On December 13, 2006, the Court entered the Order awarding Lead plaintiffs counsel attorneys’ fees of 25% of settlement fund and reimbursement of litigation expenses in amount of $703,694.30. Further that day, the Court entered the Order and Final Judgment certifying the class action, approving the settlement and approving the plan of allocation. According to the Order, the litigation is dismissed on merits with prejudice as to the defendants.
According to the Company’s FORM 10-K for the fiscal year ended June 30, 2006, the Company has reached an agreement with plaintiffs to settle the Class Action lawsuit. The Company has also reached agreements with its relevant insurance carriers with respect to the funding of the cash portions of the settlement with plaintiffs. Under the terms of the agreement with the Class Action plaintiffs, the Company will not be required to contribute any cash to the Class Action settlement, as all cash contributed would be from the Company’s insurance carriers. However, as part of the agreement with the plaintiffs in the Class Action lawsuit, the Company has agreed to issue certain Lantronix securities to the plaintiffs. As of June 30, 2006, the Company has recorded an accrued settlement of $15.2 million of which the Company’s insurance carriers have agreed to fund $14.1 million. On August 29, 2006, the Court held a hearing to consider a motion for preliminary approval of the settlement, and granted preliminary approval on September 8, 2006. The court has scheduled a final settlement approval hearing date on November 22, 2006. There is no guarantee that the Class Action settlement will be finalized or approved by the court.
As summarized by the same SEC filing, beginning on May 15, 2002, a number of securities class actions were filed against the Company and certain of its current and former directors and former officers alleging violations of the federal securities laws. These actions were consolidated into a single action pending in the United States District Court for the Central District of California and entitled: In re Lantronix, Inc. Securities Litigation, Case No. CV 02-3899 GPS (JTLx). After the Court appointed a lead plaintiff, amended complaints were filed by the plaintiff, and the defendants filed various motions to dismiss directed at particular allegations. Through that process, certain of the allegations were dismissed by the Court. On October 18, 2004, the plaintiff filed the third amended complaint, which was the operative complaint in the action. The complaint alleges violations of Sections 11 and 15 of the Securities Act of 1933, as amended (the “Securities Act”) and violations of Sections 10(b) and 20(a) and Rule 10b-5 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Securities Act claims are brought on behalf of all persons who purchased common stock of Lantronix pursuant or traceable to the Company’s August 4, 2000 initial public offering (“IPO”). The Exchange Act claims are based on alleged misstatements related to the Company’s financial results that were contained in the Registration Statement and Prospectus for the IPO. The claims brought under the Exchange Act are brought on behalf of all persons and entities that purchased or acquired Lantronix securities from November 1, 2000 through May 30, 2002 (the “Class Period”). The complaint alleges that defendants issued false and misleading statements concerning the business and financial condition in order to allegedly inflate the value of the Company’s securities during the Class Period. The complaint alleges that during the Class Period, Lantronix overstated financial results through improper revenue recognition and failure to comply with Generally Accepted Accounting Principles (“GAAP”). Defendants filed an answer to the complaint and the case entered discovery. The Court set a trial date in September 2006.
The original complaint alleges that Lantronix, Inc. and certain of its officers and directors violated the federal securities laws by deliberately inflating the price of the Company's stock through a series of false and misleading public statements concerning the Company and its financial results in press releases and reports filed with the Securities and Exchange Commission. The complaint alleges that defendants engaged in improper revenue recognition practices throughout the Class Period. On February 6, 2002, Lantronix issued a press release disclosing that the Company would retroactively record a charge to its 1Q 2002 financial results, miss its forecasts for 2Q 2002, and lower its outlook for 3Q 2002 and fiscal 2002, due to a purported change in its method of accounting for revenue. Shortly thereafter, Lantronix terminated the employment of Steven Cotton, the Company's Chief Financial Officer and Chief Operating Officer. The complaint alleges that as a result of the defendants' conduct, plaintiff and other members of the Class suffered damages.