Exhibit 99.2
 STARCITE, INC. AND SUBSIDIARIES




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STARCITE, INC. AND SUBSIDIARIES
 Table of Contents
 PageIndependent Auditors Report
    
    
    1Consolidated Balance Sheets, December 31, 2008 and 2007
    
    
    2Consolidated Statements of Operations, Years ended December 31, 2008 and 2007
    
    
    3Consolidated Statements of Stockholders Equity and Comprehensive Loss, Years ended
December 31, 2008 and 2007
    
    
    4Consolidated Statements of Cash Flows, Years ended December 31, 2008 and 2007
    
    
    5Notes to Consolidated Financial Statements
    
    
    6




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Independent Auditors Report




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STARCITE, INC. AND SUBSIDIARIES
    2008
    
    
    2007AssetsCurrent assets:Cash and cash equivalents
    
    $
    2,873
    
    
    
    330Accounts receivable, net of allowance for doubtful accounts of
$1,299 and $479
    
    
    11,726
    
    
    
    12,960Prepaid expenses and other current assets
    
    
    1,775
    
    
    
    715Deferred commissions
    
    
    3,963
    
    
    
    3,106Total current assets
    
    
    20,337
    
    
    
    17,111Property and equipment, net
    
    
    5,012
    
    
    
    4,770Other assets
    
    
    513
    
    
    
    258Restricted cash
    
    
    8
    
    
    
    116Intangible assets, net
    
    
    22,630
    
    
    
    25,922Goodwill
    
    
    11,847
    
    
    
    11,847Total assets
    
    $
    60,347
    
    
    
    60,024Liabilities and Stockholders EquityCurrent liabilities:Short-term borrowings
    
    $
    3,689
    
    
    
    3,493Current portion of notes payable
    
    
    4,898
    
    
    
    1,093Current portion of obligations under capital leases
    
    
    4
    
    
    
    141Accounts payable
    
    
    3,690
    
    
    
    4,513Accrued liabilities
    
    
    6,777
    
    
    
    7,947Deferred revenue
    
    
    19,395
    
    
    
    15,396Total current liabilities
    
    
    38,453
    
    
    
    32,583Notes payable
    
    
    
    
    
    
    4,694Obligations under capital leases
    
    
    
    
    
    
    Other long-term liabilities
    
    
    988
    
    
    
    235Total liabilities
    
    
    39,441
    
    
    
    37,512Stockholders equity:Series A Convertible preferred stock, $0.001 par value: Authorized
20,000,000 shares; issued and outstanding 20,000,000 shares
(liquidation value of $26,000)
    
    
    23,888
    
    
    
    23,888Series A-1 Convertible preferred stock, $0.001 par value: Authorized 200,000 shares; issued and outstanding 200,000
(liquidation value of $10,000)
    
    
    9,187
    
    
    
    9,187Series B preferred stock, $0.001 par value; Authorized 3,260,869
shares; issued and outstanding 3,260,869 shares
(liquidation value of $15,000)
    
    
    15,000
    
    
    
    Common stock, $0.001 par value: Authorized 33,260,869 shares in
2008 and 30,000,000 shares in 2007; issued and outstanding
9,879 shares in 2008 and 2,709 shares in 2007
    
    
    
    
    
    
    Additional paid-in capital
    
    
    74,327
    
    
    
    71,394Accumulated other comprehensive income
    
    
    92
    
    
    
    132Accumulated deficit
    
    
    (101,588
    )
    
    
    (82,089
    )Total stockholders equity
    
    
    20,906
    
    
    
    22,512Total liabilities and
stockholders equity
    
    $
    60,347
    
    
    
    60,024
   2




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STARCITE, INC. AND SUBSIDIARIES
    2008
    
    
    2007Net sales
    
    $
    50,548
    
    
    
    44,944Costs and operating expenses:Cost of sales
    
    
    15,918
    
    
    
    14,537Selling and marketing
    
    
    18,061
    
    
    
    13,067Research and development
    
    
    10,802
    
    
    
    13,158General and administrative
    
    
    17,098
    
    
    
    13,787Depreciation and amortization
    
    
    5,076
    
    
    
    4,499Severance and restructuring
    
    
    2,008
    
    
    
    Total costs and operating
expenses
    
    
    68,963
    
    
    
    59,048Operating loss
    
    
    (18,415
    )
    
    
    (14,104
    )Other income (expense):Other expense:
    
    
    (538
    )
    
    
    (87
    )Interest income
    
    
    127
    
    
    
    43Interest expense
    
    
    (620
    )
    
    
    (517
    )Total other expense, net
    
    
    (1,031
    )
    
    
    (561
    )Net loss before income tax
    
    
    (19,446
    )
    
    
    (14,665
    )Income tax expense
    
    
    (53
    )
    
    
    Net loss
    
    $
    (19,499
    )
    
    
    (14,665
    )
   3




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STARCITE, INC. AND SUBSIDIARIES
    AccumulatedPreferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Additional
    
    
    otherComprehensive
    
    
    Series A, Series A-1
    
    
    Series B Preferred Stock
    
    
    Common stock
    
    
    paid-in
    
    
    comprehensive
    
    
    Accumulatedloss
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    capital
    
    
    income (loss)
    
    
    deficit
    
    
    TotalBalance, January 1, 2007
    
    
    
    
    
    
    20,200,000
    
    
    
    33,075
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    68,544
    
    
    
    (14
    )
    
    
    (67,424
    )
    
    
    34,181Net loss
    
    $
    (14,665
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14,665
    )
    
    
    (14,665
    )Foreign currency translation
    
    
    146
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    146
    
    
    
    
    
    
    
    146Comprehensive loss
    
    $
    (14,519
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercise of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,192
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    2Issuance of nonvested stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,517
    
    
    
    
    
    
    
    1,731
    
    
    
    
    
    
    
    
    
    
    
    1,731Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,117
    
    
    
    
    
    
    
    
    
    
    
    1,117Balance, December 31, 2007
    
    
    
    
    
    
    20,200,000
    
    
    
    33,075
    
    
    
    
    
    
    
    
    
    
    
    2,709
    
    
    
    
    
    
    
    71,394
    
    
    
    132
    
    
    
    (82,089
    )
    
    
    22,512Net loss
    
    $
    (19,499
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19,499
    )
    
    
    (19,499
    )Foreign currency translation
    
    
    (40
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (40
    )
    
    
    
    
    
    
    (40
    )Comprehensive loss
    
    $
    (19,539
    )Issuance of Series B Preferred Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,260,869
    
    
    
    15,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,000Exercise of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,540
    
    
    
    
    
    
    
    13
    
    
    
    
    
    
    
    
    
    
    
    13Issuance (cancellation) of nonvested
stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (370
    )
    
    
    
    
    
    
    883
    
    
    
    
    
    
    
    
    
    
    
    883Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,037
    
    
    
    
    
    
    
    
    
    
    
    2,037Balance, December 31, 2008
    
    
    
    
    
    
    20,200,000
    
    
    $
    33,075
    
    
    
    3,260,869
    
    
    $
    15,000
    
    
    
    9,879
    
    
    $
    
    
    
    $
    74,327
    
    
    $
    92
    
    
    $
    (101,588
    )
    
    $
    20,906
   4




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STARCITE, INC. AND SUBSIDIARIES
    2008
    
    
    2007Cash flows from operating activities:Net loss
    
    $
    (19,499
    )
    
    
    (14,665
    )Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:Depreciation and amortization
    
    
    5,335
    
    
    
    4,671Imputed interest on note payable
    
    
    66
    
    
    
    115Stock-based compensation
    
    
    2,920
    
    
    
    2,848Changes in operating assets and liabilities (net of acquisitions):Increase (decrease) in accounts receivable
    
    
    1,123
    
    
    
    (4,431
    )(Decrease) increase in prepaid expenses and other assets
    
    
    (2,302
    )
    
    
    (2,611
    )(Decrease) increase in accounts payable and accrued liabilities
    
    
    (2,020
    )
    
    
    2,429Increase in deferred revenue
    
    
    4,094
    
    
    
    8,194Increase (decrease) in other liabilities
    
    
    766
    
    
    
    43Net cash (used in) provided by operating activities
    
    
    (9,517
    )
    
    
    (3,407
    )Cash flows from investing activities:Purchases of property and equipment
    
    
    (2,514
    )
    
    
    (4,255
    )Cash paid for purchase of Travent assets
    
    
    
    
    
    
    (1,244
    )Decrease in restricted cash
    
    
    177
    
    
    
    294Net cash (used in) provided by investing activities
    
    
    (2,337
    )
    
    
    (5,205
    )Cash flows from financing activities:Issuance of preferred stock
    
    
    15,000
    
    
    
    Net proceeds from short-term borrowings
    
    
    390
    
    
    
    3,493Net proceeds from notes payable
    
    
    
    
    
    
    1,530Repayments of capital lease obligations
    
    
    (137
    )
    
    
    (482
    )Repayments of short-term borrowings
    
    
    (194
    )
    
    
    Repayments of notes payable
    
    
    (1,033
    )
    
    
    (374
    )Exercise of stock options
    
    
    13
    
    
    
    2Net cash provided by (used in) financing activities
    
    
    14,039
    
    
    
    4,169Effect of exchange rate changes on cash and cash equivalents
    
    
    358
    
    
    
    (16
    )Net (decrease) increase in cash and cash equivalents
    
    
    2,543
    
    
    
    (4,459
    )Cash and cash equivalents, beginning of year
    
    
    330
    
    
    
    4,789Cash and cash equivalents, end of year
    
    $
    2,873
    
    
    
    330
   5




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STARCITE, INC. AND SUBSIDIARIES
   (1)
    
    Background and Summary of Significant Accounting Policies
 (a)
    
    The Company, Liquidity, and Going ConcernStarCite, Inc. and its subsidiaries is an Internet business that delivers content and
services for both professional and occasional meeting planners. StarCite, Inc. (StarCite)
was incorporated in Delaware in 2006 in connection with the merger of StarCite, Inc. (the
Predecessor or Legacy StarCite) and OnVantage, Inc. (OnVantage) (see note 2).Legacy StarCite was the accounting acquirer in the transaction. Legacy StarCite was
incorporated in Delaware and began operations in January 1999. Legacy StarCite for the
period prior to the merger and StarCite for the period subsequent to the merger, together
with their subsidiaries, are referred to herein as the Company.The Company has incurred net losses and negative operating cash flows since its
inception. As of December 31, 2008, the Company has an accumulated deficit of $101,588.
The Companys primary sources of liquidity have been through the issuance of preferred
stock, borrowings from stockholders, and borrowings from banks.During 2008 and 2007,
the Company has continued to make investments in ongoing business development efforts in
anticipation of future growth. The Companys future results of operations involve
significant risks and uncertainties. Factors that could affect the Companys future
operating results and cause actual results to vary materially from expectations include,
but are not limited to risks from competition, new products, technological change,
recent economic activity, and
dependence on key personnel. In order to complete its future growth strategy, the Company
is likely to require additional equity and/or debt financing. There is no assurance that
additional equity and/or debt financing will be available to the Company as needed.Based upon the Companys cash balance, order backlog and availability under its
February 2009 Credit Facility (see note 13) as of December 31, 2008, management of the
Company estimates that liquidity during 2009 will be at or near the minimum amount
necessary to operate its business. However, if anticipated revenue growth is not
achieved, the Company may be required to further curtail or limit certain general and
administrative, selling and marketing and research and development activities in order to
reduce its cash outflows.(b)
    
    Principles of ConsolidationThe accompanying consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All intercompany balances and transactions have been
eliminated in consolidation.(c)
    
    Cash EquivalentsThe Company considers all highly liquid investments purchased with original maturities of
three months or less to be cash equivalents. Cash equivalents of $3,189 and $50 at
December 31, 2008 and 2007, respectively, consists of investments in money market funds
and overnight repurchase agreements.
   6




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STARCITE, INC. AND SUBSIDIARIES
   (d)
    
    Allowance for Doubtful AccountsThe allowance for doubtful accounts is the Companys best estimate of the amount of
probable credit losses in the Companys existing accounts receivable. The Company
determines the allowance based on a specific review of aged accounts as well as
historical write-off experience. Account balances are charged off against the allowance
after all means of collection have been exhausted and the potential for recovery is
considered remote.(e)
    
    Property and EquipmentProperty and equipment are stated at cost. Depreciation and amortization are provided on
the straight-line basis over the assets estimated useful lives or, if shorter, the lease
terms for leasehold improvements. Gains and losses on sales and retirements of assets are
reflected in the results of operations.(f)
    
    Intangible AssetsIntangible assets primarily consist of customer relationships and acquired technology.
Amortization of intangible assets is provided on a straight-line basis over the assets
estimated useful life.(g)
    
    Fair Value of Financial InstrumentsCarrying amounts of financial instruments held by the Company, which include cash
equivalents, accounts receivable, other current assets, accounts payable, accrued
liabilities, and debt, approximate fair value due to the short-term nature of those
instruments.(h)
    
    Long-Lived AssetsStatement of Financial Accounting Standards (SFAS) No. 144, Accounting for Impairment or
Disposal of Long-Lived Assets,addresses the accounting of and reporting for the
impairment of long-lived assets and for long-lived assets to be disposed of. In
accordance with SFAS No. 144, long-lived assets, such as property and equipment, and
other intangibles subject to amortization, are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a comparison of
the carrying amount of an asset to estimated undiscounted future cash flows expected to
be generated by the asset. If the carrying amount of an asset exceeds its estimated
future cash flows, then an impairment charge is recognized by the amount by which the
carrying amount of the asset exceeds the fair value of the asset.The Company did not record any impairment charges related to property and equipment or
intangibles during the years ended December 31, 2008 and 2007, as its carrying amounts
were not impaired.(i)
    
    GoodwillGoodwill represents the excess of cost over fair value of net assets acquired through the
Companys acquisitions. In accordance with SFAS No. 142, Goodwill and Other Intangible
Assets, goodwill and intangible assets acquired in a purchase business combination and
determined to have an indefinite useful life are not amortized, but instead are tested
for impairment at least annually in accordance
with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets
with estimable useful lives be amortized over their respective estimated useful lives to
their estimated residual values and reviewed for impairment in accordance with
SFAS No. 144.
   7




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STARCITE, INC. AND SUBSIDIARIES
   SFAS No. 142 requires the Company to perform an assessment of whether there is an
indication that goodwill is impaired. To accomplish this, the Company identifies its
reporting units and determines the carrying value of each reporting unit by assigning the
assets and liabilities, including existing goodwill and other intangible assets, to those
reporting units. The Company then determines the fair value of each reporting unit and
compares it to the carrying amount of the reporting unit. To the extent the carrying
amount of a reporting unit exceeds the fair value of the reporting unit, the Company
would be required to perform the second step of the impairment test, as this is an
indication that the reporting unit goodwill may be impaired. The second step requires a
comparison of the implied fair value of goodwill to the carrying amount of goodwill to
determine if there is impairment.In December 2008, the Company completed its annual goodwill impairment test in accordance
with SFAS No. 142. The Company has one reporting unit.
The Company determined that its fair value was greater than the carrying
amount as of December 31, 2008 and 2007. Accordingly, there was no indication that
goodwill was impaired.(j)
    
    Restricted CashThe Company is required to maintain an escrow account for the benefit of its landlord.
The cash and any related investment income may not be withdrawn until certain conditions
are met as defined in the agreement. At December 31, 2008 and 2007, $108 and $177,
respectively, were classified as prepaid expenses and other current assets, as these
amounts are scheduled to be returned to the Company within twelve months of the
respective balance sheet date.(k)
    
    Revenue RecognitionThe Company recognizes revenue in accordance with Emerging Issues Task Force (EITF)
No. 00-21, Revenue Arrangements with Multiple Deliverables.The Company generates revenue primarily from fees
from customers accessing its on-demand
application service, transactions (prepaid or pay-as-you-go), professional services (site
selection and software implementation), as well as advertising and marketing packages.
Its customers are corporations that utilize its on-demand meeting management software and
suppliers of meeting venues.The Companys corporate products are on-demand web-based solutions to manage and automate
every element of corporate meetings and events. This includes planning, budgeting,
sourcing of venues, electronic attendee management, expense reconciliations, and
measurement reporting. The Companys corporate solutions include StarCite Online
Marketplace (SOM) and MeetingView (MV).
   8




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STARCITE, INC. AND SUBSIDIARIES
   Through SOM and MV, meeting planners have the ability to research venues and submit
Requests for Proposals (RFPs). Suppliers of meeting venues utilize MarketView, the
Companys gateway for hotels and other venues, or private label solutions to receive and
respond to RFPs submitted by the Companys corporate clients through one of its
on-demand web-based solutions. Suppliers of meeting venues are able to advertise their
properties on the Companys web-based solutions through StarCites marketing programs.Customers pay a licensing fee for access to SOM and MV, which is recognized ratably over
the license period, which is typically three years. In addition, many customers will
prepurchase transactions associated with attendee registrations, which are also
recognized over the relevant licensing period. Fees associated with implementation and
outsourced meeting planning services, included in such agreements, are also recognized
ratably over the licensing period. Hotel marketing packages, intended to reach corporate
meeting planners, provide various levels of images and information concerning the
property. The revenue from the packages is recognized ratably over the life of the
contract, which is typically twelve months.In addition, the Company earns commissions associated with the negotiation and
contracting of hotel meeting space on behalf of corporate meeting planners. The
commissions, which are paid by the hotels, are recognized at the time the meeting occurs
as no significant performance obligations remain.Deferred revenue represents advanced billings associated with customer agreements less
revenue recognized related thereto. Such amounts are recognized as revenue when the
related significant performance obligations have been satisfied.(l)
    
    Research and DevelopmentResearch and development costs are charged to expense as incurred.(m)
    
    Advertising ExpenseAdvertising costs are expensed as incurred.(n)
    
    Income TaxesIncome taxes are accounted for under the asset-and-liability method. Deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and the tax effect of net operating loss
carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period that includes the enactment
date. A valuation allowance is recorded against deferred tax assets if it is more likely
than not that such assets will not be realized.
   9




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STARCITE, INC. AND SUBSIDIARIES
   (o)
    
    Concentration of Credit RiskFinancial instruments that potentially subject the Company to concentration of credit
risk consist principally of cash balances and trade receivables. The Company does not
require collateral from its customers.For the years ended December 31, 2008 and 2007, no single customer represented more than
10% of the Companys net sales.(p)
    
    Stock-Based CompensationThe Company accounts for stock-based payments in accordance SFAS No. 123 (revised 2004),
Share-Based Payment (SFAS No. 123R). SFAS No. 123R requires all stock-based payments,
including grants of employee stock options and nonvested shares, to be recognized in the
financial statements based on their fair values at date of grant. Under SFAS No. 123R,
companies are required to measure the cost of services received in exchange for stock
options and similar awards based on the grant-date fair value of the award and to
recognize this cost in the income statement over the period during which an award
recipient is required to provide service in exchange for the award.The Companys policy is to recognize compensation expense for awards granted on a
straight-line basis over the requisite service period. The Company uses the
Black-Scholes-Merton (Black Scholes) model to determine the grant date fair value of its
stock-based awards. The Company estimates forfeitures at the date of grant based on
historical experience and future expectations.(q)
    
    Use of EstimatesThe preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions that affect
the amounts reported in the financial statements and accompanying notes. Actual results
could differ from these estimates. These estimates include evaluation of the Companys
goodwill, intangible assets, revenue recognition and commitments and contingencies. These
estimates and assumptions are based on managements best judgments. Management evaluates
its estimates and assumptions on an ongoing basis using historical experience and other
factors, including the current economic environment, which management believes to be
reasonable under the circumstances. Management adjusts such estimates and assumptions
when facts and circumstances dictate. Illiquid credit markets, volatile equity markets
and reductions in information technology spending have combined to increase the
uncertainty inherent in such estimates and assumptions. It is reasonably possible that
the Companys accounting estimates with respect to the useful life of intangible assets
and the ultimate recoverability of goodwill and intangible assets could change in the
near term and that the effect of such changes on the financial statements could be
material. The Company believes the recorded amount of goodwill and intangible assets is
not impaired at December 31, 2008.(r)
    
    Supplemental Cash Flow InformationFor the years ended December 31, 2008 and 2007, the Company paid interest of $310 and
$147, respectively. The Company paid $67 and $50 of income taxes during the years ended
December 31, 2008 and 2007, respectively.
   10




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STARCITE, INC. AND SUBSIDIARIES
   (s)
    
    Deferred CommissionsThe Company capitalizes commission costs that are incremental and directly related to the
acquisition of customer contracts. Commission costs are accrued and capitalized upon
execution of the sales contract by the customer. Payments to sales personnel are made
shortly after the receipt of the related customer payment. Deferred commissions are
amortized over the term of the related customer contract and are recoverable through the
related future revenue streams.(t)
    
    Recent Accounting PronouncementsIn November 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 141R,
Business Combinations, which continues to require that all business combinations be
accounted for by applying the acquisition method. Under the acquisition method, the
acquirer recognizes and measures the identifiable assets acquired, the liabilities
assumed, and any contingent consideration and contractual contingencies as a whole at
their fair value as of the acquisition date. Under SFAS No. 141R, all transaction costs
are expensed as incurred. The guidance in SFAS No. 141R will be applied prospectively to
business combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning after December 15, 2008. The Company does not
expect the adoption of SFAS No. 141R to have a material impact on its consolidated
financial statements.In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities Including an amendment of FASB Statement No 115. This
standard permits entities to choose to measure many financial instruments and certain
other items at fair value that are not currently required to be measured at fair value.
The objective is to improve financial reporting by providing entities with the
opportunity to mitigate volatility in reported earnings caused by measuring related
assets and liabilities differently without having to apply complex hedge accounting
provisions. This standard also establishes presentation and disclosure requirements
designed to facilitate comparisons between entities that choose different measurement
attributes for similar types of assets and liabilities. This statement does not affect
any existing accounting literature that requires certain assets and liabilities to be
carried at fair value, nor does it eliminate disclosure requirements included in other
accounting standards, including requirements for disclosures about fair value
measurements included in FASB Statements No. 157, Fair Value Measurements, and No. 107,
Disclosures about Fair Value of Financial Instruments. The Company does not anticipate a
material effect on its financial statements as a result of the measurement provisions of
SFAS No. 159.
   11




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##### 



STARCITE, INC. AND SUBSIDIARIES
   In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. The standard
provides guidance for using fair value to measure assets and liabilities. The standard
also responds to investors requests for expanded information about the extent to which
companies measure assets and liabilities at fair value, the information used to measure
fair value, and the effect of fair value measurements on earnings. SFAS No. 157 applies
whenever other standards require (or permit) assets or liabilities to be measured at fair
value. SFAS No. 157 does not expand the use of fair value in any new circumstances.
SFAS No. 157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal years, except for
certain nonfinancial assets and liabilities for which the effective date has been
deferred until periods beginning after November 15, 2008. The Company does not anticipate
a material effect on its financial statements as a result of the measurement provisions
of SFAS No. 157.In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertain Tax
Positions(FIN 48). FIN 48 provides guidance for the recognition and measurement of
uncertain tax positions in an enterprises financial statements. Recognition involves a
determination of whether it is more likely than not that a tax position will be sustained
upon examination with the presumption that the tax position will be examined by the
appropriate taxing authority that would have full knowledge of all relevant information.
FASB Staff Position FIN 48-2, Effective Date of FASB Interpretation No. 48 for Certain
Nonpublic Enterprises, defers the effective date of FIN 48 for nonpublic enterprises to
the annual financial statements for fiscal years beginning after December 15, 2008, which
for the Company will be the year beginning January 1, 2009. The Company does not
anticipate a material effect on its financial statements as a result of the adoption of
FIN 48.
 (2)
    
    MergerOn December 29, 2006, the Company and OnVantage effected the terms of the Agreement and Plan
of Reorganization (Reorganization Agreement). Subject to the terms of the Reorganization
Agreement and in accordance with applicable provisions of the laws of the state of Delaware,
the Company and OnVantage, through a series of steps, consolidated their operations into a
Surviving Corporation (the Reorganization).Under the Reorganization Agreement, all common and preferred stock of the Company and
OnVantage issued and outstanding immediately prior to the effective date of the Reorganization
Agreement were converted into the right to receive an aggregate of 20,000,000 shares of
Series A preferred stock and 200,000 shares of Series A-1 preferred stock of the Surviving
Corporation, subject to adjustment pursuant to the terms of the Reorganization Agreement.
   12




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##### 



STARCITE, INC. AND SUBSIDIARIES
   The Reorganization was accounted for as an acquisition of OnVantage using the purchase method
of accounting. The purchase price consisted of the estimated fair value of the shares granted
to the former shareholders of OnVantage valued at $33,075 plus $884 of transaction costs.
Accordingly, tangible and intangible assets acquired and liabilities assumed were recorded at
their estimated fair values at the date of acquisition. The results of operations of OnVantage
have been included in the accompanying consolidated statement of operations from the date of
acquisition. The purchase price was allocated as follows:
 Cash and cash equivalents
    
    $
    3,301Accounts receivable
    
    
    3,593Other current and noncurrent assets
    
    
    345Acquired technology
    
    
    2,340Tradenames
    
    
    230Customer relationships
    
    
    23,601Property and equipment
    
    
    1,059Goodwill
    
    
    8,350Accounts payable and accrued liabilities
    
    
    (5,552
    )Deferred revenue
    
    
    (2,661
    )Other long-term liabilities
    
    
    (647
    )$
    33,959
    13




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##### 



STARCITE, INC. AND SUBSIDIARIES
   (3)
    
    Property and EquipmentProperty and equipment consist of the following at December 31, 2008 and 2007:
 Estimated
    
    December 31,useful life
    
    2008
    
    
    2007Computer
equipment and software
    
    3 years
    
    $
    8,426
    
    
    
    6,787Furniture and fixtures
    
    7 years
    
    
    899
    
    
    
    719Leasehold improvements
    
    89 years
    
    
    1,356
    
    
    
    61110,681
    
    
    
    8,117Less accumulated
depreciation
and amortization
    
    
    
    
    (5,669
    )
    
    
    (3,347
    )$
    5,012
    
    
    
    4,770
 Depreciation and amortization expense amounted to $2,365 and $1,303 for the years ended
December 31, 2008 and 2007, respectively.(4)
    
    Intangible Assets and Goodwill
 (a)
    
    Intangible AssetsIntangible assets consist of the following at December 31, 2008 and 2007:
 WeightedAverageAmortization
    
    December 31,Period
    
    2008
    
    
    2007Acquired technology
    
    4.6 years
    
    $
    8,490
    
    
    
    8,490Customer relationships
    
    12.8 years
    
    
    28,575
    
    
    
    28,913Covenant not to compete
    
    5 years
    
    
    210
    
    
    
    210Domain names/trademarks
    
    4.2 years
    
    
    430
    
    
    
    43037,705
    
    
    
    38,043Less accumulated
amortization
    
    
    
    
    (15,075
    )
    
    
    (12,121
    )$
    22,630
    
    
    
    25,922
   14




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##### 



STARCITE, INC. AND SUBSIDIARIES
   Amortization expense for intangible assets amounted to $2,711 and $3,195 for the years
ended December 31, 2008 and 2007, respectively.On May 14, 2007, the Company entered into an Asset Purchase Agreement with Travent
Limited (Travent), a company incorporated in the United Kingdom, primarily to acquire
Travents customers. The Company paid $1,244 for Travent, which was allocated to customer
relationships and is being amortized over their useful lives.The Company entered into an Asset Purchase Agreement (Purchase Agreement) and Strategic
Distribution and License Agreement (Service Agreement) with Maritz Travel Company
(Maritz) on December 15, 2006 (together, the Maritz Agreements). As part of the Maritz
Agreements, StarCite acquired certain developed technology for $1,297. Maritz entered
into a five-year Service Agreement with the Company during which Maritz will utilize the
Companys spend and attendee management applications with a minimum commitment of $3,600.
Since the Maritz Agreements were negotiated as one transaction, they were accounted for
as a multiple-element agreement. Accordingly, the amortization of the technology cost is
being amortized as a reduction of revenue over the life of the Service Agreement, which
totaled $259 and $173 for the years ended December 31, 2008 and 2007, respectively.Amortization of intangible assets is estimated to be as follows:
 Year ending December 31:2009
    
    $
    2,6372010
    
    
    2,3812011
    
    
    2,3162012
    
    
    1,9472013
    
    
    1,861Thereafter
    
    
    11,488$
    22,630
 (b)
    
    GoodwillGoodwill was $11,847 as of December 31, 2008 and 2007. There were no changes to goodwill
during the years ended December 31, 2008 or 2007.
   15




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##### 



STARCITE, INC. AND SUBSIDIARIES
   (5)
    
    Accrued LiabilitiesAccrued liabilities consist of the following at December 31, 2008 and 2007:
 December 31,2008
    
    
    2007Accrued compensation and benefits
    
    $
    2,425
    
    
    
    4,809Severance and restructuring
    
    
    1,204
    
    
    
    Consulting and outside services
    
    
    323
    
    
    
    1,034Client payable
    
    
    367
    
    
    
    437Professional fees
    
    
    624
    
    
    
    366Partnership commissions
    
    
    709
    
    
    
    343Accrued other
    
    
    1,125
    
    
    
    958$
    6,777
    
    
    
    7,947
 During the year ended December 31, 2008, the Company, in order to better align its cost
structure with its current revenue streams and current economic environment, approved and
implemented a Repositioning Program (the Program) that included a reduction in force and
consolidation of offices. Through this Program, the Company reduced its worldwide workforce by
approximately 18% and closed its office in Twinsburg, Ohio. The Company recorded severance
costs of approximately $1,916 during the year ended December 31, 2008. As a result of closing
its Twinsburg, Ohio office prior to the expiration of its lease, the Company recorded an early
termination charge of $92 which will be paid to the landlord in 2009. At December 31, 2008,
the Company had the following accrual related to this Program:
 December 31,
    
    
    2008
    
    
    2008
    
    
    December 31,2007
    
    
    Expense
    
    
    Payments
    
    
    2008Severance and benefits
    
    $
    
    
    
    
    1,916
    
    
    
    (804
    )
    
    
    1,112Lease termination
    
    
    
    
    
    
    92
    
    
    
    
    
    
    
    92$
    
    
    
    
    2,008
    
    
    
    (804
    )
    
    
    1,204
 (6)
    
    Short-Term BorrowingsOn June 20, 2007, the Company amended and renewed its line-of-credit facility (the Line) with
Comerica Bank. The Line was a one-year revolving credit facility providing available credit of
up to $3,500. Cash advances bore interest at a rate of 0.50% above the prime lending rate.
Monthly payments were interest-only. The Line subjected the Company to various financial and
reporting covenants, including the maintenance of certain financial ratios and covenants, such
as maintaining certain cash levels. The outstanding balance on the Line at December 31, 2007
was $3,493, excluding a stand-by letter of credit in the amount of $7.On July 11, 2008, the Company entered into a second amendment and renewed the Line. The
renewed facility provided available credit up to $4,000, revised the financial and reporting
covenants and expired on September 18, 2008. At September 18, 2008, the Company was unable to
amend and renew the Line. As of December 31, 2008, the Company was not in compliance with the
financial ratios required by the Line. The outstanding balance against the Line at
December 31, 2008 was $3,493, excluding a stand-by letter of credit in the amount of $235. As
of December 31, 2008 and 2007, the Line is classified as a short-term borrowing on the
accompanying consolidated balance sheet. Interest expense on short-term borrowings was $203
and $126 for the years ended December 31, 2008 and 2007, respectively.
   16




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##### 



STARCITE, INC. AND SUBSIDIARIES
   As discussed in Note 13, on February 3, 2009, the Company entered into a term loan and
revolving credit facility with Horizon Technology Finance and Silicon Valley Bank,
respectively. As a result, the Line was repaid in full.During 2008, the Company incurred additional short-term borrowings of $390 to finance various
aspects of its operations. As of December 31, 2008, the outstanding balance on short-term
borrowings was $196, which is due in monthly installments through 2009.
 (7)
    
    Notes PayableNotes payable consists of the following at December 31, 2008 and 2007:
 December 31,2008
    
    
    2007Equipment Line
    
    $
    885
    
    
    
    1,415Note payable to stockholder
(Technology purchase  see Note 4)
    
    
    541
    
    
    
    1,038Note payable to stockholder
    
    
    3,472
    
    
    
    3,3344,898
    
    
    
    5,787Less current portion
    
    
    (4,898
    )
    
    
    (1,093
    )Long-term notes payable
    
    $
    
    
    
    
    4,694
 On June 20, 2007, the Company entered into a credit facility that provided available credit up
to $2,500 for the financing of capital equipment purchases (Equipment Line). The terms of the
Equipment Line provided for advances from June 20, 2007 to March 20, 2008. During this period,
advances bore interest at a rate of
1.00% above the prime lending rate and monthly payments were interest-only. Any advances
outstanding at March 20, 2008 were payable in twenty-four equal installments of principal,
plus accrued interest, which began on April 1, 2008. At December 31, 2008 and 2007, the
outstanding balance against the Equipment Line was $885 and $1,415, of which $885 and $530,
respectively, are classified as current portion of notes payable. Interest expense on the
Equipment line was $75 and $54 for the years ended December 31, 2008 and 2007, respectively.
As discussed in Note 13, on February 3, 2009, the Company entered into a term loan and
revolving credit facility with Horizon Technology Finance and Silicon Valley Bank,
respectively. As a result, the Equipment Line was repaid in full.On December 15, 2006, the Company entered into an Asset Purchase Agreement to acquire certain
developed technology (note 4) from a stockholder who holds less than 1% interest in the
Company. The purchase price was $1,500 payable over three years. The payments are non-interest
bearing and, accordingly, the note was recorded net of discount of $203. During the year ended
December 31, 2008 and 2007, the Company recorded imputed interest expense of $66 and $115,
respectively. Included in current portion of notes payable is $541 and $563 at December 31,
2008 and 2007, respectively. Included in long-term notes payable is $475 at December 31, 2007.
The Company made payments of $563 and $374 during the years ended December 31, 2008 and 2007,
respectively. The final payment is due in November 2009.
   17




---



##### 



STARCITE, INC. AND SUBSIDIARIES
   The Company has a note payable to a stockholder of the Company, who holds less than 1%
interest in the Company. The note payable bears interest at 6% per year, and the principal and
accrued interest are due in August 2009. There are no covenants connected with this note
payable. The Company incurred $138 of interest expense related to this note payable in each of
the years ended December 31, 2008 and 2007. The balance at December 31, 2008 and 2007
consisted of the following:
 December 31,2008
    
    
    2007Note payable to stockholder
    
    $
    2,304
    
    
    
    2,304Accrued interest
    
    
    1,168
    
    
    
    1,030$
    3,472
    
    
    
    3,334
 On February 3, 2009,
one of the Companys stockholders, entered
into certain arrangements under which this stockholder has guaranteed this note payable. Under these
arrangements, this stockholder placed approximately $3,600 into a
bank account that will be used to repay
this debt when it matures or otherwise becomes due and payable.(8)
    
    Income TaxesAt December 31, 2008 and 2007, the Company had federal net operating loss carryforwards of
approximately $147,558 and $136,066, respectively, which begin to expire in 2017. At December 31,
2008 and 2007, the Company had net operating loss carryforwards for state tax purposes of
approximately $79,950 and $69,523, respectively, which begin to expire in 2010. At December 31,
2008 and 2007, the Company had foreign net operating loss carryforwards of approximately $994 and
$1,534, respectively.OnVantage had net operating loss carryforwards for federal and state income tax purposes of
approximately $138,349 at the date of acquisition, which have been fully reserved. Under
current tax laws, if the Company is acquired by or merges with another company, the net
operating losses of the Company (including those of OnVantage) may be substantially reduced or
eliminated. Under the Tax Reform Act of 1986, the utilization of a corporations net operating
loss carryforwards is limited following a change in ownership of greater than 50% within a
three-year period. Due to the Companys prior equity transactions, the Companys net operating
loss carryforwards may be subject to an annual limitation generally determined by multiplying
the market value of the Company on the date of the ownership change by the federal long-term
tax-exempt rate. Any amount exceeding the annual limitation may be carried forward to future
years for the balance of the net operating loss carryforward period.
   18




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##### 



STARCITE, INC. AND SUBSIDIARIES
   The components of deferred tax assets and liabilities were as follows:
 December 31,2008
    
    
    2007Allowance for doubtful accounts
    
    $
    518
    
    
    
    191Bonus accruals
    
    
    46
    
    
    
    Deferred revenue
    
    
    7,734
    
    
    
    6,139Deferred rent
    
    
    192
    
    
    
    94Long-lived assets
    
    
    2,322
    
    
    
    2,136Other
    
    
    1,301
    
    
    
    607Net operating loss carryforward
    
    
    56,539
    
    
    
    52,085Tax credits
    
    
    1,729
    
    
    
    1,729Net deferred income tax
assets
    
    
    70,381
    
    
    
    62,981Less valuation allowance
    
    
    (70,320
    )
    
    
    (62,772
    )Total assets
    
    
    61
    
    
    
    209Long-lived assets
    
    
    (61
    )
    
    
    (102
    )Other
    
    
    
    
    
    
    (107
    )Total liabilities
    
    
    (61
    )
    
    
    (209
    )Deferred tax asset, net
    
    $
    
    
    
    
    
 Deferred income taxes reflect the net tax effects of temporary differences between carrying
amounts of assets and liabilities for financial reporting purposes and the carrying amounts
used for income tax purposes. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future taxable income
during the periods in which temporary differences representing net future deductible amounts
become deductible. Due to the uncertainty of the Companys ability to realize the benefit of
the deferred tax asset, the deferred tax assets are fully offset by a valuation allowance at
December 31, 2008 and 2007.The change in the valuation allowance for the years ended December 31, 2008 and 2007 was
$7,548 and $5,759, respectively.The following summarizes the Companys current income tax expense for the years ended
December 31, 2008 and 2007:
 For the years ended December 31,2008
    
    
    2007Current:Federal
    
    $
    
    
    
    
    Foreign
    
    
    53
    
    
    
    State
    
    
    
    
    
    
    Total Current
    
    $
    53
    
    
    
    
   19




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##### 



STARCITE, INC. AND SUBSIDIARIES
   There was no deferred income tax expense for the years ended December 31, 2008 and 2007.A reconciliation between the provision (benefit) for income taxes, computed by applying the
statutory federal income tax rate of 35% to income before income taxes, and the actual
provision for income taxes follows:
 For the years ended December 31,2008
    
    
    2007Federal income tax provision
at statutory tax rate
    
    
    35.00
    %
    
    
    35.00
    %Change in valuation allowance
    
    
    (34.01
    )%
    
    
    (32.60
    )%Non-deductible expenses
    
    
    (1.69
    )%
    
    
    (2.43
    )%Foreign rate difference
    
    
    0.43
    %
    
    
    0.03
    %Annual income tax provision effective tax rate
    
    
    (0.27
    )%
    
    
    
    %
 (9)
    
    Commitments and Contingencies
 (a)
    
    Lease CommitmentsThe Company rents certain office space under noncancelable operating leases which expire
between 2010 and 2013. The total amount of all payments due under this lease is being
charged to expense on
the straight-line method over the term of the lease. Additionally, the Company has
recorded deferred rent to reflect the excess rent expense over actual cash payments since
the inception of the lease. Rent expense under this lease amounted to $1,795 and $1,620
for the years ended December 31, 2008 and 2007 respectively.Future minimum lease payments for each of the following five years are as follows:
 Year ending December 31:2009
    
    $
    1,4752010
    
    
    1,0032011
    
    
    7212012
    
    
    6602013
    
    
    681$
    4,540
   20




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##### 



STARCITE, INC. AND SUBSIDIARIES
   (b)
    
    LitigationThe Company is party to certain legal actions arising in the ordinary course of business.
While it is not possible to determine with certainty the outcome of these matters, in the
opinion of management the eventual resolution of these claims and actions outstanding
will not have a material adverse effect on the Companys consolidated financial position,
results of operations, or liquidity.(c)
    
    GuaranteesFASB Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others, an Interpretation of
FASB Statements 5, 57 and 107 and Rescission of FASB Interpretation No. 34, clarifies the
requirements of SFAS No. 5, Accounting for Contingencies, relating to the guarantors
accounting for, and disclosure of, the issuance of certain types of guarantees.Under the indemnification of the Companys standard product license agreement, the
Company guarantees to defend and indemnify the licensee against any proceeding based upon
any failure to satisfy the warranty set forth in the contract associated with license
infringements on any patent, copyright, trade secret, or other intellectual property
right on products licensed to its customers. As of December 31, 2008, the Company does
not expect to incur any infringement liability as a result of the customer
indemnification clauses.
   21




---



##### 



STARCITE, INC. AND SUBSIDIARIES
   (d)
    
    Stockholder AgreementsAll stockholders have entered into stockholder agreements that define and provide for,
among other things, the purchase, sale, and transfer of shares in accordance with
agreements.(e)
    
    401(k)PlanThe Company sponsors a 401(k) defined contribution plan, which is available for
participation to all eligible employees. Company contributions to the plan are subject to
the discretion of the board of directors. Company contributions are allocated to the
participants accounts based on the percentage of each participants contributions to the
plan during the given year to the total of all participant contributions. The Company
made discretionary contributions of $285 and $346 for the years ended December 31, 2008
and 2007, respectively.(f)
    
    Severance ArrangementsThe Company has severance arrangements with certain key employees that provide for
severance payments and other benefits upon termination and/or change of control. Such
arrangements were entered into outside of the Companys 2008 Repositioning Program (see
Note 5).
 (10)
    
    Capital Lease ObligationsThe Company has several capital lease agreements, which originally totaled $1,668. The
interest rates range from 15.2% to 15.7% per year, and the leases are collateralized by
equipment. The minimum lease payments under these leases as of December 31, 2008 are $4, which
is due in 2009.(11)
    
    Preferred StockAs of December 31, 2008 and 2007, the Company is authorized to issue 20,000,000 shares of
Series A convertible preferred stock (Series A Preferred Stock), $0.001 par value;
200,000 shares of Series A-1 convertible preferred stock (Series A-1 Preferred Stock), $0.001
par value; and 3,260,869 shares of Series B convertible preferred stock (Series B Preferred
Stock).
 (a)
    
    Series A and A-1 Preferred StockConversionEach share of Series A Preferred Stock and any dividends accrued but unpaid are
convertible at the option of the holder into shares of the Companys common stock. The
number of shares of common stock is determined by dividing the original issue price of
the preferred stock, which was $1.30 per share, by the applicable Conversion Price
(Conversion Price). The initial Conversion Price for the Series A Preferred Stock is the
original issue price for the Series A Preferred Stock.
   22




---



##### 



STARCITE, INC. AND SUBSIDIARIES
   The Conversion Price of the Series A Preferred Stock shall be subject to adjustment when
a Common Stock Event (as defined) occurs. Upon the occurrence of a Common Stock Event,
the Conversion Price of the Series A Preferred Stock shall be adjusted by multiplying the
Conversion Price of the Series A Preferred Stock in effect immediately prior to the
Common Stock Event by a fraction of which the numerator shall be the number of shares of
common stock issued and outstanding immediately prior to the Common Stock Event and the
denominator shall be the number of shares of common stock issued and outstanding
immediately after such Common Stock Event. Following each adjustment of the Conversion
Price, such adjusted Conversion Price shall remain in effect until a subsequent Common
Stock Event occurs. A Common Stock Event is defined as (i) the issue by the Company of
additional shares of common stock as a dividend or other distribution; (ii) a stock
split; or (iii) a reverse stock split.Each share of Series A-1 Preferred Stock shall automatically be converted into common
stock immediately prior to the closing of a public offering pursuant to an effective
registration statement filed under the Securities Act of 1933, as amended, covering the
offer and sale of common stock of the Company in which the aggregate public offering
price equals or exceeds $25,000 and the offering price per share of common stock equals
or exceeds $13.50 (Qualified IPO).Each share of Series A Preferred Stock shall automatically be converted into common stock
(i) immediately prior to the closing of a Qualified IPO or (ii) upon the Companys
receipt of the written consent of the holders of not less than two-thirds of the then
outstanding shares of Series A Preferred Stock to the conversion of all outstanding
Series A Preferred Stock to common stock.DividendsThe holders of the Series A Preferred Stock are entitled to receive dividends at the rate
of $0.10 per share per year. These dividends are paid only when declared by the board of
directors and are noncumulative. The payment of dividends to the holders of Series A
Preferred Stock is in preference to all other classes of stock. For the years ended
December 31, 2008 and 2007, no dividends were declared by the board of directors.The holders of the Series A-1 Preferred Stock are not entitled to receive any dividends.VotingEach share of Series A Preferred Stock shall be entitled to vote on all matters on which
the holders of common stock are entitled to vote. The number of votes allocated for each
share of preferred stock is determined by the number of shares of common stock into which
such share of preferred stock could be converted into common stock.The Series A-1 Preferred Stock is a nonvoting stock.
   23




---



##### 



STARCITE, INC. AND SUBSIDIARIES
   Liquidation PreferenceIn the event of any liquidation, the holders of the Series A-1 Preferred Stock shall be
entitled to receive prior to all other classes of stock an amount equal to $50.00 per
share. The holders of the Series A Preferred Stock shall be entitled to receive after
amounts set aside for the holders of the Series A-1 Preferred Stock an amount equal to
$1.30 per share, plus all declared but unpaid dividends. As of December 31, 2008 and
2007, the liquidation value of the Series A-1 Preferred Stock is $10,000. As of
December 31, 2008 and 2007, the liquidation value of the Series A Preferred Stock is
$26,000.A merger or consolidation of the Company that results in the Companys stockholders
immediately prior to the transaction not holding at least 50% of the voting power of the
surviving entity shall be deemed a liquidation event.(b)
    
    Series B Preferred StockIn 2008, the Company authorized and issued 3,260,869 shares of Series B Preferred Stock,
$0.001 par value, at $4.60 per share for cash proceeds of $15,000.Following the issuance of the Series B Preferred Stock, significant terms of the
convertible preferred stock were amended as follows.ConversionEach share of Series A and Series B Preferred Stock shall be convertible, at the option
of the holder at any time after the date of issuance into shares of the Companys common
stock. The number of shares of common stock is determined by dividing the original issue
price of the preferred stock, which was $1.30 and $4.60, respectively, by the applicable
Conversion Price (Conversion Price). The initial Conversion Price for the Series A and
Series B Preferred Stock is the original issue price for the Series A and Series B
Preferred Stock, respectively.Each share of Series A-1 Preferred Stock shall automatically be converted into common
stock immediately prior to the closing of a public offering pursuant to an effective
registration statement filed under the Securities Act of 1933, as amended, covering the
offer and sale of common stock of the Company in which the aggregate public offering
price equals or exceeds $50,000, and the offering price per share of common stock equals
or exceeds $23.00 (Qualified IPO).Each share of Series A and Series B Preferred Stock shall automatically be converted into
common stock (i) immediately prior to the closing of a Qualified IPO or (ii) upon the
Companys receipt of the written consent of the holders of not less than two-thirds of
the then outstanding shares of Series A and Series B Preferred Stock to the conversion of
all outstanding Series A and Series B Preferred Stock to common stock.
   24




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##### 



STARCITE, INC. AND SUBSIDIARIES
   DividendsThe holders of Series B Preferred Stock are entitled to receive dividends at the rate of
$0.3538 per share, per year, prior to and in preference to any declaration or payment of
any dividend on the Series A Preferred Stock and common stock. The holders of the Series
A Preferred Stock are entitled to receive dividends at the rate of $0.10 per share, per
year, prior to and in preference to any declaration or payment of any dividend on the
common stock. These dividends are paid only when declared by the board of directors and
are noncumulative. For the years ended December 31, 2008 and 2007, no dividends were
declared by the board of directors.The holders of Series A-1 Preferred Stock are not entitled to receive of any dividends.VotingEach share of Series A and Series B Preferred Stock shall be entitled to vote on all
matters on which the holders of common stock are entitled to vote. The number of votes
allocated for each share of Series A and Series B Preferred Stock is determined by the
number of shares of common stock into which such share of preferred stock could be
converted into common stock.The Series A-1 Preferred Stock is a nonvoting stock.Liquidation PreferenceIn the event of any liquidation, the holders of the Series B Preferred Stock shall be
entitled to receive prior to all other classes of stock an amount equal to $4.60 per
share, plus any and all accrued but unpaid dividends. The holders of the Series A-1
Preferred Stock shall be entitled to receive prior to any distribution to the holders of
Series A and common stock, an amount equal to $50.00 per share. The holders of the Series
A Preferred Stock shall be entitled to receive prior to any distribution to the holders
of common stock, an amount equal to $1.30 per share, plus any and all accrued but unpaid
dividends. As of December 31, 2008, the liquidation value of the Series B Preferred Stock
is $15,000.
 (12)
    
    Stock-Based CompensationThe Companys 2006 Stock Option Plan (the 2006 Plan) authorizes up to 6,000,000 common shares,
which can be granted as incentive stock options, nonqualified stock options or nonvested stock
awards. Option grants under this plan generally expire 10 years from the date of grant, 90
days after termination, or one year after the date of death or termination due to disability.
Stock options generally vest over a period of four years, with options becoming exercisable in
equal installments over the vesting period. As a result of the Reorganization, the 2006 Plan
replaced the Companys 1999 Equity Compensation Plan (the 1999 Plan). As of December 31, 2008,
1,460,613 common shares were available for grant under the 2006 Plan.Under the provisions of SFAS No. 123R, the Company recorded $2,037 and $1,117 of stock
compensation related to stock option awards in the Companys consolidated statements of
operations for the years ended December 31, 2008 and 2007, respectively.
   25




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##### 



STARCITE, INC. AND SUBSIDIARIES
   The estimated fair value of options granted was calculated using a Black Scholes option
pricing model. The Black Scholes model incorporates assumptions to value stock-based awards.
The Company uses historical data on exercise timing to determine the expected life assumption.
The risk-free rate of interest for periods within the contractual life of the option is based
on U.S. Government Securities Treasury Constant Maturities over the expected term of the
equity instrument. The Companys common stock is not publicly traded; therefore, expected
volatility is based on the historical volatilities of selected companies whose services are
comparable to that of the Company. The table below outlines the weighted average assumptions
for these grants:
 Year ended December 312008
    
    
    2007Weighted average expected volatility
    
    
    58.5
    %
    
    
    57.7
    %Expected term (years)
    
    
    6.3
    
    
    
    6.5Risk-free interest rate
    
    
    3.7
    %
    
    
    4.5
    %Expected dividend yield
    
    
    
    
    
    
    
 The fair value of share-based awards is recognized as expense over the requisite service
period, net of estimated forfeitures. Based on the Companys historical experience of option
forfeitures, the Company has assumed an annualized forfeiture rate of 5.25% for all stock
options granted to individuals except those grants with monthly vesting as their rate was
estimated to be 0%. Under the provision of SFAS No. 123R, the Company will record additional
expense at the end of each vesting period if the actual forfeiture rate is lower than
estimated, and will record a recovery of prior expense if the actual forfeiture is higher than
estimated.
   26




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##### 



STARCITE, INC. AND SUBSIDIARIES
   The following table summarizes stock option activity during the years ended December 31, 2008
and 2007:
 WeightedaverageWeighted
    
    
    remainingaverage
    
    
    contractualNumber of
    
    
    exercise
    
    
    termshares
    
    
    price
    
    
    (years)Outstanding, January 1, 2007
    
    
    
    
    
    
    Granted
    
    
    2,936,141
    
    
    
    2.18Exercised
    
    
    (1,192
    )
    
    
    1.79Forfeited
    
    
    (151,871
    )
    
    
    1.81Outstanding, December 31, 2007
    
    
    2,783,078
    
    
    
    2.20
    
    
    
    6.42Granted
    
    
    1,545,000
    
    
    
    3.38Exercised
    
    
    (7,540
    )
    
    
    1.79Forfeited
    
    
    (936,685
    )
    
    
    2.43Outstanding, December 31, 2008
    
    
    3,383,853
    
    
    
    2.68
    
    
    
    6.87Options exercisable, December 31, 2008
    
    
    1,542,143
    
    
    
    2.07
    
    
    
    4.12
 The weighted average grant date fair value of options granted during 2008 and 2007 was $3.14
and $2.75, respectively. The total intrinsic value of options exercised during the years ended
December 31, 2008 and 2007 was $7 and $2, respectively.As of December 31, 2008, there
was $3,677 of total unrecognized compensation cost, which
includes the impact of expected forfeitures, related to unvested stock options. The cost is
expected to be recognized over a weighted average period of 2.9 years.
   27




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##### 



STARCITE, INC. AND SUBSIDIARIES
   Additional information regarding stock options outstanding at December 31, 2008, is as
follows:
 Options outstandingOptions outstanding
    
    
    and exercisableWeightedaverage
    
    
    Weighted
    
    
    
    
    
    
    Weightedremaining
    
    
    average
    
    
    
    
    
    
    averageNumber
    
    
    contractual
    
    
    exercise
    
    
    Number
    
    
    exerciseExercise prices
    
    
    
    
    outstanding
    
    
    life (years)
    
    
    price
    
    
    vested
    
    
    price$
    1.79
    
    
    
    
    
    1,495,539
    
    
    $
    4.25
    
    
    $
    1.79
    
    
    
    1,275,096
    
    
    $
    1.793.38
    
    
    
    
    
    1,888,314
    
    
    
    8.95
    
    
    
    3.38
    
    
    
    267,047
    
    
    
    3.383,383,853
    
    
    $
    6.87
    
    
    $
    2.68
    
    
    
    1,542,143
    
    
    $
    2.07
 Nonvested SharesThe Company may grant nonvested share awards to employees, nonemployee directors, and
consultants. A nonvested share award is an award of common shares that is subject to certain
restrictions during a specified period, such as an employees continued employment combined
with the Company achieving certain financial goals. The Company holds the common shares during
the restriction period, and the grantee cannot transfer the shares before the termination of
that period. The grantee is, however, generally entitled to vote the common shares and receive
any dividends declared and paid on the Companys common shares during the restriction period.
Stock-based compensation resulting from nonvested awards for the year ended December 31, 2008
and 2007 was $883 and $1,731, respectively, and is included in the accompanying consolidated
statement of operations. Total unrecognized compensation cost of nonvested shares granted as
of December 31, 2008 was $239, which is expected to be recognized over a weighted average
period of 3.1 years.A summary of the activity of the Companys nonvested stock as of and for the years ended
December 31, 2008 and 2007 is presented below:
 WeightedaverageNumber of
    
    
    grant-dateshares
    
    
    fair valueNonvested at January 1, 2007
    
    
    
    
    
    $
    Granted
    
    
    1,528,289
    
    
    
    1.79Vested
    
    
    (673,157
    )
    
    
    1.79Forfeited
    
    
    (11,742
    )
    
    
    1.79Nonvested at December 31, 2007
    
    
    843,390
    
    
    
    1.79Granted
    
    
    
    
    
    
    Vested
    
    
    (339,862
    )
    
    
    1.79Forfeited
    
    
    (369,745
    )
    
    
    1.79Nonvested at December 31, 2008
    
    
    133,783
    
    
    $
    1.79
   28




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##### 



STARCITE, INC. AND SUBSIDIARIES
   The following table sets forth the total stock-based compensation expense for the years ended
December 31, 2008 and 2007:
 Year ended December 31,2008
    
    
    2007Cost of sales
    
    $
    304
    
    
    
    293Selling and marketing
    
    
    342
    
    
    
    287General and administrative
    
    
    1,869
    
    
    
    1,751Research and development
    
    
    405
    
    
    
    517$
    2,920
    
    
    
    2,848
 (13)
    
    Subsequent Events
 (a)
    
    Debt RefinancingOn February 3, 2009, the Company secured a $4,000 term loan with Horizon Technology
Finance (the Horizon Loan) and entered into a two year revolving line-of-credit facility
(the Credit Facility) with Silicon Valley Bank (SVB). The Company used the proceeds from
the Horizon Loan as well as cash on hand to extinguish its outstanding obligations to
Comerica Bank. These obligations consisted of $3,493 related to short-term borrowings
under an expired line-of-credit facility (see Note 6), and $885 associated with an
equipment line loan (see Note 7).Horizon LoanThe Horizon Loan is a forty-two month installment loan bearing interest at a rate based
on the greater of 12.05% or 12.05% plus increases in the Libor rate above 3.03%. Payments
through December 31, 2009 are interest only ($41 per month) with the remaining thirty
three payments consisting of principal plus interest of $143 each. In addition, the
Company is obligated to make a one-time payment of $400 with the last installment on
September 1, 2012. Pursuant to the terms of the loan, the Company issued to Horizon a
warrant with a 10 year term to purchase 43,478 shares of StarCites Series B preferred
stock at an exercise price per share of $4.60 preferred shares. The Company is not
subject to any financial covenants under the Horizon Loan. The Horizon Loan contains
certain cross-default provisions with the Credit Facility.Credit FacilityThe Credit Facility is a revolving line-of-credit for a term of 24 months that permits
borrowing up to $7,500 (including a sub-limit of $2,500 for letters of credit) subject to
limitations based on the achievement of certain performance measures
(free cash flow and quick ratio, as defined in the Credit Facility) and 80% of
eligible accounts receivable. The Credit Facility is secured by a first priority secured
interest in all of StarCites assets. The Credit Facility subjects the Company to various
financial and reporting covenants, including the achievement of certain free cash flow
milestones measured on a trailing three month basis (as defined in the Credit Facility).
The Credit Facility bears interest
at the U.S. prime rate plus 1.5% to 3.0% based on the maintenance of certain balance
sheet ratios and includes unused line fees, letter of credit fees and other customary
fees.
  29