D&O Lawsuits
At about the same time as the Company began its efforts to restructure the relationship with Macrovision, in August 2002, nine purported stockholders of the Company filed a complaint against the Company, eight of its current or former officers and several third parties in the United State District Court for the Southern District of New York. The action, which is known as Eilenberg et al. v. Kronitz et al. (02 Civ. 6502), alleges, among other things, that the Company issued a series of false and misleading statements, including press releases, that misled the plaintiffs' into purchasing the Company's Common Stock. The complaint seeks relief under federal securities laws and common law, and demands compensatory damages of $10 million or more, and punitive damages of $50 million or more. The Company and most of its current or former officers have filed a motion based upon the federal securities laws to dismiss the complaint for failure to state a claim. After hearing arguments on November 26, 2002, the Court granted defendants' motion to dismiss the complaint. Plaintiffs may file an amended complaint, but must do so by January 3, 2003. In the meantime, no discovery may be conducted in the case.
Counsel for the Eilenberg plaintiffs filed a second action against the Company and several of its current or former officers in the same court on August 21, 2002, this time on behalf of three additional purported stockholders as plaintiffs. This action, which is known as Sturm et al. v. Tokayer et al. (602 Civ. 6672), alleged, among other things, that the Company had violated the federal securities laws by distributing false and misleading materials in connection with the annual shareholder meeting scheduled for August 26, 2002, and that several officers and directors had breached duties to the Company and committed acts of waste and mismanagement by paying excessive salaries to themselves and others. Plaintiffs promptly moved for a temporary restraining order to enjoin the annual shareholder meeting from being conducted on August 26, 2002. The Court denied this motion. Defendants thereafter moved to dismiss the complaint for failure to state a claim for relief. In response, the plaintiffs filed an amended complaint, which deleted the prior claims concerning violations of the federal securities laws, but continued to assert derivative claims for waste and mismanagement. The Court denied defendants' motion to dismiss the latter claim, and the Sturm action is now in the beginning of the discovery phrase.
The Company has notified the insurer that issued a directors and officers liability policy to
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the Company covering the period in which the filing of the Eilenberg and Sturm actions occurred. The Company is seeking, among other things, to recover its costs of defense to the extent provided in the policy, but the insurer has not yet responded to that request. The Company does not believe that the proposed sale of assets to Macrovision will affect the prosecution of the Eilenberg or Sturm action. The Company expects both lawsuits to continue whether or not the Asset Sale is approved.
These lawsuits further eroded the Company's limited ability to raise capital, thereby effectively limiting the possible avenues open to the Company to restructure its business. |
