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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-K
 
     
(Mark One)    
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the fiscal year ended December 31, 2007
OR
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the transition period from          to          
 
Commission file number: 000-52026
 
LOOPNET, INC.
(Exact name of registrant as specified in its charter)
 
     
Delaware
  77-0463987
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
     
185 Berry Street, Suite 4000
San Francisco, CA
(Address of principal executive offices)
  94107
 
(415) 243-4200
(Registrant’s telephone number, including area code)
 
N/A
(Former name, former address and former fiscal year, if changed since last report)
 
Securities registered pursuant to Section 12(b) of the Act:
 
     
Title of Class
 
Name of Each Exchange on Which Registered
 
Common Stock
  The NASDAQ Stock Market LLC
 
Securities registered pursuant to Section 12(g) of the Act:
N/A
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.  Yes o     No þ
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
             
Large accelerated filer o
  Accelerated filer þ   Non-accelerated filer o
(Do not check if a smaller reporting company)
  Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ
 
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was approximately $630,465,000 as of the last business day of the registrant’s most recently completed second fiscal quarter, based upon the closing sale price on the Nasdaq National Market reported for such date. Shares of common stock held by each officer and director and by each person who owns 5% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
 
There were 37,296,354 shares of the registrant’s common stock issued and outstanding as of February 21, 2008.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Items 10 (as to directors), 11, 12, 13 and 14 of Part III incorporate by reference information from the Registrant’s Proxy Statement to be filed with the Securities and Exchange Commission in connection with the solicitation of proxies for the Registrant’s 2008 Annual Meeting of Stockholders.
 


 

 
TABLE OF CONTENTS
 
 
             
        Page
 
  Business     4  
  Risk Factors     14  
  Unresolved Staff Comments     25  
  Properties     25  
  Legal Proceedings     25  
  Submission of Matters to a Vote of Security Holders     26  
 
  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities     26  
  Selected Financial Data     28  
  Management’s Discussion and Analysis of Financial Condition and Results of Operations     30  
  Quantitative and Qualitative Disclosures About Market Risk     43  
  Financial Statements and Supplementary Data     43  
  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure     43  
  Controls and Procedures     43  
  Other Information     44  
 
  Directors Executive Officers, and Corporate Governance     45  
  Executive Compensation     45  
  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     46  
  Certain Relationships and Related Transactions and Director Independence     46  
  Principal Accountant Fees and Services     46  
 
  Exhibits and Financial Statement Schedules     47  
    48  
 EXHIBIT 2.2
 EXHIBIT 23.1
 EXHIBIT 31.1
 EXHIBIT 31.2
 EXHIBIT 32.1
 EXHIBIT 32.2


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Statement regarding forward-looking statements
 
This report includes forward-looking statements. All statements other than statements of historical facts contained in this report, including statements regarding our future financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “should,” “could,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “plan,” “potential,” “predict” and similar expressions, as they relate to us, are intended to identify forward-looking statements. Forward-looking statements contained in this report include, but are not limited to, statements relating to:
 
  •  our future financial results;
 
  •  our future growth and offering of new products or services;
 
  •  our future advertising and marketing activities; and
 
  •  our future investment in technology.
 
We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in “Risk Factors” in Item 1A of Part I. No forward-looking statement is a guarantee of future performance and you should not place undue reliance on any forward-looking statement.
 
In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this report may not occur and actual results could differ materially from those anticipated or implied in the forward-looking statements. Except as otherwise required by law, we undertake no obligation to update or revise any forward-looking statement contained in this report.
 
“LoopNet,” “BizBuySell,” “LoopLink” and “Cityfeet” are our registered trademarks in the United States. We also use the marks “RecentSales” and “ProspectList.” This annual report on Form 10-K also includes trademarks, trade names and service marks of other companies. Use or display by us of other parties’ trademarks, trade names or service marks is not intended to and does not imply a relationship with, or endorsement or sponsorship of us by, these other parties.
 
Internet Site
 
Our Internet address is www.loopnet.com. We make publicly available free of charge on our Internet website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. Information contained on our website is not a part of this annual report on Form 10-K.
 
Where You Can Find Additional Information
 
You may review a copy of this annual report on Form 10-K, including exhibits and any schedule filed therewith, and obtain copies of such materials at prescribed rates, at the Securities and Exchange Commission’s Public Reference Room in Room 1580, 100 F Street, NE, Washington, D.C. 20549-0102. You may obtain information on the operation of the Public Reference Room by calling the Securities and Exchange Commission at 1-800-SEC-0330. The Securities and Exchange Commission maintains a website (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants, such as LoopNet, that file electronically with the Securities and Exchange Commission.


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PART I
 
Item 1.   Business.
 
LoopNet, Inc. (the Company or LoopNet) was incorporated under the laws of the state of California on June 2, 1997, and is now organized as a Delaware corporation.
 
We believe we are the leading online marketplace for commercial real estate in the United States, based on the number of monthly unique visitors to our marketplace, which averaged approximately 500,000 unique users per month during 2005, approximately 800,000 during 2006 and approximately 900,000 during 2007, as reported by comScore Media Metrix. comScore Media Metrix defines a unique visitor as an individual who visited any content of a website, a category, a channel, or an application. Our online marketplace, available at www.LoopNet.com, enables commercial real estate agents, working on behalf of property owners and landlords, to list properties for sale or for lease and submit detailed information on property listings including qualitative descriptions, financial and tenant information, photographs and key property characteristics, in order to find a buyer or tenant. Commercial real estate agents, buyers and tenants use the LoopNet online marketplace to search for available property listings that meet their commercial real estate criteria. By connecting the sources of commercial real estate supply and demand in an efficient manner, we believe that our online marketplace enables commercial real estate participants to initiate and complete more transactions more cost-effectively than through other means. As of December 31, 2007, the LoopNet online marketplace contained approximately 560,000 listings.
 
To use the LoopNet online marketplace, users must register and become registered members. Registration requires that a user create a user record, which includes basic contact information such as name and a working email address, and also requires that a user accepts our Terms of Service. Basic membership is available free-of-charge, and enables members to experience some of the benefits of the LoopNet offering, with limited functionality. LoopNet premium membership is available for a monthly subscription fee and provides enhanced marketing exposure for property listings and full access to search LoopNet property listings, as well as numerous other features. The minimum term of a premium membership subscription is one month, with discounts available for quarterly or annual subscriptions. A customer choosing to cancel a discounted quarterly or annual subscription will receive a refund based on the number of months remaining on the subscription, but may be subject to an adjustment according to the monthly rate rather than the discounted rate. As of December 31, 2007, we had more than 2.5 million registered members and more than 88,000 premium members.
 
In addition to our LoopNet marketplace, we also operate BizBuySell, an online marketplace for operating businesses for sale, which we acquired in October, 2004. As of December 31, 2007, BizBuySell contained over 49,900 listings of operating businesses for sale.
 
We also generate revenues by selling our LoopLink online real estate marketing and database services suite to commercial real estate firms and by selling advertising and sponsorships on our website to parties who are seeking to market products or services to the LoopNet registered member base. Additionally, through our RecentSales product, members can access historical sale transaction information on a monthly subscription or per property transaction record basis. Additional information regarding our primary sources of revenue and our business segment are included in Note 1 to our consolidated financial statements. Additional information regarding our business’ seasonality is included in “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
 
Industry Background
 
The commercial real estate industry encompasses real estate assets types such as office, industrial, retail, multi-family, hotel, storage and land for development. According to Pramerica Real Estate Investors, the aggregate value of commercial real estate in the United States was approximately $5 trillion in 2003.
 
Much like the residential real estate industry, the commercial real estate industry relies primarily on brokers and agents who facilitate sales and leasing transactions for a commission. According to CB Richard Ellis, the commercial real estate services industry in the United States generated approximately $23 billion in services revenue in 2004. This brokerage system is highly fragmented and, according to CB Richard Ellis, the top five


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commercial real estate brokerage firms accounted for less than 15% of the revenue generated by the commercial real estate services industry in 2004. In most cases, commercial real estate agents associated with both small and large brokerage firms operate as independent contractors, make decisions for property marketing strategies, and seek cost-effective means to market their property listings. We believe that the majority of transactions in the industry are small and are consummated by local independent brokers.
 
According to the Association of Real Estate License Law Officials, there are over 2.6 million licensed real estate professionals in the United States, including commercial and residential real estate agents.
 
In addition to the brokerage community, industry participants include tenants, owners, property investors and business operators, all of which are actively involved in commercial real estate transactions. Commercial office, industrial, and retail properties are often occupied by operating businesses, which are generally either rent-paying tenants or owners of those properties. According to the Small Business Administration, in 2002 there were approximately 5.7 million operating businesses classified as “employers” and there were another 17.6 million operating businesses which were classified as “non-employers,” such as small family-owned and -operated businesses. We also believe that there are a large number of private investors who actively participate in commercial real estate transactions.
 
The traditional processes for marketing and searching for commercial real estate are inefficient. Traditionally, agents working on behalf of commercial real estate sellers and landlords market their property listings through methods such as word of mouth in the brokerage community, signage placed directly on buildings for sale or with space for lease, availability lists that are printed and shared among brokerage firms, advertisements placed in print media including newspapers and other publications, direct mail campaigns and emails sent to private distribution lists.
 
Similarly, the process of searching for properties available for sale or for lease has been inefficient. Unlike the residential real estate industry, which is served by local multiple listing services or other central local databases of residential real properties available for sale, there has not been an equivalent listing service in the commercial real estate or operating business for sale industries. As a result, compiling a comprehensive and reliable collection of current for sale or for lease property listings has been a slow and expensive process for individual commercial real estate participants, requiring significant resources and often resulting in inaccurate and incomplete information.
 
The LoopNet Model
 
We provide an online marketplace that efficiently connects commercial real estate supply and demand. Our marketplace enables agents working on behalf of commercial real estate owners and landlords to list properties for sale or for lease. We provide tools that allow property listers to proactively contact potential buyers and tenants seeking specific types of properties. Similarly, we enable commercial real estate agents, buyers and tenants to search for available property listings that meet their criteria, such as price range, location, building size and property type. Individuals that search for and find properties that meet their requirements on our marketplace are able to contact and connect with the listing party and initiate a commercial real estate transaction such as a property purchase or lease. We offer property searchers access to a large number of available property listings that would be difficult and costly to compile through traditional means. We also enable property listers to cost-effectively reach a large number of buyers and tenants. We believe that the LoopNet online marketplace enables our members to initiate and complete more commercial real estate transactions more cost-effectively than through other means.
 
The key attributes of our business model include:
 
Leading commercial real estate online marketplace.  We believe we have aggregated a critical mass of commercial real estate agents, property owners, landlords, buyers, tenants and for sale or for lease property listings. As a result, we believe that we are the leading online commercial real estate marketplace. As of December 31, 2007, we had more than 2.5 million registered members and more than 88,000 premium members. For the year ended December 31, 2007, our registered members viewed property profiles on our website approximately 150 million times. We believe that this critical mass of commercial real estate industry participants and properties listed for sale or for lease creates a cycle that helps us to continue to grow our member base and expand our online marketplace. Commercial real estate agents, property owners and


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landlords are attracted to LoopNet as a result of the large number of potential buyers and tenants, who in turn are attracted to our marketplace by the broad selection of properties listed on our marketplace.
 
Comprehensive member-generated content offering.  The majority of our property listings are submitted by our members through our website, using our online tools. We enable members to provide detailed content on a property listing including description, financial and tenant information, photographs and key property characteristics. We automatically compile this content into an interactive property profile that is available to our members when they search for properties on our website. We believe that the content provided in our property profiles is more comprehensive, up-to-date and useful than the information provided in traditional commercial real estate property listings, such as newspaper and magazine ads or property signs. In addition, we believe that using member-generated property listings has allowed us to grow our online marketplace more efficiently and cost-effectively than if we had compiled the listings on our own.
 
Compelling member experience.  Our marketplace is accessible at any time and we believe it is an intuitive, easy-to-use online service. Upon registering as a member, an owner or agent working for the owner can list properties on the service, and buyers and tenants can search for property listings quickly and easily. Properties are searchable immediately upon listing by our members. Basic members can list and search the properties for free. Our members can sign up to receive an email with updated listings that meet their criteria on a daily or weekly basis. We also offer several online tools that facilitate the communication between parties who are seeking to make a commercial real estate transaction. For example, a premium member that has listed a property can use our ProspectList feature to email other members who have searched for similar properties on our website. Members searching for properties are able to use our MyLoopNet feature to store multiple property profiles online to better organize their search process and find the property that is right for them. To assist members further, we offer member support via email and phone.
 
In addition to our LoopNet marketplace, we provide BizBuySell, an online marketplace that enables business owners, sellers and brokers to list and search for operating businesses for sale. We believe that the operating business market is complementary in several ways to the commercial real estate market. In many cases, owners or brokers who are seeking to sell a business are also selling the commercial real estate associated with the business, and business owners are active participants in the commercial real estate market as both buyers and tenants. In addition, many commercial real estate agents also function as business brokers. We believe that BizBuySell benefits operating business owners, sellers and brokers by providing an efficient online marketplace to connect and initiate transactions.
 
The LoopNet Advantage
 
We developed our marketplace to address the needs of commercial real estate agents and the property owners, landlords, buyers and tenants they represent.
 
Benefits to Property Listers
 
Broad marketing exposure.  Our online marketplace offers commercial real estate agents and the owners and landlords they represent an efficient way to market properties available for sale or for lease. Properties listed on our website gain exposure to our large audience of members who are interested in commercial real estate opportunities. The size and geographic breadth of our marketplace and member base enables property listers to realize marketing benefits for listings on both a local and national level. We believe that the marketing exposure provided by a property listing on our marketplace is superior to traditional commercial real estate marketing methods, such as newspapers ads and newsletters, and enables our members to complete more sale and lease transactions in a more efficient manner.
 
Cost-effective and measurable marketing method.  We believe that the LoopNet online marketplace is more cost effective and accountable than traditional methods for marketing commercial real estate properties. Premium members are able to use our reporting tools to track and monitor the marketing exposure of their property listings and receive a marketing statistics email that indicates the number of times a property profile has been viewed. We believe that the low cost of a monthly premium membership and the features and measurability of our product offering is superior to commercial real estate marketing alternatives.


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Detailed and up-to-date property listing information.  Our marketplace allows our members to provide significantly more information on a real-time basis than they typically can provide using traditional commercial real estate marketing methods. For example, when submitting a property listing, a member may choose to include files containing detailed financial spreadsheets, descriptive brochures or hyperlinks to other information. We offer a set of online tools and services that facilitate the submission and verification of commercial real estate property listing information, and we provide additional information relating to the property such as detailed location and demographic data and aerial and satellite imagery. In addition, our online marketplace enables members to update their property listings. These updates are immediately available on our marketplace, ensuring that the property listings provide the most comprehensive and timely information.
 
Benefits to Property Searchers
 
Access to a large number of property listings.  Our online marketplace contained approximately 560,000 property listings as of December 31, 2007, primarily from the United States and Canada. The listings in our marketplace include all major asset types, such as office, industrial, retail, land and multi-family properties of all sizes. We believe that the depth and breadth of our property listings make our online marketplace valuable to commercial real estate agents as well as property buyers and tenants.
 
Real-time, comprehensive information.  Our online marketplace provides access to comprehensive content on commercial real estate properties available for sale or for lease. Our online property listings provide more information than is available through traditional methods such as print or fax. We are able to provide immediate updates on revised and new property listings on our website to our members. We also provide premium members with daily email alerts with new property listings that meet their specified criteria. In addition, through our RecentSales product, members can access historical sale transaction information from the LoopNet marketplace and third-party information service providers to inform their analysis and decision process.
 
Customized search engine.  We have designed our online marketplace to be easy to use and navigate. Commercial real estate agents, buyers and tenants use our proprietary commercial real estate search engine to quickly find properties in our marketplace that meet their criteria. Members can search based on a number of commercial real estate industry-specific variables including property type and sub-type, location, size, price range and key word. We believe that offering a customized search engine makes our website easier to use for our members and allows them to derive more value from our online marketplace.
 
Our Strategy
 
Our objective is to enhance our position as the leading online marketplace for commercial real estate, operating businesses for sale, and related markets. To achieve this objective, we are pursuing the following strategy:
 
Expand our base of registered members.  We believe that growing our base of registered members increases the value of our online marketplace to the sources of both supply and demand for the commercial real estate market. More property listings attract more individuals searching for properties, which in turn attracts more individuals seeking to list properties, making the LoopNet marketplace more valuable for all of our members. We intend to continue to grow our member base through focused marketing efforts to increase awareness of our online marketplace. We acquire new members through word-of-mouth referrals, online and traditional marketing and direct marketing campaigns. In addition, we plan to promote increased usage of the LoopNet online marketplace by facilitating more property listings and searches by existing members. As part of our efforts to increase our base of registered members, we offer free basic membership with limited functionality.
 
Derive revenue from premium members.  We derive revenues primarily from premium memberships, so it is critical to our future growth that we convert basic members into premium members and grow our revenue per premium member. We intend to grow our premium member base by increasing the number of basic members and then highlighting to them the value and benefits of premium membership. We intend to grow our revenue per premium member by continuing to increase the value of the services we provide to our premium members, and to increase the fees paid by our premium members as we increase the value of the services provided. We promote the premium offering to our basic members throughout our website, including at initial


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registration and when they list and search for properties. We also plan on continuing to engage in targeted direct marketing to convert basic members into premium members.
 
Offer complementary products and services.  Our online marketplace produces a significant amount of information on commercial real estate transactions and property listings. We intend to use the information provided by our online marketplace and from third-party sources to identify additional, complementary products and services that we could in the future offer to help commercial real estate transaction participants research and make property decisions. For example, in 2006, we launched our RecentSales product, an online service that provides sale transaction information based upon data collected from transactions initiated through our website and from third-party information providers. We intend to continue offering commercial real estate transaction participants complementary information services to improve their analysis, decision and marketing processes.
 
Enhance the functionality of our marketplace.  We intend to continue to invest in improving our marketplace. For example, in 2006, we added our MapSearch feature that allows our members to use a dynamic aerial and satellite map interface to search for and view property listings, which we believe improves the property search and marketing process. We will continue to enhance our product offering to grow our base of premium members and to increase the value of our online marketplace to our members.
 
Expand into new markets.  We believe that there are opportunities to expand into new markets, although we have no current plans to do so. We expanded into the operating business for sale market through our acquisition of BizBuySell, an online marketplace for operating businesses for sale, in October, 2004. We intend to identify and pursue appropriate opportunities in other markets that are related to the commercial real estate industry where we can apply our expertise in developing online marketplaces. We may also pursue similar opportunities outside the United States. We would consider expanding through either acquisitions or internal investments depending on opportunities and circumstances.
 
Increase opportunities to advertise to our member base.  We intend to increase the advertising opportunities available to parties who are seeking to market products and services to our member base. We believe that our large base of members is attractive to companies marketing to the commercial real estate industry. For example, a commercial real estate lender may want to market a real estate loan program to an individual who is purchasing a property. We plan on making additional sponsorship and lead generation advertising opportunities available to parties who are interested in marketing to our member base.
 
Products and Services
 
Our products and services facilitate the sale and lease of commercial real estate by enabling industry participants to list and find properties on our online marketplace and to contact and transact with one another. Through our online marketplace, commercial real estate agents working on behalf of sellers and landlords can list their properties for sale or for lease along with detailed qualitative descriptions, quantitative specifications, photographs and diagrams. Buyers and tenants of commercial real estate and their agents can perform highly targeted searches and review the property listings on our online marketplace. By addressing the needs of commercial real estate industry participants, we believe that we have built the leading online commercial real estate marketplace.
 
Our customers access the LoopNet and BizBuySell online marketplaces through the following product and service offerings:
 
Basic and premium membership.  We offer two types of memberships on the LoopNet marketplace. Basic membership is available free-of-charge to anyone who registers at our website, and enables members to experience some of the benefits of the LoopNet offering, with limited functionality. LoopNet premium membership is available for a monthly subscription fee and provides enhanced marketing exposure for property listings and full access to LoopNet property listings, as well as numerous other features. Our fee for our LoopNet premium membership averaged $56.00 per month during the fourth quarter of 2007. The minimum term of a premium membership subscription is one month. We also offer quarterly and annual subscriptions which are priced and discounted accordingly, and paid in advance for the subscription period. A


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customer choosing to cancel a discounted quarterly or annual subscription will receive a refund based on the number of months remaining on the subscription, but may be subject to an adjustment according to the monthly rate rather than the discounted rate. Premium membership provides members with maximum marketing exposure for property listings and full access to LoopNet property listings, as well as numerous other features provided on our marketplace. We believe that the benefits provided by a premium membership enable premium members to initiate and complete more commercial real estate transactions. The following table illustrates some of the key features of basic and premium membership:
 
                 
    Basic
    Premium
 
    Membership     Membership  
 
Listing Benefits
               
Detailed Property Listings
    ü       ü  
MyLoopNet — Listing Management Center
    ü       ü  
Enhanced Listing Exposure
            ü  
ProspectList — Lead Generation
            ü  
Marketing Exposure Statistics
            ü  
Controlled Access Marketing
            ü  
Searching Benefits
               
Listings Search Engine
    ü       ü  
MyLoopNet — Searching Management Center
    ü       ü  
Enhanced Listings Access
            ü  
PropertyAlert — Email Alerts of New Listings
    Weekly       Daily  
Reporting and Map-Based Presentations
            ü  
MapSearch
    ü       ü  
 
  •  Property listing.  Our property listing service allows customers to quickly and easily submit listings on properties available for sale or for lease, enabling them to reach a large audience of commercial real estate transaction participants. All listings submitted to the LoopNet online marketplace are processed through a listing quality assessment mechanism. Members can submit an unlimited number of listings and include detailed property listing information, including building description, financial and tenant information, photographs and key property characteristics. Our service automatically compiles this information into a professional-quality online brochure.
 
  •  MyLoopNet.  Members can use MyLoopNet to manage various features of their LoopNet membership, including managing their listings and tracking the exposure their property profiles have received.
 
  •  Enhanced Listing Exposure.  Property listings submitted by basic members can only be viewed by premium members. Property listings submitted by premium members are available for viewing by all registered members and have premium placement on search results.
 
  •  ProspectList.  Premium members have exclusive access to ProspectList, a reverse lookup search function that enables property listers to market listings to specific agents, buyers and tenants who have posted their property purchase or lease criteria on LoopNet and requested that they be contacted with property listings that match those criteria.
 
  •  Marketing Exposure Statistics.  Premium members have access in MyLoopNet to various statistics on the number of exposures being generated for their listings on LoopNet.
 
  •  Controlled Access Marketing.  Premium members can use Controlled Access Marketing to password-protect their listings. For example, a premium member might choose to limit access to a property listing such that searchers can only access the listing details after agreeing to a confidentiality agreement with the listing agent.
 
  •  Property searching.  We developed our property search engine specifically for the commercial real estate market. Members use our proprietary search engine to identify properties available for sale or for lease on


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  our online marketplace that meet their criteria. Members can search for properties based on a broad scope of commercial real estate specifications, including property type and sub-type, location, building and lot size, and price range. Members can also search using map-based geographic searching combined with various property listing attributes, including a keyword search capability.
 
  •  MyLoopNet.  Members can use MyLoopNet to manage various features of their LoopNet membership, including saving links to multiple property profiles and detailed search parameters for future use. Members can also use MyLoopNet to specify the criteria for PropertyAlert emails.
 
  •  Enhanced Listings Access.  Basic members are able to view summary details of their search results but can only view property profiles submitted by premium members. Premium members have full access to all property listings and profiles.
 
  •  PropertyAlert.  Members can use PropertyAlert to receive email alerts with new property listings that meet their selection criteria. Premium members receive email alerts daily, while basic members receive email alerts weekly.
 
  •  Reporting and Map-Based Presentations.  Premium members can automatically generate professional-quality reports and maps of properties they have selected to use for presentations to clients and interested parties.
 
  •  MapSearch.  Members have access to MapSearch, an interactive and dynamic aerial and satellite image map interface for property searches.
 
LoopLink.  LoopLink is an online real estate marketing and database services suite that enables commercial real estate firms to showcase their available properties both on the LoopNet marketplace and on the brokerage firm’s own website using our hosted search software. Within LoopNet, each LoopLink listing is branded with the client’s logo and is hyperlinked to the client’s website. Additionally, the LoopLink service provides customizable, branded property search and results screens that can be integrated into the client’s website. The LoopNet import service offers the opportunity to simplify the process of submitting listings to LoopNet from the client’s internal databases, and features advanced data matching and data integrity rules and file conversion capabilities. We charge a monthly subscription fee to commercial real estate firms for the LoopLink service. Key features of LoopLink include comprehensive reporting and listing administration tools, a searchable and seamlessly integrated professional directory, property mapping for geographic and feasibility analysis, thumbnail photos and expanded property descriptions in search results.
 
RecentSales.  RecentSales is a comprehensive nationwide database of recent commercial real estate transactions collected from sales initiated through our online marketplace and from third party information providers. Our RecentSales service enables property searchers to review precedent sales data to inform commercial real estate valuation analysis based on asset type, asking and sale price, sale date, property address and size. RecentSales is available for a monthly subscription or on a per-property-record basis.
 
Advertising and lead generation.  Our large base of registered members represents an attractive marketing opportunity for parties who are in sectors related to the commercial real estate industry. We provide advertising and lead generation services which can be used, for example, to generate enhanced marketing exposure for a property listed for sale or for lease, general branding exposure for a particular party or service provider, or sales leads for specific service providers such as commercial mortgage lenders. Advertisers using our services pay fees based on 1) the number of ad impressions, 2) the number of clickthroughs for an ad, or 3) the leads that we provide to them from an ad. The market for our advertising products is comprised of any party wishing to advertise services to our community of registered members who are participating in commercial real estate and operating business for sale transactions.
 
BizBuySell.  Similar to LoopNet, BizBuySell is an online marketplace for operating businesses for sale. Business sellers pay a fee of $59.95 to $99.95 per listing per month to list their operating businesses for sale, and interested buyers can search our listings for free. BizBuySell also offers BrokerWorks, a membership service available to business brokers, enabling them to list an unlimited number of businesses for sale. BrokerWorks


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members are listed in BizBuySell’s BrokerPages directory and receive access to our online prospect management tools. BrokerWorks is available for a one-time account setup fee of $24.95 and a monthly subscription fee of $49.95.
 
Our BizBuySell service also offers the option of paid access to pricing reports that provide a comparative analysis of recently sold businesses and businesses currently available for sale.
 
Sales and Marketing
 
The main objectives of our sales and marketing department are to increase our base of LoopNet registered members, to build awareness among our members for our suite of products and services and to convert basic members to premium members. In addition, some of our sales professionals focus on a specific product, such as our LoopLink service. We also have a team dedicated to selling our advertising products.
 
Our marketing team is responsible for generating new registered members. Our primary source of new registered members is word-of-mouth referrals. We use direct marketing and online and traditional advertising to market to potential members. Our direct marketing program includes direct mail, email and outbound telesales campaigns that are designed to deliver targeted messages to prospective members about our products and services. Our online advertising consists primarily of paid search marketing. We also sponsor and attend local industry association events, and participate in industry trade shows and conferences to engage with existing LoopNet members, identify potential new members and build brand awareness with key member constituents such as commercial real estate agents or property investors.
 
Our sales team is responsible for identifying and qualifying new customer prospects, including premium members and commercial real estate brokerage firms, responding to inbound sales inquires, selling our products and services, identifying cross-selling and education opportunities, and assisting with product training. In addition, our sales team is responsible for building internal and external awareness related to new product offerings.
 
Our sales team is also responsible for converting our basic members to premium members. We believe that encouraging basic members to use our products and services is a highly effective way to promote premium membership. We also communicate the value of our products and services to our basic members through targeted direct marketing including permission-based email and telemarketing.
 
Our customer and account services staff is responsible for ensuring customer satisfaction by providing high quality and tailored customer support. We solicit feedback from our customers to assess and understand market trends, provide training and demonstrations, build awareness for our products and identify new product opportunities. We believe that providing a high level of customer service is an important element of our member retention program.
 
Competition
 
Our market is competitive and fragmented. Although there is no one firm that competes with us in all of our service and product areas, we do face competition from separate sources with respect to our different product offerings.
 
Because there is no comprehensive national commercial real estate listing service, the primary alternatives to our services are the traditional practices used by the commercial real estate industry. These include print brochures created by listing agents that are mailed and distributed by hand; “current availabilities” lists printed and shared among brokerage firms; signage on properties; email brochures distributed to private distribution lists; word of mouth in the brokerage community; and newspaper advertisements. We believe that these practices do not create an efficient mechanism to market, search or compare property listings locally or nationally.
 
We compete with CoStar, a provider of information and research services to the commercial real estate market. Some of the services that CoStar offers directly compete with our product offering. For example, CoStar provides commercial real estate for sale and for lease property listings which compete directly with our online commercial real estate marketplace.
 
Several companies, such as Property Line International, have created online property listing services that compete with us. These companies aggregate property listings obtained through various sources, including from


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commercial real estate agents. In addition, newspapers include on their websites listings of commercial real estate for sale and for lease.
 
In the past, the National Association of REALTORS © , or NAR, its local boards of REALTORS © , various affiliates, and other third parties have created commercial real estate information and listing services. These services could provide commercial real estate for sale and for lease property listings, and transaction comparables, which compete directly with our online commercial real estate marketplace services.
 
Companies such as eBay and craigslist, inc. provide commercial real estate listing or advertising services in addition to a wide variety of other products or services. eBay and craigslist operate real estate listing services which include commercial real estate and operating businesses. Other large Internet companies that have large user bases, such as Google, Yahoo! and Microsoft, have recently launched classified listing services which could be used to market and search for commercial real estate property listings.
 
Technology and Infrastructure
 
We have developed proprietary software that facilitates the listing and searching of commercial properties and businesses for sale or for lease on our marketplaces. The LoopNet marketplace is built primarily on Microsoft technology, utilizing the Microsoft.Net framework and Microsoft SQL Server. The system has been specifically built to provide capacity scaling through the addition of server and network hardware without making software changes. The system is secure, and important components have redundancy. Tape backups are performed daily and the tapes are rotated to a secure, offsite facility. Static website content is cached at locations across the United States to maximize website speed throughout the country.
 
Our primary website is hosted in a co-location facility in Los Angeles, California. A secondary, backup facility is maintained in a co-location facility in San Francisco, California. The backup system provides complete client functionality and business critical internal functionality with capacity to operate the business in the event of a catastrophic event affecting the Los Angeles facility. Listing data updates are sent to the backup system on a regular basis to minimize data loss in the event of a primary site failure. Both facilities are earthquake-resistant and have physical access security, environmental controls, and internal power generation capabilities.
 
BizBuySell’s business listing system is built on Unix technology utilizing RedHat Enterprise Linux, Apache web service, Microsoft.Net, and MySQL database manager. The system is hosted in a co-location facility in Virginia. The facility provides tape backups and provides backup site services in the event of a primary facility failure.
 
As part of our normal business operations, we collect and utilize personal information. The use of all personal information is governed by our Terms and Conditions, which are posted on the website. Additionally, the use of personal information is reviewed and certified annually by TRUSTe.
 
We take steps to protect the personal information we collect and use. All personal information collected is stored in our databases. Access to this information by internal users is protected and controlled by network passwords. Our company has clear policies and procedures that our employees must follow to protect against compromising the security of the personal information we collect and maintain, and we communicate those policies and procedures regularly to our employees. Additionally, access to our network, and consequently to the databases, is protected by an industry standard firewall. External access to the network is tested monthly by a third-party security consultant (AmbironTrustWave) for vulnerabilities. All database servers and related equipment are maintained in physically secured environments with access limited to operations personnel only. Data backups are also maintained in a physically secured offsite location with controlled access.
 
An additional level of protection is implemented for financially sensitive personal information. Information such as credit card numbers are stored on our databases in an encrypted format. This encryption is intended to ensure that anyone gaining access to our servers will still be unable to obtain sensitive information. We recently discovered that certain of our servers with respect to credit card and other personally identifiable information at our subsidiary Cityfeet may have been compromised. This potential breach has not affected any personally identifiable information with respect to LoopNet members which information is maintained on separate servers. We will continue to review and enhance our databases to prevent such unauthorized and unlawful intrusions.


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Our technology and product development expenses were $3.7 million, $4.3 million, and $6.4 million in 2005, 2006, and 2007, respectively.
 
Intellectual Property
 
We rely on a combination of trademark, copyright and trade secret laws in the United States as well as contractual provisions to protect our proprietary technology and our brand. We currently have trademarks registered or pending in the United States for our name and certain words and phrases that we use in our business. We also rely on copyright laws to protect computer programs relating to our websites and our proprietary technologies, although to date we have not registered for copyright protection. We have registered numerous Internet domain names related to our business in order to protect our proprietary interests. We also enter into confidentiality and invention assignment agreements with our employees and consultants and confidentiality agreements with other third parties, and we actively monitor access to our proprietary technology.
 
Protecting our intellectual property rights could be costly and time-consuming. From time to time, we may encounter disputes over rights and obligations concerning our intellectual property. Also, the efforts we have taken to protect our proprietary rights may not be sufficient or effective. Any significant impairment of our intellectual property rights could harm our business, our brand and reputation, and our ability to compete.
 
Employees
 
As of December 31, 2007, we had 266 employees. None of our employees are covered by a collective bargaining agreement. We have never experienced employment-related work stoppages and we consider our employee relations to be good.
 
Executive Officers
 
The following table sets forth information about our executive officers as of March 31, 2008.
 
             
Name
 
Age
 
Position
 
Richard J. Boyle, Jr. 
    42     Chief Executive Officer and Chairman of the Board of Directors
Thomas Byrne
    41     President and Chief Operating Officer
Brent Stumme
    46     Chief Financial Officer and Senior Vice President, Finance and Administration
Jason Greenman
    40     Chief Strategy Officer and Senior Vice President, Corporate Development
Wayne Warthen
    44     Chief Technology Officer and Senior Vice President, Information Technology
 
Richard J. Boyle, Jr. has served as our Chief Executive Officer, and Director from July, 2001, and Chairman of the Board of Directors since February, 2006. Mr. Boyle also served as our President from July, 2001 through January, 2008. Prior to being named our President, Chief Executive Officer, and Director, Mr. Boyle was Vice President of LoopNet in charge of product and technology development and operations from December 1999 to July 2001. Prior to joining LoopNet, Mr. Boyle was Senior Vice President of Products & Technology at Risk Management Solutions. Mr. Boyle holds a B.S. in Electrical Engineering from Stanford University.
 
Thomas Byrne has served as President and Chief Operating Officer since January 2008. Mr. Byrne also served as Chief Marketing Officer and Vice President, Marketing and Sales since 2002 and Senior Vice President, Marketing and Sales since February, 2006. Prior to joining LoopNet, Mr. Byrne served as Group Vice President of NextCard, a credit card company. Mr. Byrne holds a B.S. of Electrical Engineering, with highest honors, from Georgia Tech and an M.B.A. from the Harvard Business School.
 
Brent Stumme has served as Chief Financial Officer and Vice President, Finance and Administration since 2001 and Senior Vice President, Finance and Administration since February, 2006. Prior to joining LoopNet, Mr. Stumme was Chief Financial Officer for PropertyFirst.com, Inc., which merged with the Company in July, 2001. Prior to joining PropertyFirst, Mr. Stumme was Senior Finance Executive of the CalMat division of Vulcan


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Materials Company. Mr. Stumme holds a B.S. in Accounting from the University of Oregon and an M.B.A. from the University of Southern California. Mr. Stumme is a certified public accountant.
 
Jason Greenman has served as Chief Strategy Officer and Senior Vice President, Corporate Development since January, 2008. Mr. Greenman also served as Chief Product Officer from 2005 through 2008 and Senior Vice President, Business and Product Development from 2006 through 2008. Mr. Greenman joined LoopNet as Vice President, Business and Product Development in 2002. Prior to joining LoopNet, Mr. Greenman co-founded and served as Senior Vice President, Business Development, of Clareon Corporation, a provider of Internet-based electronic payment services, from 2000 to 2001. Mr. Greenman holds a B.S. in Product Design with distinction from Stanford University and a Master’s of Management from the Stanford University Graduate School of Business, where he was a Sloan Fellow.
 
Wayne Warthen has served as Chief Technology Officer since 2001 and Senior Vice President, Information Technology since February, 2006. Mr. Warthen also served as Vice President, Information Technology since 1999. Prior to joining LoopNet, Mr. Warthen was Director of Internet Infrastructure, PC/LAN services and Business Development for Experian Information Solutions from 1996 to 1999. Mr. Warthen holds a B.A. in Economics from California State University at Fullerton.
 
Item 1A.   Risk Factors.
 
Because of the following factors, as well as other variables affecting our operating results and financial condition, past financial performance may not be a reliable indicator of future performance, and historical trends should not be used to anticipate results or trends in future periods.
 
Our business is largely based on a subscription model, and accordingly, any failure to increase the number of our customers or retain existing customers could cause our revenues to decline.
 
Our customers include premium members of our LoopNet marketplace, LoopLink users, users of our BizBuySell marketplace, RecentSales subscribers, and advertising and lead generation customers. Most of our revenues are generated by subscription fees paid by our premium members. Our growth depends in large part on increasing the number of our free basic members and then converting them into paying premium members, as well as retaining existing premium members. Either category of members may decide not to continue to use our services in favor of alternate services or because of budgetary constraints or other reasons. Historically, the overall conversion ratio of premium members to basic members on LoopNet has been approximately five percent, and our average monthly cancellation rate for premium members has ranged between three and five percent. We believe that a decline in the fourth quarter of 2007 in our premium to basic member conversion ratio to approximately 3.4% is attributable to an increasing proportion of principals (i.e., investors and tenants) in our membership base, who convert to premium membership at a lower rate than the professional agents and brokers in the market, and an approximately 18% increase in the average subscription prices which we charge our premium members. During the current quarter the commercial real estate credit markets experienced further tightening as a result of the subprime issues affecting the residential real estate credit markets. In the fourth quarter of 2007 our cancellation rate exceeded our historical levels and we believe the increase is attributable to the credit tightening that the commercial real estate industry experienced and the increase in the average subscription prices which we charge our premium members. Given the current market conditions we are experiencing we believe our monthly cancellation rate during 2008 will range from 4.5% to 6.5%.
 
We anticipate that the average subscription price for our premium members will continue to rise, which may in turn drive slower acquisition of new premium members and increased cancellations of existing premium memberships. While we believe that the increase in revenues attributable to the higher average subscription price will offset any slowing of or decline in our acquisition of premium members, we cannot assure you that such an offset will in fact occur. If our existing members choose not to use our services, decrease their use of our services, or change from being premium members to basic members, or we are unable to attract new members, listings on our site could be reduced, search activity on our website could decline, the usefulness of our services could be diminished, and we could incur significant expenses and/or experience declining revenues.


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The value of our marketplace to our customers is dependent on increasing the number of property listings provided by and searches conducted by our members. To grow our marketplace, we must convince prospective members to use our services. Prospective members may not be familiar with our services and may be accustomed to using traditional methods of listing, searching, marketing and advertising commercial real estate. We cannot assure you that we will be successful in continuing to acquire more members, in continuing to convert free basic members into paying premium members or that our future sales efforts in general will be effective. Further, it is difficult to estimate the total number of active commercial real estate agents, property owners, landlords, buyers and tenants in the United States during any given period. As a result, we do not know the extent to which we have penetrated this market. If we reach the point at which we have attempted to sell our services to a significant majority of commercial real estate transaction participants in the United States, we will need to seek additional products and markets in order to maintain our rate of growth of revenues and profitability.
 
We rely on our marketing efforts to generate new registered members. If our marketing efforts are ineffective, we could fail to attract new registered members, which could reduce the attractiveness of our marketplace to current and potential customers and lead to a reduction in our revenues.
 
We believe that the attractiveness of our services and products to our current and potential customers increases as we attract additional members who provide additional property listings or conduct searches on our marketplace. This is because an increase in the number of our members and the number of listings on our website increases the utility of our website and of its associated search, listing and marketing services. In order to attract new registered members, we rely on our marketing efforts, such as word-of-mouth referrals, direct marketing, online and traditional advertising, sponsoring and attending local industry association events, and attending and exhibiting at industry trade shows and conferences. There is no guarantee that our marketing efforts will be effective. If we are unable to effectively market our products and services to new customers, or convert existing basic members into premium members, and we are not able to offset any decline in our rate of conversion of basic members to premium members with higher average subscription prices, our revenues and operating results could decline as a result of current premium members failing to renew their premium memberships and potential premium members failing to become premium members.
 
We may be unable to compete successfully with our current or future competitors.
 
The market to provide listing, searching and marketing services to the commercial real estate industry is highly competitive and fragmented, with limited barriers to entry. Our current or new competitors may adopt certain aspects of our business model, which could reduce our ability to differentiate our services. All of the services which we provide to our customers, including property and business listing, searching, and marketing services, are provided separately or in combination to our current or potential customers by other companies that compete with us. These companies, or new market entrants, will continue to compete with us. Listings in the commercial real estate industry are not marketed exclusively through any single channel, and accordingly our competition could aggregate a set of listings similar to ours. Increased competition could result in a reduction in our revenues or our rate of acquisition of new customers, or loss of existing customers or market share, any of which would harm our business, operating results and financial condition.
 
We compete with CoStar Group, Inc., a provider of information and research services to the commercial real estate market. Some of the services that CoStar offers directly compete with our product offering. For example, CoStar provides commercial real estate for sale and for lease property listings which compete directly with our online commercial real estate marketplace.
 
Several companies, such as Property Line International, Inc., have created online property listing services that compete with us. These companies aggregate property listings obtained through various sources, including from commercial real estate agents. In addition, newspapers typically include on their websites listings of commercial real estate for sale and for lease. If our current or potential customers choose to use these services rather than ours, demand for our services could decline.
 
Additionally, the National Association of REALTORS © , or NAR, its local boards of REALTORS © , its various affiliates, and other third parties have in the past created, and they or others may in the future create,


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commercial real estate information and listing services. These services could provide commercial real estate for sale and for lease property listings which compete directly with our online commercial real estate marketplace. If they succeed in attracting a significant number of commercial real estate transaction participants, demand for our services may decrease.
 
Large Internet companies that have large user bases and significantly greater financial, technical and marketing resources than we do, such as eBay Inc. and craigslist, Inc., provide commercial real estate listing or advertising services in addition to a wide variety of other products or services. eBay and craigslist operate real estate listing services which include commercial real estate and operating businesses. Other large Internet companies, such as Google, Yahoo! and Microsoft, have classified listing services which could be used to market and search for commercial real estate property listings. Competition by these companies could reduce demand for our services or require us to make additional expenditures, either of which could reduce our profitability.
 
If we are unable to obtain or retain listings from commercial real estate brokers, agents, and property owners, our marketplace could be less attractive to current or potential customers, which could result in a reduction in our revenues.
 
Our success depends substantially on the number of commercial real estate property listings submitted by brokers, agents and property owners to our online marketplace. The number of listings on our marketplace has grown from approximately 224,000 as of December 31, 2003 to approximately 460,000 as of December 31, 2006, and as of December 31, 2007, we had approximately 560,000 listings. If agents marketing large numbers of property listings, such as large brokers in key real estate markets, choose not to continue their listings with us, or choose to list them with a competitor, our website would be less attractive to other real estate industry transaction participants, thus resulting in cancelled premium memberships, failure to attract and retain new members, or failure to attract advertising and lead generation revenues.
 
Our operating results and revenues are subject to fluctuations that may cause our stock price to decline, and our quarterly financial results may be subject to seasonality, each of which could cause our stock price to decline.
 
Our revenues, expenses and operating results have fluctuated in the past and are likely to continue to do so in the future. Our revenues, expenses and operating results may fluctuate from quarter to quarter due to factors including those described below and elsewhere in this Annual Report on Form 10-K:
 
  •  rates of member adoption and retention;
 
  •  changes in our pricing strategy and timing of changes;
 
  •  changes in our marketing or other corporate strategies;
 
  •  our introduction of new products and services or changes to existing products and services;
 
  •  the amount and timing of our operating expenses and capital expenditures;
 
  •  the amount and timing of non-cash stock-based charges;
 
  •  costs related to acquisitions of businesses or technologies; and
 
  •  other factors outside of our control.
 
Our results of operations could vary significantly from quarter to quarter due to the seasonal nature of the commercial real estate industry. The timing of widely observed holidays and vacation periods, particularly slow downs during the end-of-year holiday period, and availability of real estate agents and related service providers during these periods, could significantly affect our quarterly operating results during that period. For example, we have historically experienced a significant decline in the rate of growth of both new memberships and revenues during the fourth quarter.
 
These fluctuations or seasonality effects could negatively affect our results of operations during the period in question and/or future periods or cause our stock price to decline.


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Our revenues, expenses and operating results could be affected by general economic conditions or by changes in commercial real estate markets, which are cyclical.
 
Our business is sensitive to trends in the general economy and trends in commercial real estate markets, which are unpredictable. Therefore, our operating results, to the extent they reflect changes in the broader commercial real estate industry, may be subject to significant fluctuations. A number of factors could have an effect on the commercial real estate industry, such as:
 
  •  periods of economic slowdown or recession globally, in the United States or locally;
 
  •  inflation;
 
  •  flows of capital into or out of real estate investment in the United States or various regions of the United States;
 
  •  rates of unemployment;
 
  •  interest rates;
 
  •  the availability and cost of capital;
 
  •  wage and salary levels; or
 
  •  concerns about any of the foregoing.
 
We believe that the commercial real estate industry is composed of many submarkets, each of which is influenced differently, and often in opposite ways, by various economic factors. We believe that commercial real estate submarkets can be differentiated based on factors such as geographic location, value of properties, whether properties are sold or leased, and other factors. Each such submarket may be affected differently by, among other things:
 
  •  economic slowdown or recession;
 
  •  changes in levels of rent or appreciation of asset values;
 
  •  changing interest rates;
 
  •  tax and accounting policies;
 
  •  the availability and cost of capital;
 
  •  costs of construction;
 
  •  increased unemployment;
 
  •  lower consumer confidence;
 
  •  lower wage and salary levels;
 
  •  war, terrorist attacks or natural disasters; or
 
  •  the public perception that any of these conditions may occur.
 
For example, as of December 31, 2007, more than 28% of our premium members were based in California and more than 12% were based in Florida. Negative conditions in these or other significant commercial real estate submarkets could disproportionately affect our business as compared to competitors who have less or different geographic concentration of their customers. Additionally, negative general economic conditions could reduce the overall amount of sale and leasing activity in the commercial real estate industry, and hence the demand for our services. Events such as a war or a significant terrorist attack are also likely to affect the general economy, which could cause a slowdown in the commercial real estate industry and therefore reduce utilization of our marketplace, which could reduce our revenue from premium members. In addition, the occurrence of any of the events listed above could increase our need to make significant expenditures to continue to attract customers to our marketplace.


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If we are unable to introduce new or upgraded services or products that our customers recognize as valuable, we may fail to attract new customers or retain existing customers. Our efforts to develop new and upgraded products and services could require us to incur significant costs.
 
To continue to attract new members to our online marketplace, we may need to continue to introduce new products or services. We may choose to develop new products and services independently or choose to license or otherwise integrate content and data from third parties. For example, in early 2006 we introduced our RecentSales product and aerial imagery MapSearch feature to address perceived customer needs or to add additional searching enhancements, both of which utilize content and technology licensed from third parties. The introduction of these improvements imposed costs on our business and required the use of our resources, and there is no guarantee that we will continue to be able to access these technologies and content on commercially reasonable terms or at all. If customers or potential customers do not recognize the value of our new services or enhancements to existing services, they might choose not to become premium members or to otherwise utilize our marketplace.
 
Developing and delivering these new or upgraded services or products may impose costs and require the attention of our product and technology department and management. This process is costly, and we may experience difficulties in developing and delivering these new or upgraded services or products. In addition, successfully launching and selling a new service or product will require the use of our sales and marketing resources. Efforts to enhance and improve the ease of use, responsiveness, functionality and features of our existing products and services have inherent risks, and we may not be able to manage these product developments and enhancements successfully. If we are unable to continue to develop new or upgraded services or products, then our customers may choose not to use our products or services.
 
We may be unable to effectively manage our growth.
 
As our operations have expanded, and as the result of acquisitions of other companies, we have experienced rapid growth in our headcount. Our overall employee base has grown from 71 employees as of December 31, 2003 to 266 employees as of December 31, 2007. We expect to continue to increase headcount in the future. Our rapid growth has demanded, and will continue to demand, substantial resources and attention from our management. We will need to continue to hire additional qualified software engineers, client and account services personnel, and sales and marketing staff, and improve and maintain our technology to properly manage our growth. If we do not effectively manage our growth, our customer service and responsiveness could suffer and our costs could increase, which could harm our brand, increase our expenses, and reduce our profitability.
 
We could face liability for information on our website.
 
We provide information on our website, including commercial real estate listings, that is submitted by our customers and third parties. We also allow third parties to advertise their products and services on our website and include links to third-party websites. We could be exposed to liability with respect to this information. Customers could assert that information concerning them on our website contains errors or omissions and third parties could seek damages for losses incurred if they rely upon incorrect information provided by our customers or advertisers. We could also be subject to claims that the persons posting information on our website do not have the right to post such information or are infringing the rights of third parties. For example, in 1999 CoStar sued us, claiming that we had directly and indirectly infringed their copyrights in photographs by permitting our members to post those photographs on our website. Although the court issued rulings that were favorable to us in that litigation, other persons might assert similar or other claims in the future. Among other things, we might be subject to claims that by directly or indirectly providing links to websites operated by third parties, we would be liable for wrongful actions by the third parties operating those websites. Even if these claims do not result in liability to us, we could incur significant costs in investigating and defending against these claims.
 
The Digital Millennium Copyright Act, or DMCA, allows copyright owners to obtain subpoenas compelling disclosure by an Internet service provider of the names of customers of that Internet service provider. We have been served with such subpoenas in the past, and may in the future be served with additional such subpoenas. Compliance with subpoenas under the DMCA may divert our resources, including the attention of our management, which could impede our ability to operate our business.


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Our potential liability for information on our websites or distributed by us to others could require us to implement additional measures to reduce our exposure to such liability, which may require us to expend substantial resources and limit the attractiveness of our online marketplace to users. Our general liability insurance may not cover all potential claims to which we are exposed and may not be adequate to indemnify us for all liability that may be imposed.
 
If we are unable to convince commercial real estate brokers and other commercial real estate professionals that our services and products are superior to traditional methods of listing, searching, and marketing commercial real estate, they could choose not to use our marketplace, which could reduce our revenues or increase our expenses.
 
A primary source of new customers for us is the commercial real estate professional community. Many commercial real estate professionals are used to listing, searching and marketing real estate in traditional ways, such as through the distribution of print brochures, sharing of written lists, placing signs on properties, word-of-mouth, and newspaper advertisements. Commercial real estate professionals may prefer to continue to use traditional methods or may be slow to adopt our products and services. If we are not able to continue to persuade commercial real estate professionals of the efficacy of our products and services, they may choose not to use our marketplace, which could reduce our revenues. In addition, we could be required to increase our marketing and other expenditures to continue our efforts to attract these potential customers.
 
Our business depends on retaining and attracting capable management and operating personnel.
 
Our success depends in large part on our ability to retain and attract high-quality management and operating personnel, including our Chief Executive Officer and Chairman of the Board of Directors, Richard J. Boyle, Jr.; our President and Chief Operating Officer, Thomas Byrne; our Chief Financial Officer and Senior Vice President, Finance and Administration, Brent Stumme; our Chief Strategy Officer and Senior Vice President, Corporate Development, Jason Greenman; and our Chief Technology Officer and Senior Vice President, Information Technology, Wayne Warthen. Our business plan was developed in large part by our senior-level officers, and its implementation requires their skills and knowledge. We may not be able to offset the impact on our business of the loss of the services of Mr. Boyle or other key officers or employees. We have no employment agreements that prevent any of our key personnel from terminating their employment at any time, and we do not maintain any “key-person” life insurance for any of our personnel.
 
Furthermore, our business requires skilled technical, management, product and technology, and sales and marketing personnel, who are in high demand and are often subject to competing offers. Competition for qualified employees is intense in our industry, and the loss of a substantial number of qualified employees, or an inability to attract, retain and motivate additional highly skilled employees required for the expansion of our activities, could harm our business. To retain and attract key personnel, we use various measures, including an equity incentive program and incentive bonuses for key executive officers and other employees. These measures may not be enough to attract and retain the personnel we require to execute our business plan.
 
If we fail to protect confidential information against security breaches, or if our members or potential members are reluctant to use our marketplace because of privacy concerns, we might face additional costs, and activity in our marketplace could decline.
 
As part of our membership registration process, we collect, use and disclose personally identifiable information, including names, addresses, phone numbers, credit card numbers and email addresses. Our policies concerning the collection, use and disclosure of personally identifiable information are described on our websites. While we believe that our policies are appropriate and that we are in compliance with our policies, we could be subject to legal claims, government action or harm to our reputation if actual practices fail to comply or are seen as failing to comply with our policies or with local, state or federal laws concerning personally identifiable information or if our policies are inadequate to protect the personally identifiable information that we collect.
 
Concern among prospective customers regarding our use of the personal information collected on our websites could keep prospective customers from using our marketplace. Industry-wide incidents or incidents with respect to


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our websites, including misappropriation of third-party information, security breaches, or changes in industry standards, regulations or laws could deter people from using the Internet or our website to conduct transactions that involve the transmission of confidential information, which could harm our business. Recently, our subsidiary, Cityfeet.com, was informed that there may have been a security breach to its credit card database and that some personally identifiable information of individuals contained in that database may have been misappropriated. Under California law and the laws of a number of other states, if there is a breach of our computer systems and we know or suspect that unencrypted personal customer data has been stolen, we are required to inform any customers whose data was stolen, which could harm our reputation and business.
 
In addition, another California law requires businesses that maintain personal information about California residents in electronic databases to implement reasonable measures to keep that information secure. Our practice is to encrypt all personal information, but we do not know whether our current practice will continue to be deemed sufficient under the California law. Other states have enacted different and sometimes contradictory requirements for protecting personal information collected and maintained electronically. Compliance with numerous and contradictory requirements of the different states is particularly difficult for an online business such as ours which collects personal information from customers in multiple jurisdictions.
 
Another consequence of failure to comply is the possibility of adverse publicity and loss of consumer confidence were it known that we did not take adequate measures to assure the confidentiality of the personally identifiable information that our customers had given to us. This could result in a loss of customers and revenue that could jeopardize our success. While we intend to comply fully with all relevant laws and regulations, we cannot assure you that we will be successful in avoiding all potential liability or disruption of business in the event that we do not comply in every instance or in the event that the security of the customer data that we collect is compromised, regardless of whether our practices comply or not. If we were required to pay any significant amount of money in satisfaction of claims under these laws or if we were forced to cease our business operations for any length of time as a result of our inability to comply fully with any such laws, our business, operating results and financial condition could be adversely affected. Further, complying with the applicable notice requirements in the event of a security breach could result in significant costs.
 
Our services may infringe the intellectual property rights of others and we may be subject to claims of intellectual property rights infringement.
 
We may be subject to claims against us alleging infringement of the intellectual property rights of others, including our competitors. Any intellectual property claims, regardless of merit, could be expensive to litigate or settle and could significantly divert our management’s attention from other business concerns.
 
Our technologies and content may not be able to withstand third-party claims of infringement. If we were unable to successfully defend against such claims, we might have to pay damages, stop using the technology or content found to be in violation of a third party’s rights, seek a license for the infringing technology or content, or develop alternative noninfringing technology or content. Licenses for the infringing technology or content may not be available on reasonable terms, if at all. In addition, developing alternative noninfringing technology or content could require significant effort and expense. If we cannot license or develop technology or content for any infringing aspects of our business, we may be forced to limit our service offerings. Any of these results could reduce our ability to compete effectively and harm our business.
 
Our trademarks are important to our business. Other companies may own, obtain or claim trademarks that could prevent, limit or interfere with our use of trademarks. If we were unable to use our trademarks, we would need to devote substantial resources toward developing different brand identities.
 
If we are unable to enforce or defend our ownership and use of intellectual property, our business, competitive position and operating results could be harmed.
 
The success of our business depends in large part on our intellectual property, and our intellectual property rights, including existing and future trademarks, trade secrets, and copyrights, are and will continue to be valuable and important assets of our business. Our business could be significantly harmed if we are not able to protect the content of our databases and our other intellectual property.


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We have taken measures to protect our intellectual property, such as requiring our employees and consultants with access to our proprietary information to execute confidentiality agreements. We also have taken action, and in the future may take additional action, against competitors or other parties who we believe to be infringing our intellectual property. We may in the future find it necessary to assert claims regarding our intellectual property. These measures may not be sufficient or effective to protect our intellectual property.
 
We also rely on laws, including those regarding patents, copyrights, and trade secrets, to protect our intellectual property rights. Current laws may not adequately protect our intellectual property or our databases and the data contained in them. In addition, legal standards relating to the validity, enforceability and scope of protection of proprietary rights in Internet-related businesses are uncertain and evolving, and we cannot assure you of the future viability or value of any of our proprietary rights.
 
Others may develop technologies that are similar or superior to our technology. Any significant impairment of our intellectual property rights could require us to develop alternative intellectual property, incur licensing or other expenses, or limit our product and service offerings.
 
If we are not able to successfully identify or integrate acquisitions, our management’s attention could be diverted, and efforts to integrate acquisitions could consume significant resources.
 
We have made recent acquisitions of, and investments in, other companies, and we may in the future further expand our markets and services in part through additional acquisitions of, or investments in, other complementary businesses, services, databases and technologies. For example, in October, 2004, we acquired BizBuySell, an online marketplace for operating businesses for sale, in June, 2007, we acquired a minority position in Xceligent, Inc. and on August 2, 2007, we acquired Cityfeet.com Inc. Mergers and acquisitions are inherently risky, and we cannot assure you that our acquisitions will be successful. The successful execution of any acquisition strategy will depend on our ability to identify, negotiate, complete and integrate such acquisitions and, if necessary, obtain satisfactory debt or equity financing to fund those acquisitions. Failure to manage and successfully integrate acquired businesses could harm our business. Acquisitions involve numerous risks, including the following:
 
  •  difficulties in integrating the operations, technologies, and products of the acquired companies;
 
  •  diversion of management’s attention from normal daily operations of the business;
 
  •  inability to maintain the key business relationships and the reputations of acquired businesses;
 
  •  entry into markets in which we have limited or no prior experience and in which competitors have stronger market positions;
 
  •  dependence on unfamiliar affiliates and partners;
 
  •  insufficient revenues to offset increased expenses associated with acquisitions;
 
  •  reduction or replacement of the sales of existing services by sales of products or services from acquired lines of business;
 
  •  responsibility for the liabilities of acquired businesses;
 
  •  inability to maintain our internal standards, controls, procedures and policies; and
 
  •  potential loss of key employees of the acquired companies.
 
We may also incur costs, and divert our management’s attention from our business, by pursuing potential acquisitions or other investments which are never consummated.
 
Although we undertake a due diligence investigation of each business that we acquire, there may be liabilities of the acquired companies that we fail to or are unable to discover during the due diligence investigation and for which we, as a successor owner, may be responsible. In connection with acquisitions, we generally seek to minimize the impact of these types of potential liabilities through indemnities and warranties from the seller, which may in some instances be supported by deferring payment of a portion of the purchase price. However, these indemnities


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and warranties, if obtained, may not fully cover the liabilities due to limitations in scope, amount or duration, financial limitations of the indemnitor or warrantor or other reasons.
 
In addition, if we finance or otherwise complete acquisitions or other investments by issuing equity or convertible debt securities, our existing stockholders may be diluted.
 
Unless we develop, maintain and protect our brand identity, our business may not grow and our financial results may suffer.
 
In an effort to obtain additional registered members and increase use of our online marketplace by commercial real estate transaction participants, we intend to continue to pursue a strategy of enhancing our brand both through online advertising and through traditional print media and to increase our marketing and business development expenditures to maintain and enhance our brand in the future. These efforts can involve significant expense and may not have a material positive impact on our brand identity. In addition, maintaining our brand will depend on our ability to provide products and services that are perceived as being high-value, which we may not be able to implement successfully. If we are unable to maintain and enhance our brand, our ability to attract and retain customers or successfully expand our operations will be harmed.
 
If we are unable to effectively implement enhanced systems and internal controls, we may incur increased general and administrative costs, which could reduce our profitability, and investor confidence in us may decrease, which could cause our stock price to decline.
 
As we grow, our success will depend on our ability to continue to implement and improve our operational, financial and management information and control systems on a timely basis, together with maintaining effective cost controls, in order to comply with the more stringent requirements of being a public company, such as the requirements of Sections 302 and 404 of the Sarbanes-Oxley Act of 2002, which require management to evaluate and assess the effectiveness of our internal controls and our disclosure controls and procedures. We are continuing to evaluate and, where appropriate, enhance our systems, procedures and internal controls. If our systems, procedures or controls are not adequate to support our operations and reliable, accurate and timely financial and other reporting, we may not be able to successfully satisfy regulatory and investor scrutiny, offer our services and implement our business plan. The implementation of these new systems, procedures and controls has increased our general and administrative costs in 2007 and is likely to do so in the future. If we fail to effectively implement these new systems, procedures and controls, investors may choose not to invest in us, which could cause our stock price to decline.
 
Changes in or interpretations of accounting rules and regulations, such as expensing of stock options, could result in unfavorable accounting charges or require us to change our compensation policies.
 
In the first quarter of 2006, we adopted Statement of Financial Accounting Standards No. 123R, Share-Based Payment (SFAS 123R), which revises SFAS 123, Accounting for Stock-Based Compensation and supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). SFAS 123R requires that share-based payment transactions with employees be recognized in the financial statements based on their value and recognized as compensation expense over the vesting period. Prior to SFAS 123R we disclosed the pro forma effects of SFAS 123 under the minimum value method. We adopted SFAS 123R effective January 1, 2006, prospectively for new equity awards issued subsequent to January 1, 2006. As a result of SFAS 123R, we may choose to reduce our reliance on stock options as a compensation tool. If we reduce our use of stock options and do not adopt other forms of compensation, it may be more difficult for us to attract and retain qualified employees. If we do not reduce our reliance on stock options, our operating expenses would increase. We currently rely on stock options to retain existing employees and attract new employees. Although we believe that our accounting practices are consistent with current accounting pronouncements, changes to or interpretations of accounting methods or policies in the future may require us to adversely revise how our consolidated financial statements are prepared.


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If our operating results do not meet the expectations of investors or equity research analysts, our market price may decline and we may be subject to class action litigation.
 
It is possible that in the future our operating results will not meet the expectations of investors or equity research analysts, causing the market price of our common stock to decline. In the past, companies that have experienced decreases in the market price of their stock have been subject to securities class action litigation. A securities class action lawsuit against us could result in substantial costs and divert our management’s attention from other business concerns.
 
If our website or our other services experience system failures, our customers may be dissatisfied and our operations could be impaired.
 
Our business depends upon the satisfactory performance, reliability and availability of our website. Problems with our website could result in reduced demand for our services. Furthermore, the software underlying our services is complex and may contain undetected errors. Despite testing, we cannot be certain that errors will not be found in our software. Any errors could result in adverse publicity, impaired use of our services, loss of revenues, cost increases or legal claims by customers.
 
Additionally, our services substantially depend on systems provided by third parties, over whom we have little control. Interruptions in our services could result from the failure of data providers, telecommunications providers, or other third parties. We depend on these third-party providers of Internet communication services to provide continuous and uninterrupted service. We also depend on Internet service providers that provide access to our services. Any disruption in the Internet access provided by third-party providers or any failure of third-party providers to handle higher volumes of user traffic could harm our business.
 
Our internal network infrastructure could be disrupted or penetrated, which could materially impact our ability to provide our services and our customers’ confidence in our services.
 
Our operations depend upon our ability to maintain and protect our computer systems, most of which are located in redundant and independent systems in Los Angeles, California and San Francisco, California. In addition, our BizBuySell website is hosted at a co-location facility in Virginia. While we believe that our systems are adequate to support our operations, our systems may be vulnerable to damage from break-ins, unauthorized access, vandalism, fire, floods, earthquakes, power loss, telecommunications failures and similar events. Although we maintain insurance against fires, floods, and general business interruptions, the amount of coverage may not be adequate in any particular case. Furthermore, any damage or disruption could materially impair or prohibit our ability to provide our services, which could significantly impact our business.
 
Experienced computer programmers, or hackers, may attempt to penetrate our network security from time to time. Our subsidiary, Cityfeet.com, recently was informed that there may have been a security breach to its credit card database, and that some personally identifiable information of individuals contained in that database may have been misappropriated. The potential breach has not affected any personally identifiable information with respect to LoopNet members, which information is maintained on separate servers. Although we maintain a firewall, and will continue to enhance and review our databases to prevent unauthorized and unlawful intrusions, a hacker who penetrates our network security could misappropriate proprietary information or cause interruptions in our services. We might be required to expend significant capital and resources to protect against, or to alleviate, problems caused by hackers. We also may not have a timely remedy against a hacker who is able to penetrate our network security. In addition to purposeful security breaches, the inadvertent transmission of computer viruses could expose us to litigation or to a material risk of loss. Any of these incidents could materially impact our ability to provide our services as well as materially impact the confidence of our customers in our services, either of which could significantly impact our business.
 
We may be subject to regulation of our advertising and customer solicitation or other newly-adopted laws and regulations.
 
As part of our membership registration process, our customers agree to receive emails and other communications from us. However, we may be subject to restrictions on our ability to communicate with our customers


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through email and phone calls. Several jurisdictions have proposed or adopted privacy-related laws that restrict or prohibit unsolicited email or “spam.” These laws may impose significant monetary penalties for violations. For example, the CAN-SPAM Act of 2003, or CAN-SPAM, imposes complex and often burdensome requirements in connection with sending commercial email. Key provisions of CAN-SPAM have yet to be interpreted by the courts. Depending on how it is interpreted, CAN-SPAM may impose burdens on our email marketing practices or services we offer or may offer. Although CAN-SPAM is thought to have pre-empted state laws governing unsolicited email, the effectiveness of that preemption is likely to be tested in court challenges. If any of those challenges are successful, our business may also be subject to state laws and regulations that may further restrict our email marketing practices and the services we may offer. The scope of those regulations is unpredictable. Compliance with laws and regulations of different jurisdictions imposing different standards and requirements is very burdensome for an online business. Our business, like most online businesses, offers products and services to customers in multiple state jurisdictions. Our business efficiencies and economies of scale depend on generally uniform service offerings and uniform treatment of customers. Compliance requirements that vary significantly from jurisdiction to jurisdiction impose an added cost to our business and increased liability for compliance deficiencies. In addition, laws or regulations that could harm our business could be adopted, or reinterpreted so as to affect our activities, by the government of the United States, state governments, regulatory agencies or by foreign governments or agencies. This could include, for example, laws regulating the source, content or form of information or listings provided on our websites, the information or services we provide or our transmissions over the Internet. Violations or new interpretations of these laws or regulations may result in penalties or damage our reputation or could increase our costs or make our services less attractive.
 
An important aspect of the new Internet-focused laws is that where federal legislation is absent, states have begun to enact consumer-protective laws of their own and these vary significantly from state to state. Thus, it is difficult for any company to be sufficiently aware of the requirements of all applicable state laws, and it is further difficult or impossible for any company to fully comply with their inconsistent standards and requirements. In addition to the consequences that could result from violating one or another state’s laws, the cost of attempting to comply will be considerable. Also, as our business grows to be world-wide, we will be required to comply with the laws of all foreign countries, and the costs of that compliance effort will be considerable.
 
Our stock price may be volatile and you may be unable to sell your shares at or above the purchase price.
 
The market price of our common stock could be subject to wide fluctuations in response to, among other things, the risk factors described in this section of this Annual Report on Form 10-K, and other factors beyond our control, such as fluctuations in the valuation of companies perceived by investors to be comparable to us.
 
Furthermore, the stock markets have experienced price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political and market conditions, such as recessions, interest rate changes or international currency fluctuations, may negatively affect the market price of our common stock.
 
In the past, many companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business.
 
Our charter documents and Delaware law could prevent a takeover that stockholders consider favorable and could also reduce the market price of our stock.
 
Our amended and restated certificate of incorporation and our bylaws contain provisions that could delay or prevent a change in control of our company. These provisions could also make it more difficult for stockholders to elect directors and take other corporate actions. These provisions include:
 
  •  providing for a classified board of directors with staggered, three-year terms;


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  •  not providing for cumulative voting in the election of directors;
 
  •  authorizing the board to issue, without stockholder approval, preferred stock rights senior to those of common stock;
 
  •  prohibiting stockholder action by written consent;
 
  •  limiting the persons who may call special meetings of stockholders; and
 
  •  requiring advance notification of stockholder nominations and proposals.
 
In addition, the provisions of Section 203 of the Delaware General Corporate Law govern us. These provisions may prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us for a certain period of time.
 
These and other provisions in our amended and restated certificate of incorporation, our bylaws and under Delaware law could discourage potential takeover attempts, reduce the price that investors might be willing to pay for shares of our common stock in the future and result in the market price being lower than it would be without these provisions.
 
Item 1B.   Unresolved Staff Comments.
 
None.
 
Item 2.   Properties.
 
Our headquarters are located in San Francisco, California, where we lease approximately 15,800 square feet of office space under a lease that expires in 2008. We have entered into four expansions of this lease, the first of which covers an additional 4,180 square feet of space, the second of which covers an additional 4,777 square feet of space, the third of which covers an additional 6,489 square feet of space, and the fourth of which covers an additional 5,574 square feet of space, all with an expiration date in 2008. The San Francisco office lease that expires in 2008 includes a renewal option at fair market value rental rates, which would be higher than our current rental rates. The Company is currently in the process of negotiating a renewal for the San Francisco office lease. We also lease approximately 18,000 square feet of office space in Monrovia, California, pursuant to a lease that expires in 2011. We recently entered into an expansion of this lease which covers an additional 5,741 square feet of space, with an expiration date in 2011. We believe that these facilities are suitable and appropriately support our business needs.
 
Item 3.   Legal Proceedings.
 
On November 15, 2007 the Company filed a lawsuit against CoStar Group, Inc. and CoStar Realty Information, Inc. in the Superior Court for the State of California, County of Los Angeles, asserting claims for breach of contract and unfair business practices arising out of CoStar’s alleged unlawful use of data from the Company’s Web site for competitive purposes. On or about January 22, 2008, CoStar Group, Inc. and CoStar Realty Information, Inc. filed a Cross-Complaint against the Company in that lawsuit, alleging that the Company breached a 2005 Settlement Agreement between the Company and CoStar and CoStar’s terms of use, and asserting various state law causes of action arising out of the Company’s purported unlawful accessing of and use of data on CoStar’s Web site. CoStar’s Cross-Complaint seeks unspecified damages and injunctive relief. On or about February 22, 2008, the Company filed a special motion to strike CoStar’s Cross-Complaint and dismiss all claims in that pleading. That motion is currently set for hearing on March 17, 2008. The Company believes it has meritorious defenses to CoStar’s claims and intends to vigorously defend itself against those claims.
 
On or about February 5, 2008, CoStar Group, Inc. filed a lawsuit against the Company in the U.S. District Court for the Southern District of New York, alleging that the Company has engaged in false advertising by misrepresenting the number of users of its Web site. The Complaint seeks unspecified damages and injunctive relief. The Company’s response to the Complaint is due on or about March 27, 2008. Discovery in the action has not yet commenced. The Company believes it has meritorious defenses to CoStar’s claims and intends to vigorously defend itself against those claims.


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Currently, there is no other material litigation pending against the Company. From time to time, the Company may become party to litigation and subject to claims incident to the ordinary course of the Company’s business.
 
Item 4.   Submission of Matters to a Vote of Security Holders.
 
None.
 
PART II
 
Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
 
Market information
 
Our common stock began trading on the Nasdaq National Market (now called the Nasdaq Global Market) under the symbol “LOOP” on June 7, 2006. We have not listed our stock on any other markets or exchanges. The following table shows the high and low sale prices for our common stock as reported by the Nasdaq Global Market:
 
                 
    High     Low  
 
2006
               
Second Quarter (June 7 to June 30, 2006)
  $ 19.92     $ 14.11  
Third Quarter
  $ 19.18     $ 10.48  
Fourth Quarter
  $ 17.07     $ 12.67  
2007
               
First Quarter
  $ 17.99     $ 14.50  
Second Quarter
  $ 24.21     $ 15.02  
Third Quarter
  $ 26.37     $ 16.76  
Fourth Quarter
  $ 23.90     $ 13.22  
 
As of February 21, 2008, we had approximately 191 common stockholders of record. This does not include the number of persons whose stock is in nominee or “street name” accounts through brokers.
 
Dividend policy
 
We have never declared or paid dividends on our common stock. We intend to retain our earnings for use in our business and repurchases of our common stock, and therefore we do not anticipate declaring or paying any cash dividends in the foreseeable future.
 
Unregistered Sales of Equity Securities
 
We had no issuance of unregistered securities during the three months ended December 31, 2007.
 
Use of Proceeds
 
On June 6, 2006, the Securities and Exchange Commission declared effective our Registration Statement on Form S-1 (File No. 333-132138) for our initial public offering. The net offering proceeds received by us in the offering after deducting total estimated expenses, including the underwriters’ discount, were $42,309,000.
 
We have no current specific plan for the use of the proceeds of the offering or a significant portion thereof.
 
We have invested all of the net proceeds from the offering in short-term, investment-grade securities. We cannot predict whether the net proceeds invested will yield a favorable return.
 
Issuer Purchases of Equity Securities
 
We made no purchases of our equity securities during 2007, but in the first quarter of 2008, our Board of Directors approved a stock repurchase plan for Company common stock.


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Performance Graph
 
The following graph shows the total shareholder return of an investment of $100 in cash on June 7, 2006 (the date on which our common stock was first traded on the Nasdaq National Market) for (i) our common stock, (ii) the Nasdaq Stock market (U.S.) Index and (iii) the Goldman Sachs Internet Trading Index, at the closing price on June 7, 2006. All values assume reinvestment of the full amount of all dividends, if any.
 
Comparative Returns
 
(PERFORMANCE GRAPH)
 
                         
    Culmulative Total Return
    6/7/2006   12/29/2006   12/31/2007
LOOPNET, INC.
    100.00       99.87 (1)     93.67 (1)
                         
NASDAQ STOCK MARKET (U.S)
    100.00       112.25       123.26  
                         
GOLDMAN SACHS INTERNET TRADING INDEX
    100.00       116.95       127.45  
                         
 
(1) Based on the initial public offering price of $12.00 per share on June 6, 2006, the cumulative total return is $124.83 and $117.08 on 12/29/06 and 12/31/07, respectfully.
 
The returns shown on the graph do not necessarily predict future performance.


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Item 6.   Selected Financial Data.
 
You should read the selected consolidated financial data set forth below in conjunction with our consolidated financial statements, the notes to our consolidated financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained elsewhere in this annual report on Form 10-K.
 
The consolidated statements of operations data for the years ended December 31, 2003 and 2004 and the consolidated balance sheet data as of December 31, 2003, 2004 and 2005 are derived from our audited consolidated financial statements not included in this annual report on Form 10-K. The consolidated statements of operations data for each of the three years ended December 31, 2005, 2006 and 2007 have been derived from our audited consolidated financial statements that are included elsewhere in this annual report on Form 10-K. Our historical results are not necessarily indicative of results to be expected for future periods.
 
                                         
    Year Ended December 31,  
    2003     2004     2005     2006     2007  
    (In thousands, except per share data)  
 
Consolidated Statements of Operations Data:
                                       
Revenues
  $ 10,480     $ 17,036     $ 30,977     $ 48,411     $ 70,729  
Cost of revenue(1)
    1,984       2,562       3,825       5,599       8,033  
                                         
Gross profit
    8,496       14,474       27,152       42,812       62,696  
Operating expenses(1):
                                       
Sales and marketing
    1,704       3,193       6,252       9,506       14,667  
Technology and product development
    2,289       2,686       3,746       4,341       6,427  
General and administrative
    3,180       4,889       5,955       7,803       12,253  
                                         
Total operating expenses
    7,173       10,768       15,953       21,650       33,347  
                                         
Income from operations
    1,323       3,706       11,199       21,162       29,349  
Interest and other income, net
    282       132       494       2,883       5,046  
                                         
Income from continuing operations
    1,605       3,838       11,693       24,045       34,395  
Discontinued operations:
                                       
Gain on sale of assets, net
    287                          
                                         
Income from discontinued operations
    287                          
                                         
Income before taxes
    1,892       3,838       11,693       24,045       34,395  
Income tax expense (benefit)
    188       118       (7,243 )     8,550       13,268  
                                         
Net income
  $ 1,704     $ 3,720     $ 18,936     $ 15,495     $ 21,127  
                                         
Net income per share
                                       
Basic
  $     $ 0.06     $ 0.58     $ 0.42     $ 0.55  
                                         
Diluted
  $     $ 0.04     $ 0.54     $ 0.40     $ 0.52  
                                         
 
 
(1) Stock-based compensation is allocated as follows:
 


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    Year Ended December 31,  
    2003     2004     2005     2006     2007  
    (In thousands)  
 
Cost of revenue
  $     $ 1     $ 18     $ 151     $ 357  
Sales and marketing
          251       146       686       1,358  
Technology and product development
          236       350       195       600  
General and administrative
          1,188       150       421       1,180  
                                         
Total
          1,676       664       1,453       3,495  
                                         
 
                                         
    Year Ended December 31,  
    2003     2004     2005     2006     2007  
    (In thousands)  
 
Consolidated Balance Sheet Data:
                                       
Cash, cash equivalents and short-term investments
  $ 5,174     $ 8,724     $ 21,865     $ 89,028     $ 107,889  
Working capital
    2,915       5,100       16,939       81,884       94,667  
Total assets
    6,034       12,971       35,177       100,205       137,359  
Total liabilities
    2,727       4,255       6,604       10,202       15,506  
Reedeemable convertible preferred stock
    39,712       39,712       39,962              
Total shareholders’ (deficit) equity
    (36,405 )     (30,996 )     (11,389 )     90,003       121,853  
 
                                         
    Year Ended December 31,  
    2003     2004     2005     2006     2007  
    (In thousands)  
 
Consolidated Statement of Cash Flows Data:
                                       
Cash flow provided by operating activities
  $ 2,944     $ 6,921     $ 14,490     $ 23,205     $ 30,301  
Depreciation and amortization
    377       278       505       611       1,154  
Capital expenditures
    (243 )     (500 )     (719 )     (665 )     (1,797 )
 
                                         
    Year Ended December 31,  
    2003     2004     2005     2006     2007  
 
Other Operating Data (unaudited):
                                       
LoopNet registered members at end of period
    450,876       703,111       1,116,589       1,766,508       2,567,729  
LoopNet premium members at end of period
    21,203       35,482       57,461       78,952       88,340  

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Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
You should read the following discussion and analysis by our management of our financial condition and results of operations in conjunction with our consolidated financial statements and the accompanying notes included elsewhere in this Annual Report on Form 10-K . This discussion and other parts of this Annual Report on Form 10-K contain forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in Item 1A of Part I, “Risk Factors.”
 
Overview
 
We are a leading online marketplace for commercial real estate in the United States, based on the number of monthly unique visitors to our marketplace, which averaged approximately 500,000 unique visitors per month during 2005, approximately 800,000 per month during 2006 and approximately 900,000 during 2007, as reported by comScore Media Metrix. comScore Media Metrix defines a unique visitor as an individual who visited any content of a website, a category, a channel, or an application. Our online marketplace, available at www.LoopNet.com, enables commercial real estate agents, working on behalf of property owners and landlords, to list properties for sale or for lease and submit detailed information on property listings including qualitative descriptions, financial and tenant information, photographs and key property characteristics in order to find a buyer or tenant. We offer two types of memberships on the LoopNet online marketplace. Basic membership is available free-of-charge, and enables members to experience some of the benefits of the LoopNet offering, with limited functionality. LoopNet premium membership is available for a monthly subscription fee and provides enhanced marketing exposure for property listings and full access to LoopNet property listings, as well as numerous other features. The minimum term of a premium membership subscription is one month.
 
We believe that the key metrics that are material to an analysis of our business are the number of our registered members, the number of our premium members, the rate of conversion of our basic members to premium members, the average monthly subscription price paid by our premium members and the cancellation rate of our premium members. We also believe that the number of listings on our marketplace and the number of property profiles viewed by our registered members are key metrics, as they affect the attractiveness of our website to current and potential customers. Our total membership has grown from approximately 1.1 million members as of December 31, 2005 to over 1.7 million members as of December 31, 2006 and over 2.5 million members as of December 31, 2007. Our base of premium members has grown from over 57,000 premium members as of December 31, 2005 to over 78,000 premium members as of December 31, 2006 and over 88,000 premium members as of December 31, 2007. Historically, our average monthly rate of conversion of basic members to premium members has been approximately five percent, and our average monthly cancellation rate for premium members has ranged between three and five percent. We believe that a decline in the fourth quarter of 2007 in our average monthly conversion rate to approximately 3.4% is attributable to an increasing proportion of principals (i.e. investors and tenants) in our membership base, who convert to premium membership at a lower rate than the professional agents and brokers in the market, and an approximately 18% increase in the average subscription prices which we charge our premium members. During the current quarter the commercial real estate credit markets continued to experience some degree of tightening as a result of the subprime issues affecting the residential real estate credit markets. In the fourth quarter of 2007 our cancellation rate exceeded our historical levels and we believe the increase is attributable to the credit tightening that the commercial real estate industry experienced and the increase in the average subscription prices which we charge our premium members. Given the current market conditions we are experiencing we believe our monthly cancellation rate during 2008 will range from 4.5% to 6.5%. The average monthly subscription price paid by our premium members has increased from $44.96 in the fourth quarter of 2005 to $47.26 in the fourth quarter of 2006 and to $56.00 in the fourth quarter of 2007. We anticipate that the average subscription price for our premium members will continue to rise, which may in turn drive slower acquisition of new premium members and increased cancellations of existing premium memberships. Premium membership fees have driven the majority of our growth in revenues since 2001 and were the source of approximately 80% of our revenues in 2005 and 2006, and 77% of our revenues in 2007. The number of listings on our marketplace has grown from approximately 335,000 as of December 31, 2005 to approximately 460,000 as of December 31, 2006 and approximately 560,000 as of


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December 31, 2007. The number of property profiles that were viewed by our registered members during the year increased from 74 million in 2005 to 130 million in 2006 and 150 million in 2007.
 
Our Revenues and Expenses
 
Our primary sources of revenues are:
 
  •  LoopNet premium membership fees;
 
  •  BizBuySell BrokerWorks membership fees and paid listings;
 
  •  advertising on, and lead generation from, our marketplaces,
 
  •  LoopLink product license fees; and
 
  •  LoopNet RecentSales membership fees.
 
Our revenues have grown significantly in the past three years from $31.0 million in 2005, to $48.4 million in 2006 and to $70.7 million in 2007. We have been profitable and cash flow positive each quarter since the second quarter of 2003. The key factors influencing our growth in revenues are:
 
  •  the increased adoption of our premium membership services by the commercial real estate industry;
 
  •  increases in the average monthly subscription price of our premium membership product;
 
  •  the increased adoption of out RecentSales services by the commercial real estate industry, and
 
  •  our acquisition of BizBuySell in October, 2004, and the increased adoption of our services by the operating business for sale industry.
 
Our ability to continue to grow our revenues will largely depend on our ability to expand the number of users of www.LoopNet.com and www.BizBuySell.com and to convince those users to upgrade to our paid services, especially premium membership. As noted below, we anticipate that revenues will not increase in the future at the same percentage rate as in previous periods.
 
We derive the substantial majority of our revenues from customers that pay monthly fees for a suite of services to market and search for commercial real estate and operating businesses. The fee for our LoopNet premium membership averaged $56.00 per month during the fourth quarter of 2007. The minimum term of a premium membership subscription is one month. We also offer quarterly and annual memberships which are priced and discounted accordingly, and paid in advance for the subscription period. A customer choosing to cancel a discounted annual or quarterly membership will receive a refund based on the number of months the membership was used and charging the customer at the monthly rate rather than at the discounted quarterly or annual rates. We also license our LoopLink product to commercial real estate brokerage firms who pay a monthly, quarterly or annual fee. For our BrokerWorks product at BizBuySell, we charge $49.95 per month. We also charge fees associated with marketing individual businesses listed on BizBuySell. For our RecentSales product, we charge $29.95 per month or $1.95 to $3.95 for an individual transaction.
 
Revenues from other sources include advertising and lead generation revenues from both our LoopNet and BizBuySell marketplaces, which are recognized ratably over the period in which the advertisement is displayed, provided that no significant obligations remain and collection of the resulting receivable is probable. Advertising rates are dependent on the services provided and the placement of the advertisements. To date, the duration of our advertising commitments has generally averaged two to three months.
 
The largest component of our expenses is personnel costs. Personnel costs consist of salaries, benefits and incentive compensation for our employees, including commissions for salespeople. These expenses are categorized in our statements of operations based on each employee’s principal function.
 
Critical Accounting Policies and Estimates
 
Our consolidated financial statements are prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of


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assets, liabilities, revenues, costs and expenses and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions. Accordingly, our actual results may differ from these estimates under different assumptions or conditions.
 
Our significant accounting policies are described in Note 1 to the consolidated financial statements included in this Annual Report, and of those policies, we believe that the accounting policies discussed below involve the greatest degree of complexity and exercise of judgment by our management. Accordingly, we believe the following policies are the most critical for understanding and evaluating our financial condition and results of operations.
 
Revenue Recognition
 
We derive the substantial majority of our revenues from premium membership fees for our online marketplaces. We recognize revenues, under the provisions of Securities and Exchange Commission (SEC) Staff Accounting Bulletin (SAB) No. 104, “Revenue Recognition,” when persuasive evidence of an agreement exists, delivery has occurred, the sales price is fixed or determinable and collectibility is reasonably assured. For the majority of our revenues, payments for LoopNet premium memberships, revenues are recognized immediately on a monthly basis as such accounts are charged. Payments that we receive in advance of services being rendered, such as advance payments on annual and quarterly subscriptions by our premium members, are recorded as deferred revenue and recognized on a straight-line basis over the service period.
 
Income Taxes
 
Deferred tax assets and liabilities arise from the differences between the tax basis of an asset or liability and its reported amount in the consolidated financial statements, as well as from net operating loss and tax credit carryforwards. Deferred tax amounts are determined by using the tax rates expected to be in effect when the taxes will actually be paid or refunds received, as provided under current tax law. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense or benefit is the tax payable or refundable, respectively, for the period, plus or minus the change during the period in deferred tax assets and liabilities. In the fourth quarter of 2005, we determined that it was more likely than not that we would generate sufficient taxable income from operations in the future to be able to realize tax benefits arising from the use of a portion of our net operating loss carryforwards. Prior to the fourth quarter of 2005, we recorded a valuation allowance on the deferred tax assets associated with these future tax benefits because we were not certain we would generate sufficient taxable income in the future to utilize the net operating loss carryforwards. The release of a portion of the valuation allowance in the fourth quarter of 2005 resulted in a tax benefit of approximately $7.6 million that was recognized in our results from operations. As of December 31, 2007, we continued to maintain a valuation allowance of approximately $10.1 million for certain federal and state net operating loss and tax credit carryforwards due to the uncertainty of realization.
 
At December 31, 2007, we had approximately $34.2 million of federal and $17.7 million of state net operating loss carryforwards available to reduce future taxable income, which will begin to expire in 2017 for federal and 2009 for state purposes, respectively. Under Section 382 of the Internal Revenue Code, the utilization of the net operating loss carryforwards is limited based upon changes in the percentage of our ownership. As a result of prior ownership changes, we were limited to using $2.7 million of net operating losses to offset taxable income in 2007 and estimate that we will be able to utilize approximately $3.7 million in 2008 and each year thereafter until 2011, $2.8 million in 2012 and $2.0 million each year thereafter until 2021.
 
The difference between our effective income tax rate and the federal statutory rate is primarily a function of the valuation allowance provided against the net deferred tax assets and permanent differences. Our future effective income tax rate will depend on various factors, such as changes in our valuation allowance, pending or future tax law changes including rate changes and the tax benefit from research and development credits, potential limitations on the use of federal and state net operating losses, and state taxes.
 
On January 1, 2007, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 clarifies the accounting for income taxes by prescribing a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized. The minimum threshold is defined in FIN 48 as a tax position that is more likely than not to be sustained upon examination by the applicable taxing authority,


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including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. FIN 48 must be applied to all existing tax positions upon initial adoption. The cumulative effect of applying FIN 48 at adoption, if any, is to be reported as an adjustment to opening retained earnings for the year of adoption. The adoption of FIN 48 did not have a material effect on the Company’s consolidated financial position or results of operations.
 
Website Development Costs
 
In March 2000, the Emerging Issues Task Force (EITF) issued EITF 00-2, “Accounting for Web Site Development Costs,” which addresses whether certain development costs should be capitalized or expensed. Because our current website development costs relate to routine maintenance and operating costs, we expense such costs as incurred.
 
Stock-Based Compensation
 
In the first quarter of 2006, we adopted Statement of Financial Accounting Standards No. 123R, Share-Based Payment (SFAS 123R), which revises SFAS 123, Accounting for Stock-Based Compensation and supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). SFAS 123R requires that share-based payment transactions with employees be recognized in the financial statements based on their value and recognized as compensation expense over the vesting period. Prior to FAS 123R we disclosed the pro forma effects of FAS 123 under the minimum value method. We adopted SFAS 123R effective January 1, 2006, prospectively for new equity awards issued subsequent to January 1, 2006.
 
Under SFAS 123R we calculated the fair value of stock option grants using the Black-Scholes option-pricing model. The weighted average assumptions used in the Black-Scholes model were 4.6 years for the expected term, 44% for the expected volatility, 4.43% for the risk free rate and 0% for dividend yield for the twelve month period ending December 31, 2007. Future expense amounts for any particular quarterly or annual period could be affected by changes in our assumptions or changes in market conditions.
 
The weighted average expected option term for 2007 reflects the application of the simplified method set out in SEC Staff Accounting Bulletin No. 107 (SAB 107), which was issued in March 2005. The simplified method defines the life as the average of the contractual term of the options and the weighted average vesting period for all option tranches.
 
Estimated volatility for fiscal 2007 also reflects the application of SAB 107 interpretive guidance and, accordingly, incorporates historical volatility of similar public entities.
 
Prior to January 1, 2006, we accounted for employee stock-based compensation in accordance with provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, or APB 25, and Financial Accounting Standards Board Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation — an Interpretation of APB 25, and comply with the disclosure provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, or SFAS 123, and related Statement of Financial Accounting Standard No. 148, Accounting for Stock-Based Compensation — Transaction and Disclosure. Under APB 25, compensation expense is based on the difference, if any, on the date of the grant, between the fair value of our stock and the exercise price of the option. We amortize deferred stock-based compensation using the straight-line method over the vesting period.
 
Seasonality and Cyclicality
 
The commercial real estate market is influenced by annual seasonality factors, as well as by overall economic cycles. The market is large and fragmented, and different segments of the industry are influenced differently by various factors. Broadly speaking, the commercial real estate industry has two major components: tenants leasing space from owners or landlords, and the investment market for buying and selling properties.
 
We have experienced seasonality in our business in the past, and expect to continue to experience it in the future. While individual geographic markets vary, commercial real estate transaction activity is fairly consistent


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throughout the year, with the exception of a slow-down during the end-of-year holiday period. The impact that this has had on our business is that the growth rate in the fourth quarter of each year, while positive, has been slower than in the first three quarters of each year. We expect this pattern to continue.
 
The commercial real estate industry has historically experienced cyclicality. The different segments of the industry, such as office, industrial, retail, multi-family, and others, are influenced differently by different factors, and have historically moved through cycles with different timing. The “for lease” and “for sale” components of the market also do not necessarily move on the same timing cycle. During the second half of 2007 the commercial real estate credit markets experienced some degree of tightening as a result of the subprime issues affecting the residential real estate credit markets. We believe the credit tightening caused our cancellation rates to exceed our historical levels during the fourth quarter of 2007.
 
Results of Operations
 
The following table presents our historical operating results as a percentage of revenues for the periods indicated:
 
                         
    Year Ended December 31,  
    2005     2006     2007  
 
Revenues
    100.0 %     100.0 %     100.0 %
Cost of revenues
    12.3       11.6       11.4  
                         
Gross profit
    87.7       88.4       88.6  
Operating expenses:
                       
Sales and marketing
    20.2       19.6       20.7  
Technology and product development
    12.1       9.0       9.1  
General and administrative
    19.2       16.1       17.3  
                         
Total operating expenses
    51.5       44.7       47.1  
Income from operations
    36.2       43.7       41.5  
Interest and other income, net
    1.6       6.0       7.1  
                         
Income before taxes
    37.8       49.7       48.6  
Income tax expense (benefit)
    (23.3 )     17.7       18.8  
                         
Net income
    61.1 %     32.0 %     29.9 %
                         
 
Comparison of Years Ended December 31, 2006 and 2007
 
Revenues
 
                                 
    Year Ended December 31,  
                      Percent
 
    2006     2007     Increase     Change  
    (Dollars in thousands)  
 
Revenues
  $ 48,411     $ 70,729     $ 22,318       46.1 %
Premium members at year-end
    78,952       88,340       9,388       11.9 %
 
The increase in revenues was due primarily to increased adoption of our premium membership product, as well as an increase of approximately 15.9% in the average monthly price of a premium membership.
 
We anticipate that revenues will not increase in the future at the same percentage rate as in previous periods as a result of the larger revenue base and the current market conditions we are experiencing.


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Cost of Revenues
 
                                 
    Year Ended December 31,  
                      Percent
 
    2006     2007     Increase     Change  
    (Dollars in thousands)  
 
Cost of revenues
  $ 5,599     $ 8,033     $ 2,434       43.5 %
Percentage of revenues
    11.6 %     11.4 %                
 
Cost of revenues consists of the expenses associated with the operation of our website, including depreciation of network infrastructure equipment, salaries and benefits of network operations personnel, Internet connectivity and hosting costs. Cost of revenues also includes salaries and benefits expenses associated with our data quality, data import and customer support personnel and credit card and other transaction fees relating to processing customer transactions.
 
The increase in cost of revenues was due to an increase in salaries and benefit costs related to an increase in the number of data quality, data import and customer support personnel, which was required in order to support our increased property listing and user activity. Also contributing to the increased cost of revenues was higher credit card fees due to the growth in revenues.
 
We expect cost of revenues to increase in absolute dollar amounts as we continue to expand our business, but to remain relatively consistent as a percentage of revenues.
 
Sales and Marketing
 
                                 
    Year Ended December 31,  
                      Percent
 
    2006     2007     Increase     Change  
    (Dollars in thousands)  
 
Sales and marketing
  $ 9,506     $ 14,667     $ 5,161       54.3 %
Percentage of revenues
    19.6 %     20.7 %                
 
Sales and marketing expenses consist of the compensation and associated costs for sales and marketing personnel, advertising expenses as well as public relations and other promotional activities.
 
The increase in sales and marketing expenses was due largely to an increase in the number of sales personnel and increased commissions paid as a result of growth in our revenues. Additionally, advertising costs were higher, primarily to attract new members to our online marketplace.
 
Also contributing to the increase was higher stock-based compensation, which increased to $1,358,000 in 2007 compared to $686,000 in 2006.
 
We expect sales and marketing expenses to increase in absolute dollar amounts, and potentially as a percentage of revenues, as we continue to expand our marketing program to attract and retain premium members and launch and support new products and services.
 
Technology and Product Development
 
                                 
    Year Ended December 31,  
                      Percent
 
    2006     2007     Increase     Change  
    (Dollars in thousands)  
 
Technology and product development
  $ 4,341     $ 6,427     $ 2,086       48.1 %
Percentage of revenues
    9.0 %     9.1 %                
 
Technology and product development costs include expenses for the research and development of new products and services, as well as improvements to and maintenance of existing products and services.


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The increase in technology and product development expenses was due primarily to increases in salaries and related costs associated with an increase in headcount to assist in the launch of new products and services and the maintenance of our existing services.
 
We expect technology and product development expenses to increase in absolute dollar amounts and potentially as a percentage of revenues as we hire more personnel and continue to build the infrastructure required to support the development of new products and services.
 
General and Administrative
 
                                 
    Year Ended December 31,  
                      Percent
 
    2006     2007     Increase     Change  
    (Dollars in thousands)  
 
General and administrative
  $ 7,803     $ 12,253     $ 4,450       57.0 %
Percentage of revenues
    16.1 %     17.3 %                
 
General and administrative expenses consist primarily of salaries and related expenses for executive, accounting, billing and human resources personnel. These costs also include insurance and professional fees, rent and related expenses. Professional fees primarily consist of outside legal and audit fees.
 
The increase in general and administrative expenses was due primarily to higher office rent associated with our growth in personnel, increased salaries and higher professional fees and directors’ and officers’ liability insurance premiums associated with being a public company.
 
Also contributing to the increase was higher stock-based compensation, which increased to $1,180,000 in 2007 compared to $421,000 in 2006
 
We expect general and administrative expenses to increase in absolute dollar amounts as we continue to absorb the expenses associated with being a public company, but to potentially decline as a percentage of revenue.
 
Stock-Based Compensation
 
Expenses associated with stock-based compensation increased by $2,042,000 to $3,495,000 in the twelve months ended December 31, 2007 from $1,453,000 in the twelve months ended December 31, 2006. The increase was due primarily to option grants for employees hired in 2007 and additional option grants to existing employees.
 
Stock-based compensation has been allocated as follows:
 
                                 
    Year Ended December 31,  
                Increase/
    Percent
 
    2006     2007     (Decrease)     Change  
 
Cost of revenue
  $ 151     $ 357     $ 206       136.4 %
Selling and marketing
    686       1,358       672       98.0 %
Technology and product development
    195       600       405       207.7 %
General and administrative
    421       1,180       759       180.3 %
                                 
Total
  $ 1,453     $ 3,495     $ 2,042       140.5 %
                                 
 
Interest Income
 
Interest and other income increased by $2.16 million to $5.05 million for the year ended December 31, 2007, from $2.88 million for the year ended December 31, 2006. This increase was primarily due to higher a higher average cash balance. As of December 31, 2007, we held $107.9 million in cash, cash equivalents and short-term investments, compared to $89.0 million in cash, cash equivalents and short-term investments as of December 31, 2006.


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Income Taxes
 
We recorded a provision for income taxes of $13.3 million for the year ended Decemeber 31, 2007 based upon a 38.6% effective tax rate.
 
Comparison of Years Ended December 31, 2005 and 2006
 
Revenues
 
                                 
    Year Ended December 31,  
                      Percent
 
    2005     2006     Increase     Change  
    (Dollars in thousands)  
 
Revenues
  $ 30,977     $ 48,411     $ 17,434       56.3 %
Premium members at year-end
    57,461       78,952       21,491       37.4 %
 
The increase in revenues was due primarily to increased adoption of our premium membership product, as well as an increase of approximately 5% in the average monthly price of a premium membership.
 
Cost of Revenues
 
                                 
    Year Ended December 31,  
                      Percent
 
    2005     2006     Increase     Change  
    (Dollars in thousands)  
 
Cost of revenues
  $ 3,825     $ 5,599     $ 1,774       46.4 %
Percentage of revenues
    12.3 %     11.6 %                
 
Cost of revenues consists of the expenses associated with the operation of our website, including depreciation of network infrastructure equipment, salaries and benefits of network operations personnel, Internet connectivity and hosting costs. Cost of revenues also includes salaries and benefits expenses associated with our data quality, data import and customer support personnel and credit card and other transaction fees relating to processing customer transactions.
 
The increase in cost of revenues was due to an increase in salaries and benefit costs related to an increase in the number of data quality, data import and customer support personnel, which was required in order to support our increased property listing and user activity. Also contributing to the increased cost of revenues was higher credit card fees due to the growth in revenues.
 
Sales and Marketing
 
                                 
    Year Ended December 31,  
                      Percent
 
    2005     2006     Increase     Change  
    (Dollars in thousands)  
 
Sales and marketing
  $ 6,252     $ 9,506     $ 3,254       52.0 %
Percentage of revenues
    20.2 %     19.6 %                
 
Sales and marketing expenses consist of the compensation and associated costs for sales and marketing personnel, advertising expenses as well as public relations and other promotional activities.
 
The increase in sales and marketing expenses was due largely to an increase in the number of sales personnel and increased commissions paid as a result of growth in our revenues. Additionally, advertising costs were higher, primarily to attract new members to our online marketplace.
 
Also contributing to the increase was higher stock-based compensation, which increased to $686,000 in 2006 compared to $146,000 in 2005.


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Technology and Product Development
 
                                 
    Year Ended December 31,  
                      Percent
 
    2005     2006     Increase     Change  
    (Dollars in thousands)  
 
Technology and product development
  $ 3,746     $ 4,341     $ 595       15.9 %
Percentage of revenues
    12.1 %     9.0 %                
 
Technology and product development costs include expenses for the research and development of new products and services, as well as improvements to and maintenance of existing products and services.
 
The increase in technology and product development expenses was due primarily to increases in salaries and related costs associated with an increase in headcount to assist in the launch of new products and services and the maintenance of our existing services. As a percentage of revenues, technology and product development expenses decreased due primarily to the growth in revenues.
 
General and Administrative
 
                                 
    Year Ended December 31,  
                      Percent
 
    2005     2006     Increase     Change  
 
General and administrative
  $ 5,955     $ 7,803     $ 1,848       31.0 %
Percentage of revenues
    19.2 %     16.1 %                
 
General and administrative expenses consist primarily of salaries and related expenses for executive, accounting, billing and human resources personnel. These costs also include insurance and professional fees, rent and related expenses. Professional fees primarily consist of outside legal and audit fees.
 
The increase in general and administrative expenses was due primarily to higher office rent associated with our growth in personnel, increased salaries and higher professional fees and directors’ and officers’ liability insurance premiums associated with being a public company. As a percentage of revenues, general and administrative expenses decreased primarily due to growth in revenues.
 
Stock-Based Compensation
 
Expenses associated with stock-based compensation increased by $789,000 to $1,453,000 in the twelve months ended December 31, 2006 from $664,000 in the twelve months ended December 31, 2005. The increase was due primarily to option grants for employees hired in 2006 and additional option grants to existing employees.
 
Stock-based compensation has been allocated as follows:
 
                                 
    Year Ended December 31,  
                Increase/
    Percent
 
    2005     2006     (Decrease)     Change  
    (Dollars in thousands)  
 
Cost of revenue
  $ 18     $ 151     $ 133       738.9 %
Selling and marketing
    146       686       540       369.9 %
Technology and product development
    350       195       (155 )     (44.3 )%
General and administrative
    150       421       271       180.7 %
                                 
Total
  $ 664     $ 1,453     $ 789       118.8 %
                                 
 
Interest Income
 
Interest income increased by $2.4 million to $2.9 million for the year ended December 31, 2006, from $487,000 for the year ended December 31, 2005. This increase was primarily due to higher interest rates and a higher average cash balance due in part to the proceeds received from our initial public offering. As of December 31,


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2006, we held $89.0 million in cash, cash equivalents and short-term investments, compared to $21.9 million in cash, cash equivalents and short-term investments as of December 31, 2005.
 
Income Taxes
 
Income tax expense in 2006 increased by $15.8 million to $8.6 million compared to a tax benefit of $7.2 million in 2005. The 2005 tax benefit was the result of the release of a portion of our valuation allowance on our deferred tax asset, related to our net operating loss carryforwards, based upon our recent positive operating results. Under Section 382 of the Internal Revenue Code, the utilization of the net operating loss carryforwards is limited based upon changes in the percentage of our ownership. As a result of prior ownership changes, we were limited to using $12.2 million of net operating losses to offset taxable income in 2006.
 
Quarterly Consolidated Statements of Income Data
 
The following tables present the unaudited consolidated statements of income data for the eight quarters ended December 31, 2007 in dollars and as a percentage of revenues. This quarterly information has been prepared on the same basis as our audited consolidated financial statements and, in the opinion of our management, reflects all adjustments necessary for a fair representation of the information for the periods presented. This data should be read in conjunction with our audited consolidated financial statements and the related notes included in this Annual Report on Form 10-K. Operating results for any quarter apply to that quarter only and are not necessarily indicative of results for any future period.
 
                                                                 
    Quarter Ended  
    Mar. 31,
    June 30,
    Sept. 30,
    Dec. 31,
    Mar. 31,
    June 30,
    Sept. 30,
    Dec. 31,
 
    2006     2006     2006     2006     2007     2007     2007     2007  
    (In thousands, except per share data)  
 
Revenues
  $ 10,226     $ 11,631     $ 12,707     $ 13,847     $ 15,515     $ 17,022     $ 18,627     $ 19,565  
Cost of revenues(1)
    1,228       1,366       1,421       1,584       1,780       1,874       2,072       2,308  
                                                                 
Gross profit
    8,998       10,265       11,286       12,263       13,735       15,148       16,555       17,257  
Operating expenses(1):
                                                               
Sales and marketing
    1,949       2,183       2,776       2,598       3,259       3,577       3,916       3,914  
Technology and product development
    960       1,032       1,146       1,203       1,350       1,569       1,699       1,809  
General and administrative
    1,478       1,751       2,147       2,427       2,569       2,849       3,211       3,623  
                                                                 
Total operating expenses
    4,387       4,966       6,069       6,228       7,178       7,995       8,826       9,346  
                                                                 
Income from operations
    4,611       5,299       5,217       6,035       6,557       7,153       7,729       7,911  
Interest and other income
    253       465       1,028       1,137       1,193       1,313       1,242       1,298  
                                                                 
Income before taxes
    4,864       5,764       6,245       7,172       7,750       8,466       8,971       9,209  
Income tax expense
    1,899       2,321       2,479       1,851       3,201       3,367       3,193       3,508  
                                                                 
Net income
  $ 2,965     $ 3,443     $ 3,766     $ 5,321     $ 4,549     $ 5,099     $ 5,778     $ 5,701  
                                                                 
Net income per share:
                                                               
Basic
  $ 0.08     $ 0.09     $ 0.10     $ 0.14     $ 0.12     $ 0.13     $ 0.15     $ 0.15  
                                                                 
Diluted
  $ 0.06     $ 0.09     $ 0.09     $ 0.13     $ 0.11     $ 0.13     $ 0.14     $ 0.14  
                                                                 
 
 
(1) Includes stock-based compensation as follows:
 


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    Quarter Ended  
    Mar. 31,
    June 30,
    Sept. 30,
    Dec. 31,
    Mar. 31,
    June 30,
    Sept. 30,
    Dec. 31,
 
    2006     2006     2006     2006     2007     2007     2007     2007  
    (In thousands)  
 
Cost of revenues
  $ 8     $ 24     $ 54     $ 65     $ 67     $ 94     $ 96     $ 100  
Sales and marketing
    51       87       301       247       238       351       363       405  
Technology and product development
    23       32       64       76       91       150       169       191  
General and administrative
    32       56       190       143       159       280       365       375  
                                                                 
Total
  $ 114     $ 199     $ 609     $ 531     $ 555     $ 875     $ 993     $ 1,071  
                                                                 
 
                                                                 
    Quarter Ended  
    Mar. 31,
    June 30,
    Sept. 30,
    Dec. 31,
    Mar. 31,
    June 30,
    Sept. 30,
    Dec. 31,
 
    2006     2006     2006     2006     2007     2007     2007     2007  
 
Revenues
    100.0 %     100.0 %     100.0 %     100.0 %     100.0 %     100.0 %     100.0 %     100.0 %
Cost of revenues
    12.0       11.7       11.2       11.4       11.5       11.0       11.1       11.8  
                                                                 
Gross profit
    88.0       88.3       88.8       88.6       88.5       89.0       88.9       88.2  
Operating expenses:
                                                               
Sales and marketing
    19.0       18.8       21.8       18.8       21.0       21.0       21.0       20.0  
Technology and product development
    9.4       8.9       9.0       8.7       8.7       9.2       9.1       9.2  
General and administrative
    14.5       15.1       16.9       17.5       16.6       16.7       17.2       18.5  
                                                                 
Total operating expenses
    42.9       42.7       47.8       45.0       46.3       46.9       47.4       47.8  
                                                                 
Income from operations
    45.1       45.6       41.1       43.6       42.3       42.1       41.5       40.4  
Interest and other income
    2.5       4.0       8.1       8.2       7.7       7.7       6.7       6.6  
                                                                 
Income before taxes
    47.6       49.6       49.1       51.8       50.0       49.8       48.2       47.1  
Income tax expense
    18.6       20.0       19.5       13.4       20.6       19.8       17.1       17.9  
                                                                 
Net income
    29.0 %     29.6 %     29.6 %     38.4 %     29.3 %     30.0 %     31.0 %     29.1 %
                                                                 
 
Revenues increased sequentially in each of the quarters presented, due primarily to increased adoption and higher average selling prices of our premium membership product. There have been and may in the future be fluctuations in sales and marketing expenses as a result of the timing of the hiring of additional sales and marketing personnel. The increase in general and administrative expenses beginning in the third quarter of 2006 was due in part to expenses associated with operating as a public company.
 
Liquidity and Capital Resources
 
The following table summarizes our cash flows:
                         
    Year Ended December 31,  
    2005     2006     2007  
    (In thousands)  
 
Cash provided by operating activities
  $ 14,490     $ 23,205     $ 30,301  
Cash (used in) investing activities
    (1,719 )     (665 )     (18,827 )
Cash provided by financing activities
    296       44,485       7,300  
 
From our incorporation in 1997 until the first quarter of 2003, we financed our operations through private placements of our capital stock and cash acquired in the July, 2001 merger with PropertyFirst.com, Inc. Since the first quarter of 2003, we have financed our operations through cash flow that we generate from our operations. On June 12, 2006, we completed the initial public offering of our stock, resulting in net proceeds of $42.3 million.

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As of December 31, 2007, our cash, cash equivalents and short-term investments totaled $107.9 million, compared to $89.0 million, and $21.9 million at December 31, 2006, and 2005, respectively.
 
Cash equivalents and short-term investments consist of money market funds, and debt securities that we classify as available for sale. Our principal sources of liquidity are our cash, cash equivalents and short-term investments, as well as the cash flow that we generate from our operations. We do not currently have any commercial debt or posted letters of credit.
 
Operating Activities
 
Net cash provided by operating activities was $30.3 million for the year ended December 31, 2007. Included in cash provided by operating activities was $3.5 million of stock-based compensation, $2.5 million increase in deferred revenue, and $1.2 million of depreciation and amortization expense. The net cash provided by operating activities was $14.5 million and $23.2 million in the years ended December 31, 2005 and 2006, respectively. The increase in cash provided by operating activities in 2007 was primarily due to increased net income generated by the Company. The increase in net income is primarily related to higher revenue, due primarily to increased adoption and higher average selling prices of our premium membership product.
 
Investing Activities
 
Cash used in investing activities in 2007 of $18.8 million was primarily attributable to the August 2, 2007 acquisition of Cityfeet.com Inc. for a purchase price of $15.0 million (net of cash acquired), the purchase of other investments of $38.0 million, the sale of investments of $36.0 and capital expenditures amounting to $1.8 million for the purchase of computer equipment, office equipment and furniture, and leasehold improvements.
 
Cash used in investing activities in 2006 of $665,000 was primarily attributable to capital expenditures for the purchase of computer equipment.
 
Cash used in investing activities in 2005 of $1.7 million was primarily attributable to a $1.0 million contingent payment pursuant to a one-year transition agreement associated with the October 1, 2004 acquisition of BizBuySell and capital expenditures of $719,000 generally for the purchase of computer and office equipment.
 
Financing Activities
 
Cash provided by financing activities in 2007 of $7.3 million consisted of $1.6 million of proceeds from the exercise of stock options and a $5.7 million tax benefit from the exercise of stock options.
 
Cash provided by financing activities in 2006 of $44.5 million consisted of $42.3 million of net proceeds from the sale of common stock, $0.6 million of proceeds from the exercise of warrants and stock options, $1.1 million tax benefit from the exercise of stock options, and $0.5 million from repayments of promissory notes issued to certain named executive officers as payment for the exercising of stock options and restricted stock.
 
Cash provided by financing activities in 2005 of $296,000 consisted of proceeds from the exercise of stock options and warrants.
 
Off-Balance Sheet Arrangements
 
We do not have any special purpose entities, and other than operating leases for office space, described below, we do not engage in off-balance sheet financing arrangements.
 
Tabular Disclosure of Contractual Obligations and Known Future Cash Requirements
 
As of December 31, 2007, our principal commitments consist of obligations under two leases for office space in San Francisco, California and Monrovia, California. The offices are currently leased under operating lease agreements which expire at various dates in 2008 and 2011.
 
In January, 2003, we entered into a new lease for approximately 15,800 square feet of office space in San Francisco, California. This lease commenced in March, 2003 and has a five-year term with an expiration date of


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May, 2008 and a current base rent rate of approximately $388,000 per year. In August, 2005, we entered into an expansion of this lease, covering an additional 4,180 square feet of space, commencing September, 2005 and with an expiration date of May, 2008 and a current base rent of approximately $118,000 per year. During 2006, we entered into two additional expansions of this lease. The first amendment covers an additional 4,777 square feet of space, commenced in September, 2006 and has an expiration date of May, 2008 and a current base rent of approximately $152,900 per year. The second amendment covers an additional 6,489 square feet of space, commenced in February, 2007, and has an expiration date of May, 2008 and a current base rent of approximately $224,000 per year. During 2007, we entered into an another expansion of this lease, covering an additional 5,574 square feet of space, commencing October, 2007 with an expiration date of May, 2008 and a current base rate of approximately $223,000 per year. The San Francisco office lease that expires in May 2008 includes a renewal option at fair market value rental rates, which would be higher than our current rental rates. The Company is currently in the process of renegotiating a renewal for the San Francisco office lease.
 
In January, 2005, we entered into a new lease for approximately 18,000 square feet of office space in Monrovia, California. This lease commenced in June, 2005, and has a six-year term with an expiration date of May, 2011 and a current base rent rate of approximately $445,000 per year. In January, 2007, we entered into an expansion of this lease, covering an additional 5,741 square feet of space, commencing June, 2007 and with an expiration date of May, 2011 and a current base rent of approximately $169,000 per year.
 
Future minimum payments under these operating leases as of December 31, 2007, are as follows:
 
                                                 
    Payments Due by Period  
                            2012 and
       
    2008     2009     2010     2011     thereafter     Total  
    (Dollars in thousands)  
 
Operating lease obligations
  $ 1,084     $ 640     $ 652     $ 271     $ 0     $ 2,647  
 
Advertising and Media Contracts
 
We purchase advertising from online vendors such as Google and Yahoo! and pay for the services on a monthly basis. We have no ongoing obligations to purchase a fixed or minimum amount with these vendors.
 
Future Capital Requirements
 
We believe that our existing cash, cash equivalents, short-term investments and cash generated from operations will be sufficient to satisfy our currently anticipated cash requirements. Our future capital requirements will depend on many factors, including our rate of revenue growth, the expansion of our marketing and sales activities, the timing and extent of spending to support product development efforts, the timing of introductions of new products and services and enhancements to existing products and services, and the continuing market acceptance of our products and services. We may need to raise additional capital through future debt or equity financing to the extent necessary to fund such activities. Additional financing may not be available at all or on terms favorable to us. We from time to time make investments in, or acquisitions of, complementary businesses, products, services or technologies. These investments and acquisitions could also require us to seek additional equity or debt financing.
 
Recent Accounting Pronouncements
 
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (FAS 141(R)). This Statement provides greater consistency in the accounting and financial reporting of business combinations. It requires the acquiring entity in a business combination to recognize all assets acquired and liabilities assumed in the transaction, establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed, and requires the acquirer to disclose the nature and financial effect of the business combination. FAS 141(R) is effective for fiscal years beginning after December 15, 2008. We will adopt FAS 141(R) no later than the first quarter of fiscal 2009 and are currently assessing the impact the adoption will have on our financial position and results of operations.


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In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements (FAS 160). This Statement amends Accounting Research Bulletin No. 51, Consolidated Financial Statements, to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. FAS 160 is effective for fiscal years beginning after December 15, 2008. We will adopt FAS 160 no later than the first quarter of fiscal 2009 and are currently assessing the impact the adoption will have on our financial position and results of operations.
 
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, which permits entities to choose to measure at fair value eligible financial instruments and certain other items that are not currently required to be measured at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings at each subsequent reporting date. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. We will adopt SFAS No. 159 no later than the first quarter of fiscal 2008. We are currently assessing the impact the adoption of SFAS No. 159 will have on our financial position and results of operations.
 
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 establishes a framework for measuring fair value in generally accepted accounting principles, clarifies the definition of fair value and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements. However, the application of SFAS No. 157 may change current practice for some entities. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We will adopt SFAS No. 157 in the first quarter of fiscal 2008. We are currently assessing the impact that the adoption of SFAS No. 157 will have on our financial position and results of operations.
 
Item 7A.   Quantitative and Qualitative Disclosures About Market Risk.
 
The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, we invest in short-term, high- quality, interest-bearing securities. Our investments in debt securities are subject to interest rate risk. To minimize our exposure to an adverse shift in interest rates, we invest in short-term securities and maintain an average maturity of one year or less. If interest rates were to instantaneously increase or decrease by 100 basis points, the change in the fair market value of our short-term investment would not be a material amount to our financial statements. There have not been any material changes in the past year to our primary market risk exposures, or how these exposures are managed.
 
Item 8.   Financial Statements and Supplementary Data.
 
Our financial statements and supplementary data required by this item are contained in separate sections of this annual report on Form 10-K. See “Index to Financial Statements” commencing on page 50 and the supplemental data contained in “Quarterly Consolidated Statements of Income Data” under Item 6.
 
Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
 
Not applicable.
 
Item 9A.   Controls and Procedures.
 
(a) Evaluation of disclosure controls and procedures.  Under the supervision and with the participation of our Company’s management, including the Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. Based on that evaluation, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective to provide reasonable assurance that the information required to be disclosed by us in periodic SEC reports is reported within the time periods specified in SEC rules and forms.


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(b) Management’s Report on Internal Control over Financial Reporting.  Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rules 13a-15(f). We conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework and criteria established in Internal Control — Integrated Framework issued by the Committee of the Sponsoring Organizations of the Treadway Commission. Based on our evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2007.
 
Our management acknowledges that because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected.
 
The effectiveness of internal control over financial reporting as of December 31, 2007 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which is included herein.
 
(c) Changes in internal control over financial reporting.  There was no change in our internal control over financial reporting that occurred during the period covered by this Annual Report on Form 10-K that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
Item 9B.   Other Information.
 
(a) Rule 10b5-1 Trading Plan.  Our Insider Trading Compliance Program allows officers, directors, and certain designated employees covered under the program to establish, under limited circumstances contemplated by Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, written programs that permit automatic trading of our stock or trading of our stock by an independent person (such as an investment bank) who is not aware of material inside information at the time of the trade. As of the filing date of this Annual Report on Form 10-K, Richard Boyle, our chief executive officer; Brent Stumme, our chief financial officer and senior vice president, finance and administration; Jason Greenman, our chief strategy officer and senior vice president, corporate development; and Wayne Warthen, our chief technology officer, have each adopted 10b5-1 trading plans.
 
We undertake no obligation to update or revise our disclosure regarding plans currently in effect or plans which may be modified in the future, or to identify other individuals who may enter into trading plans under Rule 10b5-1 in the future.
 
(b) 2008 Bonus Plan.  At a meeting held on January 9, 2008, the Board of Directors of the Company (the “Board”), upon the recommendation of the Compensation Committee, approved a cash incentive plan for our executive officers for fiscal year 2008. Participants will have incentive opportunities ranging from 25% to 80% of base salary based on performance objectives established by the Board which will include financial metrics such as revenues, EBITDA and net income, as well as business objectives.
 
(c) Option Grants to Named Executive Officers.  At a meeting held on January 9, 2008, the Board ratified the decision of the Compensation Committee to grant stock options to purchase shares of the Company’s common stock to our executive officers as follows: Mr. Boyle, 90,000 shares; Mr. Stumme, 65,000 shares, Mr. Byrne, 65,000 shares, Mr. Greenman, 60,000 shares and Mr. Warthen, 60,000 shares. These stock options were granted on January 9, 2008, and the exercise price of such shares were equal to the closing price of our common stock on the date of grant. These options were granted under the Company’s 2006 Equity Incentive Plan and are subject to the Company’s standard vesting over four years.


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PART III
 
Certain information required by Part III is omitted from this report because the Company will file a definitive proxy statement within 120 days after the end of its fiscal year pursuant to Regulation 14A (the “ Proxy Statement”) for its 2008 annual meeting of stockholders, and the information included in the Proxy Statement is incorporated herein by reference.
 
Item 10.   Directors, Executive Officers and Corporate Governance.
 
The names of the executive officers of the Company and their ages, titles and biographies as of the date hereof are incorporated by reference from Part I, Item 1, above.
 
The following information is included in the Company’s Notice of Annual Meeting of Stockholders and Proxy Statement to be filed within 120 days after the Company’s fiscal year end of December 31, 2007 (the “Proxy Statement”) and is incorporated herein by reference:
 
  •  Information regarding directors of the Company who are standing for reelection and any persons nominated to become directors of the Company is set forth under “Nominees and Continuing Directors.”
 
  •  Information regarding the Company’s Audit Committee and designated “audit committee financial experts” is set forth under “Corporate Governance — Board Committees — Audit Committee.”
 
  •  Information regarding Section 16(a) beneficial ownership reporting compliance is set forth under “Section 16(a) Beneficial Ownership Reporting Compliance.”
 
Code of Business Conduct and Ethics
 
We are committed to maintaining the highest standards of business conduct and corporate governance, which we believe are essential to running our business efficiently, serving our stockholders well and maintaining our integrity in the marketplace. We have adopted a code of business conduct and ethics for directors, officers (including our principal executive officer and principal financial officer) and employees, known as the LoopNet, Inc. Code of Business Conduct and Ethics. We have also adopted Corporate Governance Guidelines, which, in conjunction with our certificate of incorporation, bylaws and board of directors committee charters, form the framework for the corporate governance of the Company. The LoopNet, Inc. Code of Business Conduct and Ethics and our Corporate Governance Guidelines are available at: www.loopnet.com under “About Us / Investor Relations / Corporate Governance / Compensation Committee”. The Company’s web site address provided above is not intended to function as a hyperlink, and the information on the Company’s web site is not and should not be considered part of this proxy statement and is not incorporated by reference herein. The Company will post on this web site any amendments to the LoopNet, Inc. Code of Business Conduct and Ethics or waivers of the LoopNet, Inc. Code of Business Conduct and Ethics for directors and executive officers.
 
Stockholders may request free printed copies of the LoopNet, Inc. Code of Business Conduct and Ethics and the Corporate Governance Guidelines from:
 
LoopNet, Inc.
Attn: Secretary
185 Berry Street, Suite 4000,
San Francisco, CA 94107
(415) 243-4200
 
Item 11.   Executive Compensation.
 
The following information is included in the Proxy Statement and is incorporated herein by reference:
 
  •  Information regarding the Company’s compensation of its named executive officers is set forth under “Executive Compensation.”
 
  •  Information regarding the Company’s compensation of its directors is set forth under “Executive Compensation — Director Compensation.”


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Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
 
The following information is included in the Proxy Statement and is incorporated herein by reference:
 
  •  Information regarding security ownership of certain beneficial owners, directors and executive officers is set forth under “Common Stock Ownership of Certain Beneficial Owners and Management.”
 
Equity Compensation Plan Information
 
The following table provides information as of December 31, 2007 about our common stock that may be issued upon the exercise of options under our 2001 Stock Option and Purchase Plan and our 2006 Equity Incentive Plan. Our stockholders have approved each of these plans.
 
                         
                Number of Securities
 
                Available for
 
    Number of Securities
          Issuance Under
 
    to be Issued
    Weighted-Average
    Equity Compensation
 
    Upon Exercise of
    Exercise Price of
    Plans (Excluding
 
    Outstanding Options,
    Outstanding Options,
    Securities Reflected
 
Plan Name and Type
  Warrants and Rights     Warrants and Rights     in the First Column)  
 
Equity compensation plans approved by stockholders
                       
2001 Stock Option and Purchase Plan
    1,847,519     $ 2.00        
2006 Equity Incentive Plan
    1,790,863     $ 16.09       6,755,607  
                         
Equity Compensation Plans not Approved by Stockholders
    None       None       None  
                         
Total
    3,638,382     $ 8.93       6,755,607 (1)
                         
 
 
(1) Excludes 1,556,332 shares authorized for issuance on January 31, 2008 in connection with our 2006 Equity Incentive Plan. The 2006 Equity Incentive Plan is subject to an automatic annual increase of the least of (a) 1,800,000 shares, (b) 4% of the shares outstanding as of the end of the prior fiscal year, and (c) a lesser number as determined by the Company’s Board of Directors or Compensation Committee.
 
Item 13.   Certain Relationships and Related Transactions and Director Independence.
 
Information regarding certain relationships and related transactions, and director independence is set forth under “Certain Relationships and Related Transactions” and “Corporate Governance — Board Independence” in the Proxy Statement, which information is incorporated herein by reference.
 
Item 14.   Principal Accountant Fees and Services.
 
Information regarding principal auditor fees and services is set forth under “Principal Accountant Fees and Services” in the Proxy Statement, which information is incorporated herein by reference.


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PART IV
 
Item 15.   Exhibits and Financial Statement Schedules.
 
(a) The following documents are filed as part of this report:
 
(1) Financial Statements and Report of Ernst & Young LLP
 
(2) Exhibits (numbered in accordance with Item 601 of Regulation S-K)
 
         
  2 .2*   Amendment to Stock Purchase Agreement with Cityfeet.com
  3 .1   First Amended and Restated Certificate of Incorporation (incorporated herein by reference to the registrant’s Form 10-Q filed on August 4, 2006)
  3 .2   Bylaws (incorporated herein by reference to the registrant’s Form 10-Q filed on August 4, 2006)
  4 .1   Specimen Common Stock Certificate (incorporated herein by reference to the registrant’s Form S-1/A filed on April 27, 2006)
  4 .2   Amended and Restated Investor Rights Agreement by and among LoopNet, Inc. and certain holders of preferred stock, dated as of November 30, 2001 (incorporated herein by reference to the registrant’s Form S-1 filed on March 1, 2006)
  10 .1+   LoopNet, Inc. 2001 Stock Option and Purchase Plan (incorporated herein by reference to the registrant’s Form S-1 filed on March 16, 2006)
  10 .2+   Form of Option Agreement under 2001 Stock Option and Purchase Plan (incorporated herein by reference to the registrant’s Form S-1 filed on March 1, 2006)
  10 .3+   LoopNet, Inc. 2006 Equity Incentive Plan (incorporated herein by reference to the registrant’s Form S-1/A filed on June 6, 2006)
  10 .4+   Form of Option Agreement under 2006 Equity Incentive Plan (incorporated herein by reference to the registrant’s Form S-1/A filed on April 27, 2006)
  10 .5+   Form of Indemnification Agreement (incorporated herein by reference to the registrant’s Form S-1/A filed on April 27, 2006)
  10 .6   Lease, dated January 14, 2005, between S&F Huntington Millennium LLC and LoopNet, Inc. (incorporated herein by reference to the registrant’s Form S-1 filed on March 1, 2006)
  10 .7   Office Lease, dated January 8, 2003, between PWREF/MCC-China Basin L.L.C. and LoopNet, Inc. (incorporated herein by reference to the registrant’s Form S-1/A filed on April 3, 2006)
  10 .8   First Amendment to Office Lease, dated August 16, 2005 between Stockbridge/MCC-China Basin L.L.C. and LoopNet, Inc. (incorporated herein by reference to the registrant’s Form S-1/A filed on April 3, 2006)
  10 .9+   Director Compensation Policy (incorporated herein by reference to the registrant’s Form S-1/A filed on April 27, 2006)
  10 .10+   Fiscal Year 2008 Bonus Plan (incorporated herein by reference to the registrant’s Form 8-K filed on February 5, 2008)
  10 .11+   Form of Restricted Stock Unit Agreement under 2006 Equity Incentive Plan (incorporated herein by reference to the registrant’s Form 8-K filed on February 5, 2008)
  23 .1*   Consent of Ernst & Young LLP, independent registered public accounting firm
  24 .1*   Power of Attorney (see signature page)
  31 .1*   Rule 13a-14(a) Certification (CEO)
  31 .2*   Rule 13a-14(a) Certification (CFO)
  32 .1*   Section 1350 Certification (CEO)
  32 .2*   Section 1350 Certification (CFO)
 
 
* Filed herewith.
 
+ Management contract or compensatory plan.


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SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
LOOPNET, INC.
 
  By: 
/s/  Richard J. Boyle, Jr.
Richard J. Boyle, Jr.
Chief Executive Officer, and
Chairman of the Board of Directors
 
Date: March 4, 2008
 
  By: 
/s/  Brent Stumme
Brent Stumme
Chief Financial Officer and Senior Vice President, Finance and Administration
 
Date: March 4, 2008
 
POWER OF ATTORNEY
 
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Richard J. Boyle, Jr. and Brent Stumme, jointly and severally, his or her attorneys-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his or her substitute or substitutes may do or cause to be done by virtue hereof.
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
             
Signature
 
Title
 
Date
 
         
/s/  Richard J. Boyle, Jr.

Richard J. Boyle, Jr.
  Chief Executive Officer, and Chairman of the Board of Directors (Principal Executive Officer)   March 4, 2008
         
/s/  Brent Stumme

Brent Stumme
  Chief Financial Officer and Senior Vice President, Finance and Administration (Principal Financial and Accounting Officer)   March 4, 2008
         
/s/  Noel J. Fenton

Noel J. Fenton
  Director   March 4, 2008
         
/s/  William A. Millichap

William A. Millichap
  Director   March 4, 2008


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Signature
 
Title
 
Date
 
         
/s/  Thomas E. Unterman

Thomas E. Unterman
  Director   March 4, 2008
         
/s/  Dennis Chookaszian

Dennis Chookaszian
  Director   March 4, 2008
         
/s/  Scott Ingraham

Scott Ingraham
  Director   March 4, 2008
         
/s/  William Byrnes

William Byrnes
  Director   March 4, 2008


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INDEX TO FINANCIAL STATEMENTS
 
         
    Page
 
    51  
    52  
Financial Statements
       
    53  
    54  
    55  
    56  
    57  


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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
 
The Board of Directors and Stockholders
LoopNet, Inc.
 
We have audited LoopNet, Inc.’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). LoopNet, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting. 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, LoopNet, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on the COSO criteria.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of LoopNet, Inc. as of December 31, 2006 and 2007, and the related consolidated statements of income, stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2007 of LoopNet, Inc. and our report dated February 25, 2008 expressed an unqualified opinion thereon.
 
/s/  Ernst & Young LLP
Los Angeles, California
February 25, 2008


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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
The Board of Directors and Stockholders
LoopNet, Inc.
 
We have audited the accompanying consolidated balance sheets of LoopNet, Inc. as of December 31, 2006 and 2007, and the related consolidated statements of income, stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of LoopNet, Inc. at December 31, 2006 and 2007, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles.
 
As discussed in Note 1 to the consolidated financial statements, LoopNet, Inc. changed its method of accounting for Share-Based Payments in accordance with Statement of Financial Accounting Standards No. 123 (revised 2004) on January 1, 2006.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), LoopNet, Inc.’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 25, 2008 expressed an unqualified opinion thereon.
 
/s/  Ernst & Young LLP
 
Los Angeles, California
February 25, 2008


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LOOPNET, INC.

CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
 
                 
    December 31,
    December 31,
 
    2006     2007  
 
Assets
               
Current assets:
               
Cash and cash equivalents
  $ 85,790     $ 104,564  
Short-term investments
    3,238       3,325  
Accounts receivable, net of allowance of $57 and $105, respectively
    1,138       1,190  
Prepaid expenses and other current assets
    1,518       796  
Deferred income taxes
    402       298  
                 
Total current assets
    92,086       110,173  
Property and equipment, net
    1,020       2,051  
Goodwill
    2,417       15,233  
Intangibles, net
    1,312       2,461  
Deferred income taxes
    3,083       5,196  
Deposits and other noncurrent assets
    287       2,245  
                 
Total assets
  $ 100,205     $ 137,359  
                 
Liabilities and stockholders’ equity
               
Current liabilities:
               
Accounts payable
  $ 169     $ 828  
Accrued compensation and benefits
    2,200       2,479  
Accrued liabilities
    864       1,964  
Income taxes payable
          698  
Deferred revenue
    6,969       9,537  
                 
Total current liabilities
    10,202       15,506  
Commitments and contingencies
               
Stockholders’ equity:
               
Common stock, $.001 par value, 125,000,000 shares authorized; 37,897,114 and 38,908,302 shares issued and outstanding at December 31, 2006 and 2007, respectively
    38       39  
Additional paid in capital
    97,072       107,866  
Accumulated other comprehensive loss
    (31 )     (103 )
Retained earnings (deficit)
    (7,076 )     14,051  
                 
Total stockholders’ equity
    90,003       121,853  
                 
Total liabilities and stockholders’ equity
  $ 100,205     $ 137,359  
                 
 
See accompanying notes.


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LOOPNET, INC.

CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data)
 
                         
    Year Ended December 31,  
    2005     2006     2007  
 
Revenues
  $ 30,977     $ 48,411     $ 70,729  
Cost of revenue
    3,825       5,599       8,033  
                         
Gross margin
    27,152       42,812       62,696  
                         
Operating expenses:
                       
Sales and marketing
    6,252       9,506       14,667  
Technology and product development
    3,746       4,341       6,427  
General and administrative
    5,955       7,803       12,253  
                         
Total operating expenses
    15,953       21,650       33,347  
                         
Income from operations
    11,199       21,162       29,349  
Interest and other income, net
    494       2,883       5,046  
                         
Income before tax
    11,693       24,045       34,395  
Income tax expense (benefit)
    (7,243 )     8,550       13,268  
                         
Net Income
  $ 18,936     $ 15,495     $ 21,127  
                         
Net income per share
                       
Basic
  $ 0.58     $ 0.42     $ 0.55  
                         
Diluted
  $ 0.54     $ 0.40     $ 0.52  
                         
Number of shares used in per share calculations:
                       
Basic
    7,259       36,767       38,291  
Diluted
    35,092       38,686       40,672  
 
See accompanying notes.


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LOOPNET, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)
(In thousands)
 
                                                                 
                                        Accumulated
    Total
 
                Additional
    Deferred
    Stockholders’
    Retained
    Other
    Stockholders’
 
    Common Stock     Paid-in
    stock-based
    Notes
    Earnings
    Comprehensive
    Equity
 
    Shares     Amount     Capital     compensation     Receivable     (Deficit)     (Loss)     (Deficit)  
 
Balance at December 31, 2004
    7,197       7       11,374       (512 )     (352 )     (41,507 )     (6 )     (30,996 )
Exercise of stock options
    828       1       81                               82  
Issuance of Restricted Stock
    490       1       48                               49  
Stockholders’ note receivable
                            (86 )                 (86 )
Interest on stockholders’ note receivable
                            (15 )                 (15 )
Stock-based compensation on revalued options
                236                               236  
Deferred stock-based compensation related to options granted to employees
                743       (743 )                        
Amortization of deferred stock-based compensation net of forfeitures for terminated employees
                      428                         428  
Unrealized loss on marketable securities
                                        (23 )     (23 )
Net income
                                  18,936             18,936  
                                                                 
Total comprehensive income
                                              18,913  
                                                                 
Balance at December 31, 2005
    8,515     $ 9     $ 12,482     $ (827 )   $ (453 )   $ (22,571 )   $ (29 )   $ (11,389 )
Exercise of stock options
    549       1       135                               136  
Exercise of warrants
    1,362       1       2                               3  
Interest on stockholders’ note receivable
                            (3 )                 (3 )
Collection of stockholders’ note receivable
                            456                   456  
Conversion of reedemable convertible preferrred stock
    24,000       24       40,387                               40,411  
SFAS 123R adoption
                (827 )     827                          
Stock-based compensation expense
                1,453                               1,453  
Tax benefit from exercise of stock options
                1,131                               1,131  
Net proceeds from issuance of common stock, net of transaction costs
    3,471       3       42,309                               42,312  
Unrealized loss on marketable securities
                                        (2 )     (2 )
Net income
                                  15,495             15,495  
                                                                 
Total comprehensive income
                                              15,493  
                                                                 
Balance at December 31, 2006
    37,897     $ 38     $ 97,072     $     $     $ (7,076 )   $ (31 )   $ 90,003  
                                                                 
Exercise of stock options
    1,011       1       1,611                               1,612  
Stock-based compensation expense
                3,495                               3,495  
Tax benefit from exercise of stock options
                5,688                               5,688  
Unrealized loss on marketable securities
                                        (72 )     (72 )
Net income
                                  21,127             21,127  
                                                                 
Total comprehensive income
                                              21,055  
                                                                 
Balance at December 31, 2007
    38,908     $ 39     $ 107,866     $     $     $ 14,051     $ (103 )   $ 121,853  
                                                                 
 
See accompanying notes.


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LOOPNET, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 
                         
    Year Ended December 31,  
    2005     2006     2007  
 
Cash flows from operating activities:
                       
Net income
  $ 18,936     $ 15,495     $ 21,127  
Adjustments to reconcile net income to net cash provided by operating activities:
                       
Depreciation and amortization expense
    505       611       1,154  
Stock-based compensation
    664       1,453       3,495  
Tax benefits from exercise of stock options
                (5,688 )
Deferred income tax (benefit)
    (7,622 )     4,137       (527 )
Changes in operating assets and liabilities:
                       
Accounts receivable
    (157 )     (608 )     129  
Prepaid expenses and other assets
    (184 )     (1,481 )     630  
Income taxes payable
    (72 )     (16 )     6,387  
Accounts payable
    6       103       615  
Accrued expenses and other current liabilities
    4       265       232  
Accrued compensation and benefits
    301       917       221  
Deferred revenue
    2,109       2,329       2,526  
                         
Net cash provided by operating activities
    14,490       23,205       30,301  
Cash flows from investing activities:
                       
Purchase of property and equipment
    (719 )     (665 )     (1,797 )
Purchase of investments
                (38,303 )
Sale of investments
                    36,275  
Acquisitions, net of cash acquired
    (1,000 )           (15,002 )
                         
Net cash used in investing activities
    (1,719 )     (665 )     (18,827 )
Cash flows from financing activities:
                       
Proceeds from sale of common stock, net of issuance costs paid
          42,309        
Net proceeds from exercise of stock options
    46       139       1,612  
Net proceeds from exercise of warrants
    250       450        
Net proceeds from payment of notes receivable on options exercised and restricted stock purchased
          456        
Tax benefit from exercise of stock options
          1,131       5,688  
                         
Net cash provided by financing activities
    296       44,485       7,300  
                         
Net increase in cash and cash equivalents
    13,067       67,025       18,774  
Cash and cash equivalents at beginning of period
    5,698       18,765       85,790  
                         
Cash and cash equivalents at end of period
  $ 18,765     $ 85,790     $ 104,564  
                         
Supplemental disclosures of cash flow information:
                       
Cash paid during the period for income taxes
  $ 449     $ 4,115     $ 6,154  
Settlement of contingent purchase price
  $     $     $ 1,300  
 
See accompanying notes.


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LOOPNET, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
(1)   The Company and Summary of Significant Accounting Policies
 
Organization and Basis of Presentation
 
LoopNet, Inc. (the Company or LoopNet) was incorporated under the laws of the state of California on June 2, 1997. The Company changed its name from Loop Ventures, Inc. to LoopNet, Inc. on November 3, 1998. Prior to Loop Ventures, Inc., the Company operated as a limited liability corporation known as Loop Ventures, LLC. On August 26, 1997, the owners of Loop Ventures, LLC exchanged all units held for a proportionate number of the shares of Loop Ventures, Inc. The transaction was recorded at historical basis.
 
On July 13, 2001, the Company merged with PropertyFirst.com, Inc. (PropertyFirst), with LoopNet, Inc. being the surviving company. The merger was accounted for under the purchase method of accounting. In order to preserve the existing rights and preferences of the different classes and series of PropertyFirst and LoopNet capital stock, each company reorganized by forming its own holding company. The two holding companies were limited liability companies, or LLCs, and continued in separate existence after the business combination of LoopNet and PropertyFirst. The LLCs were the direct owners of LoopNet, Inc. and the LLC members were the beneficial owners. In May 2006, prior to its initial public offering, the Company reincorporated in Delaware via a merger with and into LoopNet, Inc., a Delaware corporation.
 
The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
 
Stock Split
 
On April 21, 2006, the Company’s board of directors approved a split of the Company’s common stock in the range of three-to-two to two-to-one. On April 27, 2006, the Company’s board of directors fixed the split ratio at two-to-one. The Company’s shareholders subsequently approved the split. All share and per share amounts have been restated to reflect the impact of the two-for-one stock split.
 
Use of Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from these estimates.
 
The Company has granted stock options at exercise prices equal to the value of the underlying stock as determined by its board of directors on the date of option grant. For purposes of financial accounting for employee stock-based compensation, management has applied hindsight within the two-year period ended December 31, 2005 to arrive at reassessed values for the shares underlying the options that are higher than the values determined by the board. These reassessed values were determined based on a number of factors, including input from advisors, the Company’s historical and forecasted operating results and cash flows, and comparisons to publicly held companies. The reassessed values were used to determine the amount of stock-based compensation recognized related to stock and stock option grants to employees.
 
Cash and Cash Equivalents
 
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.


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LOOPNET, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Short-term Investments
 
The Company accounts for short-term investments in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities. Management determines the appropriate classification of investments at the time of purchase and reevaluates such designation as of each balance sheet date. Short-term investments consist of debt securities that the Company classifies as available for sale. The weighted average maturities of short-term investments are less than one year. These securities are carried at fair value, with the unrealized gains and losses if any, net of taxes, reported as a component of stockholders’ equity. Any realized gains or losses on the sale of investments are determined on a specific identification method, and such gains and losses are reflected as a component of interest income or expense.
 
Concentration of Risk
 
Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents, short-term investments and accounts receivable. Cash and cash equivalents and short-term investments are deposited with high credit quality financial institutions. The Company’s revenue and accounts receivable are primarily derived from credit card transactions with subscribers and are typically settled within two to three business days.
 
No single customer accounted for more than 2.0% of the Company’s revenues for the years ended December 31, 2005, 2006 and 2007.
 
Fair Value of Financial Instruments
 
The Company’s financial instruments, including cash and cash equivalents, short-term investments, accounts receivable, and accounts payable and accrued liabilities are carried at cost, which approximates their fair value because of the short-term maturity of these instruments and the relatively stable interest rate environment.
 
Accounts Receivable
 
Accounts receivable are recorded at the invoiced amount and are non-interest bearing. The Company maintains an allowance for doubtful accounts to reserve for potentially uncollectible receivables. Management reviews the accounts receivable to identify specific subscribers where collectibility may not be probable. The amount of the allowance is determined by management estimates based on historic trends and specific account analysis.
 
Property and Equipment
 
Property and equipment are stated at historical cost. Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the assets, generally three years or less, or the shorter of the lease term or the estimated useful lives of the assets, if applicable.
 
Website Development Costs
 
In March 2000, the Emerging Issues Task Force (EITF) issued EITF 00-2, Accounting for Web Site Development Costs, which addresses whether certain development costs should be capitalized or expensed. Because the Company’s current website development costs incurred relate to routine maintenance and operating costs, the Company expenses such costs as incurred.
 
Long-Lived Assets Including Goodwill and other Intangible Assets
 
The Company reviews property and equipment and certain identifiable intangibles, excluding goodwill, for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be


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LOOPNET, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
recoverable. If property and equipment and certain identifiable intangibles are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the asset exceeds its fair value. The Company has not recorded any impairment of assets in any of the periods presented.
 
The Company follows SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually or sooner whenever events or changes in circumstances indicate that they may be impaired. The Company performed the annual impairment test during the fourth quarter of 2005, 2006 and 2007 and concluded that goodwill was not impaired.
 
SFAS No. 142 also requires that intangible assets with definite lives be amortized over their estimated useful lives and reviewed for impairment whenever events or changes in circumstances indicate that an asset’s carrying value may not be recoverable in accordance with SFAS No. 144, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed.
 
Intangible assets are comprised of customer relationships, acquired technology and a domain name acquired in connection with the acquisitions. Amortization is calculated using the straight-line method over the following estimated useful lives:
 
         
    Estimated
 
    Useful Life  
 
BizBuySell Acquisition (October 1, 2004)
       
Broker Relationships
    8.3 years  
Advertising Relationships
    1.5 years  
Technology
    3 years  
Domain name
    Indefinite  
 
         
    Estimated
 
    Useful Life  
 
Cityfeet Acquisition (August 2, 2007)
       
Newspaper Relationships
    5 years  
Advertising Relationships
    3 years  
Pay for Performance Relationships
    2 years  
Technology
    3 years  
Domain name
    5 years  
 
Goodwill represents the excess of the purchase price over the fair value of identifiable assets acquired and liabilities assumed in business combinations accounted for under the purchase method.
 
The Company believes no events or changes in circumstances have occurred that would require an impairment test for these assets.
 
Income Taxes
 
Deferred tax assets and liabilities arise from the differences between the tax basis of an asset or liability and its reported amount in the financial statements as well as from net operating loss and tax credit carry forwards. Deferred tax amounts are determined by using the tax rates expected to be in effect when the taxes will actually be paid or refunds received, as provided under current tax law. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense or benefit is the tax payable or refundable, respectively, for the period plus or minus the change during the period in deferred tax assets and liabilities.


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LOOPNET, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
On January 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 clarifies the accounting for income taxes by prescribing a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized. The minimum threshold is defined in FIN 48 as a tax position that is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. FIN 48 must be applied to all existing tax positions upon initial adoption. The cumulative effect of applying FIN 48 at adoption, if any, is to be reported as an adjustment to opening retained earnings for the year of adoption. The adoption of FIN 48 did not have a material effect on the Company’s consolidated financial position or results of operations.
 
Business Segment
 
The Company considers itself to be in a single business segment which is defined as providing an online marketplace serving the commercial real estate industry and operating businesses for sale industry. Substantially all of the Company’s business comes from customers and operations located within the United States, and the Company does not have any assets located in foreign countries.
 
Revenue Recognition
 
The Company derives substantially all its revenue from customers that pay fees for a suite of services to market and search for commercial real estate and operating businesses. These services include a premium membership that gives the customer unlimited access to listings, maximized exposure for their listings along with enhanced services to market their listings. The Company recognizes revenue under the provisions of Securities and Exchange Commission (SEC) Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition , when persuasive evidence of an agreement exists, delivery has occurred, the sales price is fixed or determinable and collectibility is reasonably assured. Payments received in advance of services being rendered are recorded as deferred revenue and recognized on a straight-line basis over the service period.
 
Revenue from other sources includes advertising revenues which are recognized ratably over the period in which the advertisement is displayed provided that no significant obligations remain and collection of the resulting receivable is probable. Advertising rates are dependent on the services provided and the placement of the advertisements. To date, the duration of the Company’s advertising commitments has generally averaged two to three months.
 
Cost of Revenues
 
Cost of revenues consists of the expenses associated with the operation of the Company’s website, including depreciation of network infrastructure equipment, salaries and benefits of network operations personnel, internet connectivity and hosting costs. Cost of revenues also includes salaries and benefit expenses associated with our data quality, data import and customer support personnel and credit card and other transaction fees relating to processing customer transactions.
 
Sales and Marketing
 
The Company’s sales and marketing expenses relate primarily to the compensation and associated costs for sales and marketing personnel, advertising expenses as well as public relations and other promotional activities.
 
Advertising costs included in sales and marketing expenses were $752,000, $1,606,000 and $3,122,000 for the years ended December 31, 2005, 2006 and 2007 respectively.


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LOOPNET, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Technology and Product Development
 
Technology and product development costs include expenses for the research and development of new products and services, as well as significant improvements to existing products and services. Also included are costs associated with the maintenance of the Company’s existing products.
 
General and Administrative
 
General and administrative costs consist primarily of salaries and related expenses for executive, accounting and human resources personnel. These costs also include insurance and professional fees, facility costs and related expenses. Professional fees primarily consist of outside legal and audit fees.
 
Comprehensive Income
 
Comprehensive Income is comprised of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on available-for-sale investments. The differences between total comprehensive income and net income as disclosed on the consolidated statements of stockholders’ equity for the years ended December 31, 2005, 2006 and 2007 were insignificant.
 
Stock-Based Compensation
 
In the first quarter of 2006, the Company adopted Statement of Financial Accounting Standards No. 123R, Share-Based Payment (SFAS 123R), which revises SFAS 123, Accounting for Stock-Based Compensation and supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). SFAS 123R requires that share-based payment transactions with employees be recognized in the financial statements based on their fair value and recognized as compensation expense over the vesting period. Prior to FAS 123R the Company disclosed the pro forma effects of FAS 123 under the minimum value method. The Company adopted SFAS 123R effective January 1, 2006, prospectively for new equity awards issued subsequent to January 1, 2006. The adoption of SFAS 123R in 2006 resulted in the recognition of additional stock-based compensation of $1,120,000 and a reduction in net income of $722,000 (net of tax benefits of $398,000) or $0.02 per diluted share.
 
Prior to January 1, 2006, the Company accounted for employee stock-based compensation in accordance with provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, or APB 25, and Financial Accounting Standards Board Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation — an Interpretation of APB No. 25, and complies with the disclosure provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, or SFAS 123, and related Statement of Financial Accounting Standard No. 148, Accounting for Stock-Based Compensation — Transaction and Disclosure. Under APB 25, compensation expense is based on the difference, if any, on the date of the grant, between the fair value of our stock and the exercise price of the option. The Company amortized deferred stock-based compensation using the straight-line method over the vesting period.
 
Recent Accounting Pronouncements
 
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (FAS 141(R)). This Statement provides greater consistency in the accounting and financial reporting of business combinations. It requires the acquiring entity in a business combination to recognize all assets acquired and liabilities assumed in the transaction, establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed, and requires the acquirer to disclose the nature and financial effect of the business combination. FAS 141(R) is effective for fiscal years beginning after December 15, 2008. We will adopt FAS 141(R) no later than the first quarter of fiscal 2009 and are currently assessing the impact the adoption will have on our financial position and results of operations.


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LOOPNET, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements (FAS 160). This Statement amends Accounting Research Bulletin No. 51, Consolidated Financial Statements, to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. FAS 160 is effective for fiscal years beginning after December 15, 2008. We will adopt FAS 160 no later than the first quarter of fiscal 2009 and are currently assessing the impact the adoption will have on our financial position and results of operations.
 
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, which permits entities to choose to measure at fair value eligible financial instruments and certain other items that are not currently required to be measured at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings at each subsequent reporting date. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. We will adopt SFAS No. 159 no later than the first quarter of fiscal 2008. We are currently assessing the impact the adoption of SFAS No. 159 will have on our financial position and results of operations.
 
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 establishes a framework for measuring fair value in generally accepted accounting principles, clarifies the definition of fair value and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements. However, the application of SFAS No. 157 may change current practice for some entities. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We will adopt SFAS No. 157 in the first quarter of fiscal 2008. We are currently assessing the impact that the adoption of SFAS No. 157 will have on our financial position and results of operations.
 
(2)   Earnings per Share
 
For periods where the Company had two classes of equity securities, it followed EITF Issue No. 03-6, Participating Securities and the Two — Class Method under FASB Statement 128 , which established standards regarding the computation of earnings per share (“EPS”) by companies that have issued securities other than common stock that contractually entitle the holder to participate in dividends and earnings of the Company. EITF Issue No. 03-6 requires earnings available to common shareholders for the period, after deduction of redeemable convertible preferred stock dividends, to be allocated between the common and redeemable convertible preferred shareholders based on their respective rights to receive dividends. Basic EPS is then calculated by dividing income allocable to common shareholders (including the reduction for any undeclared, preferred stock dividends assuming current income for the period had been distributed) by the weighted average number of shares outstanding. EITF Issue No. 03-6 does not require the presentation of basic and diluted EPS for securities other than common stock; therefore, the following EPS amounts only pertain to the Company’s common stock.
 
Upon the closing of the Company’s initial public offering, all outstanding redeemable convertible preferred shares were converted to common shares. Since the Company became a public company, the Company followed SFAS No. 128, Earnings Per Share , which requires that basic EPS be calculated by dividing earnings available to common shareholders for the period by the weighted average number of common shares outstanding. Income for the year was allocated between these periods on a straight-line basis over the number of days of the respective periods. The Company calculates diluted EPS under the if-converted method unless the conversion of the redeemable convertible preferred stock is anti-dilutive to basic EPS. To the extent redeemable convertible preferred stock is anti-dilutive, the Company calculates diluted EPS under the two class method to include the effect of potential common shares.


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LOOPNET, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The share count used to compute basic and diluted net income per share is calculated as follows (in thousands):
 
                         
    Year Ended December 31,  
    2005     2006     2007  
 
Weighted average common shares outstanding(1)
    7,259       8,028       38,291  
                         
Weighted average shares outstanding used to compute basic net income per share after conversion of redeemable convertible preferred stock; one class of common shares was outstanding for the period from June 7 to June 30, 2006
            36,767          
                         
Weighted average common shares outstanding
    7,259       23,913       38,291  
Add dilutive common equivalents:
                       
Stock options
    2,094       2,562       2,101  
Warrants
          259        
Unvested restricted stock(2)
    933       568       280  
Redeemable convertible preferred stock
    21,827       10,341        
Redeemable convertible preferred warrants
    2,979       1,043        
                         
Shares used to compute diluted net income per share
    35,092       38,686       40,672  
                         
 
 
(1) For the year ended December 31, 2006 where the Company had two classes of equity securities, it followed EITF Issue No. 03-6, Participating Securities and the Two-Class Method under FASB Statement 128.
 
(2) Outstanding unvested common stock purchased by employees is subject to repurchase by the Company and therefore is not included in the calculation of the weighted-average shares outstanding for basic earnings per share.
 
The following is a summary of the securities outstanding during the respective periods that have been excluded from the calculations because the effect on earnings per share would have been anti-dilutive (in thousands):
 
                         
    Year Ended December 31,
    2005   2006   2007
 
Stock options
    24       971       416  


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LOOPNET, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The following table sets forth the computation of basic and diluted EPS (in thousands, except per share data):
 
                         
    Year Ended December 31,  
    2005     2006     2007  
 
Calculation of basic net income per share(1):
                       
Net income
  $ 18,936     $ 6,665       N/A  
Assumed preferred stock dividends
    2,159       978       N/A  
                         
Net income, net of assumed stock dividends
  $ 16,777     $ 5,687       N/A  
Percent of net income allocable to common shareholders(2)
    25 %     26 %     N/A  
Net income allocable to common shareholders
    4,194       1,479       N/A  
Weighted average common shares outstanding
    7,259       8,028       N/A  
Basic net income per share — two-class method
  $ 0.58     $ 0.18       N/A  
Net income for period during which single class of equity securities was outstanding
          $ 8,830     $ 21,127  
Weighted average common shares outstanding
            36,767       38,291  
Basic earnings per share for period during which single class of equity securities were outstanding
          $ 0.24          
Basic earnings per share
  $ 0.58     $ 0.42     $ 0.55  
                         
Calculation of diluted net income per share:
                       
Net income
  $ 18,936     $ 15,495     $ 21,127  
Weighted average diluted shares outstanding
    35,092       38,686       40,672  
Diluted net income per share
  $ 0.54     $ 0.40     $ 0.52  
                         
 
 
(1) For the year ended December 31, 2006 where the Company had two classes of equity securities, it followed EITF Issue No. 03-6, Participating Securities and the Two-Class Method under FASB Statement 128.
 
(2) Calculation of percent of net income allocable to common shareholders:
 
                         
    Year Ended December 31,  
    2005     2006     2007  
 
Weighted average common shares outstanding
    7,259       8,028       N/A  
Weighted average redeemable convertible preferred shares outstanding
    21,827       22,896       N/A  
Weighted average common shares and preferred shares outstanding
    29,086       30,924       N/A  
Percent of net income allocable to common shareholders
    25 %     26 %     N/A  
 
(3)   Acquisitions
 
On October 1, 2004, the Company acquired BizBuySell, Inc. an online exchange for businesses for sale in North America, for $3,975,654 net of acquired cash, with $1.0 million of the purchase price contingent upon completion of a one-year transition agreement.
 
As a result of the acquisition the Company recorded intangible assets related to developed technology and customer relationships in the aggregate of $708,500 that are being amortized on a straight-line basis over their estimated lives of 1.5 to 8.3 years. Also included in other intangible assets is a trade name of $850,000 which has an indefinite life and is tested on an annual basis for impairment. The remaining excess purchase price over identified


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LOOPNET, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
tangible and intangible assets of $2,417,154 has been recorded as goodwill. Amortization expense was $123,392 in 2005, $105,867 in 2006 and $96,575 in 2007.
 
The acquisition was accounted for as a business combination consistent with SFAS No. 141 Business Combinations, and the results of operations have been included in the Company’s consolidated financial statements since the acquisition date. The contingent cash consideration was subject to a transition agreement whereby $1.0 million was payable in two installments provided that certain performance measures are met. Through December 31, 2005, all such measures have been met and the Company has made the required payments.
 
The Company performed a valuation of the net assets acquired in the BizBuySell acquisition and allocated the original purchase price as follows (in thousands):
 
         
Customer relationships
  $ 610  
Technology
    98  
Domain name
    850  
Goodwill
    2,417  
         
    $ 3,975  
         
 
On August 2, 2007, the Company acquired all of the shares of capital stock (the “Acquisition”) of Cityfeet.com Inc., a private company incorporated in Delaware (“Cityfeet”), pursuant to a Stock Purchase Agreement dated as of August 2, 2007, by and among the Company, the stockholders of Cityfeet, and Scripps Ventures II, LLC, as Stockholder Representative, for a purchase price of $14.9 million net of acquired cash. In addition, the Company was obligated to make additional cash payments up to $3.0 million if certain performance targets are met, which would be treated as additional consideration for the acquisition. On January 18, 2008, the Company made a $1.3 million cash payment to settle the outstanding contingent payment. Cityfeet operates an online marketplace and distribution network for commercial property listings. Cityfeet’s distribution network will provide increased marketing exposure to LoopNet listers.
 
As a result of the acquisition the Company recorded intangible assets related to developed technology, customer relationships and a trade name in the aggregate of $1,404,000 that are being amortized on a straight-line basis over their estimated lives of 2 to 5 years, deferred tax assets of $1,913,000 and tangible assets net of assumed liabilities of $169,000. The remaining excess purchase price over tangible assets, liabilities assumed and identifiable intangible assets of $12,815,589 has been recorded as goodwill. Amortization expense was $159,375 in 2007.
 
The acquisition was accounted for as a business combination consistent with SFAS No. 141, and accordingly, the purchase price has been allocated to the tangible assets, liabilities assumed, and identifiable intangible assets acquired based on their estimated fair values on the acquisition date. The excess of the purchase price over the aggregate fair values was recorded as goodwill. Our preliminary allocation of the purchase price is summarized below (in thousands):
 
         
Customer relationships
  $ 484  
Developed technology
    510  
Domain name
    410  
Deferred tax asset
    1,913  
Net assets acquired
    169  
Goodwill
    12,816  
         
    $ 16,302  
         
 
The results of operations of Cityfeet have been included in the Company’s consolidated statements of income for the period subsequent to our acquisition of Cityfeet. Cityfeet’s results of operations for the periods prior to this


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LOOPNET, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
acquisition were not material to our consolidated statement of income and, accordingly, pro forma financial information has not been presented.
 
(4)   Property and Equipment, net
 
Property and equipment, net consists of the following (in thousands):
 
                 
    As of December 31,  
    2006     2007  
 
Computer equipment and purchased software
  $ 5,071     $ 7,495  
Office equipment and furniture (includes leasehold improvements)
    561       692  
                 
      5,632       8,187  
Less accumulated depreciation and amortization
    (4,612 )     (6,136 )
                 
    $ 1,020     $ 2,051  
                 
 
(5)   Intangible Assets, net
 
Intangible assets, net consists of the following (in thousands):
 
                 
    As of December 31,  
    2006     2007  
 
Cost:
               
Customer relationships
  $ 610     $ 1,094  
Technology
    98       608  
Domain name
    850       1,260  
                 
Total cost
    1,558       2,962  
Accumulated amortization:
               
Customer relationships
    (172 )     (298 )
Technology
    (74 )     (169 )
Domain name
          (34 )
                 
Total accumulated amortization
    (246 )     (501 )
                 
Total
  $ 1,312     $ 2,461  
                 
 
Expected amortization expense for acquisition-related intangible assets as of December 31, 2007 is as follows (in thousands):
 
         
2008
  $ 455  
2009
    446  
2010
    341  
2011
    154  
2012 and thereafter
    126  
         
    $ 1,522  
         


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LOOPNET, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
(6)   Income Taxes
 
Income tax expense (benefit) is comprised of the following (in thousands):
 
                         
    Year Ended December 31,  
    2005     2006     2007  
 
Current:
                       
Federal
  $ 287     $ 3,631     $ 11,056  
State
    92       932       2,739  
                         
Total
  $ 379     $ 4,562     $ 13,795  
Deferred:
                       
Federal
  $ (6,207 )   $ 3,259     $ (447 )
State
    (1,415 )     728       (80 )
                         
Total
  $ (7,622 )   $ 3,987     $ (527 )
                         
Income tax expense (benefit)
  $ (7,243 )   $ 8,550     $ 13,268  
                         
 
A reconciliation of the statutory federal income tax rate to the effective tax rate is as follows:
 
                         
    Year Ended December 31,  
    2005     2006     2007  
 
Statutory federal tax rate
    34.0 %     34.0 %     35.0 %
State tax rate, net of federal benefit
    (7.5 )%     4.6 %     5.1 %
Change in valuation allowance
    (88.4 )%     (4.9 )%     (2.1 )%
Other adjustments
    0.0 %     1.9 %     0.6 %
Effective tax rate
    (61.9 )%     35.6 %     38.6 %
 
The tax effects of temporary differences that give rise to significant components of deferred tax assets are as follows (in thousands):
 
                 
    As of December 31,  
    2006     2007  
 
Deferred tax assets:
               
Net operating loss carryforwards
  $ 10,945     $ 13,545  
Property and equipment
    8       (14 )
Tax credits
    1,210       1,234  
Deferred income
    726       1,350  
Intangibles
    0       (507 )
Valuation allowance
    (9,404 )     (10,114 )
                 
Total deferred tax assets
  $ 3,485     $ 5,494  
                 
 
As of December 31, 2007, the Company continued to maintain a valuation allowance of approximately $10.1 million for certain federal and state net operating loss carryforwards due to the uncertainty of realization. In the fourth quarter of 2005, the Company determined that it is more likely than not that it would generate sufficient taxable income from operations to realize tax benefits arising from the use of our net operating loss carryforwards to reduce the income tax owed on taxable income. Prior to the fourth quarter of 2005, the Company recorded a valuation allowance on the deferred tax assets associated with these future tax benefits due to the fact that because it was not certain sufficient taxable income would be generated in the future. The release of a portion of the valuation allowance in the fourth quarter of 2005 resulted in a tax benefit of approximately $7.6 million that was recognized in


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LOOPNET, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
our results from operations. During 2007 the Company utilized $2.7 million of net operating loss carryforwards against 2007 taxable income. During 2006 the Company utilized $12.2 million of net operating loss carryforwards against 2006 taxable income. During 2005 the Company utilized $11.5 million of net operating loss carryforwards against 2005 taxable income.
 
At December 31, 2007 the Company had approximately $34.2 million of federal and $17.7 million of state net operating loss carryforwards available to reduce future taxable income which will begin to expire in 2017 for federal and 2009 for state purposes, respectively.
 
Under Section 382 of the Internal Revenue Code, the utilization of the net operating loss carryforwards is limited based upon changes in the percentage of the ownership of the Company. As a result of prior ownership changes, the Company was limited to using $2.7 million of net operating losses to offset taxable income in 2007 and estimates that the Company will be able to utilize approximately $3.7 million in 2008 and each year thereafter until 2011, $2.8 million in 2012 and $2.0 million each year thereafter until 2021.
 
(7)   Stock Option Plan
 
The Company adopted the 2006 Equity Incentive Plan (the 2006 Plan), which became effective on completion of our initial public offering in June 2006. The 2006 Plan provides for the grant of stock options, stock appreciation rights, stock units and other similar stock awards. Options granted under the 2006 Plan may be either “incentive stock options,” as defined under Section 422 of the Internal Revenue Code of 1986, or non-qualified stock options. Through December 31, 2006 the Board of Directors had reserved 7,000,000 shares of common stock to be issued in conjunction with the 2006 Plan. This plan provides for an automatic annual increase in the number of shares on January 1st of each year for the life of the plan starting 2007, equal to the least of (i) 1,800,000 shares, (ii) 4% of the shares outstanding as of the end of the prior fiscal year, or (iii) a lesser number determined by the Board of Directors or Compensation Committee.
 
Prior to June 6, 2006, the Company issued options under the 2001 Stock Option Plan (the 2001 Plan). The 2001 Plan was terminated on June 6, 2006 with respect to new grants, and no further options will be granted under the 2001 Plan. Unallocated shares created by cancellations will be transferred automatically to the new plan.
 
Incentive and nonqualified stock options typically vest over a four-year period, 25% for the first year and monthly thereafter over the remaining three years. Stock options may be exercised during continued employment, or within 60 days of terminating employment and they expire seven years from the date of grant for the 2006 Plan and ten years from the date of grant for the 2001 Plan.


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LOOPNET, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
A summary of the Company’s stock option activity is as follows:
 
                                 
    Options outstanding     Options exercisable  
          Weighted
          Weighted
 
          Average
          Average
 
    Number of
    Exercise
    Number of
    Exercise
 
    shares     Price     shares     Price  
 
Outstanding at December 31, 2004
    2,884,464     $ 0.10       1,675,286     $ 0.10  
Granted
    921,684     $ 1.31                  
Exercised
    (827,702 )   $ 0.10                  
Cancelled
    (294,668 )   $ 0.17                  
                                 
Outstanding at December 31, 2005
    2,683,778     $ 0.51       1,214,352     $ 0.11  
                                 
Granted
    1,803,976     $ 9.40                  
Exercised
    (548,841 )   $ 0.25                  
Cancelled
    (201,145 )   $ 6.14                  
                                 
Outstanding at December 31, 2006
    3,737,768     $ 4.53       1,349,454     $ 0.76  
                                 
Granted
    1,157,500     $ 17.56                  
Exercised
    (1,011,172 )   $ 1.59                  
Cancelled
    (245,714 )   $ 12.84                  
                                 
Outstanding at December 31, 2007
    3,638,382     $ 8.93       1,339,128     $ 4.59  
                                 
 
Additional information regarding stock options outstanding and exercisable as of December 31, 2007 is as follows:
 
                                                 
    Options Outstanding     Options Exercisable  
          Weighted
                      Weighted
 
          Average
    Weighted
          Weighted
    Average
 
    Number
    Remaining
    Average
          Average
    Remaining
 
    Options
    Contractual
    Exercise
    Number
    Exercise
    Contractual
 
Exercise prices
  Outstanding     Life (years)     Price     Exercisable     Price     Life (years)  
 
$0.10
    750,454       5.55     $ 0.10       611,513     $ 0.10          
$ 0.23 - $ 4.08
    1,097,065       7.89       3.29       398,393       3.11          
$10.65 - $12.00
    217,912       5.45       11.89       65,384       11.88          
$12.10 - $12.98
    102,292       5.69       12.38       29,183       12.38          
$13.00 - $14.86
    236,600       6.10       13.80       47,724       14.02          
$15.25 - $15.58
    163,096       5.59       15.26       50,995       15.26          
$15.83 - $17.51
    622,088       6.20       16.13       111,641       16.11          
$18.24 - $19.09
    205,375       6.26       18.67       21,485       18.60          
$19.10 - $22.92
    223,000       6.59       21.71       2,498       20.12