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COMMITMENTS AND CONTINGENCIES
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Sep. 30, 2011
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| COMMITMENTS AND CONTINGENCIES |
Operating Leases and Service Contracts
The
Company leases its office space and certain equipment under
long-term operating leases expiring through fiscal year
2014. Rent expense under these leases was $465,811 and
$519,716 for the years ended September 30, 2011 and 2010,
respectively. The Company has also entered into several
non-cancelable service contracts.
As
of September 30, 2011, future minimum annual lease payments under
operating lease agreements and non-cancelable service contracts for
fiscal years ended September 30 are as follows:
The
Company is also a party to certain capital leases – see Note
6.
Change in Officers and Employment Agreements
On
November 23, 2009, the Company and Richard F. Sommer, the
Company’s former Chief Executive Officer, entered into an
amendment to Mr. Sommer’s Employment
Agreement. The amendment, which was effective as of
October 29, 2009, provided that Mr. Sommer was entitled to an
option to purchase 26,316 shares of the Company’s common
stock at an exercise price of $18.53 per share, which was equal to
the closing price of the Company’s common stock on the date
of grant. The option was granted pursuant to the
Company’s 2003 Stock Plan and was to vest according to the
following schedule: 25% on October 29, 2010 (the first
anniversary of the date of grant) and 1/36 of the remainder each
month beginning on November 29, 2010. Previously, the
Employment Agreement provided that Mr. Sommer was entitled to a
success fee payable in cash equal to 2% of the excess above
$9,000,000 of any cash distributed to or received by the
Company’s stockholders in the form of a dividend, in the
event of liquidation or upon a change of control.
On
November 25, 2009, Rajeev Seshadri, the Company’s former
Chief Financial Officer, entered into a Separation Agreement and
Full Release of Claims with the Company in connection with his
departure as Chief Financial Officer of the Company, which was
agreed upon on November 19, 2009 and which took effect on January
2, 2010 (the “Resignation Date”). Under the
terms of the Separation Agreement and in accordance with his
employment agreement, the Company continued to pay Mr. Seshadri his
base salary for three months following the Resignation Date (less
applicable taxes and other withholdings). Mr. Seshadri
could also elect to receive such payment (the gross amount of which
is $53,750) in a lump sum on the Resignation Date. The
$15,000 bonus to which Mr. Seshadri was entitled under his
employment agreement for the Company’s fourth quarter of
fiscal 2009 was paid in a lump sum on the Resignation
Date. The Company paid Mr. Seshadri’s COBRA
payments for three months and reimbursed his reasonable
attorneys’ fees related to the negotiation of the Separation
Agreement. The Separation Agreement also provided for
Mr. Seshadri to serve as a consultant to the Company until January
31, 2010 for at least 16 hours per week at a rate of $230 per hour.
Finally, Mr. Seshadri continued to be entitled to
exercise his vested stock options in accordance with the terms of
the applicable stock option agreements for a period of 180 days
from the date of his resignation; his unvested options thereafter
would be forfeited and cancelled.
In
exchange for the payments described above, Mr. Seshadri provided a
full release of claims arising out of, or relating to, his
employment with the Company, his termination from the position of
Chief Financial Officer of the Company, and/or his
resignation. The Separation Agreement also contained
customary provisions with respect to confidentiality and
non-solicitation, as well as mutual covenants on the part of Mr.
Seshadri and the Company regarding public statements and
non-disparagement. As of September 30, 2010, all amounts
pertaining to this separation have been paid.
Also
on November 19, 2009, the Company appointed Lawrence W. Tomsic to
replace Mr. Seshadri as its Chief Financial Officer, effective on
the Resignation Date. In connection with Mr.
Tomsic’s appointment as Chief Financial Officer, he and the
Company were to enter into an employment agreement providing for a
one-year employment term that could be extended upon the mutual
agreement of the Company and Mr. Tomsic.
Pursuant
to this agreement, Mr. Tomsic was to be paid an annual salary of
$215,000 and was eligible to receive a bonus of up to $60,000 per
year if the Company achieves certain performance targets
established by the Company’s Board of Directors and/or its
Compensation Committee. Mr. Tomsic was to be granted an
option to purchase 10,526 shares of the Company’s common
stock under the Company’s Amended and Restated 2003 Stock
Plan. The Employment Agreement also provided that the
Company would reimburse Mr. Tomsic for reasonable business expenses
and allow him to participate in its regular benefit
programs.
If the Company terminates Mr. Tomsic’s
employment without Cause (as defined in the Employment Agreement)
and certain other conditions are met (including that Mr. Tomsic
provide a valid release of claims in favor of the Company), Mr.
Tomsic will be entitled to receive a lump sum severance payment
equal to his then current monthly salary for each full 12-month
period following the date on which Mr. Tomsic first began providing
services to the Company.
On
January 4, 2010, Mr. Sommer resigned as Chief Executive Officer of
the Company. As a result of his departure, Mr. Sommer
also resigned as a member of our Board of Directors. Mr.
Sommer did not receive any severance as part of his
resignation. All 25,000 options granted on November 23,
2009 were forfeited. Given this forfeiture, the Company
elected not to expense such options because the effects on the
financial statements would not have been
material. Following Mr. Sommer’s departure, Kevin
A. Hall was appointed as our interim Chief Operating Officer
(COO).
On
May 20, 2010, the Board of Directors of LiveDeal appointed Kevin A.
Hall as President and Chief Operating Officer of the
Company. Mr. Hall’s compensation and benefits were
not affected by his appointment as President of the
Company.
On
March 24, 2011 Mr. Hall was appointed Chief Executive Officer of
the Company. In connection with his appointment, Mr.
Hall entered into an employment agreement with the Company which
provides for a two-year term of employment, which may be extended
upon the parties’ mutual agreement, and an annual base salary
of $225,000. Mr. Hall will be entitled to receive an
annual performance bonus in the event that the Company reaches
certain performance measures established by the Board of Directors
or its Compensation Committee. The performance
milestones will be weighted 75% financial and 25% personal, and Mr.
Hall’s target bonus will be equal to 50% of his base
salary.
The
agreement further provides that Mr. Hall is entitled to an option
to purchase 13,487 shares of the Company’s common stock at an
exercise price of $3.53 per share, which was equal to the closing
price of the Company’s common stock on the date of
grant. The option was granted pursuant to the
Company’s 2003 Stock Plan and will vest according to the
following schedule: 25% on March 24, 2012 (the first
anniversary of the grant date) and 1/36 of the remainder each month
beginning on April 24, 2012. Notwithstanding the
foregoing, all unvested shares will immediately vest and become
exercisable upon a change in control.
If
the Company terminates Mr. Hall’s employment during the first
year of his term of employment without cause (as defined in the
agreement) and certain other conditions are met (including that Mr.
Hall provide a valid release of claims in favor of the Company),
Mr. Hall will be entitled to receive a lump sum severance payment
equal to his then current monthly salary for three
months. After March 24, 2012 but prior to the end of his
term of employment, if the Company terminates Mr. Hall’s
employment without cause, Mr. Hall will be entitled to a severance
payment equal to his then current monthly salary for six
months. The agreement also provides that the Company
will reimburse Mr. Hall for reasonable business expenses and allows
him to participate in its regular benefit programs.
On
May 20, 2011, in connection with the Company’s continued
employment of Mr. Tomsic as its Chief Financial Officer, the
Company entered into an employment agreement with Mr.
Tomsic. This agreement provides for a one-year term of
employment, which may be extended upon the parties’ mutual
agreement, and an annual base salary of $220,000. Mr.
Tomsic will be entitled to receive an annual performance bonus in
the event that the Company reaches certain performance measures
established by the Chief Executive Officer or the Board of
Directors (or its Compensation Committee). Mr.
Tomsic’s target bonus will be equal to $80,000.
Pursuant
to the employment agreement, on May 20, 2011, Mr. Tomsic was
granted an option to purchase 10,526 shares of the Company’s
common stock at an exercise price of $3.77 per share, which was
equal to the closing price of the Company’s common stock on
the date of grant. The options will vest and be
exercisable according to the following schedule: 3,728 options
vesting immediately and the remainder shall vest 1/31 at the end of
each month thereafter over the next 31 months so long as Mr. Tomsic
continues to provide services to the Company. Notwithstanding the
foregoing, all unvested shares will immediately vest and become
exercisable upon a change of control.
Litigation
The
Company is party to certain legal proceedings incidental to the
conduct of its business. Management believes that the outcome of
pending legal proceedings will not, either individually or in the
aggregate, have a material adverse effect on its business,
financial position, and results of operations, cash flows or
liquidity.
Except
as described below, as of September 30, 2011, the Company was not a
party to any pending material legal proceedings other than claims
that arise in the normal conduct of its business. While management
currently believes that the ultimate outcome of these proceedings
will not have a material adverse effect on its consolidated
financial condition or results of operations, litigation is subject
to inherent uncertainties. If an unfavorable ruling were to occur,
there exists the possibility of a material adverse impact on the
Company’s net income in the period in which a ruling occurs.
The Company’s estimate of the potential impact of the
following legal proceedings on its financial position and its
results of operation could change in the future.
Global Education Services, Inc. v. LiveDeal, Inc.
On
June 6, 2008, Global Education Services, Inc. ("GES") filed a
consumer class action lawsuit against the Company in King County
(Washington) Superior Court alleging that the Company's use of
activator checks violated the Washington Consumer Protection
Act. GES seeks injunctive relief against the
Company's use of the
checks, as well as judgment in an amount equal to three times the
alleged damages sustained by the members of the class. LiveDeal
denied the allegations and is defending the
litigation. Early in 2010, the Court denied both
parties’ dispositive motions after oral argument.
After settlement discussions failed to result in resolution, the
parties resumed the litigation in the fall of 2011. GES’
motion for class certification is briefed and scheduled to be heard
on January 27, 2012. The parties continue to discuss settlement
pending hearing on the motion.
The
Company has not recorded any accruals pertaining to its legal
proceedings, except as referenced above, as they do not meet the
criteria for accrual under FASB ASC 450.
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