DEFM14A 1 w82657dfdefm14a.htm DEFM14A defm14a
 
 
SCHEDULE 14A
(Rule 14a-101)
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
(Amendment No.
     )
Filed by the Registrant x
Filed by a Party other than the Registrant o
         
Check the appropriate box:
       
o Preliminary Proxy Statement
  o   Confidential, For Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
þ Definitive Proxy Statement
     
o Definitive Additional Materials
       
o Soliciting Material Under Rule 14a-12
       
LoopNet, Inc.
 
(Name of Registrant as Specified In Its Charter)
 
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
þ   No fee required.
 
o   Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
  (1)   Title of each class of securities to which transaction applies:
 
       
 
     
 
 
  (2)   Aggregate number of securities to which transaction applies:
 
       
 
     
 
 
  (3)   Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):
 
       
 
     
 
 
  (4)   Proposed maximum aggregate value of transaction:
 
       
 
     
 
 
  (5)   Total fee paid:
 
       
 
     
 
o   Fee paid previously with preliminary materials.
 
o   Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the form or schedule and the date of its filing.
  (1)   Amount previously paid:
 
       
 
     
 
 
  (2)   Form, Schedule or Registration Statement No.:
 
       
 
     
 
 
  (3)   Filing Party:
 
       
 
     
 
 
  (4)   Date Filed:
 
       
 
     
 
 
 


 

 
June 6, 2011
 
Dear Stockholder:
 
The Board of Directors of LoopNet, Inc. has unanimously approved a merger agreement providing for LoopNet to be acquired by CoStar Group, Inc. You are cordially invited to attend a special meeting of LoopNet stockholders to be held at 9:00 am, local time, on July 11, 2011, at 185 Berry Street, San Francisco, CA 94017.
 
At the special meeting, you will be asked to consider and vote upon a proposal to adopt the merger agreement entered into on April 27, 2011, as amended by Amendment No. 1, dated May 20, 2011, pursuant to which LoopNet would be acquired through a merger with a wholly-owned subsidiary of CoStar. If the merger contemplated by the merger agreement is completed:
 
  •  the holders of LoopNet common stock outstanding immediately prior to the effective time of the merger will receive a unit consisting of (i) $16.50 in cash, without interest and less applicable withholding tax, and (ii) 0.03702 shares of CoStar common stock, for each share of LoopNet common stock that they own immediately prior to the effective time of the merger, unless they exercise and perfect their appraisal rights under the General Corporation Law of the State of Delaware (the “DGCL”); and
 
  •  the holders of the Series A Convertible Preferred Stock outstanding immediately prior to the effective time of the merger, if any, will receive a unit consisting of (i) $2,455.36 in cash, without interest and less applicable withholding tax, and (ii) 5.5089 shares of CoStar common stock, for each share of Series A Convertible Preferred Stock that they own immediately prior to the effective time of the merger, unless they exercise and perfect their appraisal rights under the DGCL. This per share consideration for Series A Convertible Preferred Stock represents the common stock equivalent consideration for each share of Series A Convertible Preferred Stock. As discussed in the accompanying proxy statement/prospectus under the heading “The Voting Agreement — Contingent Conversion of Series A Preferred Stock,” the holders of all outstanding shares of Series A Convertible Preferred Stock have delivered contingent conversion notices to LoopNet pursuant to which such shares will be converted into LoopNet common stock immediately prior to, and contingent upon, the completion of the merger.
 
At the special meeting, you also will be asked to consider and vote upon a proposal to approve, by an advisory vote, the agreements and understandings of LoopNet and its named executive officers concerning compensation that is based on or otherwise relates to the merger contemplated by the merger agreement, and the aggregate total of all such compensation that may be paid or become payable to or on behalf of such executive officers, as disclosed in the accompanying proxy statement/prospectus under the heading “The Merger — Interests of Executive Officers and Directors of LoopNet in the Merger; Change in Control Severance Payments” (the “change in control severance payments”).
 
After careful consideration, the LoopNet Board of Directors approved the merger agreement, the merger and the other transactions contemplated by the merger agreement and unanimously declared that the merger agreement, the merger and the other transactions contemplated by the merger agreement are advisable, fair to and in the best interests of the stockholders of LoopNet. THE BOARD OF DIRECTORS OF LOOPNET UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR THE ADOPTION OF THE MERGER AGREEMENT, FOR THE APPROVAL, BY ADVISORY VOTE, OF THE CHANGE IN CONTROL SEVERANCE PAYMENTS AND FOR THE PROPOSAL TO ADJOURN THE SPECIAL MEETING, IF NECESSARY OR APPROPRIATE, TO SOLICIT ADDITIONAL PROXIES.
 
The proxy statement/prospectus attached to this letter provides you with information about LoopNet, CoStar, the proposed merger and the special meeting of LoopNet’s stockholders. LoopNet encourages you to read the entire proxy statement/prospectus carefully. For a discussion of risk factors you should consider in evaluating the merger on which you are being asked to vote, see “Risk Factors” beginning on page 26 of the accompanying proxy statement/prospectus. You may also obtain more information about LoopNet and CoStar from documents LoopNet and CoStar have filed with the Securities and Exchange Commission. Shares of LoopNet common stock are listed on the NASDAQ Global Select Market under the ticker symbol “LOOP” and shares of CoStar common stock are listed on the NASDAQ Global Select Market under the ticker symbol “CSGP.”


 

Your vote is important. Adoption of the merger agreement requires the approval of the holders of a majority of the outstanding shares of LoopNet’s common stock and Series A Convertible Preferred Stock, voting together as a single class on an as-converted basis. The failure of any stockholder to vote will have the same effect as a vote against adopting the merger agreement. Accordingly, whether or not you plan to attend the special meeting, you are requested to promptly grant a proxy for your shares by completing, signing and dating the enclosed proxy card and returning it in the envelope provided, or by the telephone or over the Internet as instructed in these materials. If you sign, date and mail your proxy card without indicating how you wish to vote, your vote will be counted as a vote FOR adoption of the merger agreement, approval, by an advisory vote, of the change in control severance payments, and adjourning the special meeting, if necessary or appropriate, to solicit additional proxies.
 
Granting a proxy will not prevent you from voting your shares in person if you choose to attend the special meeting.
 
Thank you for your cooperation and continued support.
 
Very truly yours,
 
-s- Richard J. Boyle, Jr.
Richard J. Boyle, Jr.
Chief Executive Officer and Chairman of the Board
 
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the merger or the other transactions described in the accompanying proxy statement/prospectus nor have they approved or disapproved of the issuance of the CoStar common stock in connection with the merger, or determined if the accompanying proxy statement/prospectus is accurate or complete. Any representation to the contrary is a criminal offense.
 
THE ACCOMPANYING PROXY STATEMENT/PROSPECTUS IS DATED JUNE 6, 2011 AND IS FIRST BEING MAILED TO STOCKHOLDERS OF LOOPNET, INC. ON OR ABOUT JUNE 7, 2011.


 

 
ADDITIONAL INFORMATION
 
The accompanying document is the proxy statement of LoopNet, Inc. for its special meeting of stockholders and the prospectus of CoStar Group, Inc. for the shares of common stock of CoStar to be issued in connection with the merger. The accompanying proxy statement/prospectus incorporates important business and financial information about LoopNet and CoStar from documents that are not included in or delivered with the accompanying proxy statement/prospectus. This information is available to you without charge upon your request. You can obtain documents incorporated by reference into the accompany proxy statement/prospectus by requesting them in writing or by telephone from the appropriate company at the following addresses and telephone numbers:
CoStar Group, Inc.
Attention: Investor Relations
1331 L Street, NW
Washington, DC 20005
Telephone: (877) 285-8321
 
LoopNet, Inc.
Attention: Investor Relations
185 Berry Street, Suite 4000
San Francisco, CA 94107
Telephone: (415) 284-4310
 
In addition, if you have questions about the merger or the accompanying proxy statement/prospectus, would like additional copies of the accompanying proxy statement/prospectus or need to obtain proxy cards, you may contact LoopNet’s proxy solicitation agent:
 
[GEORGESON LOGO]
199 Water Street, 26th Floor
New York, NY 10038-3560
Banks and Brokers Call (212) 440-9800
All Others Call Toll Free (866) 785-7395
 
In order to receive timely delivery of the documents in advance of the special meeting of LoopNet stockholders, you must request the information no later than July 1, 2011.
 
For a more detailed description of the information incorporated by reference in this proxy statement/prospectus and how you may obtain it, see “Where You Can Find Additional Information” beginning on page 111 of the accompanying proxy statement/prospectus.


 

LOOPNET, INC.
185 Berry Street, Suite 4000
San Francisco, CA 94107
 
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
 
TO BE HELD JULY 11, 2011
 
To the Stockholders of LoopNet, Inc.:
 
A special meeting of stockholders of LoopNet, Inc. (“LoopNet”), a Delaware corporation, will be held at 9:00 am, local time, on July 11, 2011, at 185 Berry Street, San Francisco, CA 94017 for the following purposes:
 
1. Adoption of the Merger Agreement. To consider and vote on a proposal to adopt the Agreement and Plan of Merger dated as of April 27, 2011 as amended by Amendment No. 1 dated May 20, 2011, among CoStar Group, Inc. (“CoStar”), Lonestar Acquisition Sub, Inc. (“merger sub”), a wholly-owned subsidiary of CoStar, and LoopNet, as it may be further amended from time to time, pursuant to which merger sub will be merged with and into LoopNet, with LoopNet surviving the merger as a wholly-owned subsidiary of CoStar;
 
2. Approval of Change in Control Severance Payments. To consider and vote on a proposal to approve, by an advisory vote, the agreements and understandings of LoopNet and its named executive officers concerning compensation that is based on or otherwise relates to the merger, and the aggregate total of all such compensation that may be paid or become payable to or on behalf of such executive officers, as disclosed in this proxy statement/prospectus under the heading “The Merger — Interests of Executive Officers and Directors of LoopNet in the Merger; Change in Control Severance Payments”; and
 
3. Adjournment of the Special Meeting. To approve the adjournment of the special meeting, if necessary or appropriate, for, among other reasons, the solicitation of additional proxies in the event that there are not sufficient votes at the time of the special meeting to adopt the merger agreement.
 
Only stockholders of record at the close of business on June 1, 2011 are entitled to notice of and to vote at the special meeting and at any adjournment or postponement of the special meeting. All stockholders of record are cordially invited to attend the special meeting in person. To ensure your representation at the meeting in case you cannot attend, you are urged to grant a proxy for your shares by completing, signing, dating and returning the enclosed proxy card as promptly as possible in the postage prepaid envelope enclosed for that purpose or by telephone or through the Internet. Any stockholder attending the special meeting may vote in person even if he or she has returned or otherwise submitted a proxy card.
 
Stockholders of LoopNet who do not vote in favor of adopting the merger agreement will have the right to seek appraisal of the fair value of their shares if the merger is completed, but only if they submit a written demand for appraisal to LoopNet prior to the time the vote is taken on the merger agreement and comply with all other requirements of the DGCL. A copy of the applicable DGCL statutory provisions is included as Annex D to the accompanying proxy statement/prospectus, and a summary of these provisions can be found under “Appraisal Rights” in the accompanying proxy statement/prospectus.
 
The adoption of the merger agreement requires the affirmative vote of the holders of a majority of the outstanding shares of LoopNet’s common stock and Series A Convertible Preferred Stock, voting together as a single class on an as-converted basis. The failure to vote will have the same effect as a vote against the merger. Even if you plan to attend the special meeting in person, please complete, sign, date and return the enclosed proxy or submit your proxy by telephone or the Internet as instructed in these materials as promptly as possible to ensure that your shares will be represented at the special meeting if you are unable to attend. If you do attend the special meeting and wish to vote in person, you may withdraw your proxy and vote in person. If you sign, date and mail your proxy card without indicating how you wish to vote, your vote will be counted as a vote in favor of adoption of the merger agreement, approval, by an advisory vote, of the change in control severance payments and adjourning the special meeting, if necessary or appropriate, to solicit additional proxies. If you fail to return your proxy card, the effect will be that your shares will not be counted


 

for purposes of determining whether a quorum is present at the special meeting and will effectively be counted as a vote against adoption of the merger agreement.
 
By Order of the Board of Directors,
 
-s-Brent Stumme
Brent Stumme
Secretary
 
San Francisco, California
June 6, 2011


 

 
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QUESTIONS AND ANSWERS ABOUT THE MERGER AND THE SPECIAL MEETING
 
Q:   What is the proposed transaction?
 
A:   The proposed transaction is the acquisition of LoopNet, Inc. (“LoopNet”) by CoStar Group, Inc. (“CoStar”). CoStar has agreed to acquire LoopNet pursuant to an Agreement and Plan of Merger dated as of April 27, 2011, as amended by Amendment No. 1, dated May 20, 2011, among CoStar, Lonestar Acquisition Sub, Inc. and LoopNet (the “merger agreement”). Lonestar Acquisition Sub, Inc. (“merger sub”) is a wholly-owned subsidiary of CoStar. Once the merger agreement has been adopted by LoopNet’s stockholders and the other closing conditions under the merger agreement have been satisfied or waived, merger sub will merge with and into LoopNet. LoopNet will be the surviving corporation in the merger and will become a wholly-owned subsidiary of CoStar. The merger agreement is attached as Annex A to this proxy statement/prospectus.
 
Q:   What will LoopNet’s stockholders receive in the merger?
 
A:   If the merger contemplated by the merger agreement is completed, the holders of LoopNet common stock outstanding immediately prior to the effective time of the merger will receive a unit consisting of (i) $16.50 in cash, without interest and less applicable withholding tax, and (ii) 0.03702 shares of CoStar common stock, for each share of common stock that they own immediately prior to the effective time of the merger, unless they exercise and perfect their appraisal rights under the DGCL.
 
Upon completion of the merger, the holders of Series A Convertible Preferred Stock (the “Series A Preferred Stock”) outstanding immediately prior to the effective time of the merger, if any, will receive a unit consisting of (i) $2,455.36 in cash, without interest and less applicable withholding tax, and (ii) 5.5089 shares of CoStar common stock, for each share of Series A Preferred Stock that they own immediately prior to the effective time of the merger, unless they exercise and perfect their appraisal rights under the DGCL. The per share consideration for Series A Preferred Stock represents the common stock equivalent consideration for each share of Series A Preferred Stock, as provided pursuant to the terms of the Certificate of Designations of Series A Convertible Preferred Stock of LoopNet (the “Series A Certificate”). As discussed in this proxy statement/prospectus under the heading “The Voting Agreement — Contingent Conversion of Series A Preferred Stock,” the holders of all outstanding shares of Series A Preferred Stock have delivered contingent conversion notices to LoopNet pursuant to which such shares will be converted into LoopNet common stock immediately prior to, and contingent upon, the completion of the merger.
 
Based on the closing price of CoStar common stock on the NASDAQ Global Select Market (“Nasdaq”) on April 26, 2011, the day prior to the Board’s approval of the proposed merger, the merger consideration represented approximately $18.73 in value for each share of LoopNet common stock. Based on the closing price of CoStar common stock on Nasdaq on June 1, 2011, the most recent practicable trading day prior to the date of this proxy statement/prospectus, the merger consideration represented approximately $18.76 in value for each share of LoopNet common stock. Because CoStar will issue a fixed number of shares of CoStar common stock in exchange for each share of LoopNet common stock and Series A Preferred Stock, the value of the stock portion of the merger consideration that LoopNet stockholders will receive in the merger will depend on the price per share of CoStar common stock at the time the merger is completed. That price will not be known at the time of the meeting and may be less than the current price or the price at the time of the special meeting.
 
Q:   What happens if the merger is not completed?
 
A:   If the merger agreement is not adopted by LoopNet stockholders or if the merger is not completed for any other reason, you will not receive any payment for your shares of LoopNet common stock or Series A Preferred Stock in connection with the merger. Instead, LoopNet will remain an independent public company and its common stock will continue to be listed and traded on Nasdaq. If the merger agreement is terminated under specified circumstances, LoopNet may be required to pay CoStar a termination fee of


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$25.8 million and if the merger is terminated under certain other circumstances, CoStar may be required to pay LoopNet a termination fee of $51.6 million as described under “The Merger Agreement — Termination Fees and Expenses.”
 
Q:   Where and when is the special meeting?
 
A:   The special meeting will take place at 9:00 am, local time, on July 11, 2011, at 185 Berry Street, San Francisco, CA 94017.
 
Q:   Who is eligible to vote?
 
A:   Holders of LoopNet common stock and Series A Preferred Stock as of the close of business on June 1, 2011, the record date for the special meeting, are eligible to vote.
 
Q:   How many votes do LoopNet’s stockholders have?
 
A:   Holders of LoopNet common stock have one vote for each share of common stock that such holder owned at the close of business on June 1, 2011, the record date for the special meeting.
 
Pursuant to the terms of the Series A Certificate, holders of Series A Preferred Stock vote on an as-converted basis with the holders of LoopNet common stock as a single class. Holders of Series A Preferred Stock have 148.80952 votes per share based on the current conversion ratio. Holders of Series A Preferred Stock have unanimously consented to the merger and the transactions contemplated by the merger agreement for purposes of Section 8 of the Series A Certificate, which provides the holders of Series A Preferred Stock with a consent right over certain matters.
 
Q:   What vote of LoopNet’s stockholders is required to approve each proposal?
 
A:   The following are the vote requirements for the proposals:
 
  •  Adoption of the merger agreement.  In order to complete the merger, holders of a majority of the outstanding shares of LoopNet’s common stock and Series A Preferred Stock, voting together as a single class on an as-converted basis, must vote FOR the adoption of the merger agreement (the “Stockholder Approval”).
 
  •  Advisory vote approving change in control severance payments.  The affirmative vote of holders of a majority of the votes cast at the special meeting and entitled to vote thereon, will be required to approve, by an advisory vote, the change in control severance payments.
 
  •  Adjournment (if necessary).  The affirmative vote of holders of a majority of the votes cast at the special meeting and entitled to vote thereon will be required to approve adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies.
 
Q:   What constitutes a quorum for the special meeting?
 
A:   A majority of the outstanding shares of LoopNet’s common stock and Series A Preferred Stock, on an as-converted basis, entitled to vote being present in person or represented by proxy constitutes a quorum for the special meeting. If a quorum shall fail to attend the meeting, the chairman of the meeting may adjourn the meeting to another place, if any, date or time.
 
Q:   How does LoopNet’s Board of Directors recommend that I vote?
 
A:   LoopNet’s Board of Directors (the “Board”), by unanimous vote, has determined that it is advisable and in the best interests of LoopNet and its stockholders to consummate the merger and the other transactions contemplated by the merger agreement. The Board unanimously recommends that stockholders vote FOR the proposal to adopt the merger agreement, FOR the approval, by advisory vote, of the change in control severance payments and FOR the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies. The Board is soliciting stockholder votes consistent with the Board’s


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recommendation. You should read the section entitled “The Merger — The Recommendation of LoopNet’s Board of Directors and LoopNet’s Reasons for the Merger” for a discussion of the factors that the Board considered in deciding to recommend voting FOR adoption of the merger agreement.
 
Q:   Are any LoopNet stockholders already committed to vote in favor of the merger?
 
A:   Yes. LoopNet’s directors and certain of LoopNet’s executive officers and significant stockholders entered into a voting and support agreement (the “voting agreement”) with CoStar and LoopNet and have agreed, in their capacities as LoopNet stockholders, to, among other things, vote all shares of LoopNet’s capital stock beneficially owned by them in favor of adoption of the merger agreement and any related proposal in furtherance thereof and against any proposal made in opposition to the merger, in each case, subject to the terms and conditions of the voting agreement. As of the record date, the directors, executive officers and significant stockholders who signed the voting agreement beneficially owned approximately 32% of the total outstanding shares of LoopNet’s common stock (including the shares underlying the Series A Preferred Stock but excluding shares issuable upon exercise of options held by such stockholders). The voting agreement will terminate automatically upon termination of the merger agreement. As long as the voting agreement remains in effect, approximately 32% of the total outstanding shares of LoopNet’s common stock are committed to be voted in favor of the adoption of the merger agreement. See “The Voting Agreement.”
 
Q:   What do I need to do now?
 
A:   Please read this proxy statement/prospectus carefully, including its annexes, to consider how the merger affects you. After you read this proxy statement/prospectus, you should complete, sign and date your proxy card and mail it in the enclosed return envelope or submit your proxy over the telephone or over the Internet as soon as possible so that your shares can be voted at the special meeting of LoopNet’s stockholders. If you sign, date and mail your proxy card without indicating how you wish to vote, your vote will be cast FOR adoption of the merger agreement, FOR approval, by advisory vote, of the change in control severance payments, and FOR the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies.
 
Q:   What happens if I do not return a proxy card or otherwise vote?
 
A:   The failure to return your proxy card or to otherwise vote will have the same effect as voting against the merger. A vote to abstain will also have the same effect as voting against the merger.
 
Q:   How do I vote?
 
A:   If you are a stockholder of record, you may vote in person at the special meeting, vote by proxy using the enclosed proxy card, vote by proxy over the telephone, or vote by proxy on the Internet. If you vote by proxy, your shares will be voted as you specify on the proxy card, over the telephone or on the Internet. Whether or not you plan to attend the meeting, LoopNet urges you to vote by proxy to ensure your vote is counted. You may still attend the special meeting and vote in person if you have already voted by proxy.
 
  •  To vote in person, come to the special meeting and you will be given a ballot when you arrive.
 
  •  To vote using the enclosed proxy card, simply complete, sign and date the enclosed proxy card and return it promptly in the enclosed return envelope. If you return your signed proxy card to LoopNet before the special meeting, LoopNet will vote your shares as you direct.
 
  •  To submit your proxy over the telephone, dial toll-free 1-800-652-VOTE (8683) using a touch-tone phone and follow the recorded instructions. You will be asked to provide the company number and control number from the enclosed proxy card. Your proxy must be received by 1:00 am, Pacific Time, on July 11, 2011 to be counted.
 
  •  To submit your proxy on the Internet, go to www.envisionreports.com/Loop to complete an electronic proxy card. You will be asked to provide the company number and control number from the enclosed proxy card. Your proxy must be received by 1:00 am, Pacific Time, on July 11, 2011 to be counted.


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If your shares of common stock are held in “street name” by your broker, you should have received a proxy card and voting instructions with these proxy materials from that organization rather than from LoopNet. Your broker will vote your shares only if you provide instructions to your broker on how to vote. You should instruct your broker to vote your shares, following the procedures provided by your broker. Without such instructions, your shares will not be voted, which will have the same effect as voting against the merger. See “The Special Meeting of LoopNet’s Stockholders — Voting by Proxy.”
 
LoopNet provides Internet proxy submission to allow you to grant a proxy for your shares online, with procedures designed to ensure the authenticity and correctness of your proxy vote instructions. However, please be aware that you must bear any costs associated with your Internet access, such as usage charges from Internet access providers and telephone companies.
 
Q:   What does it mean if I receive more than one set of materials?
 
A:   This means you own shares of LoopNet stock that are registered under different names. For example, you may own some shares directly as a stockholder of record and other shares through a broker or you may own shares through more than one broker. In these situations, you will receive multiple sets of proxy materials. You must complete, sign, date and return each of the proxy cards that you receive, or grant a proxy for all of your shares over the telephone or over the Internet in accordance with the instructions above in order to grant a proxy for all of the shares you own. Each proxy card you receive comes with its own prepaid return envelope and control number(s); if you grant a proxy by mail, make sure you return each proxy card in the return envelope that accompanies that proxy card, and if you grant a proxy by telephone or via the Internet, use the control number(s) on each proxy card.
 
Q:   May I vote in person?
 
A:   If you are the stockholder of record of shares of LoopNet common stock or Series A Preferred Stock, you have the right to vote in person at the special meeting with respect to those shares. If you are the beneficial owner of shares of common stock, you are invited to attend the special meeting. However, since you are not the stockholder of record, you may not vote these shares in person at the special meeting, unless you obtain a legal proxy from your broker, bank or nominee giving you the right to vote the shares at the special meeting. Even if you plan to attend the special meeting as a stockholder of record, LoopNet recommends that you also submit your proxy card or voting instructions as described in the above Q&A entitled “How do I vote?” so that your vote will be counted if you later decide not to attend the special meeting.
 
Q:   Am I entitled to appraisal rights?
 
A:   Under Section 262 of the DGCL, LoopNet stockholders will be entitled to seek appraisal for their shares only if certain criteria are satisfied. See “Appraisal Rights” and Annex D of this proxy statement/prospectus.
 
Q:   Is completion of the merger subject to any conditions?
 
A:   Yes. CoStar and LoopNet are not required to complete the merger unless a number of conditions are satisfied or waived. These conditions include the adoption of the merger agreement by LoopNet’s stockholders and expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”). The merger is not subject to a financing condition. For a more complete summary of the conditions that must be satisfied or waived prior to completion of the merger, see “The Merger Agreement — Conditions of the Merger.”
 
Q:   Is the merger expected to be taxable to owners of LoopNet common stock?
 
A:   The merger is expected to be a taxable transaction for U.S. federal income tax purposes. Accordingly, U.S. holders of LoopNet common stock would generally be subject to U.S. federal income tax as a result of the exchange of their LoopNet common stock for CoStar common stock and cash (including cash


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received in lieu of a fractional share of CoStar common stock) in the merger. See “The Merger — Material U.S. Federal Income Tax Consequences of the Merger.”
 
Q:   When do you expect the merger to be completed?
 
A:   LoopNet and CoStar are working to complete the merger as quickly as possible after the special meeting, and anticipate that the merger will be completed by the end of 2011. In order to complete the merger, LoopNet must obtain the required Stockholder Approval, and a number of other closing conditions under the merger agreement must be satisfied or waived. See “The Merger Agreement — Conditions of the Merger.”
 
Q:   Should I send in my stock certificates now?
 
A:   No. At or about the date of completion of the merger, if you hold certificated shares, you will receive a letter of transmittal with instructions informing you how to send in your stock certificates to CoStar’s exchange agent in order to receive the merger consideration. You should use the letter of transmittal to exchange stock certificates for the merger consideration to which you are entitled as a result of the merger. DO NOT SEND ANY STOCK CERTIFICATES WITH YOUR PROXY.
 
If you own shares of LoopNet common stock that are held in “street name” by your broker, you will receive instructions from your broker as to how to surrender your “street name” shares and receive cash and stock for those shares following the completion of the merger.
 
Q:   Who can help answer my questions?
 
A:   The information provided above in the question-and-answer format is for your convenience only and is merely a summary of some of the information in this proxy statement/prospectus. You should carefully read the entire proxy statement/prospectus, including its annexes. If you would like additional copies of this proxy statement/prospectus, without charge, or if you have questions about the merger, including the procedures for voting your shares, you should contact LoopNet’s proxy solicitation agent:
 
http://www.georgeson.com/
(GEORGESON LOGO)
199 Water Street, 26th Floor
New York, NY 10038-3560
Banks and Brokers Call (212) 440-9800
All Others Call Toll Free (866) 785-7395
 
You may also wish to consult your legal, tax and/or financial advisors with respect to any aspect of the merger, the merger agreement or other matters discussed in this proxy statement/prospectus.


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SUMMARY
 
This summary highlights selected information from this proxy statement/prospectus. It may not contain all of the information that is important to you. You are urged to read carefully the entire proxy statement/prospectus and the other documents referred to in this proxy statement/prospectus in order to fully understand the merger agreement and the proposed merger. See “Where You Can Find Additional Information” on page 111 of this proxy statement/prospectus. Each item in this summary refers to the page of this proxy statement/prospectus on which that subject is discussed in more detail.
 
The Companies
 
LoopNet, Inc.
 
LoopNet owns and operates an online marketplace for commercial real estate in the United States. The 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 in order to find a buyer or tenant. By connecting the sources of commercial real estate supply and demand in an efficient manner, LoopNet’s online marketplace enables commercial real estate participants to initiate and complete more transactions more cost-effectively than through other means.
 
The principal trading market for LoopNet’s common stock (NASDAQ: LOOP) is the Nasdaq Global Select Market. LoopNet’s executive offices are located at 185 Berry Street, Suite 4000, San Francisco, CA 94107. Its telephone number is (415) 243-4200.
 
CoStar Group, Inc.
 
CoStar Group, Inc. provides information and analytic services to the commercial real estate industry in the United States (U.S.) and United Kingdom (U.K.). CoStar offers the most comprehensive commercial real estate database available, has the largest research department in the industry, and provides information and analytic services. CoStar’s integrated suite of services offers customers online access to the most comprehensive database of commercial real estate information, which has been researched and verified by its team of researchers, currently covering the U.S., as well as London and other parts of the U.K. and parts of France. Since its founding in 1987, CoStar’s strategy has been to provide commercial real estate professionals with critical knowledge to explore and complete transactions by offering the most comprehensive, timely and standardized information on U.S. commercial real estate.
 
The principal trading market for CoStar’s common stock (NASDAQ: CSGP) is the Nasdaq Global Select Market. CoStar’s executive offices are located at 1331 L Street, N.W., Washington, D.C. 20005. Its telephone number is (202) 346-6500.
 
Lonestar Acquisition Sub, Inc.
 
Lonestar Acquisition Sub, Inc., or merger sub, is a wholly-owned subsidiary of CoStar, whose address is 1331 L Street, N.W., Washington, D.C. 20005. Its telephone number is (202) 346-6500. Merger sub was formed solely for the purpose of facilitating CoStar’s acquisition of LoopNet and has not carried on any activities other than in connection with the merger.
 
The Merger (see page 67)
 
CoStar and LoopNet agreed to the acquisition of LoopNet by CoStar under the terms of the merger agreement that is described in this proxy statement/prospectus. Pursuant to the terms of the merger agreement, merger sub will be merged with and into LoopNet, with LoopNet surviving the merger as a wholly-owned subsidiary of CoStar. CoStar and LoopNet have attached the merger agreement as Annex A to this proxy statement/prospectus. CoStar and LoopNet encourage you to read carefully the merger agreement in its entirety because it is the legal document that governs the merger.


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Consideration to Be Received in the Merger (see page 67)
 
Upon completion of the merger, the holders of LoopNet common stock outstanding immediately prior to the effective time of the merger (other than treasury stock or shares of common stock owned by CoStar or merger sub) will receive a unit consisting of (i) $16.50 in cash, without interest and less applicable withholding tax, and (ii) 0.03702 shares of CoStar common stock, for each share of common stock that they own immediately prior to the effective time of the merger, unless they exercise and perfect their appraisal rights under the DGCL. Upon completion of the merger, the holders of Series A Preferred Stock outstanding immediately prior to the effective time of the merger, if any, will receive a unit consisting of (i) $2,455.36 in cash, without interest and less applicable withholding tax, and (ii) 5.5089 shares of CoStar common stock, for each share of Series A Preferred Stock that they own immediately prior to the effective time of the merger, unless they exercise and perfect their appraisal rights under the DGCL. The per share consideration for Series A Preferred Stock represents the common stock equivalent consideration for each share of Series A Preferred Stock, as provided pursuant to the terms of the Series A Certificate. CoStar will not issue fractional shares of CoStar common stock in the merger. As a result, holders of LoopNet common stock and Series A Preferred Stock will receive cash for any fractional share of CoStar common stock that they would otherwise be entitled to receive in the merger. After the merger is completed, holders of LoopNet common stock and Series A Preferred Stock will have only the right to receive this consideration, and will no longer have any rights as LoopNet stockholders, including voting or other rights.
 
As discussed in this proxy statement/prospectus under the heading “The Voting Agreement — Contingent Conversion of Series A Preferred Stock,” the holders of all outstanding shares of Series A Preferred Stock have delivered contingent conversion notices to LoopNet pursuant to which such shares will be converted into LoopNet common stock immediately prior to, and contingent upon, the completion of the merger.
 
Treatment of LoopNet Options and Restricted Stock Units; Employee Matters (see page 68)
 
The merger agreement contains provisions relating to the benefits that LoopNet’s employees (including executive officers) and non-employee directors will receive in connection with and following the merger. In particular, under the merger agreement:
 
  •  At the effective time of the merger, each LoopNet stock option, whether or not vested or exercisable, will be canceled and LoopNet will pay each holder of any such option an amount of cash and/or shares of CoStar common stock as described under “The Merger Agreement — Treatment of LoopNet Options and Restricted Stock Units.”
 
  •  At the effective time of the merger, each LoopNet restricted stock unit, whether or not vested or exercisable, will be canceled and LoopNet will pay each holder of any such restricted stock unit an amount of cash and/or shares of CoStar common stock as described under “The Merger Agreement — Treatment of LoopNet Options and Restricted Stock Units.”
 
  •  For one year after the merger, CoStar has agreed to provide the LoopNet employees who remain in the employment of the surviving corporation with base pay and benefits (excluding equity-based compensation) which are substantially comparable, in the aggregate, to that provided by LoopNet as of the effective time;
 
  •  CoStar has agreed to provide LoopNet’s employees with credit for their service to LoopNet for purposes of any compensation and/or benefit program, policy or arrangement maintained by CoStar or any of its subsidiaries in which LoopNet’s employees become participants; and
 
  •  CoStar has agreed to provide LoopNet’s employees with certain minimum severance benefits should they be terminated under certain circumstances.
 
Voting Agreement (see page 85)
 
In connection with the transactions contemplated by the merger agreement, LoopNet’s directors and certain of LoopNet’s executive officers and significant stockholders entered into a voting agreement with


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CoStar and LoopNet and have agreed, in their capacities as LoopNet stockholders, to vote all shares of LoopNet’s capital stock beneficially owned by them in favor of adoption of the merger agreement and any related proposal in furtherance thereof, and against any proposal made in opposition to the merger, in each case, subject to the terms and conditions of the voting agreement. As of the record date, the directors, executive officers and significant stockholders who signed the voting agreement beneficially owned approximately 32% of the total outstanding shares of LoopNet’s common stock (including the shares underlying the Series A Preferred Stock but excluding shares issuable upon exercise of options held by such stockholders). More than 50% of the outstanding shares of LoopNet’s common stock (including the shares underlying the Series A Preferred Stock) must vote for the merger for it to be approved.
 
Pursuant to the voting agreement, all holders of Series A Preferred Stock have delivered a contingent conversion notice to LoopNet. Under the terms of such notices, all outstanding shares of Series A Preferred Stock will be converted into LoopNet common stock immediately prior to, and contingent upon, the completion of the merger. Based on the $6.72 conversion price of the Series A Preferred Stock, each share of Series A Preferred Stock will be converted into 148.80952 shares of LoopNet common stock. The voting agreement also provides for certain waivers and consents granted by the signing directors, executive officers and significant stockholders to LoopNet in connection with their rights under the Series A Certificate, which are described under “The Merger — Certain Terms of the LoopNet’s Series A Preferred Stock.”
 
The voting agreement will terminate automatically upon termination of the merger agreement in accordance with its terms. As long as the voting agreement remains in effect, approximately 32% of the total outstanding shares of LoopNet’s common stock will be voted in favor of adoption of the merger agreement. See “The Voting Agreement.”
 
The Special Meeting; LoopNet Stockholders Entitled to Vote; Required Vote (see page 33)
 
  •  Place, date and time.  The special meeting will be held at 9:00 am local time, on July 11, 2011, at 185 Berry Street, San Francisco, CA 94017.
 
  •  LoopNet stockholders entitled to vote.  You can vote at the special meeting all of the shares of LoopNet common stock and Series A Preferred Stock you own of record as of the close of business on June 1, 2011, which is the record date for the special meeting. If you own shares that are registered in the name of someone else, such as a broker, you need to direct that person to vote those shares or obtain an authorization from them and vote the shares yourself at the meeting. On the record date, there were 33,207,916 shares of LoopNet common stock outstanding and 50,000 shares of Series A Preferred Stock outstanding, convertible into 7,440,476 shares of LoopNet common stock.
 
  •  Required vote.  The adoption of the merger agreement requires the affirmative vote of the holders of a majority of the outstanding shares of LoopNet’s common stock and Series A Preferred Stock at the close of business on the record date, voting together as a single class on an as-converted basis (i.e., the Stockholder Approval). A failure to vote or a vote to abstain has the same effect as a vote AGAINST adoption of the merger agreement.
 
  •  Procedure for voting.  You can vote shares you hold of record by attending the special meeting and voting in person, or you can grant a proxy for your shares by mailing the enclosed proxy card, or by telephone or over the Internet. If your shares of common stock are held in “street name” by your broker, you should instruct your broker on how to vote your shares using the instructions provided by your broker. If you do not instruct your broker to vote your shares, your shares will not be voted.
 
  •  How to revoke your proxy.  You may revoke your proxy at any time before the vote is taken at the meeting. To revoke your proxy, you must either advise LoopNet’s Secretary in writing, deliver a proxy dated after the date of the proxy you wish to revoke, or attend the meeting and vote your shares in person. Merely attending the special meeting will not constitute revocation of your proxy. If you have instructed your broker to vote your shares, you must follow the directions provided by your broker to change those instructions.


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Recommendation of the LoopNet Board of Directors (see page 41)
 
The Board, by unanimous vote, has determined that it is advisable and in the best interests of LoopNet and its stockholders to consummate the merger and the other transactions contemplated by the merger agreement, and unanimously recommends that stockholders vote FOR the proposal to adopt the merger agreement, FOR the approval, by advisory vote, of the change in control severance payments and FOR the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies.
 
LoopNet’s Reasons for the Merger (see page 41)
 
The Board considered a number of factors in making its determination that the merger and the other transactions contemplated by the merger agreement are advisable and in the best interests of LoopNet and its stockholders, including the following:
 
  •  the merger consideration to be received by LoopNet’s common stockholders, including the fact that this price represented a premium of approximately 31% to the closing price of LoopNet common stock on April 26, 2011, the last day prior to the Board’s approval of the proposed merger, and premiums of approximately 32% and 39.5%, respectively, to the one-month and two-month trailing average closing prices of LoopNet common stock as of April 26, 2011;
 
  •  the market and execution risks associated with LoopNet’s recently adopted four-year strategic plan and the Board’s judgment that the premium reflected in the merger consideration reflected fair compensation for the loss of the potential stockholder benefits that could be realized if that plan were successfully executed;
 
  •  the fact that a large portion of the merger consideration will be paid in cash, giving LoopNet stockholders an opportunity to immediately realize certain value for a significant portion of their investment;
 
  •  the opportunity, at least to a limited extent, for LoopNet stockholders to participate in any future earnings or growth of the combined company and future appreciation in the value of CoStar common stock following the merger should they decide to retain the CoStar common stock payable in the merger;
 
  •  the Board’s judgment that CoStar was the most probable buyer and had the substantial resources needed for a potential merger to succeed, and the benefits that LoopNet and its advisors were able to obtain as a result of extensive negotiations with CoStar, including a significant increase in CoStar’s bid from the beginning of the process to the end of the negotiations;
 
  •  Evercore’s opinion that, as of the date of the opinion and based on and subject to assumptions made, matters considered and limitations on the scope of review undertaken by Evercore as set forth therein, the merger consideration was fair, from a financial point of view, to the holders of the shares of LoopNet common stock entitled to receive such merger consideration. The Evercore opinion is more fully described in the subsection entitled “The Merger — Opinion of LoopNet’s Financial Advisor” The full text of the opinion is attached to this proxy statement/prospectus as Annex C;
 
  •  the terms of the merger agreement, including the $51.6 million termination fee payable by CoStar in certain circumstances upon termination of the merger agreement if necessary antitrust approval is not obtained, and LoopNet’s ability to respond to a competing proposal that the Board determines is a superior proposal; and
 
  •  the closing conditions included in the merger agreement, including the absence of any financing condition, and the likelihood that the merger would be completed.
 
The Board also identified and considered a number of countervailing factors and risks to LoopNet and its stockholders relating to the merger and the merger agreement, including the following:
 
  •  the fact that LoopNet stockholders would not have the opportunity to continue participating in LoopNet’s potential upside as an independent company;


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  •  the fact that, because LoopNet’s stockholders will be receiving primarily cash for their stock, they will receive only limited compensation for any increase in the value of LoopNet or CoStar either during the pre-closing period or following the closing;
 
  •  the fact that because the stock portion of the merger consideration is a fixed exchange ratio of shares of CoStar common stock to LoopNet common stock, LoopNet common and preferred stockholders could be adversely affected by a decrease in the trading price of CoStar common stock during the pendency of the merger, and the fact that the merger agreement does not provide LoopNet with a price-based termination right or other similar protection, such as a “collar,” with respect to CoStar’s stock price;
 
  •  the possibility that the merger may not be completed and the potential adverse consequences to LoopNet if the merger is not completed;
 
  •  the limitations imposed in the merger agreement on the conduct of LoopNet’s business during the pre-closing period, its ability to solicit and respond to competing proposals and the ability of the Board to change or withdraw its recommendation of the merger;
 
  •  the fact that while the approval of the adoption of the merger agreement by LoopNet’s stockholders is required under the merger agreement and the DGCL, approximately 32% of the total outstanding shares of LoopNet’s common stock (including the shares underlying the Series A Preferred Stock), have committed to vote in favor of such adoption pursuant to the voting agreement;
 
  •  the fact that the merger is expected to be a taxable transaction to LoopNet stockholders;
 
  •  potential conflicts of interest of LoopNet’s directors and executive officers; and
 
  •  the additional risks described in the section entitled “Risk Factors.”
 
Opinion of LoopNet’s Financial Advisor (see page 44 and Annex C)
 
The Board received an opinion, dated April 27, 2011, from Evercore, that, as of that date and based on and subject to assumptions made, matters considered and limitations on the scope of review undertaken by Evercore as set forth therein, the merger consideration was fair, from a financial point of view, to the holders of the shares of LoopNet common stock entitled to receive such consideration. The full text of Evercore’s written opinion, which sets forth, among other things, the procedures followed, assumptions made, matters considered and limitations on the scope of review undertaken by Evercore in rendering its opinion is attached as Annex C to this proxy statement/prospectus. The opinion was directed to the Board and addresses only the fairness, from a financial point of view, of the merger consideration to the holders of shares of LoopNet common stock entitled to receive such consideration. The opinion does not address any other aspect of the proposed merger and does not constitute a recommendation to the Board or to any other persons in respect of the proposed merger, including as to how any holder of shares of LoopNet common stock should vote or act in respect of the proposed merger.
 
Financing (see page 87)
 
On April 27, 2011, CoStar entered into a debt commitment letter with J.P. Morgan Securities LLC and JPMorgan Chase Bank, N.A., which provides for a fully committed term loan of $415.0 million and a $50.0 million revolving credit facility, of which $37.5 million is committed, which will be available, subject to customary conditions, to fund the cash consideration for the merger and related fees and costs and the ongoing working capital needs of CoStar and its subsidiaries following the merger. CoStar has represented that, with the aggregate proceeds of this debt financing and CoStar’s available cash, it will have sufficient funds at closing to fund the payment of the cash merger consideration. The merger agreement does not contain any financing condition. For a more complete description of CoStar’s debt financing for the merger, see the section entitled “Debt Financing”.
 
Under the merger agreement, LoopNet has agreed to allow CoStar and its financing sources a period of 20 consecutive business days to market the debt financing. For details on this marketing period and other details related to financing, see the section entitled “The Merger Agreement — Financing.”


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Stock Ownership of LoopNet Directors and Executive Officers
 
As of the close of business on the record date, the directors and executive officers of LoopNet were deemed to beneficially own 15,875,467 shares of LoopNet common stock, which represented 36.5% of the shares of LoopNet common stock outstanding on that date.
 
Interests of Executive Officers and Directors of LoopNet in the Merger (see page 55)
 
You should be aware that some of LoopNet’s directors and executive officers have interests in the merger that are different from, or are in addition to, the interests of LoopNet’s stockholders generally. The Board was aware of these interests and considered them, among other matters, when approving the merger agreement and recommending that LoopNet stockholders vote to adopt the merger agreement.
 
Each of LoopNet’s executive officers and non-employee directors holds equity awards. Pursuant to the terms of the applicable LoopNet equity plan and agreements, and subject to the terms of the merger agreement, all such equity awards held by LoopNet’s executive officers and non-employee directors will become fully vested on the date of the closing of the merger and will be canceled in exchange for cash and/or shares of CoStar common stock, depending on the type of award and the exercise price of the award, if any. In addition, each of LoopNet’s executive officers has an agreement with LoopNet that provides for severance benefits, in the form of cash, health benefits and accelerated vesting of equity, if the executive’s employment is terminated in connection with this transaction under certain circumstances. CoStar has also agreed to continue certain indemnification agreements for directors and officers of LoopNet.
 
Listing of CoStar Common Stock and Delisting and Deregistration of LoopNet Common Stock (see page 65)
 
CoStar will be required to notify Nasdaq of the listing of the shares of CoStar common stock issued in the merger. If the merger is completed, LoopNet common stock will no longer be listed on Nasdaq and will be deregistered under the Securities Exchange Act of 1934 (as amended, the “Exchange Act”), and LoopNet will no longer file periodic reports with the SEC.
 
Appraisal Rights (see page 107)
 
If certain criteria are satisfied, the DGCL provides you with the right to seek an appraisal of your shares, provided that you perfect those rights in the manner provided for in the DGCL. This means that if you are not satisfied with the amount you are receiving in the merger, you are entitled to have the value of your shares determined by a Delaware court and to receive payment based on that valuation, subject to compliance with the required procedures for exercising such rights. The amount you ultimately receive in an appraisal proceeding may be more than, the same as or less than the amount you would be entitled to receive under the terms of the merger agreement.
 
LoopNet’s and CoStar’s Stock Price (see page 24)
 
Shares of LoopNet’s common stock are listed on Nasdaq under the trading symbol “LOOP”. On April 26, 2011, the day prior to the Board’s approval of the proposed merger, LoopNet’s common stock closed at $14.31 per share. On June 1, 2011, which was the last practicable trading day before this proxy statement/prospectus was printed, LoopNet’s common stock closed at $18.35 per share.
 
Shares of CoStar’s common stock are listed on Nasdaq under the trading symbol “CSGP”. On June 1, 2011, which was the last practicable trading day before this proxy statement/prospectus was printed, CoStar’s common stock closed at $61.02 per share.


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Conditions to Completion of the Merger (see page 79)
 
Mutual Conditions.  Each party’s obligation to complete the merger is subject to the satisfaction or waiver of various conditions, including the following:
 
  •  the receipt of the Stockholder Approval;
 
  •  the absence of any injunctions or other legal prohibitions preventing the consummation of the merger;
 
  •  the expiration or termination of the waiting period under the HSR Act and the obtaining of any other approvals or clearances required to consummate the merger with respect to any other antitrust laws; and
 
  •  the effectiveness of the Form S-4 in which this proxy statement/prospectus is included as a prospectus and the lack of any stop order suspending the effectiveness of the Form S-4 or pending or threatened SEC proceedings to effect a stop order.
 
CoStar Conditions.  CoStar’s obligation to complete the merger is subject to the satisfaction or waiver of additional conditions, including the following:
 
  •  the absence of any pending suit, action or proceeding by a governmental authority which seeks to make illegal, prevent or otherwise restrain the consummation of the merger, or that, individually or in the aggregate, is reasonably expected to impose a substantial detriment (as defined in the section entitled “The Merger — Regulatory Matters”);
 
  •  the absence of injunctions or other legal prohibitions making illegal or preventing or otherwise restraining the consummation of the merger or imposing, or that, individually or in the aggregate, are reasonably expected to impose a substantial detriment;
 
  •  the accuracy of LoopNet’s representations and warranties in the merger agreement to varying standards depending on the representation and warranty;
 
  •  LoopNet’s performance in all material respects of its obligations under the merger agreement;
 
  •  the delivery to CoStar of an officer’s certificate from LoopNet confirming that the conditions described in the immediately preceding two bullets have been satisfied; and
 
  •  the lack of general banking, stock market or credit market limitations, suspensions and moratoria.
 
LoopNet Conditions.  LoopNet’s obligation to complete the merger is subject to the satisfaction or waiver of additional conditions, including the following:
 
  •  the accuracy of CoStar’s representations and warranties in the merger agreement, to varying standards depending on the representation and warranty;
 
  •  CoStar’s and merger sub’s performance in all material respects of their obligations under the merger agreement; and
 
  •  the delivery to LoopNet of an officer’s certificate from CoStar confirming that the conditions described in the immediately preceding two bullets have been satisfied.
 
Expected Timing of the Merger
 
LoopNet and CoStar are working to complete the merger as quickly as possible after the special meeting, and anticipate that the merger will be completed by the end of 2011. In order to complete the merger, LoopNet must obtain the required Stockholder Approval, and a number of other closing conditions under the merger agreement must be satisfied or waived. See “The Merger Agreement — Conditions of the Merger.”
 
Regulatory Matters (see page 63)
 
Under the HSR Act, the merger may not be consummated until notification and report forms have been filed with the Antitrust Division of the U.S. Department of Justice and the Federal Trade Commission by LoopNet and CoStar, and the applicable waiting period has expired or been terminated. LoopNet and CoStar


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filed the notification and report forms under the HSR Act with the Federal Trade Commission and the Antitrust Division on May 31, 2011, as a result of which the waiting period would be expected to expire by June 30, 2011, unless otherwise terminated or extended by the antitrust authorities.
 
LoopNet is Prohibited From Soliciting Other Offers (see page 74)
 
The merger agreement contains restrictions on LoopNet’s ability to solicit or engage in discussions or negotiations with any third party regarding a proposal to acquire a significant interest in LoopNet. Notwithstanding these restrictions, under certain limited circumstances, the Board may respond to an unsolicited competing proposal and terminate the merger agreement to enter into an acquisition agreement with respect to a “superior proposal” (as defined in the section entitled “The Merger Agreement — No Solicitation; Changes in Recommendations”).
 
Termination of the Merger Agreement (see page 81)
 
The merger agreement can be terminated under certain circumstances, including:
 
  •  by mutual written consent of LoopNet and CoStar;
 
  •  by either CoStar or LoopNet, if:
 
  •  the merger has not been completed by January 31, 2012, or such later date as provided pursuant to the merger agreement (such date being the “end date”, as described in further detail in the section entitled “The Merger Agreement — Termination; Termination Fees; Expenses”), except that this right is not available to any party whose breach of the merger agreement primarily caused the failure to complete the merger by such date;
 
  •  there is a final and nonappealable legal restraint or prohibition in effect that prevents the completion of the merger; or
 
  •  the Stockholder Approval is not obtained at the special meeting or any postponement or adjournment thereof;
 
  •  by CoStar, if:
 
  •  the Board makes an adverse recommendation change (as defined in the section entitled “The Merger Agreement — Termination; Termination Fees; Expenses”);
 
  •  after an alternative acquisition proposal has been received, the Board fails to publicly reaffirm its recommendation that the stockholders adopt the merger agreement within seven business days after a request to do so by CoStar;
 
  •  the Board fails to publicly recommend against a publicly announced alternative acquisition proposal after a request to do so by CoStar by the later of five business days before the special stockholder meeting and five business days after CoStar’s request (or such shorter period as may exist between the date of the alternative acquisition proposal and the date of the special meeting);
 
  •  LoopNet materially breaches its obligations under the merger agreement related to non-solicitation and other offers;
 
  •  LoopNet breaches any of its representations or warranties or fails to perform any covenant or obligation in the merger agreement in such a way as to cause the failure of the closing conditions relating thereto, and such failure cannot be cured by the end date, provided that, at the time of notice of termination, neither CoStar nor merger sub is in material breach of its or their obligations under the merger agreement;
 
  •  LoopNet willfully fails to perform any of its covenants or agreements set forth in the merger agreement following an alternative acquisition proposal; or
 
  •  there is a final and nonappealable legal restraint or prohibition imposing a substantial detriment.


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  •  by LoopNet, if:
 
  •  prior to obtaining the Stockholder Approval, the requirements of a superior proposal termination as described in the section “The Merger Agreement — No Solicitation; Changes in Recommendations” have been fully satisfied and LoopNet pays to CoStar the $25.8 million termination fee described below; or
 
  •  if CoStar breaches any of its representations or warranties or fails to perform any covenant or obligation in the merger agreement in such a way as to cause the failure of the closing conditions relating thereto, and such failure cannot be cured by the end date, provided that, at the time the termination notice is delivered, LoopNet is not in material breach of its obligations under the merger agreement.
 
Termination Fees (see page 81)
 
LoopNet has agreed to pay CoStar a termination fee of $25.8 million if the merger agreement is terminated:
 
  •  by CoStar, if (i) the Board makes an adverse recommendation change, (ii) after an alternative acquisition proposal has been received, the Board fails to publicly reaffirm its recommendation that stockholders adopt the merger agreement within seven business days after a request to do so by Costar, (iii) the Board fails to publicly recommend against a publicly announced alternative acquisition proposal after a request to do so by CoStar by the later of five business day before the special stockholder meeting and five business days after CoStar’s request (or such shorter period as may exist between the date of the alternative acquisition proposal and the date of the special meeting), or (iv) LoopNet materially breaches its obligations under the merger agreement related to non-solicitation and other offers;
 
  •  by CoStar, if LoopNet, following an alternative acquisition proposal, willfully fails to perform any covenant or agreement set forth in the merger agreement;
 
  •  by LoopNet, when CoStar could have terminated the merger agreement for any reason described above, unless LoopNet has the right to terminate the merger agreement as described in the next bullet;
 
  •  by LoopNet, in connection with a superior proposal termination;
 
  •  by CoStar or LoopNet if the merger has not been consummated by the end date and prior to such termination, an acquisition proposal was publicly announced or otherwise communicated to the Board or its stockholders and within 12 months following the date of such termination, LoopNet enters into a definitive agreement with respect to, or consummates, an alternative acquisition proposal; or
 
  •  by CoStar or LoopNet if the special meeting has concluded (including any adjournment or postponement thereof) and the Stockholder Approval has not been obtained and (A) prior to such termination, an alternative acquisition proposal was publicly announced or otherwise communicated to the Board or its stockholders or (B) within 12 months following the date of such termination, LoopNet has entered into a definitive agreement with respect to an alternative acquisition proposal that provides for consideration to LoopNet stockholders (whether cash or otherwise) having an aggregate value that is greater than the merger consideration to be received by LoopNet stockholders under the merger agreement or (C) within 12 months following the date of such termination a tender offer or other alternative acquisition proposal is consummated as a result of which LoopNet stockholders are entitled to receive consideration (whether cash or otherwise) having an aggregate value that is greater than the merger consideration to be received by LoopNet stockholders under the merger agreement.
 
CoStar has agreed to pay LoopNet a termination fee of $51.6 million if the merger agreement is terminated by either party, in certain circumstances and subject to certain conditions, in the event necessary antitrust approval is not obtained.


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If LoopNet fails promptly to pay any termination fee due to CoStar, LoopNet will also pay the documented out-of-pocket costs and expenses (including reasonable attorneys’ fees) incurred by CoStar or merger sub in connection with a legal action to enforce the merger agreement that results in a judgment against LoopNet for the unpaid termination fee. If CoStar fails promptly to pay any termination fee due to LoopNet, CoStar will also pay the documented out-of-pocket costs and expenses (including reasonable attorneys’ fees) incurred by LoopNet in connection with a legal action to enforce the merger agreement that results in a judgment against CoStar or merger sub for the unpaid termination fee. Except as described above, all costs and expenses incurred in connection with the merger agreement will be paid by the party incurring the cost or expense.
 
Specific Performance; Remedies (see page 84)
 
Under the merger agreement, each of CoStar and LoopNet is entitled to an injunction or injunctions to prevent breaches of the merger agreement or to enforce specifically the performance of its terms and provisions, in addition to any other remedy to which they are entitled at law or in equity.
 
Material United States Federal Income Tax Consequences of the Transaction (see page 61)
 
The merger is expected to be a taxable transaction for U.S. federal income tax purposes. Accordingly, U.S. Holders (as defined under “The Merger — Material U.S. Federal Income Tax Consequences of the Merger”) would recognize gain or loss for U.S. federal income tax purposes on the exchange of their LoopNet common stock for cash and shares of CoStar common stock in an amount equal to the difference, if any, between (i) the sum of the amount of cash (including cash received in lieu of a fractional share of CoStar common stock) and the fair market value of the CoStar common stock received on the date of the exchange and (ii) the U.S. Holder’s tax basis in the LoopNet common stock surrendered in the exchange.
 
The U.S. federal income tax consequences described above may not apply to all holders of LoopNet common stock, including certain holders specifically referred to on page 61 of this proxy statement/prospectus. Your tax consequences will depend on your own situation. You should consult your tax advisor to determine the particular tax consequences of the merger to you.
 
Accounting Treatment (see page 65)
 
In accordance with accounting principles generally accepted in the United States, CoStar will account for the merger using the acquisition method of accounting for business combinations.
 
Procedure for Receiving Merger Consideration (see page 67)
 
CoStar will appoint an exchange agent to coordinate the payment of the cash and stock merger consideration following the merger. If you own shares of LoopNet common stock that are held in “street name” by your broker, you will receive instructions from your broker as to how to surrender your “street name” shares and receive cash and stock for those shares. If you hold certificated shares, the exchange agent will send you written instructions for surrendering your certificates and obtaining the cash and stock merger consideration at or about the date on which LoopNet completes the merger. Do not send in your share certificates now.
 
Comparison of Rights of CoStar Stockholders and LoopNet Stockholders (see page 101)
 
LoopNet stockholders, whose rights are currently governed by the LoopNet amended and restated certificate of incorporation, the LoopNet amended and restated bylaws and Delaware law, will, upon completion of the merger, become stockholders of CoStar and their rights will be governed by the CoStar restated certificate of incorporation, the CoStar amended and restated bylaws and Delaware law. As a result, LoopNet stockholders will have different rights once they become CoStar stockholders due to differences between the governing documents of LoopNet and CoStar. These differences are described in detail in the section titled “Comparison of Stockholder Rights.”


15


 

 
Litigation Relating to the Merger (see page 66)
 
To date, LoopNet, the Board and/or CoStar are named as defendants in three purported class action lawsuits (referred to as the stockholder actions in this proxy statement/prospectus) brought by alleged LoopNet stockholders challenging LoopNet’s proposed merger with CoStar. The stockholder actions allege, among other things, that (i) each member of the Board breached his fiduciary duties to LoopNet and its stockholders in authorizing the sale of LoopNet to CoStar, (ii) the merger does not maximize value to LoopNet stockholders, (iii) LoopNet and CoStar have made incomplete or materially misleading disclosures about the proposed transaction and (iv) LoopNet (and, in one action, CoStar) aided and abetted the breaches of fiduciary duty allegedly committed by the members of the Board. The stockholder actions seek class action certification and equitable relief, including an injunction against consummation of the merger. The parties have stipulated to the consolidation of the actions, and to permit the filing of a consolidated complaint. A consolidated complaint has not yet been filed.
 
Questions
 
If you have additional questions about the merger or other matters discussed in this proxy statement/prospectus after reading this proxy statement/prospectus, you should contact LoopNet’s proxy solicitation agent:
 
(GEORGESON LOGO)
199 Water Street, 26th Floor
New York, NY 10038-3560
Banks and Brokers Call (212) 440-9800
All Others Call Toll Free (866) 785-7395


16


 

 
SELECTED SUMMARY HISTORICAL FINANCIAL AND OPERATING DATA OF COSTAR
 
The following tables present selected historical consolidated financial and operating data of CoStar as of the dates and for the periods provided. The selected financial data of CoStar for each of the years ended December 31, 2008, 2009 and 2010 and as of December 31, 2009 and 2010 are derived from CoStar’s audited consolidated financial statements and related notes contained in its Annual Report on Form 10-K for the year ended December 31, 2010, which is incorporated by reference into this proxy statement/prospectus. The selected financial data of CoStar for each of the years ended December 31, 2006 and 2007 and as of December 31, 2006, 2007 and 2008 have been derived from CoStar’s audited consolidated financial statements for such years, which have not been incorporated into this proxy statement/prospectus by reference. The selected financial data of CoStar as of and for the quarterly period ended March 31, 2010 and 2011 are derived from CoStar’s unaudited condensed consolidated financial statements and related notes contained in its Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2011, which is incorporated by reference into this proxy statement/prospectus, which include, in the opinion of CoStar’s management team, all normal and recurring adjustments that are considered necessary for the fair presentation of the results for the period and dates presented.
 
The information in the following table is only a summary and is not necessarily indicative of the results of future operations of CoStar or the combined company. You should read the following information together with CoStar’s audited and unaudited consolidated financial statements, including the notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in CoStar’s Annual Report on Form 10-K for the year ended December 31, 2010 and CoStar’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2011, which are incorporated by reference into this proxy statement/prospectus. See “Where You Can Find Additional Information” beginning on page 111 of this proxy statement/prospectus.
 
                                                         
    Year Ended December 31,     Three Months Ended March 31,  
    2006     2007     2008     2009     2010     2010     2011  
    (In thousands, except per share data)              
 
Consolidated Statement of Operations Data:
                                                       
Revenues
  $ 158,889     $ 192,805     $ 212,428     $ 209,659     $ 226,260     $ 55,093     $ 59,618  
Cost of revenues
    56,136       76,704       73,408       73,714       83,599       21,200       22,566  
                                                         
Gross margin
    102,753       116,101       139,020       135,945       142,661       33,893       37,052  
Operating expenses
    88,672       98,249       99,232       104,110       119,886       28,791       29,956  
                                                         
Income from operations
    14,081       17,852       39,788       31,835       22,775       5,102       7,096  
Interest and other income, net
    6,845       8,045       4,914       1,253       735       238       202  
                                                         
Income before income taxes
    20,926       25,897       44,702       33,088       23,510       5,340       7,298  
Income tax expense, net
    8,516       9,946       20,079       14,395       10,221       2,451       2,766  
                                                         
Net income
  $ 12,410     $ 15,951     $ 24,623     $ 18,693     $ 13,289     $ 2,889     $ 4,532  
                                                         
Net income per share — basic
  $ 0.66     $ 0.84     $ 1.27     $ 0.95     $ 0.65     $ 0.14     $ 0.22  
                                                         
Net income per share — diluted
  $ 0.65     $ 0.82     $ 1.26     $ 0.94     $ 0.64     $ 0.14     $ 0.22  
                                                         
Weighted average shares outstanding — basic
    18,751       19,044       19,372       19,780       20,330       20,249       20,531  
                                                         
Weighted average shares outstanding — diluted
    19,165       19,404       19,550       19,925       20,707       20,602       20,965  
                                                         
 


17


 

                                                         
    As of December 31,   As of March 31,
    2006   2007   2008   2009   2010   2010   2011
    (In thousands)
 
Consolidated Balance Sheet Data:
                                                       
Cash, cash equivalents, short-term and long-term investments
  $ 158,148     $ 187,426     $ 224,590     $ 255,698     $ 239,316     $ 218,455     $ 325,023  
Working capital
    154,606       167,441       183,347       203,660       188,279       168,920       261,919  
Total assets
    275,437       321,843       334,384       404,579       439,648       407,864       506,479  
Total liabilities
    25,327       40,038       30,963       45,573       58,146       45,505       117,081  
Stockholders’ equity
    250,110       281,805       303,421       359,006       381,502       362,359       389,398  
 
                                                         
    As of December 31,   As of March 31,
    2006   2007   2008   2009   2010   2010   2011
 
Other Operating Data (unaudited):
                                                       
Number of subscription client sites
    13,257       14,467       15,920       16,020       16,781       15,995       17,267  
Millions of properties in database
    2.1       2.7       3.2       3.6       4.0       3.7       4.0  

18


 

 
SELECTED SUMMARY HISTORICAL FINANCIAL AND OPERATING DATA OF LOOPNET
 
The following tables present selected historical consolidated financial and operating data of LoopNet and as of the dates and for the periods indicated. The selected financial data of LoopNet for each of the years ended December 31, 2008, 2009 and 2010 and as of December 31, 2009 and 2010 are derived from LoopNet’s audited consolidated financial statements and related notes contained in its Annual Report on Form 10-K for the year ended December 31, 2010, which is incorporated by reference into this proxy statement/prospectus. The selected financial data of LoopNet for each of the years ended December 31, 2006 and 2007 and as of December 31, 2006, 2007 and 2008 have been derived from LoopNet audited consolidated financial statements for such years, which have not been incorporated into this proxy statement/prospectus by reference. The selected financial condition data of LoopNet as of March 31, 2011 and the selected income statement data of LoopNet for the quarterly period ended March 31, 2010 and 2011 are derived from LoopNet’s unaudited condensed consolidated financial statements and related notes contained in its Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2011, which is incorporated by reference into this proxy statement/prospectus. The selected financial condition data of LoopNet as of March 31, 2010 is derived from LoopNet’s unaudited condensed consolidated financial statements and related notes contained in its Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2010, which has not been incorporated into this proxy statement/prospectus by reference. LoopNet’s management believes that the company’s interim unaudited financial statements have been prepared on a basis consistent with its audited financial statements and include all normal and recurring adjustments necessary for a fair presentation of the results for each interim period.
 
The information in the following table is only a summary and is not indicative of the results of future operations of LoopNet. You should read the following information together with LoopNet’s Annual Report on Form 10-K for the year ended December 31, 2010, LoopNet’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2011 and the other information that LoopNet has filed with the Securities and Exchange Commission, which is referred to in this proxy statement/prospectus as the SEC, and incorporated by reference into this proxy statement/prospectus. See “Where You Can Find Additional Information” beginning on page 111 of this proxy statement/prospectus.
 
                                                         
    Year Ended December 31,     Three Months Ended March 31,  
    2006     2007     2008     2009     2010     2010     2011  
    (In thousands, except per share data)              
 
Consolidated Statements of Operations Data:
                                                       
Revenues
  $ 48,411     $ 70,729     $ 86,074     $ 76,487     $ 78,002     $ 18,822     $ 20,713  
Cost of revenue(1)
    5,599       8,033       10,858       11,060       12,562       2,846       3,157  
                                                         
Gross profit
    42,812       62,696       75,216       65,427       65,440       15,976       17,556  
Operating expenses:
                                                       
Sales and marketing(1)
    9,506       14,667       18,825       15,064       16,785       4,290       5,134  
Technology and product development(1)
    4,341       6,427       9,075       10,707       12,231       2,949       3,659  
General and administrative(1)
    7,697       11,997       17,773       20,677       15,693       4,371       4,924  
Amortization of acquired intangible assets
    106       256       966       1,191       2,083       445       641  
                                                         
Total operating expenses
    21,650       33,347       46,639       47,639       46,792       12,055       14,358  
                                                         
Income from operations
    21,162       29,349       28,577       17,788       18,648       3,921       3,198  
Interest and other (expense) income, net
    2,883       5,046       1,998       211       (2,461 )     (104 )     (317 )
                                                         
Income before tax
    24,045       34,395       30,575       17,999       16,187       3,817       2,881  
Income tax expense
    8,550       13,268       12,297       6,246       461       1,417       1,038  
                                                         
Net income
    15,495       21,127       18,278       11,753       15,726       2,400       1,843  
Convertible preferred stock accretion of discount
                      (240 )     (339 )     (85 )     (85 )
                                                         
Net income applicable to common stockholders
  $ 15,495     $ 21,127     $ 18,278     $ 11,513     $ 15,387     $ 2,315     $ 1,758  
                                                         
Net income per share applicable to common stockholders
                                                       
Basic
  $ 0.42     $ 0.55     $ 0.51     $ 0.28     $ 0.38     $ 0.06     $ 0.04  
                                                         
Diluted
  $ 0.40     $ 0.52     $ 0.49     $ 0.27     $ 0.36     $ 0.05     $ 0.04  
                                                         
 
 
(1) Stock-based compensation is allocated as follows:


19


 

 
                                                         
    Year Ended December 31,     Three Months Ended March 31,  
    2006     2007     2008     2009     2010     2010     2011  
    (In thousands)              
 
Cost of revenue
  $ 151     $ 357     $ 570     $ 495     $ 546     $ 128     $ 130  
Sales and marketing
    686       1,358       2,198       894       1,786       485       585  
Technology and product development
    195       600       1,311       2,298       2,680       682       801  
General and administrative
    421       1,180       1,855       3,140       3,220       827       994  
                                                         
Total
  $ 1,453     $ 3,495     $ 5,934     $ 6,827     $ 8,232     $ 2,122     $ 2,510  
                                                         
 
                                                         
    Year Ended December 31,     As of March 31,  
    2006     2007     2008     2009     2010     2010     2011  
    (In thousands)              
 
Consolidated Balance Sheet Data:
                                                       
Cash, cash equivalents and short-term investments
  $ 89,028     $ 107,889     $ 64,587     $ 129,011     $ 92,285     $ 118,527     $ 97,335  
Working capital
    81,884       94,667       52,529       117,210       79,917       108,267       85,544  
Total assets
    100,205       137,359       108,210       174,249       171,990       176,743       176,825  
Total liabilities
    10,202       15,506       15,759       14,747       18,765       15,581       18,605  
Redeemable convertible preferred stock
                      48,207       48,546       48,291       48,631  
Total shareholders’ equity
    90,003       121,853       92,451       111,295       104,679       112,871       109,589  
 
                                                         
    Year Ended December 31,     Three Months Ended March 31,  
    2006     2007     2008     2009     2010     2010     2011  
    (In thousands)              
 
Consolidated Statement of Cash Flows Data:
                                                       
Cash flow provided by operating activities
  $ 23,205     $ 30,301     $ 25,105     $ 18,632     $ 21,262     $ 4,001     $ 5,796  
Depreciation and amortization
    611       1,154       2,199       2,601       3,480       817       995  
Capital expenditures
    (665 )     (1,797 )     (1,319 )     (1,437 )     (1,197 )     (153 )     (900 )
 
                                                         
    Year Ended December 31,     Three Months Ended March  
    2006     2007     2008     2009     2010     2010     2011  
 
Other Operating Data (unaudited):
                                                       
LoopNet registered members at end of period
    1,766,508       2,567,729       3,251,260       3,925,534       4,626,973       4,121,906       4,833,200  
LoopNet premium members at end of period
    78,952       88,340       77,283       68,378       68,608       68,809       70,692  


20


 

 
SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
 
The following table sets forth selected unaudited pro forma condensed combined financial data of CoStar as of March 31, 2011 and for the quarterly period ended March 31, 2011 and the fiscal year ended December 31, 2010. The pro forma amounts in the table below are based on the historical consolidated financial data and the notes thereto of CoStar and LoopNet after giving effect to the merger, and after applying the assumptions, reclassifications and adjustments described in the accompanying notes to the unaudited pro forma condensed combined financial data.
 
The selected unaudited pro forma financial data in the table below should be read in conjunction with the unaudited pro forma condensed combined financial data and the accompanying disclosures included elsewhere in this proxy statement/prospectus and with the historical financial statements and accompanying disclosures of CoStar and LoopNet, which are incorporated by reference in this proxy statement/prospectus. The selected unaudited pro forma condensed combined financial data are provided for informational purposes only and do not purport to represent what CoStar’s financial position or results of operations would actually have been had the merger occurred on those dates or to project CoStar’s results of operations or financial position for any future period. See “CoStar and LoopNet Unaudited Pro Forma Condensed Combined Financial Data” beginning on page 89 of this proxy statement/prospectus and “Where You Can Find Additional Information” beginning on page 111 of this proxy statement/prospectus.
 
                 
          Three
 
          Months Ended
 
    Year Ended December 31, 2010     March 31, 2011  
    (In thousands, except per share data)  
 
Consolidated Statement of Operations Data:
               
Revenues
  $ 304,262     $ 80,331  
Cost of revenues
    96,161       25,723  
                 
Gross margin
    208,101       54,608  
Operating expenses
    202,916       53,253  
                 
Income from operations
    5,185       1,355  
Interest and other income (expense), net
    (12,637 )     (2,844 )
                 
Income (loss) before income taxes
    (7,452 )     (1,489 )
Income tax benefit, net
    (8,177 )     (863 )
                 
Net income (loss)
  $ 725     $ (626 )
                 
Net income (loss) per share — basic
  $ 0.03     $ (0.02 )
                 
Net income (loss) per share — diluted
  $ 0.03     $ (0.02 )
                 
Weighted average shares outstanding — basic
    26,628       26,829  
                 
Weighted average shares outstanding — diluted
    27,005       26,829  
                 
 
         
    As of March 31, 2011  
    (In thousands)  
 
Consolidated Balance Sheet Data:
       
Cash, cash equivalents, short-term and long-term investments
  $ 69,705  
Working capital (deficit)
    (384 )
Total assets
    1,089,864  
Total liabilities
    358,187  
Stockholders’ equity
    731,677  


21


 

 
COMPARATIVE HISTORICAL AND UNAUDITED PRO FORMA PER SHARE DATA
 
The following table sets forth selected historical per share information of CoStar and LoopNet and unaudited pro forma combined per share information after giving effect to the merger under the acquisition method of accounting, assuming that 0.03702 of a share of CoStar common stock had been issued in exchange for each outstanding share of LoopNet common stock, other than excluded shares (which amount does not include the $16.50 per share cash portion of the merger consideration). The acquisition accounting is dependent upon certain valuations of LoopNet assets and liabilities and other studies that have yet to commence or progress to a stage where there is sufficient information for a definitive measurement. Accordingly, the pro forma adjustments reflect the assets and liabilities of LoopNet at their preliminary estimated fair values. Differences between these preliminary estimates and the final acquisition accounting will occur and these differences could have a material impact on the unaudited pro forma combined per share information set forth in the following table.
 
In accordance with the requirements of the SEC, the pro forma and pro forma equivalent per share information gives effect to the merger as if the merger had been effective on January 1, 2010, in the case of income from continuing operations, and March 31, 2011, in the case of book value per share data.
 
The unaudited CoStar pro forma combined per share information is derived from, and should be read in conjunction with, the unaudited pro forma condensed combined financial statements and related notes included in this proxy statement/prospectus. The historical per share information of CoStar and LoopNet is derived from audited financial statements as of and for the year ended December 31, 2010 and the unaudited condensed consolidated financial statements as of and for the quarterly period ended March 31, 2011. The unaudited pro forma LoopNet per share equivalents are calculated by multiplying the unaudited CoStar pro forma combined per share amounts by 0.03702.
 
Neither CoStar nor LoopNet has historically paid dividends. Under the terms of the merger agreement, LoopNet is prohibited from declaring or paying any dividends prior to completion of the merger.
 
The unaudited pro forma combined per share information does not purport to represent what the actual results of operations of CoStar and LoopNet would have been had the companies been combined during these periods or to project the future results of operations that CoStar may achieve after the merger.
 
You should read this information in conjunction with the selected historical financial data included elsewhere in this proxy statement/prospectus, and the historical financial statements of CoStar and LoopNet and related notes that have been filed with the SEC, certain of which are incorporated in this proxy statement/ prospectus by reference. See “Selected Summary Historical Financial and Operating Data of CoStar”, “Selected Summary Historical Financial and Operating Data of LoopNet” and “Where You Can Find Additional Information” beginning on pages 17, 19 and 111, respectively, of this proxy statement/prospectus. The unaudited CoStar pro forma combined per share information is derived from, and should be read in conjunction with, the unaudited pro form condensed combined financial statements and related notes included


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in this proxy statement/prospectus. See “CoStar and LoopNet Unaudited Pro Forma Condensed Combined Financial Data” beginning on page 89 of this proxy statement/prospectus.
 
                 
    As of and for the  
    Year Ended
    Three Months Ended
 
    December 31, 2010     March 31, 2011  
 
CoStar Historical
               
Per common share data:
               
Income from continuing operations — basic
  $ 0.65     $ 0.22  
Income from continuing operations — diluted
    0.64       0.22  
Book value
    18.37       18.70  
LoopNet Historical
               
Per common share data:
               
Income from continuing operations — basic
  $ 0.38     $ 0.04  
Income from continuing operations — diluted
    0.36       0.04  
Book value
    3.25       3.37  
Unaudited CoStar Pro Forma Combined
               
Per common share data:
               
Income (loss) from continuing operations — basic
  $ 0.03     $ (0.02 )
Income (loss) from continuing operations — diluted
    0.03       (0.02 )
Book value
    N/A       26.98  
Unaudited Pro Forma Combined LoopNet Equivalent
               
Per common share data:
               
Income (loss) from continuing operations — basic
  $ 0.00     $ (0.00 )
Income (loss) from continuing operations — diluted
    0.00       (0.00 )
Book value
    N/A       1.00  


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COMPARATIVE PER SHARE MARKET PRICE DATA
 
CoStar common stock is listed and traded on Nasdaq under the symbol “CSGP.” LoopNet common stock is listed and traded on Nasdaq under the symbol “LOOP.” The following table sets forth, for the calendar quarters indicated, (1) the high and low daily closing price per share of CoStar common stock as reported on Nasdaq, and (2) the high and low sales prices of LoopNet common stock as reported on Nasdaq, in each case (other than with respect to the prices reported for the calendar quarters ended March 31, 2011 and thereafter) as reported in CoStar’s and LoopNet’s respective Annual Reports on Form 10-K for the years ended December 31, 2010 and December 31, 2009. On June 1, 2011, the last practicable trading day prior to the date of this proxy statement/prospectus, there were 25,194,615 shares of CoStar common stock outstanding and 33,207,916 shares of LoopNet common stock outstanding.
 
                                 
    CoStar   LoopNet
    High   Low   High   Low
 
For the Calendar Quarter Ended:
                               
2009
                               
March 31, 2009
    35.93       24.23       7.59       5.04  
June 30, 2009
    40.09       31.10       9.20       5.93  
September 30, 2009
    41.57       33.97       9.27       7.27  
December 31, 2009
    44.43       38.35       11.47       8.29  
2010
                               
March 31, 2010
    42.97       38.22       11.86       8.86  
June 30, 2010
    45.95       38.80       12.72       8.50  
September 30, 2010
    49.53       37.66       12.95       9.73  
December 31, 2010
    57.75       48.86       13.08       10.38  
2011
                               
March 31, 2011
    62.89       55.58       14.81       9.94  
June 30, 2011 (through June 1, 2011)
    72.84       59.96       18.95       13.11  
 
The following table sets forth the closing sale price per share of LoopNet common stock and CoStar common stock as of April 27, 2011, the last trading day prior to the public announcement of the proposed merger, and as of June 1, 2011, the most recent practicable trading day prior to the date of this proxy statement/prospectus. The table also sets forth the implied value of the merger consideration proposed for each share of LoopNet common stock as of the same two dates. This implied value was calculated by multiplying the closing sale price of CoStar common stock on the relevant date by the exchange ratio of 0.03702 and adding the per share cash consideration, or $16.50 per share.
 
                         
                Implied Value Per
 
                Share of LoopNet
 
    LoopNet Common Stock     CoStar Common Stock     Common Stock  
 
April 27, 2011
  $ 14.37     $ 61.38     $ 18.77  
                         
June 1, 2011
  $ 18.35     $ 61.02     $ 18.76  
                         
 
The market value of the CoStar common stock to be issued in exchange for shares of LoopNet common stock upon the completion of the merger will not be known at the time of the LoopNet special meeting. The above tables show only historical comparisons. Because the market prices of CoStar common stock and LoopNet common stock will likely fluctuate prior to the merger, these comparisons may not provide


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meaningful information to LoopNet stockholders in determining whether to adopt the merger agreement. Stockholders are encouraged to obtain current market quotations for CoStar common stock and LoopNet common stock and to review carefully the other information contained in this proxy statement/prospectus or incorporated by reference in this proxy statement/prospectus. See “Where You Can Find Additional Information” beginning on page 111 of this proxy statement/prospectus.
 
Neither CoStar nor LoopNet has historically paid dividends. Under the terms of the merger agreement, LoopNet is prohibited from declaring or paying any dividends prior to completion of the merger.


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RISK FACTORS
 
In addition to the other information included in this proxy statement/prospectus, including the matters addressed in “Cautionary Statement Concerning Forward-Looking Statements” beginning on page 32 of this proxy statement/prospectus, you should carefully consider the following risks before deciding whether to vote for the adoption of the merger agreement.
 
Risk Factors Related to the Merger
 
Because the market price of CoStar common stock will fluctuate, LoopNet stockholders cannot be sure of the market value of CoStar common stock that they will receive in the merger.
 
Upon completion of the merger, in addition to the per share cash consideration, each share of LoopNet common stock, other than excluded shares, will be converted into the right to receive 0.03702 shares of CoStar common stock. Because this number of shares of CoStar common stock is fixed and will not be adjusted in the event of any increase or decrease in the price of either CoStar common stock or LoopNet common stock, the value of the CoStar common stock to be issued in the merger will depend upon the market price of CoStar common stock. This market price may vary from the closing price of CoStar common stock on the date the merger was announced, on the date that this proxy statement/prospectus was mailed to LoopNet stockholders and on the date of the LoopNet special meeting. Accordingly, at the time of the LoopNet special meeting, LoopNet stockholders will not necessarily know or be able to calculate the value of the consideration they would be entitled to receive upon completion of the merger. You should obtain current market quotations for shares of CoStar common stock and for shares of LoopNet common stock.
 
The market price of CoStar common stock after the merger may be affected by factors different from those affecting the shares of CoStar or LoopNet currently.
 
The businesses of CoStar and LoopNet differ and, accordingly, the results of operations of CoStar and the market price of CoStar common stock following the merger and the combination of the two businesses may be affected by factors different from those currently affecting the independent results of operations and market prices of common stock of each of CoStar and LoopNet. For a discussion of the businesses of CoStar and LoopNet and of certain factors to consider in connection with those businesses, see the documents incorporated by reference in this proxy statement/prospectus and referred to under “Where You Can Find Additional Information” beginning on page 111.
 
The failure to successfully integrate LoopNet’s business and operations and/or fully realize synergies from the merger in the expected time frame may adversely affect CoStar’s future results.
 
The success of the merger will depend, in part, on CoStar’s ability to successfully integrate LoopNet’s business and operations and fully realize the anticipated benefits and synergies from combining the businesses of CoStar and LoopNet. However, to realize these anticipated benefits and synergies, the businesses of CoStar and LoopNet must be successfully combined. If CoStar is not able to achieve these objectives following the merger, the anticipated benefits and synergies of the merger may not be realized fully or at all or may take longer to realize than expected. Any failure to timely realize these anticipated benefits could have a material adverse effect on the revenues, expenses and operating results of CoStar.
 
CoStar and LoopNet have operated and, until the completion of the merger, will continue to operate independently. It is possible that the integration process could result in the loss of key employees, loss of key clients, decreases in revenues, increases in operating costs, as well as the disruption of each company’s ongoing businesses, any or all of which could limit CoStar’s ability to achieve the anticipated benefits and synergies of the merger and have an adverse effect on the operating results of CoStar. Integration efforts between the two companies will also divert management attention and resources, which could also adversely affect the operating results of CoStar.


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CoStar and LoopNet may have difficulty attracting, motivating and retaining executives and other key employees in light of the merger.
 
Uncertainty about the effect of the merger on CoStar and LoopNet employees may have an adverse effect on CoStar and LoopNet and consequently the combined business. This uncertainty may impair CoStar’s and LoopNet’s ability to attract, retain and motivate key personnel until the merger is completed, or longer for the combined entity. Employee retention may be particularly challenging during the pendency of the merger, as employees of CoStar and LoopNet may experience uncertainty about their future roles with the combined business. Additionally, LoopNet’s officers and employees may own shares of LoopNet’s common stock and/or have stock option or restricted stock unit grants and, if the merger is completed, may therefore be entitled to the merger consideration, the payment of which could provide sufficient financial incentive for certain officers and employees to no longer pursue employment with the combined business. If key employees of CoStar or LoopNet depart because of issues relating to the uncertainty and difficulty of integration, financial incentives or a desire not to become employees of the combined business, CoStar may have to incur significant costs in identifying, hiring and retaining replacements for departing employees, which could reduce CoStar’s ability to realize the anticipated benefits of the merger.
 
The merger is subject to the receipt of consents and approvals from governmental entities that may jeopardize or delay the date of completion of the merger or impose conditions that could have an adverse effect on CoStar.
 
Completion of the merger is conditioned upon the receipt of certain governmental clearances or approvals, including the expiration or termination of the applicable waiting period relating to the merger under the HSR Act. These consents and approvals may not be obtained or, if obtained, may delay the date of completion of the merger and may include conditions in the completion of the merger or require divestitures or other changes relating to the operations or assets of CoStar and LoopNet. No assurance can be given that the required clearances or approvals will be obtained and, if all required clearances and approvals are obtained, no assurance can be given as to the terms, conditions and timing of the clearances and approvals.
 
Such conditions, divestitures or changes could have the effect of jeopardizing or delaying completion of the merger or reducing the anticipated benefits of the merger, any of which might have a material adverse effect on CoStar following the merger. CoStar is not obligated to complete the merger if, among other things, the governmental approvals required to be received in connection with the merger include any conditions or restrictions that, individually or in the aggregate, are reasonably expected to impose a substantial detriment on CoStar, but CoStar could choose to waive this condition. If CoStar waives this condition, the anticipated benefits of the merger may be reduced and its business and results of operations may be adversely affected after the completion of the merger.
 
See “The Merger Agreement — Conditions of the Merger” and “The Merger — Regulatory Matters” beginning on pages 79 and 63, respectively, of this proxy statement/prospectus.
 
CoStar’s and LoopNet’s business relationships, including client relationships, may be subject to disruption due to uncertainty associated with the merger.
 
Parties with which CoStar and LoopNet do business may experience uncertainty associated with the transaction, including with respect to current or future business relationships with CoStar, LoopNet or the combined business. CoStar’s and LoopNet’s business relationships may be subject to disruption as clients and others may attempt to negotiate changes in existing business relationships or consider entering into business relationships with parties other than CoStar, LoopNet or the combined business. These disruptions could have an adverse effect on the businesses, financial condition, results of operations or prospects of the combined business. The adverse effect of such disruptions could be exacerbated by a delay in the completion of the merger or termination of the merger agreement.


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The merger agreement may be terminated in accordance with its terms and the merger may not be completed.
 
The merger agreement is subject to a number of conditions which must be fulfilled in order to complete the merger. Those conditions include: adoption of the merger agreement by LoopNet stockholders, the receipt of necessary antitrust approvals, absence of orders prohibiting the completion of the merger, effectiveness of the registration statement of which this proxy statement/prospectus is a part, continued accuracy of the representations and warranties by both parties and the performance by both parties of their covenants and agreements.
 
In addition, both CoStar and LoopNet have rights to terminate the merger agreement under certain circumstances specified in the merger agreement. See “The Merger Agreement — Termination; Termination Fees; Expenses” beginning on page 81 for a discussion of the circumstances under which the merger agreement could be terminated.
 
LoopNet’s directors and executive officers have financial interests in the merger that may be different from, or in addition to, the interests of LoopNet stockholders.
 
In considering the recommendation by the LoopNet board of directors to vote “FOR” adoption of the merger agreement, you should be aware that certain of LoopNet’s executive officers and directors have financial interests in the merger that are different from, or in addition to, the interests of LoopNet stockholders generally. The executive officers and directors of LoopNet will receive certain benefits upon completion of the merger, including accelerated vesting of stock options and restricted stock. In addition, certain executive officers may be entitled to receive severance payments in connection with the merger, and CoStar has agreed to continue certain indemnification arrangements for directors and executive officers of LoopNet. See “The Merger — Interests of Executive Officers and Directors of LoopNet in the Merger; Change in Control Severance Payments” beginning on page 55 of this proxy statement/prospectus for a discussion of these financial interests.
 
The indebtedness of CoStar following the completion of the merger will be substantially greater than CoStar’s indebtedness on a stand-alone basis and greater than the combined indebtedness of CoStar and LoopNet existing prior to the transaction. This increased level of indebtedness could adversely affect CoStar, including by decreasing CoStar’s business flexibility and increasing its borrowing costs.
 
CoStar has received a commitment letter from J.P. Morgan for a fully committed term loan of $415.0 million and a $50.0 million revolving credit facility, of which $37.5 million is committed, which will be available, subject to the conditions described below on page 87, to fund the cash consideration for the merger and related fees and costs and CoStar’s ongoing working capital needs following the transaction. CoStar expects the amount of the term loan facility that is actually borrowed on the closing date to be approximately $175.0 million.
 
CoStar expects the credit agreement to contain customary restrictive covenants imposing operating and financial restrictions on CoStar, including restrictions that may limit its ability to engage in acts that may be in CoStar’s long-term best interests. These covenants are likely to include, among others, limitations (and in some cases, prohibitions) that would, directly or indirectly, restrict CoStar’s ability to:
 
  •  incur liens or additional indebtedness (including guarantees or contingent obligations);
 
  •  engage in mergers and other fundamental changes;
 
  •  sell or otherwise dispose of property or assets or make acquisitions;
 
  •  pay dividends and other distributions; and
 
  •  change the nature of its business.
 
Any operating restrictions and financial covenants in CoStar’s credit agreement and any future financing agreements may limit CoStar’s ability to finance future operations or capital needs or to engage in other


28


 

business activities. CoStar’s ability to comply with any covenants in the credit agreement could be materially affected by events beyond its control, and there can be no assurance that it will satisfy any such requirements. If CoStar fails to comply with these covenants, CoStar may need to seek waivers or amendments of such covenants, seek alternative or additional sources of financing or reduce its expenditures. CoStar may be unable to obtain such waivers, amendments or alternative or additional financing at all, or on terms favorable to CoStar.
 
The credit agreement is expected to specify several events of default, including non-payment, certain cross-defaults, certain bankruptcy events, covenant or representation breaches and certain changes in control. If an event of default occurs, the lenders under the credit agreement are expected to be able to elect to declare all outstanding borrowings, together with accrued interest and other fees, to be immediately due and payable. CoStar may not be able to repay all amounts due under the credit agreement in the event these amounts are declared due upon an event of default.
 
CoStar will incur significant transaction costs as a result of the merger.
 
CoStar expects to incur significant one-time transaction costs related to the merger. These transaction costs include investment banking, legal and accounting fees and expenses and filing fees, printing expenses and other related charges. The companies may also incur additional unanticipated transaction costs in connection with the merger. A portion of the transaction costs related to the merger will be incurred regardless of whether the merger is completed. Additional costs will be incurred in connection with integrating the two companies’ businesses, such as severance and IT integration expenses. Costs in connection with the merger and integration may be higher than expected. These costs could adversely affect CoStar’s financial condition, results of operation or prospects of the combined business.
 
The fairness opinion obtained by LoopNet from its financial advisor will not reflect changes in circumstances subsequent to the date of the fairness opinion.
 
Evercore Group L.L.C. (“Evercore”), LoopNet’s financial advisor in connection with the proposed merger, has delivered to the board of directors of LoopNet its opinion dated as of April 27, 2011. The opinion of Evercore stated that as of such date, and based on and subject to assumptions made, matters considered and limitations on the scope of review undertaken by Evercore as set forth in the opinion, the cash consideration plus the exchange ratio was fair, from a financial point of view, to the holders of the shares of LoopNet common stock entitled to receive shares of CoStar common stock in the merger. The opinion does not reflect changes that may occur or may have occurred after the date of the opinion, including changes to the operations and prospects of CoStar or LoopNet, changes in general market and economic conditions or regulatory or other factors. Any such changes, or changes in other factors on which the opinion is based, may materially alter or affect the relative values of CoStar and LoopNet.
 
The merger agreement and the voting agreement limit LoopNet’s ability to pursue alternatives to the merger.
 
The merger agreement contains provisions that limit LoopNet’s ability to solicit and respond to competing proposals, and the ability of the Board to change or withdraw its recommendation of the merger. Further, following an acquisition proposal or offer for a competing transaction, CoStar has the right to negotiate with LoopNet to match such proposal or offer. Although the Board is permitted to terminate the merger agreement in certain circumstances if it determines in good faith, after consultation with outside legal counsel and its financial advisor, that the failure to take such action would be inconsistent with its fiduciary duties to LoopNet stockholders under Delaware law, doing so in specified situations could entitle CoStar to a termination fee of $25.8 million. See “The Merger Agreement — No Solicitation; Changes in Recommendations”, and “The Merger Agreement— Termination; Termination Fees; Expenses” beginning on pages 74 and 81, respectively, of this proxy statement/prospectus.
 
While LoopNet believes these provisions are reasonable and not preclusive of other offers, the provisions might discourage a third party that has an interest in acquiring all or a significant part of LoopNet from


29


 

considering or proposing that acquisition, even if that party were prepared to pay consideration with a higher per-share value than the currently proposed merger consideration. In addition, the termination fee may result in a potential competing acquiror proposing to pay a lower per-share price to acquire LoopNet than it might otherwise have proposed to pay because of the potential added expense.
 
In addition, LoopNet’s directors and certain of LoopNet’s executive officers and significant stockholders entered into a voting agreement with CoStar and LoopNet and have agreed, in their capacities as LoopNet stockholders, to vote all shares of LoopNet’s capital stock beneficially owned by them in favor of the adoption of the merger agreement and any related proposal in furtherance thereof and against any proposal made in opposition to the merger, in each case, subject to the terms and conditions of the voting agreement. As of the record date, the directors, executive officer and significant stockholders who signed the voting agreement beneficially owned approximately 32% of the total outstanding shares of LoopNet’s common stock (including the shares underlying the Series A Preferred Stock but excluding shares issuable upon exercise of options held by such stockholders). The voting agreement will terminate automatically upon termination of the merger agreement. As long as the voting agreement remains in effect, approximately 32% of the total outstanding shares of LoopNet’s common stock are committed to be voted in favor of the merger. See “The Voting Agreement.”
 
Failure to complete the merger could negatively impact the stock price and future business and financial results of LoopNet.
 
If the merger is not completed, the ongoing business of LoopNet may be adversely affected and LoopNet will be subject to several risks, including the following:
 
  •  LoopNet may be required, under certain circumstances, to pay CoStar a termination fee of $25.8 million under the merger agreement;
 
  •  LoopNet will be required to pay certain costs relating to the merger, whether or not the merger is completed, such as legal, accounting, financial advisor and printing fees;
 
  •  under the merger agreement, LoopNet is subject to certain restrictions on the conduct of its business prior to completing the merger which may adversely affect its ability to execute certain of its business strategies; and
 
  •  matters relating to the merger may require substantial commitments of time and resources by LoopNet management, which could otherwise have been devoted to other opportunities that may have been beneficial to LoopNet as an independent company.
 
In addition, if the merger is not completed, LoopNet may experience negative reactions from the financial markets and from its customers and employees. LoopNet also could be subject to litigation related to any failure to complete the merger or to enforcement proceedings commenced against it to perform its obligations under the merger agreement. If the merger is not completed, LoopNet cannot assure its stockholders that the risks described above will not materialize and will not materially affect its business, financial results and stock price.
 
The shares of CoStar common stock to be received by LoopNet stockholders as a result of the merger will have different rights from shares of LoopNet common stock.
 
Following completion of the merger, LoopNet stockholders will no longer be stockholders of LoopNet. LoopNet stockholders will instead be stockholders of CoStar. There will be important differences between your current rights as a LoopNet stockholder and the rights to which you will be entitled as a CoStar stockholder. See “Comparison of Stockholder Rights” beginning on page 101 for a discussion of the different rights associated with CoStar common stock and LoopNet common stock.
 
In addition, upon the completion of the merger, each LoopNet stockholder will become a stockholder of CoStar with a percentage ownership that is much smaller than any such stockholder’s percentage ownership of LoopNet. Because of this, LoopNet’s stockholders will have significantly less influence on the management and policies of CoStar than they now have on the management and policies of LoopNet.


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An adverse judgment in a lawsuit challenging the merger may prevent the merger from becoming effective or from becoming effective within the expected timeframe.
 
One of the conditions to the closing of the merger is that no order, injunction or decree or other legal restraint or prohibition that prevents the completion of the merger be in effect. If any plaintiff were successful in obtaining an injunction prohibiting LoopNet or CoStar from completing the merger on the agreed-upon terms, then such injunction may prevent the merger from becoming effective or from becoming effective within the expected timeframe. See “The Merger — Litigation” on page 66.
 
Risk Factors Related to CoStar and LoopNet
 
CoStar and LoopNet are, and following completion of the merger, CoStar and LoopNet will continue to be, subject to the risks described in (i) Part I, Item 1A in CoStar’s Annual Report on Form 10-K for the year ended December 31, 2010 and filed with the SEC on February 25, 2011, (ii) Part II, Item 1A in CoStar’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2011 and filed with the SEC on April 29, 2011, (iii) Part I, Item 1A in LoopNet’s Annual Report on Form 10-K for the year ended December 31, 2010 and filed with the SEC on March 3, 2011 and (iv) Part II, Item 1A in LoopNet’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2011 and filed with the SEC on May 6, 2011, in each case, incorporated by reference into this proxy statement/prospectus. You should read and consider these additional risk factors associated with each of the businesses of CoStar and LoopNet because these risk factors may affect the operations and financial results of the combined company. See “Where You Can Find Additional Information” beginning on page 111 of this proxy statement/prospectus.


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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION
 
This proxy statement/prospectus contains forward-looking statements based on estimates and assumptions. Forward-looking statements include information concerning possible or assumed future results of operations of each of LoopNet and CoStar, the expected completion and timing of the merger and other information relating to the merger. There are forward-looking statements throughout this proxy statement/prospectus, including, among others, under the headings “Summary”, “The Merger” and “Opinion of LoopNet’s Financial Advisor” and in statements containing the words “believes”, “expects”, “anticipates”, “intends”, “estimates” or other similar expressions. For each of these statements, LoopNet and CoStar claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. You should be aware that forward-looking statements involve known and unknown risks and uncertainties.
 
These forward-looking statements, which reflect LoopNet’s and CoStar’s management’s beliefs, speak only as of the date on which the statements were made. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. Achievement of the expressed beliefs, objectives and expectations is subject to risks and uncertainties that could cause actual results to differ materially. LoopNet and CoStar undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this proxy statement/prospectus.
 
In addition to the risks described under “Risk Factors” beginning on page 26 of this proxy statement/prospectus and those risks described in documents that are incorporated by reference into this proxy statement/prospectus, the following factors could cause actual results to differ materially from those discussed in the forward-looking statements:
 
  •  the financial performance of each of LoopNet and CoStar through the completion of the merger;
 
  •  volatility in the stock markets;
 
  •  the timing of, and regulatory and other conditions associated with, the completion of the merger;
 
  •  the possibility that the merger does not close, including, but not limited to, due to the failure to obtain approval of LoopNet’s stockholders, or the failure to obtain governmental approval;
 
  •  the possibility that the expected synergies from the proposed merger will not be realized, or will not be realized within the anticipated time period or that the businesses will not be integrated successfully;
 
  •  the risk that the businesses of CoStar and LoopNet may not be combined successfully or in a timely and cost-efficient manner;
 
  •  the risk that business disruption relating to the merger may be greater than expected;
 
  •  failure to obtain any required financing on favorable terms;
 
  •  competitive pressures in the markets in which LoopNet or CoStar operates;
 
  •  the loss of key employees;
 
  •  general economic and political conditions, natural disasters, health concerns, and technological developments;
 
  •  risks related to litigation related to the merger in which LoopNet or CoStar may become involved; and
 
  •  other factors that are described from time to time in CoStar’s and LoopNet’s periodic filings with the Securities and Exchange Commission.


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THE SPECIAL MEETING OF LOOPNET STOCKHOLDERS
 
Date, Time and Place
 
The special meeting will be held at 9:00 am local time on July 11, 2011, at 185 Berry Street, San Francisco, CA 94107.
 
Purpose
 
At the special meeting, LoopNet stockholders will be asked to:
 
  •  consider and adopt the merger agreement;
 
  •  approve, by an advisory vote, the change in control severance payments; and
 
  •  approve the adjournment of the special meeting, if necessary or appropriate, for, among other reasons, the solicitation of additional proxies in the event that there are not sufficient votes at the time of the special meeting to adopt the merger agreement.
 
LoopNet does not expect that any matter other than the proposals listed above will be brought before the special meeting. If, however, other matters are properly brought before the special meeting, or any adjournment or postponement of the special meeting, the persons named as proxies will vote in accordance with their judgment.
 
LoopNet Board Recommendation
 
The Board, by unanimous vote, has determined that it is advisable and in the best interests of LoopNet and its stockholders to consummate the merger contemplated by the merger agreement, and unanimously recommends that stockholders vote FOR the proposal to adopt the merger agreement, FOR the proposal to approve, by an advisory vote, the change in control severance payments and FOR the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies.
 
Who Can Vote at the Special Meeting
 
Only holders of record of LoopNet common stock and Series A Preferred Stock, as of the close of business on June 1, 2011, which is the record date for the special meeting, are entitled to receive notice of and to vote at the special meeting. If you own shares that are registered in the name of someone else, such as a broker, you need to direct that person to vote those shares or obtain an authorization from them and vote the shares yourself at the meeting. On the record date, there were 33,207,916 shares of common stock outstanding and 50,000 shares of Series A Preferred Stock outstanding, convertible into 7,440,476 shares of LoopNet common stock.
 
Vote Required; Quorum
 
The adoption of the merger agreement requires LoopNet to obtain the Stockholder Approval. The Stockholder Approval requires the affirmative vote of the holders of a majority of the outstanding shares of LoopNet’s common stock and Series A Preferred Stock, voting together as a single class on an as-converted basis. Because the required votes of LoopNet’s stockholders are based upon the number of outstanding shares of common stock as well as the outstanding shares of Series A Preferred Stock, and not based on the number of outstanding shares represented in person or by proxy at the special meeting, failure to submit a proxy or to vote in person will have the same effect as a vote AGAINST adoption of the merger agreement. A vote to abstain will have the same effect.
 
The affirmative vote of a majority of the votes cast at the special meeting and entitled to vote thereon will be required to approve, by an advisory vote, the change in control severance payments. Because the vote is advisory in nature only, it will not be binding on LoopNet, and failure to receive the vote required for approval will not in itself change LoopNet’s obligations to make the change in control severance payments. Abstentions or broker non-votes will have no effect on this proposal.


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The affirmative vote of a majority of the votes cast at the special meeting and entitled to vote thereon will be required to approve the adjournment of the special meeting, if necessary or appropriate, for, among other reasons, the solicitation of additional proxies. Abstentions or broker non-votes will have no effect on this proposal.
 
If your shares of common stock are held in “street name” by your broker, you should instruct your broker how to vote your shares using the instructions provided by your broker. Under applicable regulations, brokers who hold shares in “street name” for customers may not exercise their voting discretion with respect to non-routine matters such as the adoption of the merger agreement. As a result, if you do not instruct your broker to vote your shares of common stock, your shares will not be voted.
 
For purposes of transacting business at the special meeting, a majority of the outstanding shares of common stock and Series A Preferred Stock, on an as-converted basis, entitled to vote being present in person or represented by proxy, will constitute a quorum.
 
Voting Agreement
 
In connection with the transactions contemplated by the merger agreement, LoopNet’s directors and certain of LoopNet’s executive officers and significant stockholders entered into the voting agreement with CoStar and LoopNet and have agreed, in their capacities as LoopNet stockholders, to, among other things, vote all shares of LoopNet’s capital stock beneficially owned by them in favor of adoption of the merger agreement and any related proposal in furtherance thereof and against any proposal made in opposition to the merger, in each case, subject to the terms and conditions of the voting agreement. As of the record date, the directors, executive officer and significant stockholders who signed the voting agreement beneficially owned approximately 32% of the total outstanding shares of LoopNet’s common stock (including the shares underlying the Series A Preferred Stock but excluding shares issuable upon exercise of options held by such stockholders).
 
Pursuant to the voting agreement, all holders of Series A Preferred Stock have delivered a contingent conversion notice to LoopNet. Under the terms of such notices, all outstanding shares of Series A Preferred Stock will be converted into LoopNet common stock immediately prior to, and contingent upon, the completion of the merger. Based on the $6.72 conversion price of the Series A Preferred Stock, each share of Series A Preferred Stock will be converted into 148.80952 shares of LoopNet common stock. The voting agreement also provides for certain waivers and consents granted by the signing directors, executive officers and significant stockholders to LoopNet in connection with their rights under the Series A Certificate, which are described under “The Merger — Certain Terms of the LoopNet’s Series A Preferred Stock.”
 
Voting by Proxy
 
This proxy statement/prospectus is being sent to you on behalf of the Board for the purpose of requesting that you allow your shares of LoopNet common stock and Series A Preferred Stock, as applicable, to be represented at the special meeting by the persons named in the enclosed proxy card. All shares of LoopNet common stock represented at the meeting by properly executed proxy cards or by proxies submitted over the telephone or over the Internet will be voted in accordance with the instructions indicated on those proxies. If you sign and return a proxy card without giving voting instructions, your shares will be voted as recommended by the Board. The Board recommends a vote FOR adoption of the merger agreement, FOR the proposal to approve, by an advisory vote, the change in control severance payments and FOR the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies.
 
You may revoke your proxy at any time before the vote is taken at the special meeting. To revoke your proxy, you must either advise LoopNet’s Secretary in writing, deliver a proxy dated after the date of the proxy you wish to revoke, or attend the special meeting and vote your shares in person. Attendance at the special meeting will not by itself constitute revocation of a proxy. If you have instructed your broker to vote your shares, you must follow the directions provided by your broker to change those instructions.


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Householding
 
Certain LoopNet stockholders who share an address are being delivered only one copy of this proxy statement/prospectus unless LoopNet or one of its mailing agents has received contrary instructions.
 
Upon the written or oral request of a LoopNet stockholder at a shared address to which a single copy of this proxy statement/prospectus was delivered, LoopNet will promptly deliver a separate copy of such document to the requesting LoopNet stockholder. Written requests should be made to LoopNet, Inc., Attention: Investor Relations, 185 Berry Street, Suite 4000, San Francisco, CA 94107 and oral requests may be made by calling Investor Relations of LoopNet at (415) 284-4310. In addition, LoopNet stockholders who wish to receive a separate copy of LoopNet’s proxy statements and annual reports in the future should notify LoopNet either in writing addressed to the foregoing address or by calling the foregoing telephone number.
 
LoopNet stockholders sharing an address who are receiving multiple copies of LoopNet’s notice of internet availability of proxy materials and/or proxy statements and annual reports may request delivery of a single copy of such documents by writing LoopNet at the address above or calling LoopNet at the telephone number above.
 
Solicitation of Proxies
 
LoopNet will pay all of the costs of this proxy solicitation. In addition to soliciting proxies by mail, directors, officers and employees of LoopNet may solicit proxies personally and by telephone, e-mail or otherwise. None of these persons will receive additional or special compensation for soliciting proxies. LoopNet will, upon request, reimburse brokers, banks and other nominees for their expenses in sending proxy materials to their customers who are beneficial owners and obtaining their voting instructions.
 
Stockholders should not send stock certificates with their proxies. A letter of transmittal and instructions for the surrender of LoopNet stock certificates will be mailed to LoopNet stockholders shortly after the completion of the merger, if approved and completed.
 
LoopNet has engaged Georgeson Inc. to assist in the solicitation of proxies for the special meeting and will pay Georgeson, Inc. a fee of approximately $12,000, plus reimbursement of out-of-pocket expenses. The address of Georgeson Inc. is 199 Water Street, 26th Floor, New York, NY 10038. If you need assistance in completing your proxy card or have questions regarding the special meeting, please contact Georgeson Inc. at (866) 785-7395 (toll-free) or (212) 440-9800 collect.


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THE MERGER
 
The discussion of the merger in this proxy statement/prospectus is qualified by reference to the merger agreement, which is attached to this proxy statement/prospectus as Annex A. You should read the merger agreement carefully.
 
Effects of the Merger; Merger Consideration
 
Treasury Stock
 
At the effective time of the merger, each share of capital stock held by LoopNet as treasury stock, other than shares of LoopNet common stock in a LoopNet employee plan, or owned by CoStar or merger sub immediately prior to the effective time of the merger shall be canceled, and no payment shall be made with respect thereto.
 
Common Stock
 
Except as described above, at the effective time of the merger, by virtue of the merger and without any action on behalf of the holders of LoopNet capital stock, each share of LoopNet common stock outstanding immediately prior to the effective time of the merger (other than dissenting shares) will receive a unit consisting of (i) $16.50 in cash, without interest and less applicable withholding tax, and (ii) 0.03702 shares of CoStar common stock.
 
Series A Preferred Stock
 
At the effective time of the merger, each share of Series A Preferred Stock outstanding immediately prior to the effective time of the merger (other than dissenting shares, if any), will receive a unit consisting of (i) $2,455.36 in cash, without interest and less applicable withholding tax, and (ii) 5.5089 shares of CoStar common stock, for each share of Series A Preferred Stock. The per share consideration for Series A Preferred Stock represents the common stock equivalent consideration for each share of Series A Preferred Stock, as provided pursuant to the terms of the Series A Certificate and the merger agreement. As discussed in this proxy statement/prospectus under the heading “The Voting Agreement — Contingent Conversion of Series A Preferred Stock,” the holders of all outstanding shares of Series A Preferred Stock have delivered contingent conversion notices to LoopNet pursuant to which such shares will be converted into LoopNet common stock immediately prior to, and contingent upon, the completion of the merger.
 
Fractional Shares
 
CoStar will not issue fractional shares of CoStar common stock in the merger. As a result, LoopNet stockholders will receive cash for any fractional share of CoStar common stock that they would otherwise be entitled to receive in the merger. For a full description of the treatment of fractional shares, see “The Merger Agreement — Fractional Shares.”
 
Background of the Merger
 
From time to time, LoopNet’s management and Board have reviewed the strategic options available to LoopNet, including organic growth of LoopNet’s online marketplace for commercial real estate through product and customer initiatives, and growth through acquisitions and other diversification efforts. As part of this review, LoopNet has from time to time considered various possible business combinations and commercial arrangements and had discussions with potential strategic partners.
 
From November 2007 through November 2009, LoopNet and CoStar were involved in commercial and intellectual property litigation against each other in California state court and in federal courts in New York and Maryland. In September 2008, while the parties were engaged in discussions with a view to settling the litigation, Andrew Florance, the President and Chief Executive Officer of CoStar, approached Richard Boyle, LoopNet’s Chief Executive Officer and Chairman of its Board, to suggest the companies discuss a business combination. In November 2008, CoStar proposed that the parties enter into a mutual nondisclosure agreement


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and engage in further discussions to that end. This discussion did not involve a proposed price or any other substantive terms.
 
The Board responded to this proposal by authorizing management to continue discussions with CoStar and to exchange confidential information, provided that the parties could reach a suitable confidentiality and standstill agreement. The parties exchanged drafts of a confidentiality agreement and continued discussions of the drafts through February 2009, but were unable to reach agreement. There were no substantive contacts between the two companies with respect to a possible sale of LoopNet between February 2009 and February 2010.
 
In November 2009, LoopNet and CoStar entered into a settlement agreement with respect to all outstanding litigation between the companies.
 
On February 26, 2010, CoStar’s financial advisor contacted LoopNet’s financial advisor, Evercore, to express CoStar’s continuing interest in a possible business combination transaction with LoopNet. Mr. Boyle advised the Board of this development. On March 2, Mr. Boyle received a call from Mr. Florance in which Mr. Florance reiterated CoStar’s interest in a transaction. Following this call, on March 10, CoStar delivered a preliminary written proposal for an acquisition of LoopNet at a price of $13.00 per share, in equal parts cash and CoStar common stock.
 
On March 15, 2010, the Board held a special meeting at which it reviewed and discussed CoStar’s proposal and potential responses with its legal and financial advisors. Following this discussion, the Board directed management and LoopNet’s advisors to respond to CoStar that the Board had determined that a sale of LoopNet to CoStar at that price was not in the best interests of LoopNet’s common stockholders, and that LoopNet remained focused on executing on its strategic plan to create value for its stockholders.
 
On March 19, 2010, Mr. Boyle delivered a letter to Mr. Florance conveying the Board’s determination. On March 26, CoStar delivered a letter to three members of the Board, Noel Fenton, Thomas E. Unterman and James T. Farrell, indicating that it had no interest in pursuing an unsolicited bid, but remained open to discussing a possible business combination transaction. On March 31, at a special meeting of the Board, the Board reviewed the letter and, in consultation with its advisors, determined that no further response was warranted.
 
There were no substantive contacts between the two companies with respect to a possible sale of LoopNet between March 2010 and February 2011.
 
On February 17, 2011, CoStar made an unsolicited written proposal to acquire LoopNet at a price of $16.50 per share in cash, which represented a premium of 39% to the closing price of LoopNet common stock on that day. The proposal stated that it was subject to customary conditions, including confirmatory due diligence, the negotiation of an acceptable merger agreement, and final approval by the CoStar board of directors. The proposal stated that, based on discussions with its financial advisors at J.P. Morgan Securities LLC, CoStar was “comfortable” that it would be able to arrange the necessary financing and that the merger agreement would not be subject to a financing condition.
 
Mr. Boyle forwarded the CoStar proposal to the Board, which held a meeting on February 19, 2011, together with financial and legal advisors, for a preliminary discussion of the proposal. The Board directed Mr. Boyle to acknowledge to CoStar that LoopNet had received the proposal and that the Board would consider it. The Board then scheduled a meeting for February 26, 2011 for a detailed review of the CoStar proposal.
 
At the February 26, 2011 meeting Davis Polk & Wardwell LLP, LoopNet’s counsel, reviewed with the Board its legal duties in considering the proposal, and introduced the key legal issues that would need to be addressed if the Board were to consider a transaction with CoStar. Davis Polk also reviewed with the Board the elements of a stockholder rights plan so that the Board would be prepared to adopt such a plan in the future if circumstances warranted. Evercore presented an overview of LoopNet’s defensive profile and current trends in shareholder rights plans and reviewed the CoStar proposal from a financial point of view based on a preliminary valuation analysis that it had prepared using, among other things, the four-year strategic plan that


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had earlier in the month been reviewed and adopted by the Board. Evercore discussed with the Board the state of the acquisition finance markets and its view of CoStar’s ability to finance the transaction at various price points. Evercore also reviewed with the Board its assessment of the potential interest and capacity of other prospective acquirors, including companies and private equity sponsors. This assessment indicated that CoStar was by a clear margin the most likely potential acquiror of LoopNet in terms both of strategic fit and purchase price capacity.
 
The Board discussed the CoStar proposal in the context of LoopNet’s other strategic alternatives, including remaining independent and executing on LoopNet’s growth strategy, including potential acquisitions. The Board concluded that while CoStar’s proposal in its current form was not acceptable, it did represent a substantial and credible offer and that it would be in the interests of LoopNet stockholders to attempt to engage with CoStar with a view to improving the proposal. The Board directed management and advisors to communicate this position to CoStar and to state that LoopNet was prepared to negotiate with and provide certain information to CoStar, provided that a suitable confidentiality and standstill agreement could be reached.
 
Evercore communicated LoopNet’s position to J.P. Morgan, and provided a form of confidentiality and standstill agreement. The financial advisors and legal counsel discussed the proposed agreement and CoStar’s advisors provided a list of requested nonpublic information concerning LoopNet. The Board reviewed the status of the process at a meeting on March 4, 2011, and agreed upon the required elements of a confidentiality and standstill agreement. The Board also agreed with management’s view that, especially in light of the history of adversarial relations between the two companies, LoopNet should provide only limited information to CoStar until and unless the parties had reached agreement as to price and key terms. The Board determined, in consultation with its advisors, that it would be inappropriate at this point to contact other potential acquirors in light of the early stage of the process, the perceived unlikelihood of others being competitive, and the risk of information leakage.
 
The companies and their advisors continued to negotiate with respect to the confidentiality and standstill agreement and reached agreement on March 10, 2011. Under the agreement, in exchange for LoopNet providing nonpublic information, CoStar agreed for a period of four months, subject to earlier termination in certain circumstances, not to acquire LoopNet shares, to make an unsolicited offer to acquire LoopNet, or to take certain other unilateral actions. Management and advisors updated the Board on this and other developments in a meeting on March 11, 2011.
 
Following execution of the confidentiality and standstill agreement, LoopNet provided nonpublic commercial and financial information to CoStar and participated in conversations and meetings with CoStar and its advisors. Davis Polk also prepared a form of merger agreement which it reviewed with the Board at a meeting on March 16, 2011. At that same meeting the Board discussed with management and advisors the response that LoopNet should provide to CoStar with respect to its initial offer. At the Board’s direction on March 16, Evercore communicated to J.P. Morgan that LoopNet believed that CoStar’s initial $16.50 offer was inadequate and that LoopNet believed that an acceptable valuation would be in excess of 10% above that level ($18.15) but not necessarily as much as 20% higher ($19.80). On March 16 Davis Polk also provided LoopNet’s proposed form of merger agreement to Simpson Thacher & Bartlett LLP, CoStar’s counsel. On March 18, 2011, senior management of the companies and their respective financial advisors participated in a due diligence meeting in San Francisco.
 
On April 5, 2011, J.P. Morgan indicated to Evercore that CoStar was revising its proposal from $16.50 per share to $17.35 per share, consisting of $15.46 in cash and the balance in CoStar common stock. The Board met the following day with management and advisors to consider this proposal. The Board noted that the revised proposal was not at a valuation that the Board considered acceptable and that the cash portion of the offer had been reduced from the $16.50 per share in the original proposal. The Board directed Evercore to inform J.P. Morgan that the revised offer was unacceptable and that LoopNet did not intend to continue discussions on this basis. Evercore conveyed the Board’s determination to J.P. Morgan the following day.
 
On April 8, 2011, J.P. Morgan informed Evercore of a revised CoStar proposal of $18.25 per share, consisting of $16.50 per share in cash and the balance in CoStar common stock. This offer represented an


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approximately 25% premium to the then-current price of LoopNet common stock. Simpson Thacher had also provided a markup of the merger agreement to Davis Polk on April 6. The Board considered the revised proposal at a meeting with management and advisors on April 8. The Board directed Evercore to respond to J.P. Morgan with a counterproposal at $19.25 per share, consisting of $16.50 per share and the balance in CoStar common stock. The Board decided on this mix of consideration based in part on advice from Evercore that the $16.50 per share cash component was at or near the high end of the cash level that CoStar likely would be willing to pay. Evercore communicated this proposal to J.P. Morgan the following day.
 
During this period, Davis Polk and Simpson Thacher continued to negotiate the merger agreement, with particular focus on the allocation of risk concerning antitrust clearance, the amount of and triggering circumstances of the termination fees, and whether the transaction would be effected through a two-step approach, with a tender offer followed by a merger, or through a one-step merger. The parties also discussed issues concerning CoStar’s financing for the transaction, including the financial information that would be required to be supplied by LoopNet and the timing implications of the marketing plan for the financing.
 
On April 14, 2011, members of CoStar and LoopNet senior management, along with their respective financial advisors, held a conference call in which each party discussed its preliminary financial results for the first quarter of 2011 and its financial outlook for the remainder of 2011. Subsequent to this financial due diligence discussion, on April 14, 2011, J.P. Morgan communicated to Evercore what it called CoStar’s best and final proposal for the acquisition of LoopNet, which called for a merger consideration of $18.75 per share, consisting of $16.50 in cash and the balance in CoStar common stock. The Board considered this proposal at a meeting the following day. Evercore presented a preliminary financial analysis of the revised proposal. Evercore also advised the Board that in its view CoStar’s position that it would be unwilling to increase its offer further was credible.
 
Davis Polk reviewed with the Board at this meeting the status of discussions with respect to the merger agreement. The two principal issues highlighted were the allocation of regulatory approval risk and the timing impact of CoStar’s need to arrange financing. On the first point, LoopNet’s initial position had been that CoStar agree to a “hell or high water” formulation whereby CoStar would agree to take any and all actions to secure approval. As is typical of acquirors in a similar situation, CoStar indicated that it was unwilling to accept such an unconditioned obligation. The Board concluded that it would consider requiring a lesser level of obligation, provided that in the event the transaction failed to occur because of antitrust issues CoStar would be obliged to pay LoopNet an appropriate termination fee. On the second point the Board concluded that, provided that the merger agreement continued to have no financing condition, it would be willing to grant CoStar the ability to delay a closing for a modest period in order to market and complete its financing on favorable terms. The Board authorized management and advisors to seek to complete negotiations with CoStar on the basis of the price reflected in its most recent proposal.
 
During negotiations, CoStar took the position that LoopNet should be required to pay a termination fee equal to 3.75% of the equity value of the transaction if the transaction were terminated after signing for any of several reasons. The Board viewed this proposed termination fee as unacceptably high. During negotiations over the weekend of April 16 and 17, 2011, the parties agreed that the termination fee payable by LoopNet under certain circumstances would be $25.8 million, approximately 3.0% of transaction equity value, while the termination fee payable by CoStar under certain circumstances would be $51.6 million, approximately 6.0% of transaction equity value.
 
Over the course of the week of April 18, 2011, LoopNet and its legal and financial advisors responded to documentary due diligence requests from CoStar, its legal and financial advisors and its potential lenders, and the parties’ respective legal advisors continued to negotiate the merger agreement and related documents.
 
On April 18, 2011, members of LoopNet senior management discussed the terms of the merger agreement with Davis Polk, and Davis Polk delivered a revised draft of the merger agreement and related documents to Simpson Thacher.
 
On the morning of April 20, 2011, members of LoopNet senior management and representatives of Evercore participated in due diligence sessions with CoStar, its legal and financial advisors and its potential


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lenders related to the proposed merger and acquisition financing. Diligence discussions continued during the remainder of the negotiations.
 
Later on April 20, 2011, Evercore and J.P. Morgan held a telephone conference to discuss status and CoStar’s supplemental due diligence requests. Simpson Thacher provided markups of the merger agreement and related documents, and a draft of a voting and support agreement pursuant to which LoopNet’s directors and certain of LoopNet’s executive officers and significant stockholders would agree, in their capacities as LoopNet stockholders, to, among other things, vote their shares of LoopNet capital stock in favor of adoption of the merger agreement.
 
On April 21, 2011, members of LoopNet senior management and LoopNet’s legal and financial advisors discussed CoStar’s supplemental due diligence requests, the documents delivered by Simpson Thacher and the compensation committee’s recommendation. Davis Polk and Simpson Thacher held a telephone conference to discuss the merger agreement and related documents, and narrowed the remaining open legal issues.
 
On the evening of April 21, 2011, Mr. Boyle and Mr. Florance discussed the status of the merger agreement, due diligence and CoStar’s financing arrangements.
 
On April 22, 2011, the Board met to review and discuss the status of the process. Evercore provided the Board with an update, noting the substantial due diligence undertaken by CoStar and its potential lenders during the week. Davis Polk reviewed the status of the merger agreement and related documents, noting that most major issues had been satisfactorily resolved. Mr. Boyle then summarized for the Board his recent discussions with Mr. Florance regarding the proposed merger. Evercore also reviewed with the Board its assessment of the potential risks and benefits of soliciting interest from other potential acquirors with respect to the acquisition of any or all of LoopNet’s capital stock or any business combination or other extraordinary transaction involving LoopNet. This assessment indicated that the price offered by CoStar likely was above the range that another company or private equity sponsor would be willing to pay for LoopNet. Evercore also noted the potential for information leakage in connection with such a market check, and its concern that disruptions in the trading market for either company’s stock could impair the likelihood of executing the merger agreement on the contemplated schedule. The Board determined, in consultation with its advisors, that it would not be in the interests of LoopNet’s stockholders to conduct a market check prior to signing the merger agreement.
 
In February and September of 2010, LoopNet granted performance-based equity awards to its executive officers that, by the terms of the award agreements, would vest partially upon a change in control. These awards were also subject to the general terms of the LoopNet equity plan, which provides for full acceleration in the event an acquiror does not assume the plan. CoStar determined that the cash required to fund the merger consideration associated with the incremental acceleration would cause the aggregate cash portion of the merger consideration to exceed what it had anticipated. As a result, CoStar and LoopNet agreed that the incremental accelerated performance-based equity awards would be canceled at the closing of the merger in exchange for a payment composed entirely of CoStar common stock based upon the per share value of the merger consideration at that time. On April 23, 2011, Davis Polk delivered a revised draft of the merger agreement and related documents, including the disclosure schedules and voting agreement, to Simpson Thacher.
 
On April 23 and 24, 2011, Simpson Thacher and Davis Polk held telephone conferences to discuss the remaining open issues with respect to the merger agreement and related documents.
 
On the afternoon of April 24, 2011, the Board held a special meeting to review and consider the proposed merger. Members of LoopNet senior management and representatives from Evercore and Davis Polk were present at the meeting. Davis Polk reviewed legal matters relating to the Board’s consideration of the proposed merger, including the directors’ fiduciary duties, and provided an overview of the proposed merger agreement. Evercore then provided an updated financial analysis of CoStar’s proposal, and reviewed the fixed exchange ratio proposed by CoStar with respect to the stock portion of the merger consideration. Evercore confirmed to the Board that Evercore was prepared to render its fairness opinion with respect to the merger consideration to be received by LoopNet’s common stockholders (other than CoStar and its affiliates) when requested by the Board. The Board authorized management and advisors to seek to complete negotiations with CoStar with a targeted announcement following the close of trading on Nasdaq on April 27, 2011.


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On the evening of April 24, 2011, J.P. Morgan delivered to Evercore a draft of the debt commitment letter from JPMorgan Chase Bank, N.A. and J.P. Morgan Securities LLC. Davis Polk reviewed and discussed the terms of the acquisition financing with Simpson Thacher.
 
Over the course of April 25, 26 and 27, 2011, Simpson Thacher and Davis Polk finalized the merger agreement and related documents, including the voting agreement. Members of LoopNet senior management held several discussions with Evercore and Davis Polk regarding the final terms of the merger agreement and related documents.
 
On the afternoon of April 27, 2011, the Board met to consider the final merger agreement and related documents. Davis Polk updated the Board on developments since the Board’s previous meeting on April 24, 2011. Davis Polk also reviewed the terms of the merger agreement and noted that all major issues had been satisfactorily resolved. Evercore delivered its oral opinion, which was subsequently confirmed in writing as of April 27, 2011, to the effect that, as of that date and based on and subject to assumptions made, matters considered and limitations on the scope of review undertaken by Evercore as set forth therein, the merger consideration was fair, from a financial point of view, to the holders of shares of LoopNet’s common stock entitled to receive such merger consideration. The Board unanimously authorized and approved the merger agreement and related documents, and the merger agreement and the voting agreement were executed by the parties following receipt of a copy of the executed debt commitment letter and Evercore’s signed fairness opinion.
 
On April 27, 2011, immediately after the close of trading on Nasdaq, LoopNet and CoStar issued a joint press release announcing the merger.
 
During the week of May 16, 2011, Simpson Thacher and Davis Polk discussed and finalized Amendment No. 1 to the merger agreement dated April 27, 2011, which Amendment was unanimously approved by the Board on May 19, 2011 and executed by LoopNet, CoStar and merger sub on May 20, 2011.
 
The Recommendation of the LoopNet Board of Directors and Its Reasons for the Merger
 
The Board, by unanimous vote, has determined that it is advisable and in the best interests of LoopNet and its stockholders to consummate the merger and the other transactions contemplated by the merger agreement, and unanimously recommends that stockholders vote FOR the proposal to adopt the merger agreement. When you consider the Board’s recommendation, you should be aware that LoopNet’s directors may have interests in the merger that may be different from, or in addition to, your interests. These interests are described in “— Interests of Executive Officers and Directors of LoopNet in the Merger; Change in Control Severance Payments”.
 
In determining that the merger and the other transactions contemplated by the merger agreement are advisable and in the best interests of LoopNet and its stockholders, the Board consulted with management and its financial and legal advisors and considered a number of factors, including the following:
 
  •  Merger Consideration.  The Board concluded that the merger consideration to be received by LoopNet common stockholders, including the implied merger consideration as of April 26, 2011 of $18.73 per share, represented an attractive valuation for LoopNet. This price represented a premium of approximately 31% to the closing price per shares of $14.31 on the last day prior to the Board’s approval of the proposed merger, and premiums of approximately 32% and 39.5%, respectively, to the one-month and two-month trailing average closing prices of LoopNet common stock as of April 26, 2011. The Board believed that this price was the highest price that CoStar would be willing to pay.
 
  •  Market and Execution Risks.  While the Board remained supportive of LoopNet’s recently adopted four-year strategic plan and optimistic about LoopNet’s prospects on a standalone basis, it also considered the risks associated with going forward as an independent company. The Board considered the potential market and execution risks associated with the plan and the attendant risk that, if LoopNet did not enter into the merger agreement with CoStar, the price that might be received by LoopNet’s stockholders selling shares in the open market, both from a short-term and long-term perspective, could be less than the merger consideration. The Board concluded that the merger consideration enabled


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  LoopNet stockholders to realize a substantial portion of LoopNet’s potential future value without the market or execution risks associated with continued independence.
 
  •  Significant Portion of Merger Consideration in Cash.  The Board considered that a large portion of the merger consideration will be paid in cash, giving LoopNet stockholders an opportunity to realize certain value for a significant portion of their investment.
 
  •  Participation in Potential Upside.  The Board considered the benefits to the combined company that could result from the merger, including an enhanced financial position, increased diversity and depth in its product lines and the potential to realize significant cost savings and revenue synergies, and the fact that, since a portion of the merger consideration will be paid in CoStar common stock, LoopNet stockholders would have the opportunity, at least to a limited extent, to participate in any future earnings or growth of the combined company and future appreciation in the value of CoStar common stock following the merger should they decide to retain the CoStar common stock payable in the merger.
 
  •  Extensive Negotiations with CoStar.  The Board considered that CoStar was the most probable buyer and that CoStar had the substantial resources needed to finance a transaction at this value and to make the potential merger successful. The Board also considered the benefits that LoopNet and its advisors were able to obtain as a result of extensive negotiations with CoStar, including a significant increase in CoStar’s bid from the beginning of the process to the end of the negotiations. The Board concluded that the consideration reflected in the merger agreement was the highest value that was available to LoopNet at the time, and that there was no assurance that a more favorable opportunity to sell LoopNet would arise later, especially since CoStar had earlier been identified by LoopNet’s management and financial advisor as the most probable buyer.
 
  •  Opinion of LoopNet’s Financial Advisor.  The Board considered Evercore’s opinion that, as of the date of the opinion and based on and subject to assumptions made, matters considered and limitations on the scope of review undertaken by Evercore as set forth therein, the merger consideration was fair, from a financial point of view, to the holders of the shares of LoopNet common stock entitled to receive such merger consideration. The Evercore opinion is more fully described in the subsection entitled “— Opinion of LoopNet’s Financial Advisor”. The full text of the opinion is attached to this proxy statement/prospectus as Annex C.
 
  •  Terms of the Merger Agreement.  The Board considered the terms of the merger agreement, including the parties’ respective representations, warranties and covenants, the conditions to their respective obligations to complete the merger and their ability to terminate the agreement. The Board noted that the termination or “break-up” fee provisions of the merger agreement could have the effect of discouraging competing third party proposals, but that such provisions are customary for transactions of this size and type. The Board considered that the $25.8 million termination fee, representing approximately 3.0% of the equity value of the proposed transaction, was reasonable. The Board noted the merger agreement permits LoopNet and the Board to respond to a competing proposal that the Board determines is a superior proposal, subject to certain restrictions imposed by the merger agreement and the requirement that LoopNet pay CoStar the termination fee in the event that LoopNet terminates the merger agreement to accept a superior proposal. The Board also noted the $51.6 million termination fee payable by CoStar in certain circumstances upon termination of the merger agreement if necessary antitrust approval is not obtained.
 
  •  Likelihood of Closing.  The Board considered the relatively limited nature of the closing conditions included in the merger agreement, including the absence of any financing condition and the likelihood that the merger will be approved by requisite regulatory authorities and LoopNet’s stockholders.
 
The Board also identified and considered a number of countervailing factors and risks to LoopNet and its stockholders relating to the merger and the merger agreement, including the following:
 
  •  Lack of Ongoing Participation in LoopNet’s Potential Upside.  The Board considered that LoopNet stockholders would not have the opportunity to continue participating in LoopNet’s potentially


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significant upside as an independent company. The Board was optimistic about LoopNet’s prospects on a standalone basis and its recently adopted four-year strategic plan, but the Board’s judgment was that the premium reflected in the merger consideration reflected fair compensation for the loss of the potential stockholder benefits that could be realized if that plan were executed successfully.
 
  •  Smaller Ongoing Equity Participation in the Combined Company by LoopNet Stockholders.  The Board understood that, because LoopNet’s stockholders will be receiving primarily cash for their stock, they will receive only limited compensation for any increase in the value of LoopNet or CoStar either during the pre-closing period or following the closing.
 
  •  Fixed Stock Portion of Merger Consideration.  The Board considered that because the stock portion of the merger consideration is a fixed exchange ratio of shares of CoStar common stock to LoopNet common stock, LoopNet common and preferred stockholders could be adversely affected by a decrease in the trading price of CoStar common stock during the pendency of the merger, and the fact that the merger agreement does not provide LoopNet with a price-based termination right or other similar protection, such as a “collar,” with respect to CoStar’s stock price. The Board determined that this structure was appropriate and the risk acceptable given that a substantial portion of the merger consideration will be paid in a fixed cash amount, reducing the impact of any decline in the trading price of CoStar common stock on the value of the merger consideration.
 
  •  Potential Inability to Complete the Merger.  The Board considered the possibility that the merger may not be completed and the potential adverse consequences to LoopNet if the merger is not completed, including the potential loss of customers, partners and employees, reduction of value offered by others to LoopNet in a future business combination, and erosion of customer, partner and employee confidence in LoopNet.
 
  •  Interim Operating Covenants.  The Board considered the limitations imposed in the merger agreement on the conduct of LoopNet’s business during the pre-closing period, its ability to solicit and respond to competing proposals and the ability of the Board to change or withdraw its recommendation of the merger.
 
  •  Effect of Voting Agreement.  The Board considered the fact that while the approval of the adoption of the merger agreement by LoopNet’s stockholders is required under the merger agreement and the DGCL, approximately 32% of the total outstanding shares of LoopNet’s common stock (including the shares underlying the Series A Preferred Stock) have committed to vote in favor of such adoption pursuant to the voting agreement. As a result, approximately 32% of the total outstanding shares of LoopNet’s common stock will vote to adopt the merger agreement unless the merger agreement is terminated in accordance with its terms. See “The Merger Agreement — No Solicitation; Changes in Recommendations” and “The Voting Agreement” beginning on pages 74 and 85 of this proxy statement/prospectus, respectively.
 
  •  Taxability.  The merger is expected to be a taxable transaction for U.S. federal income tax purposes, and the receipt of CoStar common stock and cash in exchange for LoopNet common stock in the merger will therefore generally be taxable to LoopNet common stockholders for U.S. federal income tax purposes. See “The Merger — Material U.S. Federal Income Tax Consequences of the Merger”.
 
  •  Interests of LoopNet’s Directors and Executive Officers.  The Board considered the potential conflicts of interest of LoopNet’s directors and executive officers, as described in the section entitled “— Interests of Executive Officers and Directors of LoopNet in the Merger; Change in Control Severance Payments”.
 
  •  Other Risks.  The additional risks described in the section entitled “Risk Factors”.
 
The Board concluded that the potentially negative factors associated with the proposed merger were outweighed by the potential benefits that it expected LoopNet’s stockholders would achieve as a result of the merger, including the belief of the Board that the proposed merger would maximize the immediate value of LoopNet’s common stock and eliminate the risks and uncertainty affecting the future prospects of LoopNet.


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Accordingly, the Board unanimously determined that the merger agreement and the merger are advisable and fair to, and in the best interests of, LoopNet and its stockholders.
 
The foregoing discussion of the information and factors considered by the Board is not intended to be exhaustive but includes the material factors considered by the Board. In view of the complexity and wide variety of factors considered, the Board did not find it useful to and did not attempt to quantify, rank or otherwise assign weights to these factors. In addition, the Board did not undertake to make any specific determination as to whether any particular factor, or any aspect of any particular factor, was favorable or unfavorable to its ultimate determination, but rather the Board conducted an overall analysis of the factors described above, including discussions with LoopNet’s management and its financial and legal advisors. In considering the factors described above, individual members of the Board may have given different weights to different factors.
 
This explanation of LoopNet’s reasons for the merger and other information presented in this section is forward-looking in nature and, therefore, should be read in light of the section entitled “Cautionary Statement Regarding Forward-Looking Statements.”
 
Opinion of LoopNet’s Financial Advisor
 
On April 27, 2011, at a meeting of the Board, Evercore delivered to the Board an oral opinion, which opinion was subsequently confirmed by delivery of a written opinion dated April 27, 2011, to the effect that, as of that date and based on and subject to assumptions made, matters considered and limitations on the scope of review undertaken by Evercore as set forth therein, the merger consideration was fair, from a financial point of view, to the holders of the shares of LoopNet common stock entitled to receive such merger consideration.
 
The full text of Evercore’s written opinion, dated April 27, 2011, which sets forth, among other things, the procedures followed, assumptions made, matters considered and limitations on the scope of review undertaken in rendering its opinion, is attached as Annex C to this proxy statement/prospectus and is incorporated by reference in its entirety into this proxy statement/prospectus. You are urged to read Evercore’s opinion carefully and in its entirety. Evercore’s opinion was directed to the Board and addresses only the fairness, from a financial point of view, of the merger consideration to the holders of the shares of LoopNet common stock entitled to receive such merger consideration. The opinion does not address any other aspect of the proposed merger and does not constitute a recommendation to the Board or to any other persons in respect of the proposed merger, including as to how any holder of shares of LoopNet common stock should vote or act in respect of the proposed merger. Evercore’s opinion does not address the relative merits of the proposed merger as compared to other business or financial strategies that might be available to LoopNet, nor does it address the underlying business decision of LoopNet to engage in the proposed merger.
 
In connection with rendering its opinion, Evercore, among other things:
 
  •  reviewed certain publicly available business and financial information relating to LoopNet and CoStar that Evercore deemed to be relevant, including publicly available research analysts’ estimates;
 
  •  reviewed or discussed certain non-public historical financial statements and other non-public historical financial and operating data relating to LoopNet and CoStar prepared and furnished to Evercore by the respective managements of LoopNet and CoStar;
 
  •  reviewed certain non-public projected operating and financial data relating to LoopNet prepared and furnished to Evercore by management of LoopNet;
 
  •  discussed the past and current operations, financial projections and current financial condition of LoopNet with management of LoopNet (including their views on the risks and uncertainties of achieving such projections);
 
  •  reviewed the reported prices and the historical trading activity of shares of LoopNet common stock and CoStar common stock;


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  •  compared the financial performance of LoopNet and CoStar and their respective stock market trading multiples with those of certain other publicly traded companies that Evercore deemed relevant;
 
  •  compared the financial performance of LoopNet and the valuation multiples relating to the merger with those of certain other transactions that Evercore deemed relevant;
 
  •  reviewed the merger agreement; and
 
  •  performed such other analyses and examinations and considered such other factors that Evercore deemed appropriate.
 
For purposes of its analysis and opinion, Evercore assumed and relied upon, without undertaking any independent verification of, the accuracy and completeness of all of the information publicly available, and all of the information supplied or otherwise made available to, discussed with, or reviewed by Evercore, and Evercore assumed no liability therefor. With respect to the projected operating and financial data relating to LoopNet referred to above, Evercore assumed that they had been reasonably prepared on bases reflecting the best currently available estimates and good faith judgments of management of LoopNet as to the future financial performance of LoopNet. Evercore expressed no view as to any projected operating or financial data relating to LoopNet or the assumptions on which they were based.
 
For purposes of rendering its opinion, Evercore assumed, in all respects material to its analysis, that the representations and warranties of each party contained in the merger agreement were true and correct, that each party would perform all of the covenants and agreements required to be performed by it under the merger agreement and that all conditions to the consummation of the proposed merger would be satisfied without material waiver or modification thereof. Evercore further assumed that all governmental, regulatory or other consents, approvals or releases necessary for the consummation of the proposed merger would be obtained without any material delay, limitation, restriction or condition that would have an adverse effect on LoopNet or CoStar or the consummation of the proposed merger or materially reduce the benefits to the holders of shares of LoopNet common stock of the merger.
 
Evercore did not make or assume any responsibility for making any independent valuation or appraisal of the assets or liabilities of LoopNet or CoStar, nor was Evercore furnished with any such appraisals, nor did Evercore evaluate the solvency or fair value of LoopNet or CoStar under any state or federal laws relating to bankruptcy, insolvency or similar matters. Evercore’s opinion was necessarily based upon information made available to it as of the date of its opinion and financial, economic, market and other conditions as they existed and as could be evaluated on the date of its opinion. It should be understood that subsequent developments may affect Evercore’s opinion and that Evercore has no obligation to update, revise or reaffirm its opinion.
 
Evercore was not asked to pass upon, and expressed no opinion with respect to, any matter other than the fairness to the holders of shares of LoopNet common stock, from a financial point of view, as of the date of its opinion, of the merger consideration. Evercore did not express any view on, and its opinion did not address, the fairness of the proposed transaction to, or any consideration received in connection therewith by, the holders of any other securities, creditors or other constituencies of LoopNet, nor as to the fairness of the amount or nature of any compensation to be paid or payable to any of the officers, directors or employees of LoopNet, or any class of such persons, whether relative to the merger consideration or otherwise. Evercore assumed that any modification to the structure of the proposed transaction would not vary in any respect material to its analysis. Evercore’s opinion did not address the relative merits of the proposed merger as compared to other business or financial strategies that might be available to LoopNet, nor did it address the underlying business decision of LoopNet to engage in the proposed merger. The Board determined, after consulting with its advisors, that it would not be in the interests of LoopNet’s stockholders to solicit interest from potential acquirors other than CoStar with respect to the acquisition of any or all of LoopNet’s capital stock or any business combination or other extraordinary transaction involving LoopNet, and Evercore did not solicit such interest. Evercore’s opinion did not constitute a recommendation to the Board or to any other persons in respect of the proposed merger, including as to how any holder of shares of LoopNet common stock should vote or act in respect of the merger. Evercore expressed no opinion as to the price at which shares of LoopNet or CoStar would trade at any time. Evercore’s opinion noted that Evercore is not a legal,


45


 

regulatory, accounting or tax expert and that Evercore had assumed the accuracy and completeness of assessments by LoopNet and its advisors with respect to legal, regulatory, accounting and tax matters.
 
Except as described above, the Board imposed no other instructions or limitations on Evercore with respect to the investigations made or the procedures followed by Evercore in rendering its opinion. Evercore’s opinion was only one of many factors considered by the Board in its evaluation of the proposed merger and should not be viewed as determinative of the views of the Board or LoopNet management with respect to the proposed merger or the merger consideration payable in the merger. The issuance of Evercore’s opinion was approved by an opinion committee of Evercore.
 
Set forth below is a summary of the material financial analyses reviewed by Evercore with the Board on April 27, 2011 in connection with rendering its opinion. The following summary, however, does not purport to be a complete description of the analyses performed by Evercore. The order of the analyses described and the results of these analyses do not represent relative importance or weight given to these analyses by Evercore. Except as otherwise noted, the following quantitative information, to the extent that it is based on market data, is based on market data as it existed on or before April 26, 2011 (the day prior to the Board’s approval of the proposed merger), and is not necessarily indicative of current market conditions.
 
The following summary of financial analyses includes information presented in tabular format. These tables must be read together with the text of each summary in order to understand fully the financial analyses. The tables alone do not constitute a complete description of the financial analyses. Considering the tables below without considering the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of Evercore’s financial analyses.
 
For purposes of the analyses summarized below relating to LoopNet, the “implied per share merger consideration” refers to the $18.73 implied per share value of the merger consideration reflecting the cash portion of the consideration of $16.50 and the implied value of the stock portion of the consideration of 0.03702 shares of CoStar common stock based on the closing price of shares of CoStar common stock as of April 26, 2011.
 
Historical Trading Analysis
 
Evercore considered historical data with regard to (i) the average closing stock prices of LoopNet common stock and CoStar common stock as of April 26, 2011, the dates two years, one year, six months, three months, two months and one month prior to and including April 26, 2011 and (ii) the closing stock prices of LoopNet common stock and CoStar common stock as of April 26, 2011, the date of LoopNet’s initial public offering and the dates two years, one year, six months, three months, two months and one month prior to and including April 26, 2011, the 52-week high and 52-week low as of April 26, 2011 and the high since the LoopNet initial public offering on June 7, 2006.


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The following historical LoopNet common stock price analysis was presented to the Board to provide it with background information and perspective with respect to the historical share price of LoopNet common stock relative to the implied per share merger consideration:
 
                                 
    Historical Average
  Premium/(Discount)
  Historical Closing
  Premium/(Discount)
    Closing Prices of
  Based on Implied
  Prices of
  Based on Implied
    LoopNet
  Per Share Merger
  LoopNet
  Per Share Merger
    Common Stock   Consideration   Common Stock   Consideration
 
Current Price (4/26/11)
  $ 14.31       30.9 %   $ 14.31       30.9 %
One Month
    14.19       32.0 %     14.00       33.8 %
Two Month
    13.43       39.4 %     11.94       56.9 %
Three Month
    12.70       47.5 %     10.57       77.2 %
Six Month
    11.84       58.2 %     10.97       70.7 %
One Year
    11.64       61.0 %     11.82       58.5 %
Two Year
    10.47       78.9 %     9.06       106.7 %
52-Week High (04/08/11)
                    15.10       24.0 %
52-Week Low (05/06/10)
                    8.50       120.4 %
High Since IPO (07/12/07)
                    26.37       (29.0 )%
IPO Price (06/06/06)
                    12.00       56.1 %
 
Evercore also noted that the intraday trading range for LoopNet common stock for the 26-week period prior to and including April 26, 2011 ranged from $9.94 to $15.10, and that the intraday trading range for LoopNet common stock for the 52-week period prior to and including April 26, 2011 ranged from $8.50 to $15.10.
 
The following historical CoStar common stock price analysis was presented to the Board to provide it with background information and perspective with respect to the historical share price of CoStar common stock relative to CoStar’s current share price as of April 26, 2011:
 
                                 
    Historical Average
  Premium/
  Historical Closing
  Premium/
    Closing Prices of
  (Discount)
  Prices of
  (Discount)
    CoStar
  Based on Current
  CoStar
  Based on Current
    Common Stock   Share Price   Common Stock   Share Price
 
Current Price (4/26/11)
  $ 60.25             $ 60.25          
One Month
    61.38       (1.8 )%     60.35       (0.2 )%
Two Month
    59.43       1.4 %     57.23       5.3 %
Three Month
    59.15       1.9 %     58.25       3.4 %
Six Month
    57.03       5.6 %     50.25       19.9 %
One Year
    50.26       19.9 %     44.90       34.2 %
Two Year
    45.02       33.8 %     35.75       68.5 %
52-Week High (04/04/11)
                    64.06       (5.9 )%
52-Week Low (07/06/10)
                    37.50       60.7 %
 
Discounted Cash Flow Analysis
 
Evercore performed a discounted cash flow analysis of LoopNet in order to derive implied per share equity reference ranges for LoopNet as of June 30, 2011 based on the implied present value of LoopNet’s future cash flow. In this analysis, Evercore calculated implied per share equity reference ranges for LoopNet using the LoopNet management projections adjusted as described below, based on the sum of the (i) implied present values, using discount rates ranging from 10.0% to 12.0%, of LoopNet’s projected unlevered free cash flows for the second half of calendar year 2011 and calendar years 2012 through 2016, and (ii) implied present values, using discount rates ranging from 10.0% to 12.0%, of the terminal value of LoopNet calculated based on selected perpetuity growth rates of 3.0% to 5.0%. Evercore, using its professional judgment and experience, derived the discount rate range based upon a weighted average cost of capital calculation for LoopNet, as well


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as for companies identified below under the caption “Analysis of Select Publicly Traded Companies.” This analysis was performed on LoopNet’s combined business and its core online commercial real estate business (excluding new products in the LoopNet management projections), as discussed in the section entitled “— Financial Projections.” In the tables below, the terms “existing business” and “consolidated business” are used to refer to analyses based on management projections of the future performance of LoopNet’s “core business” and “combined business,” respectively.
 
For purposes of its analysis, Evercore used the following projected unlevered free cash flows, which were provided by LoopNet’s management and were adjusted to include stock-based compensation expense:
 
                                                 
    2H
                               
Projected Unlevered Free Cash Flow
  2011E     2012E     2013E     2014E     2015E     2016E  
    (in millions)  
 
Existing Business
  $ 7.5     $ 19.2     $ 24.6     $ 31.1     $ 39.9     $ 47.8  
New Products
  $ (1.2 )   $ (0.6 )   $ 1.1     $ 4.2     $ 7.1     $ 9.6  
                                                 
Consolidated Business
  $ 6.3     $ 18.6     $ 25.7     $ 35.3     $ 46.9     $ 57.5  
 
The analysis indicated the following implied per share equity reference range for LoopNet, as compared to the implied per share merger consideration:
 
         
Implied Per Share
  Implied Per Share
   
Equity Reference
  Equity Reference
   
Range for Consolidated
  Range for Existing
  Implied Per Share
LoopNet Business
 
LoopNet Business
 
Merger Consideration
 
$13.26 - $20.50
  $11.85 - $17.88   $18.73
 
Although the discounted cash flow analysis is a widely used valuation methodology, it necessarily relies on numerous assumptions, including earnings growth rates, terminal values and discount rates. As a result, it is not necessarily indicative of LoopNet’s actual, present or future value or results, which may be significantly more or less favorable than suggested by analysis.
 
Present Value of Implied Future Stock Price Analysis
 
Evercore calculated illustrative future stock prices of LoopNet on December 31, 2015 by applying a forward multiple range of 9.0x to 13.0x, based on a review of current and historical trading multiples of LoopNet and companies identified below under the caption “Analysis of Select Publicly Traded Companies,” to estimated calendar year 2016 earnings before interest, taxes, depreciation, amortization, stock based compensation and one-time, non-recurring expenses (which we refer to as “Adjusted EBITDA”) of LoopNet based on the LoopNet management projections, and adjusting the resulting total enterprise value (“TEV”) by the estimated net debt based on LoopNet management projections. These illustrative future stock prices were discounted back to June 30, 2011, using discount rates of 10.0% to 12.0%, taking into consideration, among other things, a cost of equity calculation. This analysis indicated the following implied per share equity reference range for LoopNet, as compared to the implied per share merger consideration:
 
                         
    Implied Per Share
             
    Equity Reference
    Implied Per Share
       
    Range for
    Equity Reference
    Implied Per Share
 
    Consolidated
    Range for Existing
    Merger
 
    LoopNet Business     LoopNet Business     Consideration  
 
2016E Forward Adjusted EBITDA
    $14.81 - $21.52       $13.11 - $18.91     $ 18.73  
 
Analysis of Select Publicly Traded Companies
 
In order to assess how the public market values shares of similar publicly traded companies, Evercore reviewed and compared specific financial and operating data relating to LoopNet to that of a group of selected companies that Evercore deemed to have certain characteristics that are similar to those of LoopNet. Evercore noted, however, that none of the selected publicly traded companies is identical or directly comparable to LoopNet. As part of its analysis, Evercore calculated and analyzed the multiple of TEV as of April 26, 2011 to estimated 2011 revenue for the below publicly-traded companies, as well as the ratio of TEV to estimated


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2011 Adjusted EBITDA. Evercore calculated all multiples for the selected companies based on closing share prices as of April 26, 2011 for each respective company.
 
In addition to CoStar, the companies that Evercore deemed to have certain characteristics similar to those of LoopNet were the following:
 
     
Online Real Estate Information
Interval Leisure Group, Inc.
Stewart Information Services Corporation
Move, Inc.
Reis, Inc.
REA Group
  Network Model
The Corporate Executive Board Company
DealerTrack Holdings, Inc.
The Advisory Board Company
Verisk Analytics, Inc.
Online Search/Marketplace/Lead Generation
Google Inc.
Amazon.com, Inc.
eBay Inc.
Yahoo! Inc.
IAC/InterActive Corp.
MercadoLibre, Inc.
Marchex, Inc. 
  Online Vertical Media
Monster Worldwide, Inc.
SEEK Limited
Dice Holdings, Inc.
The Knot Inc.
TechTarget, Inc.
QuinStreet, Inc.
Ancestry.com Inc.
WebMD Health Corp.
Real Estate Brokerages/Agents
CB Richard Ellis Group, Inc.
Jones Lang LaSalle Incorporated
Grubb & Ellis Company
ZipRealty, Inc.
   
 
Multiples for the selected publicly-traded companies were based on publicly available filings and financial data provided by Wall Street equity research and FactSet. LoopNet financial metrics for 2011 and 2012 financial forecasts were provided by the management of LoopNet. The range of implied 2011 multiples that Evercore calculated is summarized below:
 
                                                                                                 
    LoopNet
                                           
    (Based on
                      Online
             
    Implied
    LoopNet
                      Search/
                         
    Per Share
    (Based on
    Online
                Marketplace/
    Online
    Real Estate
 
    Merger
    Current
    Real Estate
    Network
    Lead
    Vertical
    Brokerages/
 
Metric
  Consideration)     Share Price)     Information     Model     Generation     Media     Agents  
 
                      Mean       Med.       Mean       Med.       Mean       Med.       Mean       Med.       Mean       Med.  
TEV/2011E Revenue
    9.0 x     6.4 x     3.0 x     2.7 x     3.1 x     2.4 x     4.4 x     3.5 x     4.1 x     3.6 x     1.1 x     1.1 x
TEV/2011E Adjusted EBITDA
    27.6 x     19.6 x     13.0 x     12.8 x     11.9 x     11.8 x     16.0 x     10.3 x     13.1 x     12.2 x     12.6 x     12.6 x
 
Evercore then applied a range of selected multiples derived from the selected publicly-traded companies of 3.0x to 6.5x in the case of calendar year 2011E revenue, and 12.0x to 20.0x in the case of calendar year 2011 Adjusted EBITDA, to the corresponding financial data of LoopNet. This analysis indicated the following implied per share equity reference ranges for LoopNet, as compared to the implied per share merger consideration:
 
                 
    Implied Per Share
       
    Equity Reference
    Implied Per Share
 
    Ranges for LoopNet     Merger Consideration  
 
2011E Revenue
  $ 8.81 - $14.72     $ 18.73  
2011E Adjusted EBITDA
  $ 10.33 - $14.72          


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Analysis of Historical Premiums Paid
 
Evercore reviewed the premiums paid in the acquisition of U.S. public companies announced between January 1, 2006 and April 20, 2011 with transaction values between $500 million and $1 billion, excluding acquisitions of banks, bank holding companies, real estate investment trust transactions and partial acquisitions. Using information from Securities Data Corp., a data source that monitors and publishes information on merger and acquisition transactions, premiums paid were calculated as the consideration paid in each such transaction over the closing market share prices of the target companies one day, one week and 30 days prior to transaction announcements which are summarized as follows:
 
All Transactions- January 1, 2006 — April 20, 2011 (151 Transactions)
 
                         
    1 Day Prior   1 Week Prior   1 Month Prior
 
Mean
    30.2 %     31.4 %     34.9 %
Median
    26.6 %     28.6 %     29.7 %
 
All Transactions- July 1, 2009 — April 20, 2011 (44 Transactions)
 
                         
    1 Day Prior   1 Week Prior   1 Month Prior
 
Mean
    36.6 %     36.3 %     41.5 %
Median
    30.0 %     30.0 %     31.1 %
 
Evercore then applied a range of selected premiums derived from the analysis of historical premiums paid of 25.0% to 40.0% to LoopNet’s closing share price on April 26, 2011. This analysis indicated the following implied per share equity reference range for LoopNet, as compared to the implied per share merger consideration:
 
                 
    Implied Per Share
   
    Equity Reference Range
  Implied Per Share
    for LoopNet   Merger Consideration
 
25.0% to 40.0% Premium
  $ 17.89 - $20.03     $ 18.73  
 
Selected Precedent Transactions Analysis
 
Evercore reviewed implied transaction data for 57 transactions involving target companies that Evercore deemed to have certain characteristics that are similar to those of LoopNet, although Evercore noted that none of the selected transactions or the selected companies that participated in the selected transactions are directly comparable to the proposed merger. Of the 57 transactions that Evercore reviewed, 25 involved targets in the online media/ information industry and 32 involved targets in the information/database industry.
 
Evercore reviewed transaction values in the selected transactions, calculated as the purchase price paid for the target company’s equity, plus debt, preferred stock and minority interests, less cash and cash equivalents, as multiples, to the extent publicly available, of the last twelve months (“LTM”) revenue and Adjusted EBITDA. Multiples for the selected transactions were based on publicly available information at the time of


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announcement of the relevant transaction. The range of implied multiples that Evercore calculated is summarized below:
 
                 
    Targets in the
    Targets in the
 
    Online Media/Information
    Information/Database
 
    Industry     Industry  
 
TEV/LTM Revenue
               
High
    7.0x       6.5x  
Mean
    4.0x       3.5x  
Median
    4.2x       3.2x  
Low
    1.2x       1.2x  
TEV/LTM Adjusted EBITDA
               
High
    34.4x       24.4x  
Mean
    21.1x       14.5x  
Median
    19.4x       13.5x  
Low
    12.0x       9.3x  
 
Evercore then applied a range of selected multiples derived from those transactions described above for the selected companies of 4.0x to 8.0x in the case of LTM revenue and 15.0x to 25.0x in the case of LTM Adjusted EBITDA to the corresponding financial data of LoopNet. This analysis indicated the following implied per share equity reference ranges for LoopNet, as compared to the implied per share merger consideration:
 
                 
    Implied Per Share
       
    Equity Reference Ranges
    Implied Per Share
 
    for LoopNet     Merger Consideration  
 
LTM Revenue
    $10.19 - $16.64     $ 18.73  
LTM Adjusted EBITDA
    $11.96 - $17.45          
 
Research Analyst Stock Price Targets
 
Evercore analyzed Wall Street equity research analyst estimates of potential future value for common stock (commonly referred to as price targets) of LoopNet based on publicly available equity research published on LoopNet. These targets reflect each analyst’s estimate of the future public market trading price of LoopNet common stock and are not discounted to reflect present values. Evercore noted that the range of undiscounted equity analyst price targets of LoopNet common stock as of April 26, 2011 ranged from $10.00 to $17.00 per share. In connection with this analysis, Evercore also noted that the $18.73 implied per share value of the merger consideration was higher than the range of undiscounted equity analyst price target range of LoopNet. The public market trading price targets published by equity research analysts do not necessarily reflect current market trading prices for LoopNet common stock and these estimates are subject to uncertainties, including the future financial performance of LoopNet and future market conditions.
 
General
 
In connection with the review of the proposed merger by the Board, Evercore performed a variety of financial and comparative analyses for purposes of rendering its opinion. The preparation of a fairness opinion is a complex process and is not necessarily susceptible to partial analysis or summary description. Selecting portions of the analyses or of the summary described above, without considering the analyses as a whole, could create an incomplete view of the processes underlying Evercore’s opinion. In arriving at its fairness determination, Evercore considered the results of all the analyses and did not draw, in isolation, conclusions from or with regard to any one analysis or factor considered by it for purposes of its opinion. Rather, Evercore made its determination as to fairness on the basis of its experience and professional judgment after considering the results of all the analyses. In addition, Evercore may have considered various assumptions more or less probable than other assumptions, so that the range of valuations resulting from any particular analysis described above should therefore not be taken to be Evercore’s view of the value of LoopNet. No company


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used in the above analyses as a comparison is directly comparable to LoopNet or CoStar, and no transaction used is directly comparable to the proposed merger. Further, Evercore’s analyses involve complex considerations and judgments concerning financial and operating characteristics and other factors that could affect the acquisition, public trading or other values of the companies or transactions used, including judgments and assumptions with regard to industry performance, general business, economic, market and financial conditions and other matters, many of which are beyond the control of LoopNet and CoStar.
 
Evercore prepared these analyses for the purpose of providing an opinion to the Board as to the fairness, from a financial point of view, of the merger consideration to be received by the holders of shares of LoopNet common stock. These analyses do not purport to be appraisals or to necessarily reflect the prices at which the business or securities actually may be sold. Any estimates contained in these analyses are not necessarily indicative of actual future results, which may be significantly more or less favorable than those suggested by such estimates. Accordingly, estimates used in, and the results derived from, Evercore’s analyses are inherently subject to substantial uncertainty, and Evercore assumes no responsibility if future results are materially different from those forecasted in such estimates. The merger consideration to be received by the holders of shares of LoopNet common stock pursuant to the merger agreement was determined through arm’s-length negotiations between LoopNet and CoStar and was approved by the Board. Evercore did not recommend any specific merger consideration to LoopNet or that any given merger consideration constituted the only appropriate merger consideration.
 
Under the terms of Evercore’s engagement, LoopNet has agreed to pay Evercore an aggregate cash fee equal to 1.2% of the aggregate transaction value of the merger, $500,000 of which became payable upon LoopNet’s request for a fairness opinion, and the remainder of which will become payable if the proposed merger is completed. Assuming the consummation of the merger occurred on April 26, 2011, based on the closing price of the CoStar common stock on April 26, 2011 and the number of shares of LoopNet common stock, stock options and restricted stock units outstanding as of April 26, 2011, the cash fee payable upon consummation of the merger would be $10.3 million. In addition, LoopNet agreed to reimburse Evercore’s reasonable expenses and to indemnify Evercore for certain liabilities arising out of its engagement. Evercore may provide financial or other services to LoopNet or CoStar in the future and in connection with any such services Evercore may receive compensation.
 
In the ordinary course of business, Evercore or its affiliates may actively trade the securities, or related derivative securities, or financial instruments of LoopNet, CoStar and their respective affiliates, for its own account and for the accounts of its customers and, accordingly, may at any time hold a long or short position in such securities or instruments. Evercore and its affiliates have not for the last two years provided investment banking services to CoStar and, other than services provided to LoopNet in connection with the merger, the Series A Preferred Stock financing and the contemplated shareholder rights plan described in the section entitled “— Background of the Merger”, are not currently and have not for the last two years provided investment banking services to LoopNet.
 
LoopNet engaged Evercore to act as a financial advisor based on its qualifications, experience and reputation. Evercore is an internationally recognized investment banking firm and is regularly engaged in the valuation of businesses in connection with mergers and acquisitions, leveraged buyouts, competitive biddings, private placements and valuations for corporate and other purposes.
 
Financial Projections
 
LoopNet does not as a matter of course make public projections as to future performance, earnings or other results beyond the current fiscal year due to the inherent unreliability of these matters. However, LoopNet provided certain non-public financial information to Evercore in its capacity as LoopNet’s financial advisor, including projections by management of LoopNet’s standalone financial performance for calendar years 2011 through 2016. These projections included forecasts of revenue and EBITDA related to (i) LoopNet’s business, including projected contributions from both LoopNet’s existing online commercial real estate marketplace business and LoopNet’s new, development stage products (the “combined business”), (ii) LoopNet’s existing online commercial real estate marketplace business, including the projected contribution from


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LoopNet’s acquisitions of BizQuest and LandsofAmerica (the “core business”), and (iii) LoopNet’s new, development stage products (the “new products”). These projections were in turn used by Evercore in performing the discounted cash flow analysis and present value of implied future stock price analysis described on pages 47 through 48 of this proxy statement/prospectus. Portions of this projected financial information were also provided to CoStar. A summary of these projections is set forth below.
 
The prospective financial information included in this proxy statement/prospectus has been prepared by, and is the responsibility of, LoopNet’s management. This projected financial information was not prepared with a view toward public disclosure and, accordingly, does not necessarily comply with published guidelines of the SEC, the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of financial forecasts, or generally accepted accounting principles. Ernst & Young LLP, LoopNet’s outside auditors, have not examined, compiled, or performed any procedures with respect to this prospective financial information and do not express an opinion or any other form of assurance with respect thereto. The summary of these projections is not being included in this proxy statement/prospectus to influence a LoopNet stockholder’s decision whether to vote in favor of the proposal to approve the merger agreement and the principal terms of the merger, but because the projections represent an assessment by LoopNet’s management of the future cash flows that were used in Evercore’s financial analysis and on which the Board relied in making its recommendation to LoopNet’s stockholders.
 
The inclusion of the projections in this proxy statement/prospectus should not be regarded as an indication that LoopNet or any of its affiliates, advisors, representatives, CoStar or any other recipient of this information considered or consider the projections to be predictive of actual future events, and the projections should not be relied upon as such. None of LoopNet or any of its affiliates, advisors, officers, directors or representatives can give any assurance that actual results will not differ from these projections. While presented with numeric specificity, the assumptions upon which the projected financial information was based necessarily involve judgments with respect to, among other things, future economic and competitive conditions and financial market conditions, which are difficult to predict accurately and many of which are beyond LoopNet’s control. Important factors that may affect actual results and result in the projected results not being achieved include, but are not limited to, the risks described in LoopNet’s most recent annual and quarterly reports filed with the SEC on Forms 10-K and 10-Q, respectively, and in this proxy statement/prospectus under the heading “Cautionary Statement Concerning Forward-Looking Information.” The prospective financial information also reflects assumptions as to certain business decisions that are subject to change. As a result, actual results may differ materially from those contained in the LoopNet’s prospective financial information. Accordingly, there can be no assurance that the unaudited prospective financial information will be realized or that actual results will not be significantly higher or lower than estimated.
 
None of LoopNet or any of its affiliates, advisors or representatives undertakes any obligation to update or otherwise revise or reconcile the projections to reflect circumstances existing after the date such projections were generated or to reflect the occurrence of future events even in the event that any or all of the assumptions underlying the projections are shown to be in error. LoopNet does not intend to make publicly available any update or other revision to the projections, except as required by law. None of LoopNet or any of its affiliates, advisors, officers, directors or representatives has made or makes any representation to any shareholder or other person regarding the ultimate performance of LoopNet compared to the information contained in the projections or that forecasted results will be achieved. LoopNet has made no representation to CoStar, in the merger agreement or otherwise, concerning the projections.
 
LoopNet stockholders are cautioned not to place undue reliance on the projected financial information included in this proxy statement/prospectus.


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Projected Financial Information
(in millions)
 
                                                 
Revenue
  2011E     2012E     2013E     2014E     2015E     2016E  
 
Core Business
  $ 83.8     $ 102.6     $ 123.4     $ 147.5     $ 174.4     $ 204.0  
New Products
  $ 1.8     $ 6.0     $ 11.8     $ 20.0     $ 29.4     $ 39.2  
                                                 
Combined Business
  $ 85.6     $ 108.6     $ 135.2     $ 167.4     $ 203.8     $ 243.3  
                                                 
                                                 
Adjusted EBITDA(1)
  2011E     2012E     2013E     2014E     2015E     2016E  
 
Core Business
  $ 31.8     $ 40.1     $ 50.6     $ 62.2     $ 75.2     $ 89.0  
New Products
  $ (4.0 )   $ (1.3 )   $ 1.4     $ 6.2     $ 10.6     $ 14.5  
                                                 
Combined Business
  $ 27.8     $  38.8     $ 52.0     $ 68.5     $ 85.8     $ 103.5  
 
 
(1) The estimate of Adjusted EBITDA represents an estimate of net income plus provision for income tax expense, interest and other (expense) income, net, depreciation and amortization and non-cash stock compensation.
 
                                                 
Projected Unlevered Free Cash Flow (In millions)
  2011E     2012E     2013E     2014E     2015E     2016E  
 
Core Business
  $ 23.9     $ 28.8     $ 34.8     $ 41.9     $ 51.5     $ 60.3  
New Products
  $ (2.3 )   $ (0.6 )   $ 1.1     $ 4.2     $ 7.1     $ 9.6  
                                                 
Combined Business
  $ 21.6     $  28.2     $  35.9     $  46.1     $  58.6     $  69.9  
 
LOOPNET DOES NOT INTEND TO UPDATE OR OTHERWISE REVISE THE LOOPNET PROJECTED FINANCIAL INFORMATION TO REFLECT CIRCUMSTANCES EXISTING AFTER THE DATE WHEN MADE OR TO REFLECT THE OCCURRENCE OF FUTURE EVENTS, EVEN IN THE EVENT THAT ANY OR ALL OF THE ASSUMPTIONS UNDERLYING THE LOOPNET PROJECTED FINANCIAL INFORMATION ARE NO LONGER APPROPRIATE.
 
CoStar’s Reasons for the Merger
 
CoStar’s reasons for entering into the merger agreement include to:
 
  •  increase scale, offer complementary services capabilities and diversify CoStar’s client and geographic footprint;
 
  •  double the size of CoStar’s paid subscriber base;
 
  •  unite CoStar’s strength in researching and analyzing commercial real estate with LoopNet’s complementary strength in marketing commercial real estate properties;
 
  •  offer widespread market coverage for customers ranging from large, national brokerage and institutional market players to small, local brokers and owners;
 
  •  provide CoStar’s clients with expanded access to active database listings; and
 
  •  increase CoStar’s stockholder value through enhanced revenue opportunities and cost saving strategies.
 
The board of directors of CoStar approved the merger agreement after discussing with CoStar’s senior management a number of factors, including those described above and the business, results of operations, financial performance and condition, strategic direction and prospects of LoopNet. The CoStar board of directors did not find it useful to and did not attempt to quantify, rank or otherwise assign weights to these factors. In addition, the CoStar board of directors did not undertake to make any specific determination as to whether any particular factor, or any aspect of any particular factor, was favorable or unfavorable to its ultimate determination, but rather the CoStar board of directors conducted an overall analysis of the factors described above, including discussions with CoStar’s management and its financial and legal advisors. In considering the factors described above, individual CoStar directors may have given different weights to different information and factors.


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Interests of Executive Officers and Directors of LoopNet in the Merger; Change in Control Severance Payments.
 
In considering the recommendation of the Board with respect to the merger, LoopNet stockholders should be aware that certain executive officers and directors of LoopNet have interests in the merger that may be different from, or in addition to, the interests of LoopNet stockholders generally. The Board was aware of the interests described below and considered them, among other matters, when approving the merger agreement and recommending that LoopNet stockholders vote to adopt the merger agreement.
 
Each of LoopNet’s executive officers and non-employee directors holds equity awards. Pursuant to the terms of the applicable LoopNet equity plan and agreements, and subject to the terms of the merger agreement, all such equity awards held by LoopNet’s executive officers and non-employee directors will become fully vested on the date of the closing of the merger and will be canceled in exchange for cash and/or shares of CoStar common stock, depending on the type of award and the exercise price of the award, if any. In general, such awards will be treated the same as equity awards held by all other LoopNet’s employees, as described in the section titled “The Merger Agreement — Treatment of Options and Restricted Stock Units”. In addition, each of LoopNet’s executive officers has an agreement with LoopNet that provides for severance benefits, in the form of cash, health benefits and accelerated vesting of equity, if the executive’s employment is terminated in connection with this transaction under the circumstances described below.
 
Change in Control Severance Agreements with Executive Officers
 
LoopNet entered into a change in control severance agreement with each of its executive officers; in December 2008 with respect to Messrs. Boyle, Byrne, Stumme, Greenman and Warthen, and in September 2010 with respect to Messrs. Handelsman, Saint and Smith, each as amended in February 2011. The change in control severance agreements provide that in the event that an executive officer is terminated without “cause” or such executive terminates employment for “good reason” (each as defined below) at any time during the period commencing two months prior to a change in control of LoopNet and ending twelve months following a change in control of LoopNet, which, as defined in the agreements, would include the consummation of the merger, the executives are entitled to certain severance benefits from LoopNet or any successor to LoopNet. The benefits are conditioned upon the execution of a release and the executive’s agreement to continue to be bound by the proprietary information and inventions agreement previously executed by the executive which, together, include the executive’s agreement (i) to continue to maintain the confidentiality of all of LoopNet’s confidential and proprietary information, (ii) not to make any statement that disparages LoopNet or any of its affiliates or its or their products, services, policies, business practices, employees, executives, officers or directors, and (iii) not to solicit any employees or customers of LoopNet for a period of twelve months following termination.
 
Under the change in control severance agreements, “cause” means (i) any act of personal dishonesty taken by the executive in connection with his responsibilities as an employee which is intended to result in substantial personal enrichment of the executive and is reasonably likely to result in material harm to LoopNet, (ii) the executive’s conviction of a felony, (iii) a willful act by the executive which constitutes misconduct and is materially injurious to LoopNet, or (iv) continued willful violations by the executive of the executive’s obligations to LoopNet after the executive has received a written demand for performance from LoopNet which describes the basis for the LoopNet’s belief that the executive has not substantially performed his duties; and “good reason” means the occurrence of any of the following: (i) without the executive’s express written consent, a material reduction of the executive’s duties, title, authority or responsibilities relative to the executive’s duties, title, authority or responsibilities in effect immediately prior to the change in control; (ii) a reduction by LoopNet of the executive’s base salary or bonus opportunity as in effect immediately prior to such reduction; (iii) a material reduction by LoopNet in the kind or level of employee benefits to which the executive is entitled immediately prior to such reduction with the result that the executive’s overall benefits package is materially reduced; (iv) without the executive’s express written consent, the relocation of the executive to a facility or a location more than five (5) miles from his current facility and more than fifty


55


 

(50) miles from the executive’s current residence; or (v) the failure of LoopNet to obtain the assumption of the change in control severance agreement by a successor.
 
The severance benefits include (1) a lump sum amount payable in cash equal to one times the sum of (a) the executive’s annual base salary in effect at the time of the termination and (b) the average of the annual bonuses paid to such executive over the two most recently completed fiscal years prior to the termination; (2) payment of the premiums for any continuation of health benefits for the executive and the executive’s spouse and dependents for twelve months following the date of the executive’s termination such that the executive will continue to pay the same cost for health benefits as the executive paid immediately prior to termination or, if LoopNet cannot provide such health benefits for any reason, a lump sum amount sufficient to enable the executive to purchase such health benefits from a third party as the same cost to the executive for such health benefits on an after-tax basis as the executive paid immediately prior to termination; (3) full acceleration of any unvested equity awards upon termination, excluding equity awards with performance-based vesting conditions; and (4) if necessary, the extension of the post-termination exercise period of any outstanding option to provide that the executive will have eighteen months following the termination date to exercise the options. The vesting acceleration of equity awards subject to performance-based vesting is subject to the terms of the respective performance-based equity awards agreements, which provide the following: one-third (1/3) of the underlying shares shall accelerate and vest if a change in control occurs prior to February 11, 2011, two-thirds (2/3) of the underlying shares shall accelerate and vest if a change in control occurs prior to February 11, 2012, and 100% of the underlying shares shall accelerate and vest if a change in control occurs prior to February 11, 2013. Notwithstanding the foregoing, as discussed above, pursuant to the terms of the applicable LoopNet equity plan and agreements, and subject to the terms of the merger agreement, all outstanding equity awards, including equity awards subject to performance-based vesting, will become fully vested on the date of the closing of the merger.
 
If the benefits under each change in control severance agreement, including but not limited to accelerated vesting of equity awards, would trigger a federal excise tax based on Internal Revenue Code Section 280G, then the total benefits paid to the executive under the agreement will be reduced if, and to the extent, such reduction would result in the executive retaining a larger amount on an after-tax basis (taking into account Internal Revenue Code Sections 280G and 4999) than if the executive had received the total benefit. LoopNet currently estimates that no such reduction would be made to the benefits receivable by any of its executive officers upon termination in connection with this transaction.
 
Change in Control Severance Payments
 
The following table sets forth the value of the benefits under the change in control severance agreements that would be received by each individual who has a change in control severance agreement and who has served as an executive officer at any time since the beginning of the last fiscal year, assuming the merger closes and the executive’s employment is terminated on May 27, 2011. While this table includes all executive officers, LoopNet stockholders are only being asked to cast an advisory vote to approve the agreements and understandings of LoopNet and its named executive officers involving change in control severance payments. LoopNet’s named executive officers are Richard J. Boyle, Jr., Thomas P. Byrne, Brent Stumme, Frederick G. Saint and Bryan D. Smith.
 
 


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                Pension/
          Tax
                   
    Cash
    Equity
    NQDC
    Perquisites/
    Reimbursement
    Other
    Total
       
Name
  ($)(1)     ($)(10)     ($)     Benefits($)(19)     ($)     ($)     ($)        
 
Richard J. Boyle, Jr. 
    542,500 (2)     8,058,534 (11)           26,763                   8,627,797          
Brent Stumme
    417,500 (3)     4,972,849 (12)           26,763                   5,417,112          
Thomas P. Byrne
    472,500 (4)     8,725,483 (13)           26,763                   9,224,746          
Jason Greenman
    362,500 (5)     4,661,923 (14)           26,763                   5,051,186          
Wayne Warthen
    350,500 (6)     4,661,923 (15)           26,763                   5,039,186          
Michael J. Handelsman
    272,500 (7)     4,214,044 (16)           11,599                   4,498,143          
Frederick G. Saint
    304,750 (8)     4,424,188 (17)           19,418                   4,748,356          
Bryan D. Smith
    266,250 (9)     4,328,894 (18)           17,984                   4,613,128          
 
 
(1) The payments set forth in this column would be received upon the executive’s “double-trigger” termination without cause or resignation for good reason that occurs during the period beginning two months prior to the closing of the merger and ending twelve months following the closing of the merger. These payments are equal to (x) the executive officer’s annual base salary in effect as of May 27, 2011 plus (y) the average of the annual bonuses paid to such executive over LoopNet’s last two fiscal years that ended prior to May 27, 2011.
 
(2) Represents Mr. Boyle’s annual base salary of $350,000 plus the average of the annual bonuses paid to Mr. Boyle over LoopNet’s last two fiscal years of $192,500.
 
(3) Represents Mr. Stumme’s annual base salary of $270,000 plus the average of the annual bonuses paid to Mr. Stumme over LoopNet’s last two fiscal years of $147,500.
 
(4) Represents Mr. Byrne’s annual base salary of $285,000 plus the average of the annual bonuses paid to Mr. Byrne over LoopNet’s last two fiscal years of $187,500.
 
(5) Represents Mr. Greenman’s annual base salary of $245,000 plus the average of the annual bonuses paid to Mr. Greenman over LoopNet’s last two fiscal years of $117,500.
 
(6) Represents Mr. Warthen’s annual base salary of $240,000 plus the average of the annual bonuses paid to Mr. Warthen over LoopNet’s last two fiscal years of $110,500.
 
(7) Represents Mr. Handelsman’s annual base salary of $205,000 plus the average of the annual bonuses paid to Mr. Handelsman over LoopNet’s last two fiscal years of $67,500.
 
(8) Represents Mr. Saint’s annual base salary of $231,000 plus the average of the annual bonuses paid to Mr. Saint over LoopNet’s last two fiscal years of $73,750.
 
(9) Represents Mr. Smith’s annual base salary of $215,000 plus the average of the annual bonuses paid to Mr. Smith over LoopNet’s last two fiscal years of $51,250.
 
(10) The payments set forth in this column would be received upon a closing of the merger (i.e., they are “single-trigger” benefits). The value of the portion of outstanding stock options and restricted stock units, or RSUs, that would receive accelerated vesting based on a closing date of May 27, 2011 is based on a per share value of the merger consideration of $19.00, equal to the sum of $16.50 plus $2.50, which is the value of 0.03702 shares of CoStar common stock based on the $67.46 average closing price of CoStar common stock on Nasdaq for the five days ending on May 4, 2011, less the applicable per share exercise price in the case of accelerated stock options.
 
(11) Represents $5,208,534 attributable to the value of accelerated stock options and $2,850,000 attributable to the value of accelerated RSUs held by Mr. Boyle.
 
(12) Represents $2,906,599 attributable to the value of accelerated stock options and $2,066,250 attributable to the value of accelerated RSUs held by Mr. Stumme.
 
(13) Represents $4,996,733 attributable to the value of accelerated stock options and $3,728,750 attributable to the value of accelerated RSUs held by Mr. Byrne.
 
(14) Represents $2,643,173 attributable to the value of accelerated stock options and $2,018,750 attributable to the value of accelerated RSUs held by Mr. Greenman.

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(15) Represents $2,643,173 attributable to the value of accelerated stock options and $2,018,750 attributable to the value of accelerated RSUs held by Mr. Warthen.
 
(16) Represents $1,744,044 attributable to the value of accelerated stock options and $2,470,000 attributable to the value of accelerated RSUs held by Mr. Handelsman.
 
(17) Represents $1,776,063 attributable to the value of accelerated stock options and $2,648,125 attributable to the value of accelerated RSUs held by Mr. Saint.
 
(18) Represents $1,763,894 attributable to the value of accelerated stock options and $2,565,000 attributable to the value of accelerated RSUs held by Mr. Smith.
 
(19) The benefits set forth in this column would be received upon the executive’s “double-trigger” termination without cause or resignation for good reason that occurs during the period beginning two months prior to the closing of the merger and ending twelve months following the closing of the merger. The value of these benefits is equal to the estimated twelve month continuation of health benefits for the executive officer and his dependents following May 27, 2011.
 
Payment for Outstanding Equity Awards for Executive Officers and Directors; Other Equity Holdings
 
Executive Officers’ Equity Holdings.  Each of LoopNet’s executive officers holds equity awards in the form of stock options and restricted stock units (“RSUs”), including performance-based equity awards. As with stock options held by all other employees, under the terms of LoopNet’s applicable equity plan and the stock option and RSU agreements with the executive officers, all stock options and RSUs held by the executive officers will become fully vested on the date of the closing of the merger. Pursuant to the merger agreement, each share subject to all such equity awards, other than one-third (1/3) of the unvested performance-based stock options and one-third (1/3) of the unvested performance-based RSUs held by each executive, will be canceled in exchange for (i) $16.50 in cash, without interest, and (ii) 0.03702 shares of CoStar common stock, less the exercise price per share in the case of stock options. Each share subject to the remaining one-third (1/3) of the unvested performance-based stock options and one-third (1/3) of the unvested performance-based RSUs will be canceled in exchange for that number of shares of CoStar common stock equal to the per share consideration they would have otherwise received for those equity awards, less the exercise price per share in the case of stock options, based on the market price of CoStar common stock at closing, subject to CoStar’s right to instead pay cash in the event the number of shares required to be issued pursuant to the foregoing would require CoStar to issue an aggregate number of shares of CoStar common stock that exceeds 2.25 million shares. The following table sets forth the intrinsic value of the acceleration of unvested stock options and RSUs held by LoopNet’s executive officers, as well as the intrinsic value of any vested stock options and other shares held by such executive.
 
                                                         
                Value of
                         
                Accelerated
    Value of
                   
    Value of
          Vesting of
    Accelerated
                   
    Accelerated
    Value of
    Unvested
    Vesting of
    Value of
    Value of
       
    Vesting of
    Accelerated
    Performance
    Unvested
    Vested
    Other
       
    Unvested Stock
    Vesting of
    Stock
    Performance
    Stock
    Shares
    Total
 
    Options
    Unvested RSUs
    Options
    RSUs
    Options
    Owned
    Value
 
Name
  $(1)     $(1)     $(1)     $(1)     $(1)     $(1)     $  
 
Richard J. Boyle, Jr. 
    2,634,984       570,000       2,573,550       2,280,000       7,320,266       16,687,586       32,066,386  
Brent Stumme
    1,552,099       641,250       1,354,500       1,425,000       2,961,518       3,544,982       11,479,349  
Thomas P. Byrne
    2,694,083       1,448,750       2,302,650       2,280,000       5,916,499       3,392,260       18,034,242  
Jason Greenman
    1,288,673       593,750       1,354,500       1,425,000       2,557,290       6,376,172       13,595,385  
Wayne Warthen
    1,288,673       593,750       1,354,500       1,425,000       2,457,007       6,038,105       13,157,035  
Michael J. Handelsman
    563,544       1,045,000       1,180,500       1,425,000       947,226             5,161,270  
Frederick G. Saint
    595,563       1,223,125       1,180,500       1,425,000                   4,424,188  
Bryan D. Smith
    583,394       1,140,000       1,180,500       1,425,000       1,331,804       227,829       5,888,528  
 
 
(1) Based on a per share value of the merger consideration of $19.00, equal to the sum of $16.50 plus $2.50, which is the value of 0.03702 shares of CoStar common stock based on the $67.46 average closing price of CoStar common stock on Nasdaq for the five days ending on May 4, 2011, less the applicable per share exercise price for stock options.


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Non-Employee Director Equity Holdings.  Under the terms of LoopNet’s director compensation plan, LoopNet’s applicable equity plan and the stock option agreements with directors, each share subject to stock options held by non-employee directors will become fully vested on the date of the closing of the merger and, pursuant to the merger agreement, will be canceled in exchange for (i) $16.50 in cash, without interest, and (ii) 0.03702 shares of CoStar common stock, less the exercise price per share. Stock options with an exercise price higher than the total per share value of the merger consideration will be cancelled at the effective time of the merger for no consideration. The following table sets forth the intrinsic value of the acceleration of the unvested stock options held by LoopNet’s non-employee directors, as well as the intrinsic value of any vested stock options and other shares held by such director.
 
                                 
    Value of
           
    Accelerated
           
    Vesting
  Value of
  Value of
   
    of Unvested
  Vested
  Other
  Total
    Options
  Stock Options
  Shares Owned
  Value
Name
  $(1)   $(1)   $(1)   $
 
William Byrnes
          383,523       285,000       668,523  
Dennis Chookaszian
          383,523             383,523  
James T. Farrell(2)(3)
    93,744       274,428             368,172  
Noel Fenton(3)
          262,815       781,831       1,044,646  
Scott Ingraham
          383,523       167,200       550,723  
Thomas Unterman(3)
          262,815             262,815  
 
 
(1) Based on a per share value of the merger consideration of $19.00, equal to the sum of $16.50 plus $2.50, which is the value of 0.03702 shares of CoStar common stock based on the $67.46 average closing price of CoStar common stock on Nasdaq for the five days ending on May 4, 2011, less the applicable per share exercise price for stock options. Stock options with an exercise price higher than the total per share value of the merger consideration (“underwater” stock options) will be canceled at the effective time of the merger for no consideration. These individuals would have the following underwater stock options (vested and unvested) that would be canceled for no payment:
 
         
Name
  Number of Shares Subject to Underwater Stock Options
 
William Byrnes
    10,500  
Dennis Chookaszian
    10,500  
Noel Fenton
    10,500  
Scott Ingraham
    10,500  
Thomas Unterman
    10,500  
 
 
(2) Pursuant to an agreement between Mr. Farrell and Calera Capital Advisors, L.P., Mr. Farrell has ceded all beneficial ownership over options granted to him as a director of LoopNet to Calera Capital Advisors, L.P.
 
(3) Does not include shares held by entities with which Messrs. Farrell, Fenton and Unterman are associated. See the section titled “Common Stock Ownership of Certain Beneficial Owners and Management” of LoopNet’s proxy statement on Schedule 14A regarding its 2011 annual meeting filed with the SEC on April 4, 2011 for information regarding such shares.
 
Indemnification; Directors’ and Officers’ Insurance
 
The merger agreement provides that for a period of six years after the effective time of the merger and to the fullest extent permitted by law or provided under LoopNet’s certificate of incorporation or bylaws or in an agreement between LoopNet and its current or former officers and directors, the surviving corporation will indemnify, and provide expenses as they are incurred to, the current or former officers and directors of LoopNet with respect to acts or omissions occurring at or prior to the effective time, provided that any person to whom expenses are advanced will provide an undertaking to repay any advances made if a court determines the person was not entitled to indemnification. The merger agreement further provides that, prior to the effective time of the merger, LoopNet may purchase a six-year “tail” officers’ and directors’ liability insurance policy on terms and conditions no less favorable in the aggregate than LoopNet’s existing directors’ and officers’ liability insurance. If LoopNet cannot purchase this “tail” policy for an aggregate premium of 200% or less of the annual premium paid by LoopNet for such existing insurance, LoopNet may only purchase as much insurance coverage as can be obtained within the 200% cap unless it receives written consent from


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CoStar to exceed that cap. The surviving corporation will pay all expenses, including reasonable fees and expenses of counsel, that an indemnified person may incur in enforcing the indemnity and other obligations described above, and the merger agreement provides that the foregoing rights of each indemnified person will survive the effective time of the merger and are enforceable by each indemnified person.
 
Certain Terms of the Series A Preferred Stock
 
Background.  In March 2009, LoopNet issued 50,000 shares of Series A Preferred Stock, with an initial conversion price of $6.72 per share, for an aggregate of $50.0 million in gross proceeds. All 50,000 shares of Series A Preferred Stock remain outstanding. Pursuant to the voting agreement (see the section entitled “The Voting Agreement”), the holders of all outstanding shares of Series A Preferred Stock have delivered contingent conversion notices to LoopNet pursuant to which such shares will be converted into LoopNet common stock immediately prior to, and contingent upon, the completion of the merger.
 
Treatment of Preferred Stock in the Merger.  Based on the $6.72 conversion price of the Series A Preferred Stock, each Series A share will be converted into 148.80952 shares of LoopNet common stock. The per share consideration for the Series A Preferred Stock in the merger represents the common stock equivalent consideration for each share of Series A Preferred Stock. Specifically, the consideration for each share of Series A Preferred Stock, if any, outstanding immediately prior to the effective time of the merger, will be a unit consisting of (i) $2,455.36 in cash, without interest and less applicable withholding tax, and (ii) 5.5089 shares of CoStar common stock.
 
Summary of Terms of Preferred Stock.  Each share of LoopNet’s Series A Preferred Stock is:
 
  •  convertible at the election of the holder at any time into a number of shares of LoopNet common stock equal to the quotient of $1,000 divided by the conversion price then in effect (which equals a conversion ratio of 148.80952 based on the $6.72 conversion price of the Series A Preferred Stock);
 
  •  entitled to vote generally with LoopNet common stock on an as-converted basis on all matters (including the merger) other than those matters on which the Series A Preferred Stock are entitled to vote as a separate class by law;
 
  •  entitled to a consent right on certain actions of LoopNet, including mergers, consolidations or other transactions that would impair certain rights of the holder, which the holders of the Series A Preferred Stock waived in the voting agreement;
 
  •  senior to LoopNet common stock upon a liquidation of LoopNet, as described in greater detail below under “— Liquidation Preference”;
 
  •  if LoopNet common stock closes at $16.80 or greater for twenty consecutive trading or reporting days, redeemable in cash at the option of LoopNet for 101% of the sum of $1,000 and any declared but unpaid dividends, but only if LoopNet redeems all of the outstanding Series A Preferred Stock;
 
  •  subject to certain conditions, entitled at the option of its holder to the mandatory repurchase by LoopNet for 101% of the sum of $1,000 and any declared but unpaid dividends upon qualifying mergers (such as the proposed merger with CoStar), consolidation, acquisitions or other business combinations, as described in greater detail below under ‘” — Mandatory Offer to Repurchase.”
 
Liquidation Preference.  The holders of the Series A Preferred Stock are entitled to receive liquidation payments in preference to the holders of LoopNet common stock upon any voluntary or involuntary liquidation, dissolution or winding up of LoopNet. In particular, they are entitled to an aggregate liquidation preference equal to the greater of $50.0 million plus any accrued and unpaid dividends or the amount that such holders would receive had they converted into LoopNet common stock.
 
Adjustment for Merger or Reorganization.  In case of any consolidation or merger of LoopNet with or into another corporation (except one in which the holders of LoopNet capital stock immediately prior to such consolidation or merger continue to hold a majority of the voting power of the capital stock of the surviving or acquiring corporation (on a fully diluted basis) immediately after such consolidation or merger), each share


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of Series A Preferred Stock that remains outstanding immediately prior to the effective date of such consolidation or merger shall be convertible (or shall be converted into or exchanged for a security which shall be convertible) into the kind and amount of shares of stock or other securities or property to which a holder of the number of shares of LoopNet common stock deliverable upon conversion of one share of Series A Preferred Stock would have been entitled upon such consolidation or merger (the “conversion option”); provided, however, that should any holder of Series A Preferred Stock notify LoopNet not later than twenty business days after the first public announcement by LoopNet that it has entered into a definitive agreement with respect to such consolidation or merger that such holder does not wish for one or more of its shares to be treated in the manner of the conversion option, such holder shall, at the sole option of the third party acquiror, upon the effectiveness of the consolidation or merger (i) receive, without interest, cash in an amount equal to the number of shares of LoopNet common stock into which the number of shares of Series A Preferred Stock designated in such holder’s notice would have been converted effective immediately prior to the effective date of the consolidation or merger multiplied by the fair market value of the consideration per share of LoopNet common stock issuable to each other holder of shares of LoopNet common stock in connection with such consolidation or merger, which fair market value, (1) in the case of publicly-traded equity securities to be issued in the consolidation or merger the amount of which is to be determined based on a fixed exchange ratio, shall be equal to the average closing price of such securities during the twenty consecutive trading days before and excluding the effective date of the consolidation or merger, as reported by the primary exchange or quotation system on which such securities are traded, (2) in the case of publicly-traded equity securities to be issued in the consolidation or merger the amount of which is to be determined with reference to an average trading price per share for such equity securities determined over a specified time period before the effective date, shall be equal to such average trading price, (3) in the case of any other securities or property, shall be valued using customary commercial valuation methods without giving any effect to discounts for illiquidity, restrictions on transfer or minority ownership status, and (4) in the case of publicly-traded equity securities or other securities or property to be issued in the consolidation or merger together with cash, shall be the sum of the actual cash amount plus the fair market value of such equity securities determined as provided in the preceding clauses (1), (2) or (3), as applicable; or (ii) be convertible into the kind and amount of shares of stock or other securities of the third party acquiror with rights, privileges and preferences commensurate with the rights, preferences and privileges of the Series A Preferred Stock. In the voting agreement, the holders of the Series A Preferred Stock waived these provisions of the Series A Certificate.
 
Mandatory Offer to Repurchase.  If certain change of control transactions occur, such as the merger, LoopNet is required to make an offer to repurchase up to all of the then outstanding shares of the Series A Preferred Stock at the option and election of the holders thereof. LoopNet must pay the repurchase price in cash. The aggregate cash repurchase price is 101% of the sum of the $50.0 million and any accrued and unpaid dividends. In the voting agreement, the holders of the Series A Preferred Stock waived this provision of the Series A Certificate.
 
Material U.S. Federal Income Tax Consequences of the Merger
 
The following are the material U.S. federal income consequences of the merger to “U.S. Holders” (as defined below) of LoopNet common stock. This summary is based on the provisions of the Internal Revenue Code of 1986, as amended (the “Code”), U.S. Treasury regulations promulgated thereunder, judicial authorities and administrative rulings, all as in effect as of the date of the proxy statement/prospectus and all of which are subject to change, possibly with retroactive effect.
 
As used herein, the term “U.S. Holder” means, for U.S. federal income tax purposes, a beneficial owner of LoopNet common stock that is:
 
  •  an individual citizen or resident of the United States;
 
  •  a corporation, or other entity taxable as a corporation for U.S. federal income tax purposes, created or organized in or under the laws of the United States, any state thereof or the District of Columbia;
 
  •  an estate or trust the income of which is subject to U.S. federal income taxation regardless of its source.


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This discussion does not address the consequences of the merger under the tax laws of any state, local or foreign taxing jurisdiction and does not address tax considerations applicable to holders of Series A Preferred Stock, stock options, restricted stock units or to holders who receive cash pursuant to the exercise of appraisal rights. In addition, it does not describe all of the tax consequences that may be relevant to a holder in light of the holder’s particular circumstances, including alternative minimum tax consequences or tax consequences to holders subject to special rules, such as:
 
  •  certain financial institutions;
 
  •  insurance companies;
 
  •  dealers or brokers in securities;
 
  •  tax-exempt organizations;
 
  •  former citizens or former long-term residents of the United States;
 
  •  persons whose shares of LoopNet or CoStar common stock are not held as capital assets for tax purposes;
 
  •  persons whose functional currency is not the U.S. dollar;
 
  •  persons who at the time of the merger already own, actually or constructively, shares of CoStar common stock;
 
  •  persons who hold LoopNet common stock or CoStar common stock as part of a hedge, straddle or conversion transaction; or
 
  •  persons who acquired LoopNet common stock pursuant to the exercise of compensatory options or otherwise as compensation.
 
If an entity or arrangement that is treated as a partnership for U.S. federal income tax purposes holds LoopNet or CoStar common stock, the U.S. federal income tax treatment of a partner will generally depend on the status of the partner and the activities of the partnership. Partnerships holding LoopNet or CoStar common stock and partners therein should consult their own tax advisors.
 
This discussion is not a complete analysis or description of all potential U.S. federal income tax consequences of the merger. This discussion does not address any foreign, state or local tax consequences of the merger or the ownership and disposition of CoStar common stock. Accordingly, LoopNet’s stockholders are strongly urged to consult their own tax advisors to determine the particular U.S. federal, state or local or foreign income or other tax consequences to them of the merger and of owning and disposing of CoStar common stock.
 
Tax Consequences of the Merger
 
Based on the relative values of the cash and shares of CoStar common stock to be received in the merger, it is expected, and this discussion assumes, that the merger will be treated as a taxable transaction for U.S. federal income tax purposes. In general, a U.S. Holder will recognize capital gain or loss for U.S. federal income tax purposes on the exchange of LoopNet common stock for CoStar common stock and cash in an amount equal to the difference, if any, between (i) the sum of the amount of cash (including cash received in lieu of a fractional share of CoStar common stock) and the fair market value of the CoStar common stock received on the date of the exchange and (ii) the U.S. Holder’s tax basis in the LoopNet common stock surrendered in the exchange. Gain or loss will be determined separately for each block of LoopNet common stock (i.e., shares acquired at the same cost in a single transaction) exchanged for CoStar common stock and cash pursuant to the merger. Such gain or loss will be long-term capital gain or loss if the U.S. Holder’s holding period for such LoopNet common stock is more than one year on the date of the exchange. Long-term capital gains of individuals are currently generally eligible for reduced rates of taxation. The deductibility of capital losses is subject to certain limitations.


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A U.S. Holder will have a tax basis in the CoStar common stock received equal to its fair market value on the date of the exchange, and the U.S. Holder’s holding period with respect to such CoStar common stock will begin on the day after the date of the exchange.
 
Backup Withholding and Information Reporting
 
Information returns will generally be filed with the Internal Revenue Service (“IRS”) in connection with payments to U.S. Holders pursuant to the merger. Backup withholding at a rate of 28% may apply to amounts paid in the merger to a U.S. Holder, unless the U.S. Holder furnishes a correct taxpayer identification number and certifies that the U.S. Holder is not subject to backup withholding on the substitute Form W-9 or successor form included in the letter of transmittal to be delivered following the completion of the merger.
 
Backup withholding is not an additional tax. Any amount withheld under the backup withholding rules will be allowed as a refund or credit against U.S. federal income tax liability, provided the required information is timely furnished to the IRS.
 
Regulatory Matters
 
Under the HSR Act and the rules promulgated thereunder, CoStar and LoopNet cannot complete the merger until they notify and furnish information to the Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice and specified waiting period requirements are satisfied. CoStar and LoopNet filed the notification and report forms under the HSR Act with the Federal Trade Commission and the Antitrust Division on May 31, 2011, as a result of which the waiting period would be expected to expire by June 30, 2011, unless otherwise terminated or extended by the antitrust authorities.
 
While LoopNet has no reason to believe it will not be possible to obtain regulatory approvals in a timely manner and without the imposition of burdensome conditions, there is no certainty that these approvals will be obtained within the period of time contemplated by the merger agreement or on conditions that would not be detrimental. For example, at any time before or after completion of the merger, the U.S. Federal Trade Commission or the Antitrust Division could take such action under the antitrust laws as it deems necessary or desirable in the public interest, including seeking to enjoin the consummation of the merger or seeking divestiture of substantial assets of CoStar or LoopNet. Private parties may also bring actions under the antitrust laws under certain circumstances.
 
Under the merger agreement, both LoopNet and CoStar have agreed to use reasonable best efforts to take or cause to be taken all actions to obtain all regulatory and governmental approvals necessary to complete the merger. Notwithstanding that agreement, the merger agreement does not require LoopNet or CoStar to take any divestiture action that is not conditioned upon consummation of the merger. Additionally, CoStar is not required to take any action involving CoStar businesses or assets in order to obtain the approval of a government authority unless such approval could not be obtained by an action to which CoStar is required or obliged to agree involving solely LoopNet businesses or assets. CoStar is also not required to take any actions which, individually or in the aggregate, would constitute a “substantial detriment” (as defined in the section entitled “The Merger Agreement — Reasonable Best Efforts to Complete the Merger; Other Agreements”).
 
CoStar has agreed to pay LoopNet a termination fee of $51.6 million if the merger agreement is terminated by either party in the event necessary antitrust approval is not obtained and certain other conditions are satisfied, as described in greater detail below under “The Merger Agreement — Termination of the Merger Agreement.”
 
Voting Agreement
 
In connection with the transactions contemplated by the merger agreement, LoopNet’s directors and certain of LoopNet’s executive officers and significant stockholders entered into the voting agreement with CoStar and LoopNet and have agreed, in their capacities as LoopNet stockholders, to, among other things, vote all shares of LoopNet’s capital stock beneficially owned by them in favor of adoption of the merger agreement and any related proposal in furtherance thereof and against any proposal made in opposition to the


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merger, in each case, subject to the terms and conditions of the voting agreement. As of the record date, the directors, executive officer and significant stockholders who signed the voting agreement beneficially owned approximately 32% of the total outstanding shares of LoopNet’s common stock (including the shares underlying the Series A Preferred Stock but excluding shares issuable upon exercise of options held by such stockholders).
 
The following summarizes the material terms of the voting agreement. This summary is qualified in its entirety by reference to the voting agreement, which is attached as Annex B to this proxy statement/prospectus. We encourage you to read the form of voting agreement in its entirety.
 
Pursuant to the voting agreement, the signing directors, executive officers and significant stockholders have agreed to vote (i) in favor of the adoption of the merger agreement and in favor of any related proposal in furtherance thereof; (ii) against any action or agreement that would reasonably be expected to result in a breach of any covenant, representation or warranty or any other obligation or agreement of LoopNet or the signing directors, executive officers or significant shareholders contained in the merger agreement; and (iii) against any alternative acquisition proposal or other action, agreement or transaction that would reasonably be expected to impede, interfere with, delay, postpone, discourage, frustrate the purposes of or adversely affect, or be inconsistent with, the merger or the other transactions contemplated by the merger agreement or the voting agreement or the performance by LoopNet of its obligations under the merger agreement or by the signing individuals under the voting agreement. The foregoing obligations apply whether or not the adoption of the merger agreement or any action described in the foregoing is recommended by the Board.
 
The directors, executive officers and significant stockholders who signed the voting agreement and own shares of Series A Preferred Stock agreed to execute and deliver contingent conversion notices to convert all of their shares of Series A Preferred Stock into shares of LoopNet common stock immediately prior to, and contingent upon, the completion of the merger. Such signatories, who own 100% of the outstanding shares of Series A Preferred Stock, have executed and delivered the contingent conversion notices contemplated by the voting agreement. Unless the merger agreement and the voting agreement are terminated in accordance with their respective terms, all of the outstanding Series A Preferred Stock will be converted into LoopNet common stock immediately prior to, and contingent upon, the completion of the merger.
 
The signing directors, executive officers and significant stockholders have agreed in the voting agreement not to sell, assign, transfer, encumber or otherwise dispose of the shares subject to the voting agreement or to grant any proxies or enter into a voting trust or other arrangement whereby the voting rights would be transferred during the term of the voting agreement, with certain exceptions for transfers to family members, transfers upon death, transfers to charitable trusts and transfers to affiliated entities under common control. The signing directors, executive officers and significant stockholders have also agreed in the voting agreement to be bound by a non-solicitation obligation substantially the same as the non-solicitation provisions of the merger agreement described below under “The Merger Agreement — No Solicitation; Changes in Recommendation.” They have further agreed not to exercise any rights to demand appraisal of any of their shares in connection with the merger.
 
The voting agreement terminates upon the earlier of (i) the effectiveness of the merger and (ii) the termination of the merger agreement in accordance with its terms. The voting agreement may also be terminated by each signing director, executive officer and significant stockholder in the event of an amendment, modification or waiver of the merger agreement made without the written consent of such individual if such amendment, modification or waiver changes the form or amount of the consideration payable to such individual in respect of their applicable shares in a manner adverse to such individual.
 
The voting agreement also provides for certain waivers and consents granted by the signing shareholders to LoopNet in connection with their rights under the Series A Certificate, some of which are described above under “Certain Terms of the Series A Preferred Stock.”


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Accounting Treatment
 
The merger will be accounted for as an acquisition of a business. CoStar will record net tangible and identifiable intangible assets acquired and liabilities assumed from LoopNet at their respective fair values at the date of the completion of the merger. Any excess of the purchase price, which will equal the market value, at the date of the completion of the merger, of the CoStar common stock issued as consideration for the merger, over the net fair value of such assets and liabilities will be recorded as goodwill.
 
The financial condition and results of operations of CoStar after completion of the merger will reflect LoopNet’s balances and results after completion of the transaction but will not be restated retroactively to reflect the historical financial condition or results of operations of LoopNet. The earnings of CoStar following the completion of the merger will reflect acquisition accounting adjustments, including the effect of changes in the carrying value for assets and liabilities on depreciation and amortization expense. Intangible assets with indefinite useful lives and goodwill will not be amortized but will be tested for impairment at least annually, and all long-lived assets including goodwill will be tested for impairment when certain indicators are present. If in the future, CoStar determines that tangible or intangible assets (including goodwill) are impaired, CoStar would record an impairment charge at that time.
 
Listing of CoStar Common Stock
 
CoStar will be required to notify Nasdaq of the listing of the shares of CoStar common stock issued in the merger. CoStar common stock currently is traded on Nasdaq under the symbol “CSGP.”
 
Delisting and Deregistration of LoopNet Common Stock after the Merger
 
If the merger is completed, LoopNet common stock will be delisted from Nasdaq and deregistered under the Exchange Act, and LoopNet will no longer file periodic reports with the Securities and Exchange Commission.
 
Appraisal Rights
 
Under the DGCL, you have the right to demand appraisal of your shares of LoopNet stock and to receive payment in cash for the fair value of your shares as determined by the Delaware Court of Chancery, together with interest, if any, in lieu of the consideration you would otherwise be entitled to pursuant to the merger agreement. These rights are known as appraisal rights. Stockholders electing to exercise appraisal rights must comply with the provisions of Section 262 of the DGCL in order to perfect their rights. LoopNet will require strict compliance with the statutory procedures.
 
For more details on appraisal rights, see the section entitled “Appraisal Rights.”
 
Restrictions on Sales of Shares of CoStar Common Stock Received in the Merger
 
The shares of CoStar common stock to be issued in connection with the merger will be freely transferable under the Securities Act except for shares issued to any stockholder who may be deemed to be an “affiliate” of CoStar for purposes of Rule 144 under the Securities Act. Persons who may be deemed to be affiliates include individuals or entities that control, are controlled by, or under the common control with CoStar and may include the executive officers, directors and significant stockholders of CoStar.


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Litigation
 
To date, LoopNet, the Board and/or CoStar are named as defendants in three putative class action lawsuits brought by alleged stockholders challenging the proposed merger. Two of the actions, Raymond E. Williams Jr. v. LoopNet, Inc., et al. and Ronald T. West v. Richard Boyle, et al., were filed on or around May 3, 2011 and Ronald T. West v. Richard Boyle, et al. was amended on May 20, 2011. The third action, Karin Cahill v. LoopNet, Inc., et al., was filed on June 3, 2011. All three actions were filed in the Superior Court of California, County of San Francisco. The complaints generally allege, among other things, that each member of the Board breached his fiduciary duties to LoopNet’s stockholders by authorizing the sale of LoopNet to CoStar for consideration that does not maximize value to the shareholders and engineering the transaction to benefit themselves without regard to LoopNet’s shareholders. The complaints also generally allege that LoopNet (and, in the case of the Ronald T. West action, CoStar) aided and abetted the breaches of fiduciary duty allegedly committed by the members of the Board and made incomplete or materially misleading disclosures about the proposed transaction. The shareholder actions seek equitable relief, including an injunction against consummating the merger. The parties have stipulated to the consolidation of the actions, and to permit the filing of a consolidated complaint. A consolidated complaint has not yet been filed.


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THE MERGER AGREEMENT
 
The following discussion sets forth the principal terms of the Agreement and Plan of Merger, dated as of April 27, 2011, as amended May 20, 2011, which is referred to as the merger agreement, a copy of which is attached as Annex A to this proxy statement/prospectus and is incorporated by reference herein. The rights and obligations of the parties are governed by the express terms and conditions of the merger agreement and not by this discussion, which is summary by nature. This discussion is not complete and is qualified in its entirety by reference to the complete text of the merger agreement. You are encouraged to read the merger agreement carefully in its entirety, as well as this proxy statement/prospectus, before making any decisions regarding the merger.
 
The Merger
 
Subject to the terms and conditions of the merger agreement and in accordance with the DGCL, merger sub, a Delaware corporation and a wholly-owned subsidiary of CoStar, will merge with and into LoopNet, and LoopNet will survive the merger as a wholly-owned subsidiary of CoStar.
 
Closing and Effectiveness of the Merger
 
The closing of the merger will occur as soon as possible, but no later than two business days after the date of the conditions to its completion have been satisfied or waived, provided that if such conditions have been satisfied or waived but CoStar’s marketing period (described below under “— Financing”) has not ended, the closing will occur at the earliest of (i) a date during the marketing period specified by CoStar with at least two business days notice to LoopNet, (ii) the final day of the marketing period and (iii) the end date (as defined below under “— Termination; Termination Fees; Expenses”), or on another date agreed upon by LoopNet and CoStar. The merger will become effective at such time (the “effective time”) as the parties file a certificate of merger with the Delaware Secretary of State (or at such later time as LoopNet and CoStar may agree and is specified in the merger certificate).
 
Consideration to be Received in the Merger
 
Common Stock.  At the effective time of the merger, each outstanding share of common stock (other than treasury stock, shares of common stock owned by CoStar or merger sub and dissenting shares) will be converted into the right to receive a unit consisting of (i) $16.50 in cash, without interest and less applicable withholding tax, and (ii) 0.03702 shares of CoStar common stock (together, the “common stock merger consideration”). For example, if you currently own 100 shares of common stock, you will be entitled to receive $1650 or (100 x $16.50) in cash and 3.702 shares or (100 x 0.03702 shares) of CoStar common stock. CoStar will not issue fractional shares of CoStar common stock in the merger. As a result, LoopNet stockholders will receive cash for any fractional share of CoStar common stock that they would otherwise be entitled to receive in the merger. After the merger is completed, LoopNet common stockholders will have only the right to receive this consideration, and will no longer have any rights as LoopNet common stockholders, including voting or other rights. Shares of common stock held as treasury stock or owned by CoStar will be canceled at the effective time of the merger.
 
Series A Preferred Stock.  Each share of the Series A Preferred Stock outstanding immediately prior to the effective time of the merger will be converted into the right to receive a unit consisting of (i) 148.80952 multiplied by $16.50 in cash, without interest and less applicable withholding tax (which equals $2,455.36), and (ii) 148.80952 multiplied by 0.03702 shares of CoStar common stock (which equals 5.5089 shares of CoStar common stock). For example, if you currently own 100 shares of Series A Preferred Stock, you will be entitled to receive $245,536 or (100 x $2,455.36) in cash and 550.89 shares or (100 x 5.5089 shares) of CoStar common stock. The per share consideration for Series A Preferred Stock represents the common stock equivalent consideration for each share of Series A Preferred Stock. CoStar will not issue fractional shares of CoStar common stock in the merger. As a result, holders of Series A Preferred Stock will receive cash for any fractional share of CoStar common stock that they would otherwise be entitled to receive in the merger. After the merger is completed, holders of Series A Preferred Stock will have only the right to receive this


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consideration, and will no longer have any rights as LoopNet stockholders, including voting or other rights. See the section entitled “The Merger — Certain Terms of the Series A Preferred Stock.”
 
Treatment of Options and Restricted Stock Units
 
Treatment of outstanding stock options and restricted stock units granted by LoopNet will be as follows:
 
Stock Options.  At or immediately prior to the effective time of the merger, each stock option, whether or not vested or exercisable, will be canceled, and LoopNet will pay each holder of any such stock option at or promptly after the effective time for each such stock option an amount of cash and/or shares of CoStar common stock determined as follows:
 
  •  For stock options (other than company performance stock options, as defined below) with an applicable exercise price less than the per share value of the merger consideration, the payment received will be the product of (x) the difference between the common stock merger consideration and the exercise price of the applicable option (the “excess”) and (y) the number of shares of LoopNet common stock the holder could have purchased (assuming full vesting of stock options) had the holder exercised the stock options in full immediately prior to the effective time of the merger. The amount of excess shall be determined by first reducing the cash component of the common stock merger consideration (i.e., $16.50) by the exercise price of the applicable option and then, if the exercise price of the applicable option exceeds the cash component of the common stock merger consideration (the amount of such excess, the “exercise excess”), by then reducing the stock component of the common stock merger consideration (i.e., 0.03702 shares of CoStar common stock) by the number of shares of CoStar common stock equal to the exercise excess divided by the volume weighted average price per share of CoStar common stock on Nasdaq for the ten consecutive trading days ending two days prior to closing.
 
  •  For stock options with an applicable exercise price greater than the per share value of the merger consideration, no payment will be received.
 
The per share value of the merger consideration is the sum of $16.50 plus the value of the stock component of the common stock merger consideration (based on the volume weighted average price per share of CoStar common stock on Nasdaq for the ten consecutive trading days ending two days prior to closing).
 
The following examples illustrate the consideration payable in respect of stock options (other than company performance stock options) for a hypothetical holder of stock options to acquire 100 shares of LoopNet common stock at three different hypothetical exercise prices ($10.00, $18.00 and $20.00). Each example further assumes a hypothetical volume weighted average price per share of CoStar common stock on Nasdaq for the ten consecutive trading days ending two days prior to closing of $60.00.
 
Example 1 (assuming an exercise price of $10.00): the consideration payable would be $650 in cash (the difference between $16.50 and $10.00 multiplied by 100) and 3.702 shares of CoStar common stock (0.03702 x 100), with the holder receiving cash in lieu of fractional shares.
 
Example 2 (assuming an exercise price of $18.00): the consideration payable would be 1.202 shares of CoStar common stock (which was obtained by first calculating an “exercise excess” of $1.50, dividing such exercise excess by $60.00 to obtain 0.025, subtracting 0.025 from 0.03702 to obtain 0.01202 and then multiplying 0.01202 by 100), with the holder receiving cash in lieu of fractional shares.
 
Example 3 (assuming an exercise price of $20.00): no consideration would be payable since the exercise price is greater than the per share value of the merger consideration (calculated as approximately $18.72, assuming the applicable volume weighted average price per share of CoStar common stock is $60.00, by adding the product of 0.03702 and $60.00 to $16.50).
 
Restricted Stock Units.  LoopNet restricted stock units, whether or not vested or exercisable, will be canceled at or immediately prior to the effective time of the merger and, in lieu thereof, the holders of LoopNet restricted stock units (other than company performance RSUs, as defined below) will be entitled to


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receive payment of cash and/or shares of CoStar common stock equal to the product of the number of shares of LoopNet common stock subject to the restricted stock units and the common stock merger consideration.
 
Company Performance Stock Options and Company Performance RSUs.  Two-thirds of LoopNet’s performance-based stock options and two-thirds of LoopNet’s performance-based restricted stock units, whether or not vested or exercisable, will be canceled at or immediately prior to the effective time of the merger and, in lieu thereof, the holders of such performance-based stock options and performance-based restricted stock units will be entitled to receive payment of cash and/or shares of CoStar common stock determined as described above with respect to stock options and restricted stock units, respectively.
 
The remaining one-third of LoopNet’s performance-based stock options (the “company performance stock options”) and the remaining one-third of LoopNet’s performance-based restricted stock units (the “company performance RSUs”) will be canceled at or immediately prior to the effective time of the merger and, in lieu thereof, the holders of such company performance stock options and company performance RSUs will be entitled to receive payment of cash and/or shares of CoStar common stock determined as follows:
 
  •  For such company performance stock options with an applicable exercise price less than the per share value of the merger consideration, the payment received will be equal in value to the payment determined as described above with respect to stock options, except that any payments that would have been paid in cash will be paid in CoStar common stock.
 
  •  For such company performance stock options with an applicable exercise price greater than the per share value of the merger consideration, no payment will be received.
 
  •  For such company performance RSUs, the payment received will be equal in value to the payment determined as described above with respect to restricted stock units, except that any payments that would have been paid in cash will be paid in CoStar common stock.
 
If, as a result of the foregoing treatment of company performance stock options and company performance RSUs, the merger agreement would require CoStar to issue an aggregate number of shares of CoStar common stock in excess of 2.25 million shares, CoStar may instead pay to the holders of the company performance stock options and company performance RSUs the amounts in excess of 2.25 million shares in cash.
 
Fractional Shares
 
CoStar will not issue any fractional shares of common stock in connection with the merger. Instead, each holder of LoopNet common stock who would otherwise be entitled to receive a fraction of a share of CoStar common stock (after taking into account all shares of LoopNet common stock owned by such holder at the effective time of the merger) will receive cash based on the fractional share to which such holder would otherwise be entitled and the prevailing price of CoStar stock when the exchange agent sells the aggregated fractional shares.
 
Exchange Procedures
 
CoStar will appoint an exchange agent for the payment of the applicable merger consideration in exchange for shares of LoopNet common stock and Series A Preferred Stock. Promptly after the effective time of the merger, CoStar will mail or cause the exchange agent to mail to each holder of record of common stock and Series A Preferred Stock a letter of transmittal and instructions for effecting the surrender of stock certificates or uncertificated shares in exchange for the payment of the consideration described above to be made to the holder of such certificates or uncertificated shares. Upon surrender or transfer of shares to the exchange agent, together with a properly completed letter of transmittal and such other evidence as the exchange agent may reasonably require, the holder of such shares will be entitled to receive the applicable consideration for each share of LoopNet common stock or Series A Preferred Stock, as applicable. The exchange agent, the surviving corporation and CoStar are entitled to deduct and withhold any applicable taxes from any merger consideration that would otherwise be payable.


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After the effective time, each certificate that previously represented shares of LoopNet common stock or Series A Preferred Stock will be canceled and, subject to compliance with the procedures described above, exchanged for the applicable merger consideration as described above under “— Consideration to be Received in the Merger.”
 
LoopNet and CoStar are not liable to holders of LoopNet common stock or Series A Preferred Stock for any amount delivered to a public official under applicable abandoned property, escheat or similar laws.
 
Stockholders should not return their stock certificates with the enclosed proxy card and should not forward stock certificates to the exchange agent without a letter of transmittal.
 
Distributions with Respect to Unexchanged Shares
 
Holders of LoopNet common stock are entitled to receive dividends or other distributions on CoStar common stock with a record date after the effective time of the merger, but only after such holder has surrendered its LoopNet common stock certificates and uncertificated shares. Any dividend or other distribution on CoStar common stock with a record date after the effective time of the merger will be paid (i) at the time of surrender of the common stock certificate or uncertificated share, if the payment date is on or prior to the date of surrender and not previously paid or (ii) at the appropriate payment date, if the dividends or distributions have a payment date subsequent to such surrender.
 
Lost, Stolen and Destroyed Certificates
 
If a LoopNet common stock or Series A Preferred Stock certificate is lost, stolen or destroyed, the holder of such certificate must deliver an affidavit of that fact prior to receiving any merger consideration and, if required by CoStar, may also be required to provide an indemnity bond (in such reasonable amount as may be directed by CoStar) prior to receiving any merger consideration.
 
Dissenting Shares
 
A holder of LoopNet common stock or Series A Preferred Stock may exercise appraisal rights available under Section 262 of the DGCL, which is included with this proxy statement/prospectus as Annex D. The shares of stock held by holders who have properly exercised appraisal rights will not be converted into the right to receive the consideration discussed above, but will instead be entitled to such rights as are granted by Section 262 of the DGCL.
 
Representations and Warranties
 
The merger agreement contains representations and warranties made by LoopNet to CoStar and by CoStar to LoopNet. The assertions embodied in those representations and warranties were made solely for purposes of the merger agreement and may be subject to important qualifications and limitations agreed to by the parties in connection with negotiating the terms of the merger agreement. Accordingly, LoopNet stockholders should not rely on representations and warranties as characterizations of the actual state of facts or circumstances, and should bear in mind that the representations and warranties were made solely for the benefit of the parties to the merger agreement, were negotiated for purposes of allocating contractual risk among the parties to the merger agreement rather than to establish matters as facts and may be subject to contractual standards of materiality different from those generally applicable to stockholders. Moreover, information concerning the subject matter of such representations and warranties may change after the date of the merger agreement, which subsequent information may or may not be reflected in public disclosures of LoopNet and CoStar. This description of the representations and warranties is included to provide LoopNet’s stockholders with information regarding the terms of the merger agreement. The representations and warranties in the merger agreement and the description of them in this proxy statement/prospectus should be read in conjunction with the other information contained in the reports, statements and filings LoopNet and CoStar publicly file with the SEC. See “Where You Can Find Additional Information” beginning on page 111 of this proxy statement/prospectus.


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In the merger agreement, LoopNet and CoStar made a number of representations and warranties to each other. The parties’ reciprocal representations and warranties relate to, among other things:
 
  •  due incorporation, valid existence and good standing, and corporate authorization and power to enter into the merger agreement and consummate the transactions contemplated thereby;
 
  •  required regulatory filings, consent and approval of governmental entities in connection with the merger agreement and the merger;
 
  •  the absence of any violation of or conflict with such party’s organizational documents or applicable laws as a result of entering into the merger agreement and consummating the merger;
 
  •  the proxy statement/prospectus to be filed with the SEC under the Exchange Act and the accuracy of information contained in such document as provided by such party;
 
  •  capitalization and capital structure;
 
  •  documents filed by LoopNet with the SEC since January 1, 2008 and by CoStar with the SEC since January 1, 2010, the accuracy of information contained in those documents and CoStar and LoopNet’s compliance with provisions of the Sarbanes-Oxley Act and the listing rules of Nasdaq;
 
  •  financial statements;
 
  •  litigation and legal proceedings; and
 
  •  the absence of undisclosed finders’ fees.
 
In addition to the foregoing, the merger agreement contains representations and warranties made by LoopNet to CoStar, including regarding:
 
  •  the Stockholder Approval required to consummate the merger;
 
  •  the good standing and corporate power and authority of LoopNet’s subsidiaries;
 
  •  the absence of certain changes or events, and the absence of a material adverse effect on LoopNet, in each case since December 31, 2010;
 
  •  the absence of undisclosed liabilities;
 
  •  compliance with applicable legal requirements and possession of permits;
 
  •  properties;
 
  •  intellectual property;
 
  •  filing of tax returns, payment of taxes and other tax matters;
 
  •  employee benefit plans;
 
  •  environmental matters;
 
  •  certain material contracts;
 
  •  receipt by LoopNet of a fairness opinion from Evercore;
 
  •  the inapplicability of certain state takeover statutes, the lack of any antitakeover provisions in any organizational documents of any of LoopNet’s subsidiaries and LoopNet’s lack of any rights agreement, “poison pill” or similar agreement or plan;
 
  •  affiliate transactions;
 
  •  employment matters; and
 
  •  insurance.


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In addition, the merger agreement contains representations and warranties made by CoStar to LoopNet including regarding the existence of a fully executed debt commitment letter confirming the commitments of J.P. Morgan Securities LLC and JPMorgan Chase Bank, N.A. to provide CoStar with debt financing in connection with the merger, certain terms and conditions of that debt commitment letter and the availability of sufficient funds for CoStar to consummate the merger as contemplated by the merger agreement, among other things.
 
LoopNet’s Conduct of Business Before Completion of the Merger
 
From the date of the merger agreement until the effective time, LoopNet has agreed, subject to certain exceptions, to, and to cause each of its subsidiaries to, conduct its business in the ordinary course and use its reasonable best efforts to preserve intact its business organizations and relationships with third parties, to keep available the services of its present officers and employees and to comply in all material respects with applicable law and the requirements of all material contracts.
 
In addition, LoopNet may not, among other things and subject to certain exceptions, without CoStar’s consent:
 
  •  amend or propose to amend its certificate of incorporation, bylaws or other similar organizational documents;
 
  •  split, combine, subdivide or reclassify any shares of its capital stock or authorize the issuance of any other securities in lieu of or in substitution for shares of its capital stock;
 
  •  declare, set aside or pay any dividend or other distribution (whether in cash, stock or property or any combination thereof) in respect of its capital stock, except for dividends by any of its wholly-owned subsidiaries to LoopNet or another wholly-owned subsidiary of LoopNet;
 
  •  redeem, repurchase or otherwise acquire or offer to redeem, repurchase, or otherwise acquire any LoopNet securities or any securities of LoopNet’s subsidiaries or any options, warrants or rights to acquire any LoopNet securities or any of LoopNet’s subsidiaries’ securities;
 
  •  issue, deliver, grant, pledge, redeem, accelerate rights under, dispose of, transfer or sell, or authorize the issuance, delivery, grant, pledge, redemption, acceleration of rights under, disposition, transfer or sale of, any shares of any LoopNet securities or any securities of LoopNet’s subsidiaries or any options, warrants, calls, commitments or rights or any other agreements to acquire any LoopNet securities or any securities of LoopNet’s subsidiaries, or any securities convertible into or exchangeable for any shares of, or grant to any entity any right the value of which is based on the value of, any LoopNet securities or any securities of LoopNet’s subsidiaries, other than the issuance of (i) shares of LoopNet common stock upon the exercise of LoopNet stock options that are outstanding on the date of the merger agreement in accordance with the terms of those stock options on the date of the merger agreement, (ii) shares of LoopNet common stock upon the vesting and scheduled settlement of LoopNet restricted stock units that are outstanding on the date of the merger agreement in accordance with the terms of those LoopNet restricted stock units on the date of the merger agreement, or (iii) securities of LoopNet’s subsidiaries issued to LoopNet or any other wholly-owned subsidiary of LoopNet;
 
  •  amend any term of any security of LoopNet or its subsidiaries;
 
  •  acquire (by merger, consolidation, acquisition of stock or assets or otherwise), in one transaction or any series of related transactions, directly or indirectly, any assets, securities, properties, interests or businesses that are in excess of $1 million individually or $3 million in the aggregate;
 
  •  enter into any new line of business outside of its existing business segments or enter into any agreement, arrangement or commitment that limits or otherwise restricts LoopNet or any subsidiary of LoopNet, or upon completion of the transactions contemplated by the merger agreement, CoStar, merger sub or any of their respective subsidiaries, from engaging or competing in any line of business or in any geographic area or otherwise enter into any agreements, arrangements or commitments imposing material changes or restrictions on its assets, operations or business;


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  •  make or commit to make any capital expenditures in excess of $2 million, or, if the merger shall not have been consummated before December 31, 2011, $2.5 million, for LoopNet and its subsidiaries taken as a whole;
 
  •  sell, lease, license, mortgage, pledge, surrender, encumber, divest, cancel, abandon, create or incur any lien on, allow to expire or lapse or otherwise transfer or dispose of any of its assets, rights, securities, properties, interests or businesses that individually or in the aggregate are in excess of $1 million;
 
  •  other than in connection with acquisitions permitted by the interim operating covenants, make any loans, advances or capital contributions to, or investments in, any other entity, other than in the ordinary course of business or in connection with agreements with strategic partners and not in excess of $1 million individually or in the aggregate;
 
  •  incur or assume any indebtedness for borrowed money or guarantees thereof or otherwise become responsible (whether directly, contingently or otherwise) for the obligations of any entity (other than letters of credit, guarantees or similar arrangements issued to or for the benefit of suppliers and manufacturers in the ordinary course of business consistent with past practice or indebtedness incurred between LoopNet and any of LoopNet’s wholly-owned subsidiaries or between any such subsidiaries), or enter into a “make well” or similar agreement or issue or sell any debt securities or options, warrants, calls or other rights to acquire any debt securities of LoopNet or any of LoopNet’s subsidiaries;
 
  •  with respect to any director or employee of LoopNet or any of LoopNet’s subsidiaries, (i) grant (except as specifically required by LoopNet’s employee plans as in effect on the date of the merger agreement) or increase any severance or termination pay (or amend any existing severance pay or termination arrangement) or (ii) enter into any employment, deferred compensation or other similar agreement (or amend any such existing agreement) other than (x) at will offer letters for non-executive employees of LoopNet with base salary of $150,000 or less or (y) agreements for hires made in connection with acquisitions permitted by the interim operating covenants, which, in the case of each (x) and (y), do not provide for any equity grants;
 
  •  increase benefits payable under any existing severance or termination pay policies;
 
  •  establish, adopt or materially amend (except as required by applicable law) any collective bargaining, bonus, profit-sharing, thrift, pension, retirement, deferred compensation, stock option, restricted stock or other benefit plan or arrangement;
 
  •  increase compensation, bonus or other benefits payable to any employee of LoopNet or any of LoopNet’s subsidiaries, except with respect to any nonexecutive employee of LoopNet or any of LoopNet’s subsidiaries, for increases in base salary in the ordinary course of business;
 
  •  change LoopNet’s methods of accounting, except as required by concurrent changes in GAAP or in Regulation S-X of the Exchange Act, as agreed to by its independent public accountants;
 
  •  settle, or offer or propose to settle (i) any material litigation, investigation, arbitration, proceeding or other claim involving or against LoopNet or any of its subsidiaries, (ii) any stockholder litigation or dispute against LoopNet or any of its officers or directors or (iii) any litigation, arbitration, proceeding or dispute that relates to the transactions contemplated by the merger agreement;
 
  •  make or change any material tax election, change any material annual tax accounting period, adopt or materially change any material method of tax accounting, enter into any material closing agreement or settle any material tax claim or audit;
 
  •  announce, implement or effect any material reduction in labor force, lay-off, early retirement program, severance program or other program or effort concerning the termination of employment of employees of LoopNet (including, but not limited to, any “plant closing” or “mass layoff” as those terms are defined in the Worker Adjustment and Retraining Notification Act or any similar action under a similar law), other than routine employee terminations;


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  •  adopt or implement a rights plan or similar arrangement;
 
  •  adopt a plan of complete or partial liquidation, dissolution, merger, consolidation, restructuring, recapitalization or other reorganization of LoopNet or any subsidiary, other than the merger or as expressly provided in the merger agreement;
 
  •  except as required by applicable law or the transactions contemplated in the merger agreement, amend, modify or terminate any material contract or lease, or knowingly waive, release or assign any material rights, claims or benefits under any material contract or lease or with respect to any investment in any entity (including without limitation, the right to designate one or more members to the board of directors or similar governing body of any entity (or its affiliates) or other governance rights), or enter into (i) any lease (whether as lessor, sublessor, lessee or sublessee) or (ii) any new contract that, if entered into prior to the date of the merger agreement, would constitute a material contract under the merger agreement; or
 
  •  agree, resolve or commit to do any of the foregoing.
 
No Solicitation; Changes in Recommendations
 
In the merger agreement, LoopNet has agreed that the Board will recommend that LoopNet’s stockholders adopt the merger agreement, and that none of LoopNet, its Board of Directors or its subsidiaries will, nor will any of LoopNet, its Board of Directors or any of its subsidiaries authorize or permit any of its representatives to, directly or indirectly:
 
  •  solicit, initiate, induce, explore or knowingly take any action to facilitate or encourage the submission or announcement of any acquisition proposal, or any inquiries, proposals or offers that may reasonably be expected to lead to an acquisition proposal, including through the furnishing of any information;
 
  •  enter into or participate in any discussions or negotiations with, furnish any information relating to LoopNet or any of its subsidiaries or afford access to the business, properties, assets, books or records of LoopNet or any of its subsidiaries to or otherwise cooperate in any way with, assist or facilitate any third party that is seeking to make, or has made, an acquisition proposal;
 
  •  fail to make, withdraw or modify in a manner adverse to CoStar (or publicly propose to withdraw or modify in a manner adverse to CoStar) the Board’s recommendation that LoopNet’s stockholders adopt the merger agreement, or approve, recommend or declare advisable an acquisition proposal (an “adverse recommendation change”); or
 
  •  approve, recommend, declare advisable or enter into any agreement in principle, letter of intent, term sheet, merger agreement, acquisition agreement, option agreement or other similar instrument relating to an acquisition proposal or requiring LoopNet to abandon, terminate or fail to consummate the transactions contemplated by the merger agreement.
 
However, at any time prior to obtaining the Stockholder Approval, so long as none of LoopNet, its subsidiaries or their representatives have breached or taken any actions inconsistent with LoopNet’s above obligations regarding non-solicitation, LoopNet and its Board may, to the extent required by the Board’s fiduciary duties:
 
  •  in response to a bona fide written acquisition proposal that the Board determines in good faith after consultation with outside legal and financial advisors would reasonably be expected to constitute or result in a superior proposal, (i) engage in negotiations or discussions with such third party and its representatives and financing sources and (ii) furnish information relating to LoopNet to the person making such proposal, its representatives or financing sources pursuant to a confidentiality agreement with terms no less favorable to LoopNet than LoopNet’s confidentiality agreement with CoStar (before taking into account LoopNet’s acknowledgment that the Form S-4 in which this proxy statement/prospectus is included will require the disclosure of certain information that may be confidential under the terms of its confidentiality agreement between CoStar and LoopNet and LoopNet’s waiver of the


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  restrictions under the confidentiality agreement with CoStar in respect of such disclosure, such acknowledgement and waiver being contained in the merger agreement);
 
  •  subject to compliance with the applicable terms of the merger agreement, make an adverse recommendation change (i) in connection with a bona fide written unsolicited acquisition proposal (that did not arise out of a breach of LoopNet’s non-solicitation obligations under the merger agreement) that the Board concludes in good faith constitutes a superior proposal, or (ii) in connection with an “intervening event” (a material event or circumstance that was not known to, or reasonably foreseeable by, the Board on or prior to the date of the merger agreement and does not relate to (x) any acquisition proposal, (y) clearance of the merger under the HSR Act or (z) any circumstances relating to CoStar); or
 
  •  subject to compliance with the applicable terms of the merger agreement, terminate the merger agreement to enter into a definitive agreement with respect to a bona fide written unsolicited acquisition proposal (that did not arise out of a breach of LoopNet’s non-solicitation obligations under the merger agreement) that the Board concludes in good faith constitutes a superior proposal (a “superior proposal termination”); provided that any such termination shall be void and of no force or effect, unless concurrently with such termination LoopNet pays CoStar the $25.8 million termination fee payable pursuant to the merger agreement, enters into such definitive agreement and otherwise complies with its non-solicitation obligations.
 
In each case referred to above, LoopNet may take such action only if the Board determines in good faith, after consultation with outside legal counsel and its financial advisor, that the failure to take such action would be inconsistent with its fiduciary duties under Delaware law, and, further, in the case of the second and third bullets above, only if, prior to effecting any adverse recommendation change or superior proposal termination, (i) LoopNet notifies CoStar in writing, at least five business days prior to effecting such adverse recommendation change or superior proposal termination of its intention to effect such adverse recommendation change or superior proposal termination (any material amendment to the terms of a superior proposal shall require a new notice period of at least two business days, rather than five business days), (ii) during the applicable notice period LoopNet negotiates with CoStar in good faith to make such adjustments to the terms and conditions of the merger agreement such that the superior proposal ceases to be a superior proposal or the adverse recommendation change in response to the intervening event is no longer necessary, as applicable and (iii) at the end of the notice period, the Board determines in good faith, after consultation with its outside legal counsel and financial advisor that such superior proposal continues to meet the definition of superior proposal or the intervening event continues to necessitate an adverse recommendation change, as applicable.
 
The term “acquisition proposal” means, other than the transactions contemplated by the merger agreement, any third party offer, proposal, indication of interest or inquiry contemplating or otherwise relating to any transaction or series of transactions involving (i) any acquisition, lease, license or purchase, direct or indirect, of 20% or more of the consolidated assets of LoopNet and its subsidiaries or 20% or more of any class of equity or voting securities of LoopNet or any of its subsidiaries whose assets, individually or in the aggregate, constitute 20% or more of the consolidated assets of LoopNet, (ii) any tender offer (including a self-tender offer) or exchange offer that, if consummated, would result in any third party owning, directly or indirectly, 20% or more of any class of equity or voting securities of LoopNet (or any surviving or successor entity thereto) or any of its subsidiaries whose assets, individually or in the aggregate, constitute 20% or more of the consolidated assets of LoopNet or (iii) a merger, consolidation, share exchange, business combination, sale of substantially all the assets, reorganization, recapitalization, liquidation, dissolution or other similar transaction involving LoopNet or any of its subsidiaries whose assets, individually or in the aggregate, constitute 20% or more of the consolidated assets of LoopNet and its subsidiaries.
 
The term “superior proposal” means a bona fide, unsolicited written acquisition proposal for at least a majority of the outstanding shares of LoopNet common stock on an as-converted basis or all or substantially all of the consolidated assets of LoopNet and its subsidiaries that the Board determines in good faith by a majority vote, after considering the advice of outside counsel and a financial advisor of nationally recognized reputation, is (A) at least as favorable, from a financial point of view, to the holders of LoopNet common stock as the merger consideration (disregarding the aspects and risks set forth in the parenthetical in the


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following clause (B)) and (B) on more favorable terms to the holders of LoopNet common stock than the merger (taking into account all financial, legal, financing (including availability thereof), regulatory and other aspects and risks (including required conditions (including any requirement of a stockholder vote of the party making the acquisition proposal) and likelihood and timing of consummation)).
 
The merger agreement also provides that LoopNet shall not take any of the actions described above unless LoopNet shall have delivered to CoStar a prior written notice advising CoStar that it intends to take such action. In addition, LoopNet shall notify CoStar promptly (but in no event later than 24 hours) after receipt by LoopNet (or any of its representatives) of any acquisition proposal, including of the material terms and conditions thereof, and shall, at CoStar’s request, keep CoStar informed on a reasonably current basis as to the status (including changes to the material terms) of such acquisition proposal. LoopNet shall also notify CoStar promptly (but in no event later than 24 hours) after receipt by LoopNet of any request for non-public information relating to LoopNet or any of its subsidiaries or for access to the business, properties, assets, books or records of LoopNet or any of its subsidiaries by any third party that may be considering making, or has made, an acquisition proposal.
 
Reasonable Best Efforts to Complete the Merger; Other Agreements
 
Reasonable Best Efforts.  CoStar and LoopNet have each agreed to use their reasonable best efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable under applicable law to consummate the transactions contemplated by the merger agreement.
 
Notwithstanding the parties’ “reasonable best efforts” obligation the merger agreement does not require LoopNet or CoStar to take any divestiture action that is not conditioned upon consummation of the merger. Additionally, CoStar is not required to take any action involving CoStar businesses or assets in order to obtain the approval of a government authority unless such approval could not be obtained by an action to which CoStar is required or obliged to agree involving solely LoopNet businesses or assets. CoStar is also not required to take any actions which, individually or in the aggregate, would constitute a substantial detriment. A “substantial detriment” means (i) any material limitation, restriction or prohibition on the ability of CoStar or any of its subsidiaries effectively to acquire, hold or exercise full rights of ownership of the capital stock of LoopNet or the surviving corporation, or the assets of LoopNet and its subsidiaries, (ii) a loss by CoStar and its affiliates of a material benefit or material benefits (including, without limitation, revenue or cost synergies), after taking into account the adverse effect of the proposed actions on CoStar and its affiliates (including, for these purposes, the surviving corporation and its subsidiaries) arising from or relating to the merger and the other transactions contemplated by the merger agreement, (iii) an impact that is materially adverse to the assets, business, results of operation or financial condition of the surviving corporation and its subsidiaries, or (iv) an impact that is materially adverse to the assets, business, results of operation or financial condition of CoStar and its subsidiaries, assuming for purposes of this determination that CoStar and its subsidiaries are of equivalent size to the surviving corporation and its subsidiaries, taken as a whole.
 
Proxy Statement/Prospectus; Registration Statement; Stockholders’ Meeting.  CoStar and LoopNet have agreed to prepare and file with the SEC this proxy statement/prospectus and the registration statement in which this proxy statement/prospectus is included as a prospectus as promptly as practicable after the execution of the merger agreement. CoStar and LoopNet have also agreed to use reasonable best efforts to have the registration statement declared effective, to keep the registration statement effective as long as is necessary to consummate the merger, to furnish all information reasonably requested by the other in connection with the preparation and other action involving the registration statement and to resolve any SEC comments relating to this proxy statement/prospectus. LoopNet has agreed to cause this proxy statement/prospectus to be mailed to its stockholders as promptly as practicable after the registration statement in which this proxy statement/prospectus is included as a prospectus is declared effective. The merger agreement also provides that LoopNet will hold the stockholders’ special meeting as soon as reasonably practicable following the effectiveness of the registration statement and will recommend adoption of the merger agreement by LoopNet’s stockholders and use reasonable best efforts to obtain the Stockholder Approval.


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Other Agreements.  The merger agreement contains certain other agreements, including agreements relating to notifications of certain events, public announcements and confidentiality.
 
Financing
 
Marketing Period
 
Under the merger agreement, LoopNet has agreed to allow CoStar and its financing sources a period of 20 consecutive business days to market the debt financing. The marketing period is a period during and at the end of which (i) CoStar has the LoopNet financial and other information described below (and the information will be deemed not to have been received on any date on which the financial statements of LoopNet and its subsidiaries delivered to CoStar as of such date would be required to be updated in order to be sufficiently current to permit a registration statement with the SEC using such financial statements (including pro forma financial statements) to be declared effective on any day during the marketing period if the marketing period were to commence on such date), (ii) the conditions of the merger described below under “— Conditions of the Merger — Mutual Conditions” have been satisfied (other than those conditions that by their terms are to be satisfied at the closing of the merger) and (iii) nothing has occurred and no condition exists that would cause any of the conditions of the merger described below under “— Conditions of the Merger — CoStar Conditions” to fail to be satisfied assuming the closing were to be scheduled for any time during such 20 consecutive business day period; provided that if all such conditions have been satisfied other than the Stockholder Approval because the special meeting of LoopNet’s stockholders has not yet been held, unless a bona fide acquisition proposal has been made and remains outstanding, the marketing period will commence on the date that is 15 business days prior to the date of such special meeting.
 
If the marketing period has not ended on or prior to August 19, 2011, it will commence no earlier than September 7, 2011, and if it has not ended on or prior to December 16, 2011, it will commence no earlier than January 3, 2012 and the marketing period will be deemed not to have commenced if prior to its completion, Ernst & Young LLP has withdrawn its audit opinion with respect to any of the financial statements filed by LoopNet with the SEC since January 1, 2008. In addition, for purposes of calculating the length of the marketing period, a business day does not include November 25, 2011, or any day on which there has been (i) any general suspension of, or limitation on trading in securities on Nasdaq (other than a shortening of trading hours or any coordinated trading halt triggered solely as a result of a specified increase or decrease in a market index), (ii) a declaration of a banking moratorium or any suspension of payments in respect of banks in the United States generally or in the State of New York or (iii) any material limitation (whether or not mandatory) by any governmental authority on the extension of credit by banks or other lending institutions.
 
LoopNet Cooperation
 
LoopNet has agreed to use its reasonable best efforts to provide, and to cause its subsidiaries to use their reasonable best efforts to provide, and to use its reasonable best efforts to cause each of its and their respective representatives to provide all cooperation reasonably requested by CoStar in connection with the financing (provided, that such requested cooperation does not unreasonably interfere with the ongoing operations of LoopNet and its subsidiaries), including, among other things:
 
  •  participation in meetings, due diligence sessions, presentations, “road shows” and sessions with rating agencies;
 
  •  assisting with the preparation of materials for rating agency presentations, offering documents, private placement memoranda, bank information memoranda, prospectuses and similar documents required in connection with the debt financing;
 
  •  furnishing CoStar and its financing sources with all financial and other pertinent information regarding LoopNet and its subsidiaries as may be reasonably requested by CoStar to assist in the preparation of customary offering or information documents, including information with respect to the collateral, financial statements, pro forma financial information, financial data, audit reports and certain other


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  information required and of the type and form customarily included in private placements of debt securities;
 
  •  using reasonable best efforts to obtain accountants’ comfort letters, legal opinions, surveys and title insurance;
 
  •  furnishing CoStar and its financing sources with information and documentation required under applicable “know your customer” and anti-money laundering rules and regulations, including without limitation the PATRIOT Act; and
 
  •  executing and delivering any commitment letters, underwriting or placement agreements, registration statements, pledge and security documents, perfection certificates, other definitive financing documents or other requested certificates or documents, including a customary solvency certificate by LoopNet’s chief financial officer.
 
None of these letters, agreements, registration statements, documents and certificates will have to be executed and delivered except in connection with the closing of the merger, and the effectiveness thereof will be conditioned upon, or become operative after, the occurrence of the closing of the merger. No personal liability will be imposed on the LoopNet officers or employees involved in assisting CoStar and its financing sources pursuant to the foregoing.
 
The obligations of CoStar and merger sub to consummate the merger and the other transactions contemplated by the merger agreement on the terms and subject to the conditions of the merger agreement are not conditioned upon the availability or consummation of the debt financing or receipt of the proceeds therefrom.
 
Access to Information
 
Under the merger agreement, until the effective time, subject to applicable law and the confidentiality agreement between LoopNet and CoStar dated March 10, 2011, LoopNet will give CoStar and its authorized representatives full access to the offices, properties, books and records of LoopNet and its subsidiaries, furnish CoStar and its authorized representatives with reasonably requested information and instruct LoopNet’s authorized representatives to cooperate with CoStar’s investigation of LoopNet and its subsidiaries.
 
Director and Officer Indemnification and Insurance
 
The merger agreement provides that for a period of six years after the effective time of the merger and to the fullest extent permitted by law or provided under LoopNet’s certificate of incorporation or bylaws or in an agreement between LoopNet and its current or former officers and directors, the surviving corporation will indemnify, and provide expenses as they are incurred to, the current or former officers and directors of LoopNet with respect to acts or omissions occurring at or prior to the effective time, provided that any person to whom expenses are advanced will provide an undertaking to repay any advances made if a court determines the person was not entitled to indemnification. The merger agreement further provides that, prior to the effective time of the merger, LoopNet may purchase a six-year “tail” officers’ and directors’ liability insurance policy on terms and conditions no less favorable in the aggregate than LoopNet’s existing directors’ and officers’ liability insurance. If LoopNet cannot purchase this “tail” policy for an aggregate premium of 200% or less of the annual premium paid by LoopNet for such existing insurance, LoopNet may only purchase as much insurance coverage as can be obtained within the 200% cap unless it receives written consent from CoStar to exceed that cap. The surviving corporation will pay all expenses, including reasonable fees and expenses of counsel, that an indemnified person may incur in enforcing the indemnity and other obligations described above, and the merger agreement provides that the foregoing rights of each indemnified person will survive the effective time of the merger and are enforceable by each indemnified person.
 
Employee Matters
 
The merger agreement provides that, for a period of one year after the effective time, CoStar will provide the following to those employees of LoopNet and its subsidiaries who are employed immediately prior to the


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effective time (the “covered employees”) who remain employed by CoStar after the effective time: (i) base salary or base wages that are no less than the base salary or base wages provided to each such continuing employee immediately prior to the effective time and (ii) annual cash bonus opportunity and other compensation and benefits (other than equity incentive arrangements) that are in the aggregate substantially comparable to such annual cash bonus opportunity and other compensation and benefits provided by LoopNet and its subsidiaries as in effect immediately prior to the effective time. The merger agreement also provides that, except as would result in the duplication of benefits, with respect to any compensation and/or benefit program, policy or arrangement maintained by CoStar or any of its subsidiaries, including the surviving corporation, in which any LoopNet employee becomes a participant, such employee will receive full credit (for purposes of eligibility to participate, vesting, and, except for any defined benefit plan, benefit level and accrual, where applicable under the compensation and/or benefit programs, policies or arrangements of CoStar or any of its subsidiaries), for service with LoopNet or any of its subsidiaries (or predecessor employers to the extent LoopNet provides such past service credit). In addition, CoStar will waive, or cause to be waived, any pre-existing condition limitations, exclusions, actively-at-work requirements and waiting periods under any welfare benefit plan maintained by CoStar or any of its subsidiaries in which LoopNet employees (and their eligible dependents) are eligible to participate from and after the effective time, except to the extent that such pre-existing condition limitations, exclusions, actively-at-work requirements and waiting periods would not have been satisfied or waived under the comparable plan of LoopNet and its subsidiaries in which the LoopNet employee participated. If a LoopNet employee commences participation in any health benefit plan of CoStar or any of its subsidiaries after the commencement of a calendar year, to the extent commercially practicable, CoStar shall cause such plan to recognize the dollar amount of all co-payments, deductibles and similar expenses incurred by such LoopNet employee (and his or her eligible dependents) during such calendar year for purposes of satisfying such calendar year’s deductible and co-payment limitations under the relevant welfare benefit plans in which such LoopNet employee (and dependents) commences participation. CoStar has also agreed to provide certain LoopNet employees with minimum severance benefits should they be terminated under certain circumstances.
 
Directors and Officers After the Merger
 
From the effective time until successors are duly elected or appointed and qualified in accordance with applicable law, (i) the directors of merger sub at the effective time will be the directors of the surviving corporation resulting from the merger of merger sub with and into LoopNet and (ii) the officers of LoopNet at the effective time will be the officers of the surviving corporation resulting from the merger of merger sub with and into LoopNet.
 
Conditions of the Merger
 
Mutual Conditions.  The obligations of LoopNet, CoStar and merger sub to consummate the merger are subject to the satisfaction or waiver of various conditions on or prior to the effective time, including the following:
 
  •  obtaining the Stockholder Approval;
 
  •  the absence of any injunctions or other legal prohibitions preventing the consummation of the merger;
 
  •  the expiration or termination of the waiting period under the HSR Act and the obtaining of any other approvals or clearances required to consummate the merger with respect to any other antitrust laws; and
 
  •  the effectiveness of the Form S-4 in which this proxy statement/prospectus is included as a prospectus and the lack of any stop order suspending the effectiveness of the Form S-4 or pending or threatened SEC proceedings to effect a stop order.


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CoStar Conditions.  CoStar’s and merger sub’s obligations to consummate the merger are subject to the satisfaction or waiver of additional conditions, which include the following:
 
  •  the absence of any pending suit, action or proceeding by a governmental authority which seeks to make illegal, prevent or otherwise restrain the consummation of the merger, or that, individually or in the aggregate, is reasonably expected to impose a substantial detriment;
 
  •  the absence of any injunctions or other legal prohibitions making illegal or preventing or otherwise restraining the consummation of the merger or imposing or, individually or in the aggregate, reasonably expected to impose a substantial detriment;
 
  •  in the case of certain of LoopNet’s representations and warranties relating to corporate existence and power, corporate authorization, and no material adverse effect, the accuracy of such representations and warranties in all respects; in the case of LoopNet’s representations and warranties relating to capitalization, the accuracy of such representations and warranties in all but de minimis respects; in the case of certain of LoopNet’s representations and warranties relating to corporate authorization, subsidiaries and antitakeover matters, the accuracy of such representations and warranties in all material respects; and in the case of LoopNet’s other representations and warranties, the accuracy (disregarding any materiality or material adverse effect qualifications contained in such representations and warranties) of such representations and warranties except for such inaccuracies as would not, individually or in the aggregate, have a material adverse effect on LoopNet;
 
  •  LoopNet’s performance in all material respects of its obligations under the merger agreement;
 
  •  the delivery to CoStar of an officers’ certificate from LoopNet confirming that the conditions described in the immediately preceding two bullets have been satisfied; and
 
  •  the lack of general banking, stock market or credit market limitations, suspensions and moratoria.
 
LoopNet Conditions.  LoopNet’s obligations to complete the merger are subject to the satisfaction or waiver of additional conditions, which include the following:
 
  •  in the case of certain of CoStar’s representations and warranties relating to corporate existence and power, corporate authorization and capitalization, the accuracy of such representations and warranties in all material respects; and in the case of CoStar’s other representations and warranties, the accuracy (disregarding all materiality and material adverse effect qualifications contained in such representations and warranties) of such representations and warranties except for such inaccuracies as would not, individually or in the aggregate, have a material adverse effect on CoStar;
 
  •  CoStar and merger sub’s performance in all material respects of their obligations under the merger agreement; and
 
  •  the delivery to LoopNet of an officers’ certificate from CoStar confirming that the conditions described in the immediately preceding two bullets have been satisfied.
 
The merger agreement provides that certain of the conditions described above may be waived. Neither CoStar nor LoopNet currently expects to waive any material condition to the completion of the merger.
 
Definition of Material Adverse Effect
 
A “material adverse effect” is defined with respect to any entity as (a) a material adverse effect on the financial condition, business, assets or results of operations of such entity and its subsidiaries, taken as a whole or (b) a material impairment or delay in the ability of such entity to consummate the transactions contemplated by the merger agreement.


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With respect to (a) above, the definition of material adverse effect excludes any effects resulting from or arising out of the following:
 
  •  changes in generally accepted accounting principles or changes in the regulatory accounting requirements applicable to any industry in which an entity and its subsidiaries operate that are proposed, approved or enacted on or after the date of the merger agreement;
 
  •  changes in the financial or securities markets or general economic or political conditions in the United States;
 
  •  changes (including changes of applicable laws) or conditions generally affecting the industry in which an entity and its subsidiaries operate and not specifically relating to such entity and its subsidiaries, taken as a whole;
 
  •  acts of war, sabotage or terrorism or natural disasters occurring after the date of the merger agreement;
 
  •  any loss of or adverse change in the relationship of an entity or any of its subsidiaries with its employees, customers, partners or suppliers arising out of the announcement, pendency or consummation of the transactions contemplated by the merger agreement;
 
  •  in and of itself, any failure by an entity or any of its subsidiaries to meet any internal or published budgets, projections, forecasts or predictions of financial performance for any period ending after the date of the merger agreement (it being agreed that the underlying facts and circumstances giving rise to such failure may be taken into account in determining whether a “material adverse effect” has occurred);
 
  •  any action taken by an entity or any of its subsidiaries that is specifically required pursuant to the merger agreement; or
 
  •  any action, suit, investigation or proceeding made, brought or threatened by any holder of securities of an entity, on the holder’s own behalf or on behalf of the entity on a derivative basis (other than any actions, suits, investigations or proceedings made, brought or threatened by any of the entity’s officers or directors), arising out of or related to the merger agreement or any of the transactions contemplated by the merger agreement, including the merger.
 
The exclusions described in the first four bullet points above do not apply to the extent that the relevant changes, effects, events, circumstances or occurrences disproportionately impact the entity and its subsidiaries relative to other companies in its industry.
 
Termination; Termination Fees; Expenses
 
Termination.  The merger agreement may be terminated, and the merger may be abandoned at any time prior to its completion:
 
  •  by mutual written consent of LoopNet and CoStar;
 
  •  by either CoStar or LoopNet, if:
 
  •  the merger has not been completed by January 31, 2012; provided that this date can be extended by either CoStar or LoopNet to April 30, 2012 if any required antitrust approvals have not been received but all other mutual conditions to the closing of the merger have been satisfied or waived; and provided further that this date will be automatically extended until the second business day after the final day of the marketing period if CoStar’s marketing period has commenced but not ended (as discussed in more detail above under “The Merger — Closing and Effectiveness of the Merger”); except that this right is not available to any party whose breach of the merger agreement primarily caused the failure to complete the merger by this date (January 31, 2012 or any later date resulting from an extension as described in this bullet, the “end date”);
 
  •  there is a final and nonappealable legal restraint or prohibition in effect that prevents the completion of the merger; or


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  •  the Stockholder Approval is not obtained at the special meeting or any postponement or adjournment thereof;
 
  •  by CoStar, if:
 
  •  the Board makes an adverse recommendation change;
 
  •  after an alternative acquisition proposal has been received, the Board fails to publicly reaffirm its recommendation that the stockholders adopt the merger agreement within seven business days after a request to do so by CoStar;
 
  •  the Board fails to publicly recommend against a publicly announced alternative acquisition proposal after a request to do so by CoStar by the later of five business days before the special stockholder meeting and five business days after CoStar’s request (or such shorter period as may exist between the date of the alternative acquisition proposal and the date of the special meeting);
 
  •  LoopNet materially breaches its obligations under the merger agreement related to non-solicitation and other offers;
 
  •  LoopNet breaches any of its representations or warranties or fails to perform any covenant or obligation in the merger agreement in such a way as to cause the failure of the closing conditions relating thereto, and such failure cannot be cured by the end date; provided that, at the time of notice of termination, neither CoStar nor merger sub is in material breach of its or their obligations under the merger agreement;
 
  •  LoopNet willfully fails to perform any of its covenants or agreements set forth in the merger agreement following an alternative acquisition proposal; or
 
  •  there is a final and nonappealable legal restraint or prohibition imposing a substantial detriment.
 
  •  by LoopNet, if:
 
  •  prior to obtaining the Stockholder Approval, the requirements of a superior proposal termination as described in the section “No Solicitation; Changes in Recommendations” have been fully satisfied and LoopNet pays to CoStar the $25.8 million termination fee described below; or
 
  •  if CoStar breaches any of its representations or warranties or fails to perform any covenant or obligation in the merger agreement in such a way as to cause the failure of the closing conditions relating thereto, and such failure cannot be cured by the end date; provided that, at the time of notice of termination, LoopNet is not in material breach of any of its obligations under the merger agreement.
 
If the merger agreement is terminated as described in “The Merger Agreement — Termination of the Merger Agreement” above, the merger agreement will be void, and there will be no liability or obligation of any party except that:
 
  •  each party will remain liable for any willful and material breach of the merger agreement, and
 
  •  certain provisions of the merger agreement, including the provisions relating to the allocation of fees and expenses (including, if applicable, the termination fees described above) and the confidentiality agreement dated March 10, 2011 between LoopNet and CoStar will survive termination.
 
Termination Fees.  LoopNet has agreed to pay CoStar a termination fee of $25.8 million if the merger agreement is terminated:
 
  •  by CoStar, if (i) the Board makes an adverse recommendation change, (ii) after an alternative acquisition proposal has been received, the Board fails to publicly reaffirm its recommendation that stockholders adopt the merger agreement within seven business days after a request to do so by Costar, (iii) the Board fails to publicly recommen