asset charges); the discount rate selected to measure the risks inherent in the future cash flows; and the assessment of the asset’s life cycle and the competitive trends impacting the asset, as well as

other factors. However, for purposes of these unaudited pro forma condensed combined financial statements, the fair value of the identifiable intangible assets and their weighted-average useful lives have been estimated as follows (dollars in thousands):


	Estimated Fair Value		Estimated Useful Life	Amortization Method
Customer relationships		69,000	10 years	200% declining balance
Database technology		22,000	2 years	Straight-line
Trade names		45,000	7 years	Straight-line

Total	$	136,000

These preliminary estimates of fair value, useful life, and amortization method will likely be different from the final acquisition accounting, and the difference could have a material impact on the accompanying unaudited pro forma condensed combined financial statements. As the Company reviews the specifics of the Apartments.com intangible assets, additional insight will be gained that could impact (a) the estimated total value assigned to intangible assets, (b) the estimated allocation of value between assets and/or (c) the estimated useful life and/or amortization method of each category of intangible assets. The estimated intangible asset values, their useful lives and amortization methods could be impacted by a variety of factors that may yet become known to us as the acquisition accounting has not yet been finalized. These factors include but are not limited to the regulatory, legislative, legal, technological and competitive environments. Increased knowledge about these and/or other elements could result in a change to the estimated fair value of the Apartments.com intangible assets and/or to the estimated useful lives from what the Company has assumed in these unaudited pro forma condensed combined financial statements. The combined effect of any such changes could then also result in a significant increase or decrease to our estimate of associated amortization expense.

(iii)

Goodwill is calculated as the difference between the acquisition date fair value of the consideration expected to be transferred and the values assigned to the assets acquired and liabilities assumed. Goodwill is not amortized.

Other than the preliminary estimated adjustments identified above, the accompanying unaudited pro forma condensed combined financial statements assume that the book values of the assets acquired and liabilities assumed by CoStar in the acquisition are representative of their fair value. This preliminary estimate of the fair value of assets acquired and liabilities assumed may be different from the final acquisition accounting and the difference could have a material impact on the accompanying unaudited pro forma condensed combined financial statements.

6.	Pro Forma Adjustments

This note should be read in conjunction with Note 1. Description of Transaction; Note 2. Basis of Presentation; Note 4. Consideration Transferred; and Note 5. Estimate of Assets Acquired and Liabilities Assumed. Adjustments included in the column under the heading “Pro Forma Adjustments” represent the following:

(a)

To adjust cash for the anticipated sources and uses related to the purchase, as follows (dollars in thousands):


Sources:
Proceeds from issuance of debt instruments	$	550,000

		550,000

Uses:
Cash portion of acquisition consideration		(587,104	)
Retire existing CoStar debt		(148,750	)
Acquisition related transation costs		(986	)
Fees related to debt issuance		(10,130	)

		(746,970	)

	$	(196,970	)

(b)

To adjust goodwill to an estimate of acquisition-date goodwill, as follows (dollars in thousands):


Eliminate Apartments.com historical goodwill	$	(3,440	)
Estimated transaction goodwill		441,634

Total	$	438,194

(c)

The pro forma adjustment to “Intangibles and other assets, net” of $136.0 million represents the Company’s estimate of the fair value of the intangible assets acquired.

To adjust related amortization expense for the periods presented, as follows (dollars in thousands):


	For the year ended December 31, 2013		For the three months ended March 31, 2014
Cost of revenues	$	17,429	$	4,357
Operating expenses		12,799		2,810

Total	$	30,228	$	7,167

(d)

For the year-ended December 31, 2013, to adjust Apartments.com’s historical results to eliminate $1.3 million of direct incremental costs specific to the acquisition.

For the three months ended March 31, 2014, to adjust Apartments.com’s and the Company’s historical results to eliminate $2.4 million and $1.1 million of direct incremental costs specific to the acquisition, respectively.

(e)

For the year-ended December 31, 2013 and for the three months ended March 31, 2014, to adjust Apartments.com’s historical results to eliminate $399,000 and $4,000 of gain on investments, respectively. The investments which produced those gains were part of a deferred compensation plan and were not purchased in the acquisition.

(f)

On April 1, 2014, CoStar entered into a Credit Agreement (the “2014 Credit Agreement”) by and among CoStar, 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. The 2014 Credit Agreement provided for a $400.0 million term loan facility and a $225.0 million revolving credit facility, each with a term of five years. The proceeds of the term loan facility and the initial borrowing under the revolving credit facility of $150.0 million were used to refinance the 2012

Credit Agreement, including related fees and expenses, and pay a portion of the consideration and transaction costs related to the acquisition. The undrawn proceeds of the revolving credit facility will be available for working capital and other general corporate purposes of CoStar and its subsidiaries.

Effective April 1, 2014, CoStar terminated the 2012 Credit Agreement and repaid all amounts outstanding thereunder.

The term loan facility will amortize in quarterly installments resulting in an annual amortization of 5% during each of the first, second and third years, 10% during the fourth year and 15% during the fifth year, with the remainder payable at final maturity. CoStar has the option to prepay all or any portion of the term loan at any time without penalty other than LIBOR breakage costs.

The Credit Facility carries an initial interest rate equal to LIBOR plus 2.00%. This rate is subject to adjustment in future periods based on CoStar’s first lien secured leverage ratio (as defined in the credit agreement) and could increase to LIBOR plus 2.25% or decrease to as low as LIBOR plus 1.25%. For purposes of the pro forma financial statements CoStar has assumed a rate of LIBOR plus 2.00% for the life of the credit facility and a 1 month LIBOR rate of 0.25%. The resulting effective interest rate on the credit facility, including periodic administrative fees, commitment fees on the unused portion of the revolving line of credit and the amortization of deferred debt issuance costs, is approximately 3.00%. A change in the interest rate of 25 basis points would result in a change in interest expense of approximately $1.3 million and $330,000 for the year ended December 31, 2013 and the quarter ended March 31, 2014, respectively.

Estimated origination and issuance costs of $10.0 million, in addition to $5.8 million of unamortized debt issuance cost already on the balance sheet, will be amortized to interest expense over the 5 year term of the 2014 Credit Agreement. Amortization of debt issuance costs is estimated to be $3.4 million for the year ended December 31, 2013 and $831,000 for the quarter ended March 31, 2014. Estimated financing fees of $161,000 will be expensed on origination and are included as an adjustment to retained earnings on the pro forma balance sheet.

The pro forma adjustments to interest and other expense for the periods presented are as follows (dollars in thousands):


	For the year ended December 31, 2013
Eliminate CoStar Group, Inc. interest expense to reflect change in borrowing	$	6,943
Estimated interest expense on acquisition financing		(15,876	)

	$	(8,933	)


	For the three months ended March 31, 2014
Eliminate CoStar Group, Inc. interest expense to reflect change in borrowing	$	1,615
Estimated interest expense on acquisition financing		(3,888	)

	$	(2,273	)

The pro forma adjustments to debt issuance costs and long-term debt are as follows (dollars in thousands):


Debt issuance costs	Short-term			Long-term
Reclass short-term to long-term	$	(2,547	)	$	2,547
Estimated debt issuance costs on credit facility		—			9,969
Long-term portion of new debt issuance costs included at 3/31/14					(445	)
Reclass short-term portion		3,370			(3,370	)

	$	823		$	8,701


Long-term debt	Short-term			Long-term
Reclass short-term to long-term	$	(26,250	)	$	26,250
Repay existing term loan		—			(148,750	)
Estimated new borrowing		—			550,000
Reclass short-term portion		20,000			(20,000	)

	$	(6,250	)	$	407,500

(g)

The pro forma adjustment to income tax expense represents the estimated income tax impact of the pro forma adjustments at a tax rate of 38% and the application of a 38% tax rate to Apartments.com’s historical results.

(h)

To eliminate Apartments.com’s equity and to make pro forma adjustments to retained earnings for estimated debt issuance costs and deal fees, as follows (dollars in thousands):


	Retained earnings
Eliminate Apartments.com stockholders’ equity	$	(4,739	)
Estimated deal costs		(986	)
Expenses incurred for debt refinance		(161	)

	$	(5,886	)