(10) Derivative Complaint

6 Months Ended

Sep. 30, 2011

Legal Matters and Contingencies [Text Block]

(10)	Derivative Complaint
	On May 7, 2010, Brian Murphy, derivatively on behalf of the Company, commenced a lawsuit in the Supreme Court of the State of New York, County of New York (the “Court”), against the former Chairman of the Company’s Board of Directors, certain former directors and officers of the Company, and the Company as a nominal defendant. The Complaint filed by Mr. Murphy in the action alleges, among other things, that the defendants breached fiduciary duties owed to the Company and its stockholders by failing to ensure that the Company’s financial statements for its fiscal year ended March 31, 2008 and quarter ended June 20, 2008 were prepared correctly, and by causing the Company to enter into the December 2009 financing on terms dilutive to the Company’s stockholders.
	On June 30, 2010 the defendants filed a motion to dismiss the Complaint.  Thereafter, on October 27, 2010, Mr. Murphy filed an Amended Complaint with the Court, naming the investors in the Company’s December 2009 financing as additional defendants.  In addition to repeating the allegations made in the original Complaint, the Amended Complaint alleges that the investors in the Company’s December 2009 financing were unjustly enriched at the Company’s expense, and seeks the rescission of the financing transaction, or in the alternative, the reformation of the terms of the financing.  On December 23, 2010 the defendants filed a motion to dismiss the Amended Complaint.  The Court scheduled a hearing on the motion for April 7, 2011.
	Shortly before the hearing was held on the motion to dismiss, the parties (including the Company) agreed in principle to settle the matter.  On September 16, 2011, the parties entered into a formal Settlement Agreement, pursuant to which, among other things:

● the Company will redeem its outstanding Senior Notes within 45 days of the Court’s approval of the Settlement Agreement, provided that such period may be extended for an additional 45 days if repayment is not reasonably possible due to market volatility or certain similar events set forth in the Settlement Agreement;

● the annual management fee payable by the Company to Union Capital Corporation will be reduced from $125,000 to $62,500 within two days of the Court’s approval of the Settlement Agreement;

● the Company will pay up to $175,000 of Plaintiff’s legal fees, subject to the Court’s approval;

● the Company’s Senior Notes have been amended to fix the interest rate thereunder at 12.5 percent;

● the parties agreed to the settlement of all claims relating to the lawsuit and the dismissal of the lawsuit with prejudice; and

● the plaintiff provided the defendants with a general release.

The settlement is not expected to have a material adverse impact on our finances.  Other than the amendment to the Senior Notes, which became effective on September 16, 2011, the terms of the Settlement Agreement will not become effective until approved by the Court following a hearing at which stockholders of the Company will be entitled to object to the Settlement Agreement.  It is anticipated that the Settlement Agreement will be presented to the Court for approval in the first quarter of calendar year 2012, following notice to the Company’s stockholders of the terms thereof.  There can be no assurance that the Court will approve the Settlement Agreement.  In the event the Court does not approve the settlement, for whatever reason, the litigation will resume.  The ultimate outcome of any litigation is uncertain and could result in substantial damages.

The Company has obligations to provide indemnification to its officers and directors (and former officers and directors), as well as to the investors in the December 2009 financing, including for all legal costs incurred by them in defending these claims.  As of September 30, 2011, the Company’s legal expenses in connection with its defense of the lawsuit and its indemnification obligations amounted to $966,000, with $135,000 of that amount incurred during the six months ended September 30, 2011.