On January 7, 2011, Floyd Schneider, a purported stockholder of the Company, filed a complaint (the “Schneider Complaint”) on behalf of himself and as a putative class action on behalf of the Company’s public stockholders against all of the Company’s current directors (the “Individual Defendants”), the Company, Wonder Holdings Acquisition Corp. and Wonder Holdings, Inc. in the Superior Court of the State of Arizona for the County of Maricopa. The complaint alleges, among other things, that the Individual Defendants breached their fiduciary duties in connection with the tender offer and proposed merger by failing to engage in an honest and fair sale process and by providing materially inadequate disclosure and material disclosure omissions regarding the tender offer and the merger and that the Company, Wonder
Holdings Acquisition Corp. and Wonder Holdings, Inc. have aided and abetted the breach of fiduciary duties. The complaint seeks, among other things, a declaration that the action brought by the complaint is a class action and that plaintiff be certified as the class representative, an order enjoining the transactions contemplated by the Merger Agreement, rescissory damages in the event the transaction is consummated prior to the entry of a final judgment, an accounting of all damages caused by the defendants and all profits and special benefits obtained, and an award to the plaintiff of all costs, including attorneys’ and experts’ fees and expenses. The Company believes that the Schneider Complaint is without merit and intends to contest the case vigorously.
In accordance with and subject to the provisions of the Company’s Certificate of Incorporation, Messrs. Hemelt, Cowley, Clarot and Johnson and each of the named directors will be indemnified by the Company for their expenses incurred in defending each of these lawsuits and for any other losses which they may suffer as a result of these lawsuits. The Company has submitted each of these matters to its insurance carriers. If any liability were to result from these lawsuits that is not covered by insurance, we believe our financial results could be materially impacted.
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In the quarter ended June 30, 2009, the Company recorded a $9.0 million reserve for estimated costs to recall these products. The reserve charge was recorded in selling, general and administrative expense in the accompanying statement of operations for the nine months ended December 31, 2009. As of June 30, 2010, the recall reserve was exhausted. During the nine months ended December 31, 2010, we recorded $496,000 of additional recall charges. We expect any additional charges related to the June 2009 recall will be minimal.
7. Legal Proceedings
The Company is involved in various product liability claims and other legal proceedings. The Company’s legal expense for these lawsuits continues to have a significant impact on the results of operations as the Company defends itself against the various claims.
Among the principal matters pending to which the Company is a party are the following:
Product Liability Matters
General. Since 2003, a number of lawsuits have been filed against us alleging that our Zicam Cold Remedy nasal gel products have caused the permanent loss or diminishment of the sense of smell or smell and taste. Prior to the Company’s receipt of the FDA’s June 16, 2009 warning letter (see Note 6 — “Product Recalls and Withdrawals”), the number of lawsuits filed against the Company was steadily declining; in fact, the numbers of pending lawsuits, plaintiffs, new lawsuits and potential claimants were at their lowest levels since early 2004.
Since the Company’s receipt of the FDA warning letter, numerous product liability lawsuits have been filed against the Company, many of which cite the FDA warning letter as support for their claims. The lawsuits principally fall into two categories of product liability claims: (i) those alleging that our Zicam Cold Remedy nasal gel products caused the permanent loss or diminishment of the sense of smell or smell and taste (i.e., personal injury claims) and (ii) those seeking compensation for the purchase price of the Zicam Cold Remedy nasal gel products or various forms of equitable relief based on allegations that the Company misrepresented the safety and/or efficacy of such products to consumers (i.e., economic injury claims). On October 9, 2009, a judicial panel ordered the centralization and transfer of a number of economic injury and personal injury actions pending in federal court to a federal court in the District of Arizona pursuant to federal multidistrict litigation (“MDL”) procedures (see “Multi-District Litigation Matters” below for a discussion of the cases that have been consolidated and transferred). All of the economic injury lawsuits have been filed as class actions but none of the classes has been certified to date (uncertified class actions are referred to as “putative” class actions). See “Economic Injury Claims — Settlement Status” below for a discussion of the settlement status of the economic injury lawsuits and see “Personal Injury Claims — Settlement Agreement” below for a discussion of the settlement status of the personal injury lawsuits.
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Our Position and Our Response . We believe the claims made in these lawsuits are scientifically unfounded and misleading and we disagree strongly with the FDA’s allegations that Zicam Cold Remedy nasal gel products may be unsafe and that they were unlawfully marketed. The Company’s position is supported by the cumulative science, a multi-disciplinary panel of scientists, and the decisions of 10 separate federal judges in 10 different cases in multiple jurisdictions. In October 2009, in response to the Company’s request, the FDA advised the Company that it was unwilling to reverse its position. On November 16, 2009, the Company filed its response to the FDA’s warning letter. In its response, the Company reiterated its position that there is no valid scientific evidence that Zicam nasal Cold Remedy products are unsafe and requested the FDA to withdraw the warning letter. By letter dated March 4, 2010, the FDA reaffirmed its original position and denied the Company’s request.
Product Safety . There is no known causal link between the use of Zicam Cold Remedy nasal gel and impairment of smell or smell and taste. To date, no plaintiff has ever won a product liability case against the Company on those grounds. The Company believes that upper respiratory infections and nasal and sinus disease are the most likely causes of the smell dysfunctions reported by some consumers. One of the most common causes of smell disorders is the cold itself, the very condition our product was used to treat. Other causes are sinusitis and rhinitis, conditions which are sometimes present when our product is used.
Federal law requires that the testimony of a scientific or medical expert witness be reliable and based on valid scientific data and analysis before it can be allowed into evidence. To date, the Company has submitted motions in numerous federal lawsuits against the Company challenging the reliability and admissibility of the testimony of expert witnesses who claim that Zicam Cold Remedy is capable of causing or has caused smell and taste loss. To date, the courts that have ruled on these motions found in the Company’s favor on all of the motions. Each court has ruled that the theory that Zicam Cold Remedy nasal gel causes smell loss, as promoted by the plaintiffs’ experts, has no reliable scientific support and was reached without application of proper scientific standards and procedures. Federal courts have made such rulings against the three most prominent causal experts that plaintiffs have hired to date as well as various other expert witnesses. Motions to exclude experts disclosed by plaintiffs in the MDL were filed in November 2010 and a ruling on these motions is expected sometime after mid-February 2011.
In addition, on April 3, 2008, jurors in a California case unanimously found that Zicam was not the cause of plaintiff’s smell loss.
Product Effectiveness . Our claims and advertising are subject to the requirements of the Federal Trade Commission Act (“FTC”). On March 21, 2006, the FTC’s East Central Region (Cleveland, Ohio office), initiated a detailed inquiry to determine whether the Company engaged in unfair or deceptive acts or practices in violation of the Federal Trade Commission Act in connection with the Company’s advertising and promotional activities for several of the Company’s nasal and oral cold remedy products, including Zicam Cold Remedy Nasal Gel and Zicam Cold Remedy Swabs — the products that are the subject of the FDA warning letter. As part of the inquiry, the FTC requested and received, among other things, the Company’s documentation regarding product safety, including side effects, adverse events and consumer complaints, and efficacy, including the scientific proof establishing the efficacy claims made by the Company. Following a nearly year-long process, during which the Company provided the FTC with over 65,000 pages of documentation and met with the FTC to discuss the information, on March 5, 2007, the FTC notified the Company that it was no longer pursuing the inquiry.
Total Pending Product Liability Lawsuits . As of January 28, 2011, the Company is aware of 299 pending product liability lawsuits against the Company, involving 1,006 plaintiffs. Of those cases, 222 are pending in Federal court and 77 are pending in State court.
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Cases filed since September 30, 2010 (Pending in Federal Courts) : The Company is aware of the following pending federal court cases, covering 30 named plaintiffs, which were filed against and/or served on the Company between October 1, 2010 and January 28, 2011:
Personal Injury:
Date Filed United States District Court Named Plaintiff
10/1/2010 Arizona Tompkins, S.
10/1/2010 Arizona Anderson, N.
10/8/2010 Arizona Burns, J.
10/15/2010 Arizona Cossette, S.
10/18/2010 Arizona Johnson, R.
10/22/2010 Arizona Hine, C.
10/25/2010 Arizona Artrip, M.
10/25/2010 Arizona Hall, J.
10/27/2010 Arizona Davis, R.
10/27/2010 Arizona Neuffer, J.
10/28/2010 Arizona Weiss, A.
10/29/2010 Arizona Erovick, M.
10/29/2010 Arizona Crawford, J.
11/2/2010 Arizona Mast, S.
11/5/2010 Arizona Ruska, H.
11/5/2010 Arizona Tetrick, S.
11/5/2010 Arizona English, S.
11/9/2010 Arizona Sears, R.
11/16/2010 Arizona Stevenson, B.
11/19/2010 Arizona Manning, B.
11/30/2010 Arizona Redden, J.
11/30/2010 Arizona Sokol, T.
11/30/2010 Arizona Dedecker, N.
12/3/2010 Arizona Weber, S.
12/10/2010 Arizona Grabemeyer, P.
12/21/2010 Arizona Morales, D.
1/27/2011 Western District, Texas Cathey, G.
Putative Class Actions for Economic Injury: None.
Multi-District Litigation Matters. As previously disclosed, in August 2009, the Company filed a motion to consolidate and transfer all of the personal injury and economic injury matters, including any purported class actions, pending against the Company in federal court to the District of Arizona, pursuant to MDL procedures. On October 9, 2009, the Judicial Panel on Multidistrict Litigation (“Panel”) established MDL No. 2096, In Re: Zicam Cold Remedy Marketing and Sales Practices Litigation, and centralized the economic injury and personal injury actions that involve common questions of fact before a federal court in the District of Arizona. With one exception, the Panel transferred all of the economic injury cases at issue in the original MDL request. The Panel also began the MDL transfer process for the remaining economic injury and personal injury matters pending against the Company in federal courts across the country. The plaintiffs in these remaining cases will have the opportunity to object to the MDL transfer of their specific case. The Panel determined that the case of Hohman et. al. vs. Matrixx Initiatives, Inc. et. al. (filed June 18, 2009, Northern District of Illinois) did not involve sufficient common questions of fact to allow for consolidation and transfer to the MDL at that time. The Company expects any federal economic injury and personal injury matters filed in the future to be transferred and consolidated pursuant to the MDL transfer process, subject to the plaintiffs’ opportunity to object. See “Economic Injury Claims — Settlement
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Status” and “Personal Injury Claims — Settlement Agreement” below for a discussion of the settlement status of the economic injury and personal injury lawsuits.
Cases filed since September 30, 2010 (Pending in State Courts). The Company is aware of the following state court cases, covering 77 named plaintiffs, which were filed against and/or served on the Company between October 1, 2010 and January 28, 2011:
Personal Injury:
Date Filed Court Named Plaintiff
10/4/2010 Maricopa County, AZ Ellison, G.
10/15/2010 Maricopa County, AZ Allen, S.
11/18/2010 Bingham County, ID Hulse, J.
11/24/2010 San Francisco County, CA Shoub, L.
11/29/2010 Maricopa County, AZ Varone, T.
12/2/2010 Maricopa County, AZ James, A.
12/3/2010 Broward County, FL Henriques, J.
12/9/2010 San Francisco County, CA Hironymous, M.
12/9/2010 San Francisco County, CA Hobbs, V.
12/9/2010 San Francisco County, FL Hackett, R.
12/23/2010 Travis County, TX Pumphrey, C.
1/20/2011 San Francisco County, CA Reese, S.
Putative Class Actions for Economic Injury: None.
Cases Dismissed Subsequent to September 30, 2010 (Federal Courts). The following federal court cases against the Company, which were both personal injury class action lawsuits, were dismissed subsequent to September 30, 2010:
Date Filed United States District Court Named Plaintiff Date Dismissed
4/9/2010 Arizona Gardner, C. 11/18/2010
12/16/2009 Arizona Davis, S. 12/10/2010
Cases dismissed Subsequent to September 30, 2010 (State Courts) . The following state court case against the Company, which was an economic injury class action lawsuit, was dismissed subsequent to September 30, 2010:
Date Filed Court Named Plaintiff Date Dismissed
6/30/2009 St. Louis County, MO West, G. 10/4/2010
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Economic Injury Claims — Settlement Status . On August 19, 2010, the Company and plaintiffs’ attorneys representing all of the various nationwide and statewide economic injury plaintiffs signed a Memorandum of Understanding (“ MOU ”) setting forth their agreement in principle to settle those 18 lawsuits. On August 26, 2010, the MDL Judge issued an order objecting to the procedural mechanism the parties proposed for effectuating the settlement; the order did not consider the merits of the proposed settlement. On October 1, 2010, the Company and lead plaintiffs’ attorneys representing all of the economic injury plaintiffs executed a revised Memorandum of Understanding setting forth a different procedure for seeking approval of the settlement. The revised Memorandum of Understanding sets forth a procedure for approval of the settlement of injunctive relief claims relating to the safety of the Zicam Cold Remedy nasal gel spray and swabs before the MDL Court and approval of the settlement of claims relating to the efficacy of the Zicam Cold Remedy nasal gel spray and swabs as well as other current products in the Northern District of Illinois, the jurisdiction in which the only economic injury lawsuit not made subject to the MDL procedures is pending. On October 19, 2010, the parties entered into a settlement agreement to resolve the injunctive relief claims relating to safety of the Zicam Cold Remedy nasal gel spray and swabs. On the same day, plaintiffs filed a motion to certify an injunctive relief settlement class based on the terms of the settlement agreement before the MDL Court. On November 2, 2010, the MDL Court requested that the parties submit additional briefing explaining various aspects of the settlement.
As part of the settlement of the safety claims set forth in the settlement agreement, which remains subject to court approval, the Company agreed that, if its Zicam Cold Remedy nasal gel spray and/or swab products are re-introduced into the market, the packaging will include any language regarding adverse effects required by the FDA. Under the settlement agreement, the Company will be required to pay plaintiffs’ attorneys fees and has agreed to not object to an attorney’s fee application not to exceed $150,000, which fee award is subject to court approval.
As part of the settlement of the efficacy claims as set forth in the MOU, the Company has agreed to add certain clarifications to its packaging regarding the use and status of several current products. In addition, the Company has a tentative agreement to (i) pay the plaintiffs’ attorneys fees and costs for the litigation in an aggregate amount not to exceed $1.75 million; (ii) pay incentive awards to the named plaintiffs in an aggregate amount not to exceed a total of $35,000 and (iii) be responsible for the costs of providing notice of the settlement to class members.
On January 13, 2011, the MDL Court preliminarily approved the settlement subject to certain modifications that included a full release of all damage claims arising out of the safety of the products. The MDL Court also directed the parties to give class notice. The parties are preparing an amended settlement agreement to reflect these modifications. A hearing date for final approval of the settlement agreement has not been scheduled. As of December 31, 2010, the Company has reserved $2.2 million to resolve these matters. The reserve is recorded in Legal Liability on the Condensed Consolidated Balance Sheet as of December 31, 2010.
The Company cannot predict with certainty whether definitive agreements finally settling all of the economic injury claims will ultimately be approved by the courts. Nothing in the revised MOU or settlement agreement constitutes an admission of any wrongdoing, liability, or violation of law by the Company. Rather, the Company agreed to settle the economic injury claims to reduce its high litigation defense costs and to avoid the inherent risks associated with litigation.
Personal Injury Claims — Settlement with Certain Claimants. In July 2010, the Company entered into settlement agreements with approximately 46 personal injury claimants who had previously threatened to file lawsuits against the Company. The individual settlement amounts were $5,000 or less per claimant. The settlement documents for all claimants acknowledge that the Company denies any liability to them. Those who are eligible and elect to participate in the settlement program dismiss their claims with prejudice and provide written releases of their claims against the Company in return for their participation. Each of the claimants alleged use of the Company’s single hole actuator Cold Remedy nasal gel product, which was last sold in 2005.
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Personal Injury Claims — Settlement Agreement . On December 13, 2010, the Company entered into an agreement (the “Settlement Agreement”) to settle all other claims made by the plaintiffs and claimants who allege personal injury claims (approximately 995 plaintiffs and approximately 949 claimants) against the Company, including plaintiffs who are subject to the multidistrict litigation and the consolidated proceedings pending in state courts in California and Arizona. The Company will pay no more than $15.5 million to fund awards to be made under the settlement program. The foregoing funds will cover all costs, attorneys’ fees and other expenses associated with administration of the program by plaintiffs’ counsel. The Settlement Agreement acknowledges that the settlement is not an admission or concession on the Company’s part of any liability to the plaintiffs or claimants.
The $15.5 million settlement program amount will be funded by the Company in three installments. The Company paid the first installment of $11.5 million into an escrow account on December 29, 2010 following the Company’s receipt of a verified list of plaintiffs and claimants. The Company will pay the second installment of $2 million no later than 8 months after its payment of the initial installment. The Company will pay the third installment of $2 million, less amounts based on plaintiffs and claimants who elect not to participate in the settlement program, no later than 20 months after its payment of the initial installment.
Pursuant to the Settlement Agreement, the Company retained the right and option to void and cancel the Settlement Agreement in its entirety, at its sole discretion, if prior to the close of business on January 20, 2011 (the “Settlement Expiration Date”), plaintiffs’ counsel failed to enroll and achieve participation in the settlement program by (a) at least 97% of all plaintiffs and claimants who used a Zicam Cold Remedy Nasal Gel dispensed with a single hole actuator pump and (b) at least 94% of all plaintiffs and claimants who used other Zicam products. In response to the request of plaintiffs’ counsel for additional time to secure the required level of participation, the Company agreed to extend the Settlement Expiration Date to January 31, 2011. The Company has determined that, as of the Settlement Expiration Date, Plaintiffs’ counsel met the required levels of participation, meaning that the Settlement Agreement is in effect. Approximately 5% of the eligible plaintiffs and claimants have not confirmed their participation in the settlement program. The Company is uncertain regarding their intentions.
It is possible that new product liability lawsuits may be filed against the Company. The Company intends to continue to vigorously defend itself in any remaining cases and in any new cases that may arise.
Litigation Reserves . As of December 31, 2005, the Company established a reserve of $1.3 million for any future payment of settlement or losses related to the Cold Remedy litigation. This reserve was based on certain assumptions, some of which are described below, and was the amount, excluding defense costs, the Company believed it could reasonably estimate would be spent to resolve the remaining cases that had been filed or to resolve matters with the potential claimants. Some of the significant factors that were considered in the establishment of the reserve were as follows: the actual costs incurred by the Company up to that time in resolving several claims; the development of the Company’s legal defense strategy; settlements; and the number of cases that remained pending against the Company. There are events, such as the dismissal of any of the cases, the filing of new lawsuits, threatened claims, the outcome of a trial, rulings on pending evidentiary motions, or adverse publicity that may have an impact on the Company’s conclusions as to the adequacy of the reserve for the pending product liability lawsuits. The Company maintained a $522,500 reserve balance as of September 30, 2010, compared to the $740,000 reserve at March 31, 2010. The settlement with 46 potential claimants, mentioned above, was paid from the reserve in July 2010. In
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connection with the Settlement Agreement announced on December 14, 2010, and certain assumptions regarding the settlement of the economic injury lawsuits, the Company increased the litigation reserve to $17.7 million as of December 31, 2010. The reserve includes $2.2 million for economic injury and approximately $15.5 million for personal injury settlement. The amounts that may be spent to resolve matters with every actual and potential claimant could be higher than our reserve. The Company will continue to review the product liability claims situation and will adjust the litigation reserve in the future when we can reasonably estimate changes in the amounts and likelihood of resolving the claims. Litigation is inherently unpredictable and excessive verdicts do occur. Although we believe we have substantial defenses in these matters, we could, in the future, incur judgments or enter into settlements of claims that could have a material adverse effect on our results of operations in any particular period.
Securities Litigation Matters
Two class action lawsuits were filed in April and May 2004 against the Company, our previous President and Chief Executive Officer, Carl J. Johnson, and William J. Hemelt, our President and Chief Executive Officer, alleging violations of federal securities laws. On January 18, 2005, the cases were consolidated and the court appointed James v. Siracusano as lead plaintiff. The amended complaint also includes our Vice President of Research and Development, Timothy L. Clarot, as a defendant and was filed March 4, 2005. The consolidated case is Siracusano, et al. vs. Matrixx Initiatives, Inc., et al., in the United States District Court, District of Arizona, Case No. CV04-0886 PHX DKD. Among other things, the lawsuit alleges that between October 2003 and February 2004, we made materially false and misleading statements regarding our Zicam Cold Remedy products, including failing to adequately disclose to the public the details of allegations that our products caused damage to the sense of smell and of certain product liability lawsuits pending at that time. We filed a motion to dismiss this lawsuit and, on March 8, 2006, the Company received an Order dated December 15, 2005 granting the motion to dismiss the case, without prejudice. On April 3, 2006, the plaintiff appealed the Order to the United States District Court of Appeals, Ninth Circuit and on October 28, 2009, the Ninth Circuit Court reversed the decision of the United States District Court, District of Arizona. On June 14, 2010, the United States Supreme Court granted certiorari review and heard oral arguments on January 10, 2011. A decision is expected by June 2011.
A separate putative class action was filed on July 17, 2009 against the Company; William J. Hemelt, our President and Chief Executive Officer; Samuel C. Cowley, our Executive Vice President of Business Development, General Counsel and Secretary; Timothy L. Clarot, our Vice President of Research & Development; and Carl J. Johnson, our former President and Chief Executive Officer, alleging violations of federal securities laws. Shapiro et al. vs. Matrixx Initiatives, Inc. et al., in the United States District Court, District of Arizona, Case No. 2:09-cv-01479-ECV (the “Shapiro” action). The lawsuit alleges that the Company and the named officers failed to disclose to the FDA and to the public information about adverse events regarding the Zicam Cold Remedy nasal gel products and that the Company and such officers made false and misleading statements regarding the Company’s compliance with FDA regulations. The Company believes plaintiff’s allegations are without merit and intends to vigorously defend the lawsuit.
On January 7, 2011, Floyd Schneider, a purported stockholder of the Company, filed a complaint (the “Schneider Complaint”) on behalf of himself and as a putative class action on behalf of the Company’s public stockholders against all of the Company’s current directors (the “Individual Defendants”), the Company, Wonder Holdings Acquisition Corp. and Wonder Holdings, Inc. in the Superior Court of the State of Arizona for the County of Maricopa. The complaint alleges, among other things, that the Individual Defendants breached their fiduciary duties in connection with the tender offer and proposed merger by failing to engage in an honest and fair sale process and by providing materially inadequate disclosure and material disclosure omissions regarding the tender offer and the merger and that the Company, Wonder
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Holdings Acquisition Corp. and Wonder Holdings, Inc. have aided and abetted the breach of fiduciary duties. The complaint seeks, among other things, a declaration that the action brought by the complaint is a class action and that plaintiff be certified as the class representative, an order enjoining the transactions contemplated by the Merger Agreement, rescissory damages in the event the transaction is consummated prior to the entry of a final judgment, an accounting of all damages caused by the defendants and all profits and special benefits obtained, and an award to the plaintiff of all costs, including attorneys’ and experts’ fees and expenses. The Company believes that the Schneider Complaint is without merit and intends to contest the case vigorously.
In accordance with and subject to the provisions of the Company’s Certificate of Incorporation, Messrs. Hemelt, Cowley, Clarot and Johnson and each of the named directors will be indemnified by the Company for their expenses incurred in defending each of these lawsuits and for any other losses which they may suffer as a result of these lawsuits. The Company has submitted each of these matters to its insurance carriers. If any liability were to result from these lawsuits that is not covered by insurance, we believe our financial results could be materially impacted.
Shareholder Derivative Lawsuits
On September 11, 2009, a shareholder derivative lawsuit was filed by Timothy Hall, on behalf of the Company, against all of the Company’s current directors and the following current and former officers of the Company: William Hemelt, Samuel Cowley and Carl Johnson. The lawsuit alleges, among other things, that the officers and directors named in the complaint violated their fiduciary duties to the Company by (i) misrepresenting the safety of the Zicam Cold Remedy nasal gel products, (ii) failing to warn consumers that use of the Zicam Cold Remedy nasal products could result in anosmia and (iii) failing to disclose reports of anosmia to the FDA and otherwise misrepresenting the Company’s compliance with FDA regulations (Timothy Hall v. William J. Hemelt, et al., United States District Court, District of Arizona).
On September 18, 2009, a shareholder derivative lawsuit was filed by Theodore C. Klatt, on behalf of the Company, against all of the Company’s current directors and the following current and former officers of the Company: William Hemelt, Samuel Cowley, Carl Johnson, Timothy Clarot and James Marini. The lawsuit alleges, among other things, that the officers and directors named in the complaint violated their fiduciary duties to the Company by (i) misrepresenting the safety of the Zicam Cold Remedy nasal gel products, (ii) failing to warn consumers and shareholders that use of the Zicam Cold Remedy nasal products could result in anosmia and (iii) failing to disclose reports of anosmia to the FDA and otherwise misrepresenting the Company’s compliance with FDA regulations (Theodore C. Klatt v. William J. Hemelt, et al., United States District Court, District of Arizona).
On October 14, 2009, the parties filed a stipulation to transfer the Klatt action and consolidate it with the Hall action. On November 4, 2009, the stipulation was granted. On January 19, 2010, the Company moved for a stay of the consolidated derivative action pending the outcome of the Shapiro action (discussed under “Securities Litigation Matters” above), which the Court granted on March 1, 2010.
On November 20, 2009, a shareholder derivative lawsuit was filed by Bette-Ann Liguori, on behalf of the Company, against all of the Company’s current directors and certain of their spouses, and the following current and former officers and directors of the Company and certain of their spouses: Carl Johnson, Timothy Clarot, Timothy Connors, Lynn Romero, Michael Voevodsky, James Marini, and Edward Faber (Liguori v. Egan, et al., Superior Court of the State of Arizona, County of Maricopa). The lawsuit alleges, among other things, that the officers and directors named in the complaint violated their fiduciary duties to the Company by (i) misrepresenting the safety of the Zicam Cold Remedy nasal gel products, (ii) failing to warn consumers and shareholders that use of the Zicam Cold Remedy nasal products could result in anosmia and (iii) failing to disclose reports of anosmia to the FDA and otherwise misrepresenting the
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Company’s compliance with FDA regulations. On January 19, 2010, the Company filed a motion to stay the action pending the outcome of the Shapiro action or, in the alternative, pending the outcome of the consolidated derivative action filed in Federal court. On May 18, 2010, the court granted defendants’ motion.
In accordance with and subject to the provisions of the Company’s Certificate of Incorporation, each of the named directors and current and former officers and spouses will be indemnified by the Company for their expenses incurred in defending each of these lawsuits and for any other losses that they may suffer as a result of these lawsuits.
Related Legal Matters — Informal Inquiries
As previously reported, the Company received an inquiry from several county district attorneys in California regarding enforcement of certain consumer protection statutes involving our product packaging size. We have reached an agreement in principle to settle this matter by implementing certain changes in our packaging over a twelve-month period from the final date of settlement. In addition, the Company paid the state approximately $400,000, which had been previously accrued.
Legal Expense
The Company is incurring significant legal expense for the lawsuits referenced above. As previously disclosed, the Company had a limited amount of product liability insurance to cover litigation expense, losses and/or settlements associated with claims that our Cold Remedy products caused a loss of smell. The insurer determined the ultimate defense costs and claims associated with the anosmia allegations would likely exceed the policy limit of $5 million. To avoid ongoing administrative costs, in July 2010, the Company and its product liability insurer reached agreement that the insurer would pay the full amount of the $5.0 million policy to the Company. The Company received the cash in August 2010. Net product liability and regulatory related legal defense expense was $1.3 million ($2.2 million prior to allocating $942,000 million of insurance reimbursement) in the quarter ended December 31, 2010, compared to $1.8 million in the quarter ended December 31, 2009. In addition, during the quarter ended December 31, 2010, the Company recorded an additional $17.2 million to its litigation reserve for future payments for settling personal injury and economic injury product liability claims. The reserve consisted of $17.7 million in potential settlement costs less $500,000 previously reserved.
For the nine months ended December 31, 2010, net product liability and regulatory related legal defense expense was approximately $2.0 million ($7.0 million prior to allocating $5.0 million of insurance reimbursement), versus $4.7 million in the nine months ended December 31, 2009. We do not expect to receive additional reimbursements for legal expense. We expect legal expense will decline if the bulk of the product liability claimants enter into the settlement agreement.
8. Goodwill and Asset Impairment Charges
Intangibles consist of goodwill (which is the excess of purchase price over the net assets of businesses acquired), intellectual property, and trademarks. Goodwill is not amortized but finite-lived intangibles are amortized using the straight-line method. The Company had $15.0 million in goodwill related to the Company’s acquisition of the 40% Zicam, LLC interest acquired from Zensano, Inc. in December 2001. The business of Zicam, LLC at that time was to develop and produce homeopathic nasal gel products based on a proprietary zincum gluconium delivery system. |
