STARCITE, INC. AND SUBSIDIARIES
 Table of Contents
 PageIndependent Auditors Report
    
    
    1Consolidated Balance Sheets, December 31, 2010 (Unaudited) and 2009
    
    
    2Consolidated Statements of Operations, Years ended December 31, 2010 (Unaudited), 2009 and 2008
    
    
    3Consolidated Statements of Stockholders Equity and Comprehensive Loss, Years ended December 31, 2010 (Unaudited), 2009 and 2008
    
    
    4Consolidated Statements of Cash Flows, Years ended December 31, 2010 (Unaudited), 2009 and 2008
    
    
    5Notes to Consolidated Financial Statements
    
    
    6




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Independent Auditors Report




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STARCITE, INC. AND SUBSIDIARIES
 2010
    
    
    2009(Unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    1,698
    
    
    
    2,423Accounts receivable, net of allowance for doubtful accounts of $864
and $1,158
    
    
    10,144
    
    
    
    9,444Prepaid expenses and other current assets
    
    
    1,023
    
    
    
    1,092Deferred commissions
    
    
    3,317
    
    
    
    2,997Total current assets
    
    
    16,182
    
    
    
    15,956Property and equipment, net
    
    
    2,826
    
    
    
    2,943Other assets
    
    
    571
    
    
    
    478Intangible assets, net
    
    
    17,657
    
    
    
    20,066Goodwill
    
    
    11,847
    
    
    
    11,847Total assets
    
    $
    49,083
    
    
    
    51,290Liabilities and Stockholders EquityCurrent liabilities:Short-term borrowings
    
    $
    1,960
    
    
    
    67Current portion of notes payable
    
    
    1,470
    
    
    
    1,305Current portion of obligations under capital leases
    
    
    167
    
    
    
    Accounts payable
    
    
    1,764
    
    
    
    2,796Accrued liabilities
    
    
    4,981
    
    
    
    5,348Deferred revenue
    
    
    18,287
    
    
    
    17,788Total current liabilities
    
    
    28,629
    
    
    
    27,304Notes payable
    
    
    1,225
    
    
    
    2,695Other long-term liabilities
    
    
    3,082
    
    
    
    1,738Total liabilities
    
    
    32,936
    
    
    
    31,737Commitments and contingencies (note 8)Stockholders 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 3,304,347 shares;
issued and outstanding 3,260,869 shares (liquidation value of $15,000)
    
    
    15,000
    
    
    
    15,000Common stock, $0.001 par value. Authorized 33,304,347 shares;
issued and outstanding 1,187,878 shares in 2010 and 1,173,185 shares in 2009
    
    
    1
    
    
    
    1Additional paid-in capital
    
    
    81,110
    
    
    
    79,797Accumulated other comprehensive income
    
    
    464
    
    
    
    521Accumulated deficit
    
    
    (113,503
    )
    
    
    (108,841
    )Total stockholders equity
    
    
    16,147
    
    
    
    19,553Total liabilities and stockholders
equity
    
    $
    49,083
    
    
    
    51,290
   2




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##### 



STARCITE, INC. AND SUBSIDIARIES
 2010
    
    
    2009
    
    
    2008(Unaudited)Net sales
    
    $
    44,702
    
    
    
    47,882
    
    
    
    50,548Costs and operating expenses:Cost of sales
    
    
    12,286
    
    
    
    10,991
    
    
    
    14,151Selling and marketing
    
    
    14,620
    
    
    
    17,702
    
    
    
    21,127Research and development
    
    
    7,668
    
    
    
    8,942
    
    
    
    10,802General and administrative
    
    
    9,248
    
    
    
    10,061
    
    
    
    15,799Depreciation and amortization
    
    
    4,326
    
    
    
    4,649
    
    
    
    5,076Severance and restructuring
    
    
    348
    
    
    
    1,697
    
    
    
    2,008Total costs and operating
expenses
    
    
    48,496
    
    
    
    54,042
    
    
    
    68,963Operating loss
    
    
    (3,794
    )
    
    
    (6,160
    )
    
    
    (18,415
    )Other income (expense):Other income (expense)
    
    
    60
    
    
    
    (116
    )
    
    
    (538
    )Interest income
    
    
    49
    
    
    
    101
    
    
    
    127Interest expense
    
    
    (1,017
    )
    
    
    (1,028
    )
    
    
    (620
    )Total other expense, net
    
    
    (908
    )
    
    
    (1,043
    )
    
    
    (1,031
    )Net loss before income tax
    
    
    (4,702
    )
    
    
    (7,203
    )
    
    
    (19,446
    )Income tax benefit (expense)
    
    
    40
    
    
    
    (50
    )
    
    
    (53
    )Net loss
    
    $
    (4,662
    )
    
    
    (7,253
    )
    
    
    (19,499
    )
   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, December 31, 2007
    
    
    
    
    
    
    20,200,000
    
    
    $
    33,075
    
    
    
    
    
    
    $
    
    
    
    
    1,517,739
    
    
    $
    1
    
    
     $
    71,393
    
    
    $
    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
    
    
    
    
    
    
    
    
    
    
    
    13Net cancellations of nonvested stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (369,745
    )
    
    
    
    
    
    
    883
    
    
    
    
    
    
    
    
    
    
    
    883Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,037
    
    
    
    
    
    
    
    
    
    
    
    2,037Balance, December 31, 2008
    
    
    
    
    
    
    20,200,000
    
    
    
    33,075
    
    
    
    3,260,869
    
    
    
    15,000
    
    
    
    1,155,534
    
    
    
    1
    
    
    
    74,326
    
    
    
    92
    
    
    
    (101,588
    )
    
    
    20,906Net loss
    
    $
    (7,253
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,253
    )
    
    
    (7,253
    )Foreign currency translation
    
    
    429
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    429
    
    
    
    
    
    
    
    429Comprehensive loss
    
    $
    (6,824
    )Exercise of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    72,752
    
    
    
    
    
    
    
    132
    
    
    
    
    
    
    
    
    
    
    
    132Repurchase of common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (32,735
    )
    
    
    
    
    
    
    (111
    )
    
    
    
    
    
    
    
    
    
    
    (111
    )Net cancellations of nonvested stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (22,366
    )
    
    
    
    
    
    
    282
    
    
    
    
    
    
    
    
    
    
    
    282Capitalization of Maritz loan pay-off
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,581
    
    
    
    
    
    
    
    
    
    
    
    3,581Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,587
    
    
    
    
    
    
    
    
    
    
    
    1,587Balance, December 31, 2009
    
    
    
    
    
    
    20,200,000
    
    
    
    33,075
    
    
    
    3,260,869
    
    
    
    15,000
    
    
    
    1,173,185
    
    
    
    1
    
    
    
    79,797
    
    
    
    521
    
    
    
    (108,841
    )
    
    
    19,553Net loss (Unaudited)
    
    $
    (4,662
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,662
    )
    
    
    (4,662
    )Foreign currency translation (Unaudited)
    
    
    (57
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (57
    )
    
    
    
    
    
    
    (57
    )Comprehensive loss (Unaudited)
    
    $
    (4,719
    )Net issuances of nonvested stock (Unaudited)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,693
    
    
    
    
    
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    6Stock-based compensation (Unaudited)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,307
    
    
    
    
    
    
    
    
    
    
    
    1,307Balance, December 31, 2010 (Unaudited)
    
    
    
    
    
    
    20,200,000
    
    
    
    33,075
    
    
    
    3,260,869
    
    
    
    15,000
    
    
    
    1,187,878
    
    
    
    1
    
    
    
    81,110
    
    
    
    464
    
    
    
    (113,503
    )
    
    
    16,147
   4




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STARCITE, INC. AND SUBSIDIARIES
 2010
    
    
    2009
    
    
    2008(Unaudited)Cash flows from operating activities:Net loss
    
    $
    (4,662
    )
    
    
    (7,253
    )
    
    
    (19,499
    )Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:Depreciation and amortization
    
    
    4,585
    
    
    
    4,915
    
    
    
    5,335Imputed interest on note payable
    
    
    
    
    
    
    21
    
    
    
    66Stock-based compensation
    
    
    1,313
    
    
    
    1,869
    
    
    
    2,920Non-cash interest expense
    
    
    77
    
    
    
    128
    
    
    
    Changes in operating assets and liabilities (net of acquisitions):(Increase) decrease in accounts receivable
    
    
    (708
    )
    
    
    2,281
    
    
    
    1,123(Increase) decrease in prepaid expenses and other assets
    
    
    (41
    )
    
    
    1,614
    
    
    
    (2,302
    )Increase (decrease) in accounts payable and accrued liabilities
    
    
    (1,220
    )
    
    
    (1,891
    )
    
    
    (2,020
    )Increase (decrease) in deferred revenue
    
    
    500
    
    
    
    (1,605
    )
    
    
    4,094Increase (decrease) in other liabilities
    
    
    (182
    )
    
    
    527
    
    
    
    766Net cash (used in) provided by operating activities
    
    
    (338
    )
    
    
    606
    
    
    
    (9,517
    )Cash flows from investing activities:Purchases of property and equipment
    
    
    (619
    )
    
    
    (171
    )
    
    
    (2,514
    )Decrease in restricted cash
    
    
    
    
    
    
    8
    
    
    
    177Net cash used in investing activities
    
    
    (619
    )
    
    
    (163
    )
    
    
    (2,337
    )Cash flows from financing activities:Issuance of preferred stock
    
    
    
    
    
    
    
    
    
    
    15,000Net proceeds from short-term borrowings
    
    
    1,904
    
    
    
    
    
    
    
    390Net proceeds from notes payable
    
    
    
    
    
    
    4,000
    
    
    
    Repayments of capital lease obligations
    
    
    (13
    )
    
    
    (4
    )
    
    
    (137
    )Repayments of short-term borrowings
    
    
    (324
    )
    
    
    (3,622
    )
    
    
    (194
    )Repayments of notes payable
    
    
    (1,305
    )
    
    
    (1,426
    )
    
    
    (1,033
    )Exercise of stock options
    
    
    
    
    
    
    21
    
    
    
    13Net cash provided by (used in) financing activities
    
    
    262
    
    
    
    (1,031
    )
    
    
    14,039Effect of exchange rate changes on cash and cash equivalents
    
    
    (30
    )
    
    
    138
    
    
    
    358Net (decrease) increase in cash and cash equivalents
    
    
    (725
    )
    
    
    (450
    )
    
    
    2,543Cash and cash equivalents, beginning of year
    
    
    2,423
    
    
    
    2,873
    
    
    
    330Cash and cash equivalents, end of year
    
    $
    1,698
    
    
    
    2,423
    
    
    
    2,873
   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., with 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, incorporated in Delaware and began operations in January 1999) and
OnVantage, Inc. (OnVantage).The Company has a history of net losses and negative operating cash flows since its
inception. As of December 31, 2010, the Company has an accumulated deficit of $113,503.
The Companys primary sources of liquidity have been the issuance of preferred stock,
borrowings from stockholders, and borrowings from banks.During 2010, 2009 and 2008, the Company has continued to make investments in ongoing
business development efforts in anticipation of future growth. 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. 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.(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 $51 and $734 at December
31, 2010 and 2009, respectively, consists of investments in money market funds.(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.
   6




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STARCITE, INC. AND SUBSIDIARIES
 (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, and accrued
liabilities, approximate fair value due to the short-term nature of those instruments.
The fair value of debt approximates the carrying value of debt at December 31, 2010.The Company follows FASB accounting guidance on fair value measurements for financial
assets and liabilities measured on a recurring basis. ASC 820, Fair Value Measurements
and Disclosures, among other things, defines fair value, establishes a framework for
measuring fair value and requires disclosure about such fair value measurements. Assets
and liabilities measured at fair value are based on one or more of three valuation
techniques provided for in the standards. The three value techniques are as follows:
 Market Approach
    
    Prices and other relevant information generated by market transactions
involvingIncome Approach
    
    Techniques to convert future amounts to a single present amount based on
market expectations (including present value techniques and option pricing models)Cost Approach
    
    Amount that currently would be required to replace the service
capacity of an asset (often referred to as replacement cost)
  Level 1
    
    Quoted prices in active markets for identical assets or liabilities;Level 2
    
    Inputs, other than the quoted prices in active markets, that arc
observable either directly or indirectly; orLevel 3
    
    Unobservable inputs in which there is little or no market data, which
require the reporting entity to develop its own assumptions about what market
participants would use in pricing the asset or liability.
   7




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##### 



STARCITE, INC. AND SUBSIDIARIES
  
    
    Cash equivalents  The Companys cash equivalents represent funds held in money
market funds which contain quoted prices in active markets, and accordingly, the
Company classifies these as Level 1.
    
    Warrant liability  The fair value of the warrant liability is based on Level 3
inputs. For this liability the Company developed its own assumptions that do not
have observable inputs or available market data to support the fair value. See note
6 for further discussion of the warrant liability.
  December 31, 2010Asset (liability)
    
    
    Valuationbalance
    
    
    technique
    
    Input levelCash equivalents
    
    
    51
    
    
    Market approach
    
    
    1Warrant liability
    
    
    (205
    )
    
    Income approach
    
    
    3
 (h)
    
    Long-Lived AssetsLong-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.(i)
    
    GoodwillGoodwill is an asset representing the future economic benefits arising from other assets
acquired in a business combination that are not individually identified and separately
recognized. Goodwill is reviewed for impairment at least annually in accordance with the
provisions of Financial Accounting Standards Board (FASB) ASC Topic 350, Intangibles 
Goodwill and Other.
   8




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##### 



STARCITE, INC. AND SUBSIDIARIES
 FASB ASC Topic 350 requires the Company to assess whether there is an indication that
goodwill is impaired. The Company estimates the fair value of its single reporting unit
and compares it to its carrying amount. To the extent the carrying amount of the
reporting unit exceeds its fair value, the Company would 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 2010, the Company completed its annual goodwill impairment test. The Company
determined that its fair value was greater than the carrying amount as of December 31,
2010 and 2009. Accordingly, there was no indication that goodwill was impaired.(j)
    
    Revenue RecognitionThe 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 meeting venues, electronic attendee management,
expense reconciliations, and measurement reporting. The Companys corporate solutions include
StarCite Spend Management and MeetingView.Through the Companys solutions, meeting planners have the ability to research meeting
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 the Companys solutions, 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.
   9




---



##### 



STARCITE, INC. AND SUBSIDIARIES
 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.(k)
    
    Research and DevelopmentResearch and development costs are charged to expense as incurred.(l)
    
    Income TaxesThe Company records income taxes using the asset and liability method which requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in the Companys financial statements or
tax returns. In estimating future tax consequences, expected future events other than
enactments or changes in the tax law or rates are considered. Valuation allowances are
provided when necessary to reduce deferred tax assets to the amount expected to be
realized.The Company operates in various tax jurisdictions and is subject to audit by various tax
authorities. The Company provides for tax contingencies whenever it is deemed probable
that a tax asset has been impaired or a tax liability has been incurred for events such
as tax claims or changes in tax laws. Tax contingencies are based upon their technical
merits, relative tax law, and the specific facts and circumstances as of each reporting
period. Changes in facts and circumstances could result in material changes to the
amounts recorded for such tax contingencies.The Company recognizes the effect of income tax positions only if it is more-likely
than-not that such positions will be sustained based solely on its technical merits as
of the reporting date. The Company considers many factors when evaluating and estimating
its tax positions and tax benefits, which may require periodic adjustments and which may
not accurately anticipate actual outcomes. See note 7 for additional information.(m)
    
    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, 2010 and 2009, no single customer
represented more than 10% of the Companys net sales. One customer accounted for 13% of
accounts receivable as of December 31, 2010. As of December 31, 2009, no single customer
represented more than 10% of accounts receivable.(n)
    
    Stock-Based CompensationThe Company accounts for stock-based payments in accordance with FASB ASC Topic 718,
Compensation-Stock Compensation. FASB ASC Topic 718 requires that all stock-based
payments, including grants of employee stock options and nonvested shares, be recognized
in the financial statements based on their fair values at date of grant. Under FASB ASC
Topic 718, the cost of services received in exchange for stock options and similar awards
are recognized in the statement of
operations over the period during which an award recipient is required to provide service
in exchange for the award.
   10




---



##### 



STARCITE, INC. AND SUBSIDIARIES
 The Companys policy is to recognize compensation expense for awards granted on a
straight-line basis over the requisite service period, net of actual forfeitures. The
Company uses the Black-Scholes-Merton (Black Scholes) option-pricing model to determine
the grant date fair value of its stock-based awards.(o)
    
    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, allowance for doubtful accounts 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.(p)
    
    Supplemental Cash Flow InformationFor the years ended December 31, 2010, 2009 and 2008, the Company paid interest of $661,
$568 and $310, respectively. The Company paid $0, $197 and $67 of income taxes during
the years ended December 31, 2010, 2009 and 2008, respectively. In 2009, a stockholder
repaid a debt on behalf of the Company which was treated as a capital contribution (see
note 6).Capital lease obligations of $659, $0 and $0 were incurred in 2010, 2009 and 2008,
respectively, when the Company entered into a lease for furniture and fixtures and
computer and equipment.(q)
    
    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.
   11




---



##### 



STARCITE, INC. AND SUBSIDIARIES
 (r)
    
    Foreign Currency TranslationTranslation adjustment are included as a separate component of stockholders equity
labeled accumulated other comprehensive income. The assets and liabilities of the
Companys foreign
operations are translated into U.S. dollars at exchange rates as of the balance sheet
date, and revenues and expenses are translated at average exchange rates for the year.
Foreign currency transaction gains or losses are recognized in current operations and are
included in other income (expense).(s)
    
    ReclassificationsCertain amounts in prior year financial statements have been reclassified to conform with
the current year presentation.(t)
    
    Recent Accounting PronouncementsIn January 2010, the FASB issued amended guidance requiring additional fair value
disclosures related to inputs and valuation techniques used to measure fair value as well
as disclosures about significant transfers between levels in the hierarchy of fair value
measurement. This guidance was effective for the Company beginning on January 1, 2010,
and did not have a significant impact on its consolidated financial statements.In October 2009, the FASB issued accounting guidance related to revenue recognition for
transactions with multiple deliverables, which impacts the determination of when the
individual deliverables included in a multiple-element arrangement may be treated as
separate units of accounting. This guidance is effective for the Company beginning on
January 1, 2011, however, early adoption is permitted. The Company is currently
evaluating the effect this guidance will have on its consolidated financial statements.
 (2)
    
    Property and Equipment
  Estimated
    
    December 31useful life
    
    2010
    
    
    2009Computer equipment and software
    
    3 years
    
    $
    8,958
    
    
    
    8,580Furniture and fixtures
    
    7 years
    
    
    793
    
    
    
    917Leasehold improvements
    
    5  9 years
    
    
    1,741
    
    
    
    1,25211,492
    
    
    
    10,749Less accumulated depreciation and amortization
    
    
    
    
    (8,666
    )
    
    
    (7,806
    )$
    2,826
    
    
    
    2,943
    12




---



##### 



STARCITE, INC. AND SUBSIDIARIES
  Estimated
    
    
    December 31useful life
    
    
    2010Computer equipment and software
    
    3 years
    
    $
    230Furniture and fixtures
    
    7 years
    
    
    429659Less accumulated depreciation and amortization
    
    
    
    
    
    
    (28
    )$
    631
 (3)
    
    Intangible Assets and Goodwill
 (a)
    
    Intangible AssetsIntangible assets consist of the following at December 31, 2010 and 2009:
 Weightedaverageamortization
    
    
    December 31period
    
    
    2010
    
    
    2009Acquired technology
    
    4.6 years
    
    $
    8,490
    
    
    
    8,490Customer relationships
    
    12.8 years
    
    
    28,636
    
    
    
    28,664Covenant not to compete
    
    5 years
    
    
    210
    
    
    
    210Domain names/trademarks
    
    4.2 years
    
    
    430
    
    
    
    43037,766
    
    
    
    37,794Less accumulated amortization
    
    
    
    
    
    
    (20,109
    )
    
    
    (17,728
    )$
    17,657
    
    
    
    20,066
     13




---



##### 



STARCITE, INC. AND SUBSIDIARIES
  Year ending December 31:2011
    
    $
    2,3322012
    
    
    1,9632013
    
    
    1,8772014
    
    
    1,8772015
    
    
    1,388Thereafter
    
    
    8,220$
    17,657
 (b)
    
    GoodwillGoodwill was $11,847 as of December 31, 2010 and 2009. There were no changes to goodwill
during the years ended December 31, 2010 or 2009.
 (4)
    
    Accrued Liabilities
  December 312010
    
    
    2009Accrued compensation and benefits
    
    $
    2,978
    
    
    
    3,521Severance and related costs
    
    
    
    
    
    
    124Consulting and outside services
    
    
    240
    
    
    
    93Client payable
    
    
    150
    
    
    
    167Professional fees
    
    
    313
    
    
    
    258Partnership commissions
    
    
    617
    
    
    
    281Other accrued liabilities
    
    
    683
    
    
    
    999$
    4,981
    
    
    
    5,443
     14




---



##### 



STARCITE, INC. AND SUBSIDIARIES
   December 31,
    
    
    2009
    
    
    2009
    
    
    December 31,2008
    
    
    expense
    
    
    payments
    
    
    2009Severance and benefits
    
    $
    1,112
    
    
    
    757
    
    
    
    (1,745
    )
    
    
    124Lease restructuring
    
    
    
    
    
    
    940
    
    
    
    (178
    )
    
    
    762Lease termination
    
    
    92
    
    
    
    
    
    
    
    (92
    )
    
    
    $
    1,204
    
    
    
    1,697
    
    
    
    (2,015
    )
    
    
    886
  December 31,
    
    
    2010
    
    
    2010
    
    
    December 31,2009
    
    
    expense
    
    
    payments
    
    
    2010Severance and benefits
    
    $
    124
    
    
    
    175
    
    
    
    (299
    )
    
    
    Lease restructuring
    
    
    762
    
    
    
    173
    
    
    
    (294
    )
    
    
    641$
    886
    
    
    
    348
    
    
    
    (593
    )
    
    
    641
  (5)
    
    Short-Term Borrowings
    15




---



##### 



STARCITE, INC. AND SUBSIDIARIES
   (6)
    
    Notes Payable
 Notes Payable
      16




---



##### 



STARCITE, INC. AND SUBSIDIARIES
  Year ending December 31:2011
    
    $
    1,4702012
    
    
    1,225$
    2,695
  December 312010
    
    
    2009Expected dividend yield
    
    
    
    %
    
    
    
    %Expected volatility
    
    
    57.8
    
    
    
    67.6Risk-free interest rate
    
    
    3.01
    
    
    
    2.90Remaining contractual term
    
    8 years
    
    
    10 years
   (7)
    
    Income Taxes
    17




---



##### 



STARCITE, INC. AND SUBSIDIARIES
   December 312010
    
    
    2009Allowance for doubtful accounts
    
    $
    357
    
    
    
    459Deferred revenue
    
    
    6,929
    
    
    
    6,779Deferred rent
    
    
    522
    
    
    
    451Long-lived assets
    
    
    2,310
    
    
    
    1,954Other
    
    
    2,197
    
    
    
    1,593Net operating loss carryforward
    
    
    56,538
    
    
    
    57,001Tax credits
    
    
    2,381
    
    
    
    2,381Net deferred income tax assets
    
    
    71,234
    
    
    
    70,618Less valuation allowance
    
    
    (71,180
    )
    
    
    (70,602
    )Total assets
    
    
    54
    
    
    
    16Other
    
    
    (3
    )
    
    
    (16
    )Total liabilities
    
    
    (3
    )
    
    
    (16
    )Deferred tax asset, net
    
    $
    51
    
    
    
    
     18




---



##### 



STARCITE, INC. AND SUBSIDIARIES
  2010
    
    
    2009
    
    
    2008U.S. operations
    
    $
    (4,827
    )
    
    
    (7,928
    )
    
    
    (20,199
    )Foreign operations  income
    
    
    125
    
    
    
    725
    
    
    
    753Loss before taxes
    
    $
    (4,702
    )
    
    
    (7,203
    )
    
    
    (19,446
    )
 The following summarizes the Companys current income tax expense for the years ended December
31, 2010, 2009 and 2008:
 2010
    
    
    2009
    
    
    2008Current:Federal
    
    $
    (16
    )
    
    
    (95
    )
    
    
    Foreign
    
    
    (75
    )
    
    
    145
    
    
    
    53State
    
    
    
    
    
    
    
    
    
    
    Total current
    
    
    (91
    )
    
    
    50
    
    
    
    53Deferred:Foreign
    
    
    51
    
    
    
    
    
    
    
    Total income tax
(benefit) expense
    
    $
    (40
    )
    
    
    50
    
    
    
    53
  2010
    
    
    2009
    
    
    2008Federal income tax provision at statutory
tax rate
    
    
    35.00
    %
    
    
    35.00
    %
    
    
    35.00
    %State income taxes, net of federal income tax provision
    
    
    
    
    
    
    (0.04
    )
    
    
    Change in valuation allowance
    
    
    (31.36
    )
    
    
    (32.92
    )
    
    
    (34.01
    )Nondeductible expenses
    
    
    (2.92
    )
    
    
    (2.74
    )
    
    
    (1.69
    )Foreign rate difference
    
    
    0.12
    
    
    
    0.84
    
    
    
    0.43Annual income tax provision
effective tax rate
    
    
    0.84
    %
    
    
    0.14
    %
    
    
    (0.27
    )%
   19




---



##### 



STARCITE, INC. AND SUBSIDIARIES
 (8)
    
    Commitments and Contingencies
 (a)
    
    Lease CommitmentsThe Company rents certain office space under noncancelable operating leases for its San
Jose, CA, Shanghai, China and Philadelphia, PA offices which expire between December 2013
and June 2021, respectively. 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 these
leases (excluding lease restructuring reserves discussed in note 4) amounted to $1,499,
$1,282 and $1,795 for the years ended December 31, 2010, 2009 and 2008, respectively.Future minimum lease payments (including the lease that is reserved  see note 4) for
each of the following years are as follows:
 Year ending December 31:2011
    
    $
    1,6122012
    
    
    1,6902013
    
    
    1,6072014
    
    
    5562015
    
    
    567Thereafter
    
    
    3,320$
    9,352
  Year ending December 31:2011
    
    $
    2682012
    
    
    2682013
    
    
    312$
    848
 (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.
   20




---



##### 



STARCITE, INC. AND SUBSIDIARIES
 (c)
    
    GuaranteesUnder 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, 2010, the Company does
not expect to incur any infringement liability as a result of the customer
indemnification clauses.(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 $196, $195 and $285 for the years ended December 31,
2010, 2009 and 2008, 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 and
2009 cost realignment (see note 4).
 (9)
    
    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.
   21




---



##### 



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, 2010 and 2009, no dividends were declared by the board of directors.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.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.
   22




---



##### 



STARCITE, INC. AND SUBSIDIARIES
 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. In 2009, the Company
increased the authorized shares of Series B Preferred Stock by 43,478 to 3,304,347 as a
result of the Horizon warrants (see note 6).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.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, 2010 and 2009, 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.
   23




---



##### 



STARCITE, INC. AND SUBSIDIARIES
 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, 2010, the liquidation value of the Series A-1 and Series A
Preferred Stock is $10,000 and $26,000, respectively. As of December 31, 2010, the
liquidation value of the Series B Preferred Stock is $15,000.
 (10)
    
    Stock-Based Compensation
     24




---



##### 



STARCITE, INC. AND SUBSIDIARIES
  Year ended December 312010
    
    
    2009Weighted average expected volatility
    
    
    72.6
    %
    
    
    71.6
    %Expected term (years)
    
    
    6.2
    
    
    
    6.2Risk-free interest rate
    
    
    2.8
    %
    
    
    2.7
    %Expected dividend yield
    
    
    
    
    
    
    
    25




---



##### 



STARCITE, INC. AND SUBSIDIARIES
  WeightedaverageWeighted
    
    
    remainingaverage
    
    
    contractualNumber of
    
    
    exercise
    
    
    termshares
    
    
    price
    
    
    (years)Outstanding, January 1, 2008
    
    
    2,783,078
    
    
    $Granted
    
    
    1,545,000Exercised
    
    
    (7,540
    )Forfeited
    
    
    (936,685
    )Outstanding, December 31, 2008
    
    
    3,383,853
    
    
    
    2.68Granted
    
    
    2,725,792
    
    
    
    1.48Exercised
    
    
    (72,752
    )
    
    
    1.79Forfeited
    
    
    (1,754,800
    )
    
    
    3.20Outstanding, December 31, 2009
    
    
    4,282,093
    
    
    
    1.69Granted
    
    
    110,000
    
    
    
    1.48Exercised
    
    
    
    
    
    
    Forfeited
    
    
    (1,324,143
    )
    
    
    1.99Outstanding, December 31, 2010
    
    
    3,067,950
    
    
    
    1.55
    
    
    
    7.98Options exercisable, December 31, 2010
    
    
    1,709,221
    
    
    $
    1.59
    
    
    
    7.80
      26




---



##### 



STARCITE, INC. AND SUBSIDIARIES
  OptionsOptions outstanding
    
    
    outstanding and exercisableWeightedaverage
    
    
    Weighted
    
    
    
    
    
    
    Weightedremaining
    
    
    average
    
    
    
    
    
    
    averageNumber
    
    
    contractual
    
    
    exercise
    
    
    Number
    
    
    exerciseExercise prices
    
    
    
    
    outstanding
    
    
    life (years)
    
    
    price
    
    
    vested
    
    
    price$
    1.48
    
    
    
    
    
    2,662,060
    
    
    
    8.22
    
    
    $
    1.48
    
    
    
    1,317,149
    
    
    $
    1.481.79
    
    
    
    
    
    356,065
    
    
    
    6.33
    
    
    
    1.79
    
    
    
    351,692
    
    
    
    1.793.38
    
    
    
    
    
    49,825
    
    
    
    7.16
    
    
    
    3.38
    
    
    
    40,380
    
    
    
    3.383,067,950
    
    
    
    7.98
    
    
    
    1.55
    
    
    
    1,709,221
    
    
    
    1.59
 Nonvested Shares
     27




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##### 



STARCITE, INC. AND SUBSIDIARIES
  WeightedaverageNumber of
    
    
    grant-dateshares
    
    
    fair valueNonvested at January 1, 2008
    
    
    843,390
    
    
    $
    2.60Granted
    
    
    
    
    
    
    Vested
    
    
    (339,862
    )
    
    
    2.60Forfeited
    
    
    (369,745
    )
    
    
    2.60Nonvested at December 31, 2008
    
    
    133,783
    
    
    
    2.60Granted
    
    
    
    
    
    
    Vested
    
    
    (108,476
    )
    
    
    2.60Forfeited
    
    
    (22,366
    )
    
    
    2.60Nonvested at December 31, 2009
    
    
    2,941
    
    
    
    2.60Granted
    
    
    19,270
    
    
    
    2.60Vested
    
    
    (11,795
    )
    
    
    2.60Forfeited
    
    
    (4,577
    )
    
    
    2.60Nonvested at December 31, 2010
    
    
    5,839
    
    
    
    2.60
  Year ended December 312010
    
    
    2009
    
    
    2008Cost of sales
    
    $
    375
    
    
    
    434
    
    
    
    304Selling and marketing
    
    
    424
    
    
    
    521
    
    
    
    342General and administrative
    
    
    182
    
    
    
    519
    
    
    
    1,869Research and development
    
    
    332
    
    
    
    395
    
    
    
    405$
    1,313
    
    
    
    1,869
    
    
    
    2,920
 (11)
    
    Subsequent events
    28