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SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 
 Form 10-K
 (Mark One)þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the Fiscal year ended December 31, 2004
 or  ̈
    
    FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transaction period from  to
 Commission File No. 0-27646 Matrixx Initiatives, Inc.  Delaware
    
    87-0482806(State or Other Jurisdiction
    
    (I.R.S. Employerof Incorporation or Organization)
    
    Identification No.)
 4742 N. 24th Street
Suite 455
Phoenix, AZ 85016
602-385-8888
(Address of principal executive offices,
Registrants Telephone Number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Title of Each Class
    
    Name of Each Exchange on Which RegisteredCommon Stock, $.001 par value
    
    Nasdaq National Market
 Indicate by check mark whether the Registrant (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K, is not to be contained herein, and will not be contained, to the best of the Registrants
knowledge, in definitive proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. o Indicate by check mark whether the registrant is an accelerated filer (as defined in
Exchange Act Rule 12b-2). Yes þ No o The aggregate market value of the voting stock held by non-affiliates of the registrant was
approximately $96.3 million based on the closing price of $10.19 per share of common stock as
reported on the Nasdaq National Market on June 30, 2004. For purposes of this determination, shares
of common stock held by each officer and director and by each person who owns 5% or more of the
outstanding common stock have been excluded in that such persons may be deemed to be affiliates of
the registrant. This determination of affiliate status is not necessarily a conclusive
determination for other purposes. As of March 1, 2005, 9,565,395 shares of the Registrants Common Stock were outstanding.




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DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrants definitive proxy statement prepared in connection with the
Registrants 2005 annual meeting of stockholders are incorporated by reference into Part III, Items
10, 11, 12, 13 and 14 of this Form 10-K. Unless
otherwise indicated in thisForm 10-K,
Matrixx, us, we, our,
the Company
and similar terms refer to Matrixx Initiatives, Inc. and its subsidiaries. Zicam is a registered
trademark of our subsidiary, Zicam, LLC, and the Matrixx name and logo are trademarks of the
Company.




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TABLE OF CONTENTS PagePART IItem 1.    Business
    
    2Item 2.    Properties
    
    6Item 3.    Legal Proceedings
    
    6Item 4.    Submission of Matters to a Vote of Security Holders
    
    8Supplemental Item.Executive Officers
of Matrixx
    
    8PART IIItem 5.    Market for the Registrants Common Stock, Related Stockholder
Matters and Issuer Purchases of Equity Securities
    
    9Item 6.    Selected Financial Data
    
    10Item 7.    Managements Discussion and Analysis of Financial Condition and Results
of Operations
    
    10Item 7A. Quantitative and Qualitative Disclosures about Market Risk
    
    24Item 8.    Financial Statements and Supplementary Data
    
    24Item 9.    Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
    
    24Item 9A. Controls and Procedures
    
    24Item 9B. Other Information
    
    26PART IIIItem 10.  Directors and Executive Officers of the Registrant
    
    26Item 11.  Executive Compensation
    
    26Item 12.  Security Ownership of Certain Beneficial Owners and Management
    
    26Item 13.  Certain Relationships and Related Transactions
    
    27Item 14.  Principal Accountant Fees and Services
    
    27PART IVItem 15.  Exhibits, Financial Statement Schedules
    
    28SIGNATURES
    
    57Exhibit 10.11Exhibit 10.16Exhibit 23.1Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
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PART I 
 ITEM 1. BUSINESS Introduction We develop, produce, market and sell innovative, over-the-counter (OTC) healthcare
products with an emphasis on those that utilize unique, novel
and/or proprietary delivery systems that provide consumers with
better ways to get better. Through our subsidiary, Zicam, LLC, we produce, market and
sell 16 different products under the Zicam® brand: Zicam Cold Remedy nasal gel, a patented,
homeopathic remedy that has been clinically proven to reduce the duration and severity of the
common cold; two related nasal swab cold remedy products  Zicam Cold Remedy Swabs and Zicam Cold
Remedy Swabs  Kids Size; three homeopathic oral delivery cold remedy products  Zicam Cold Remedy
Chewables, Zicam Cold Remedy RapidMelts and Zicam Cold Remedy Oral Mist; Zicam Allergy Relief, a
homeopathic nasal gel formula designed to control allergy symptoms for sufferers of hay fever and
other upper respiratory allergies; Zicam Extreme Congestion Relief, a nasal gel formula designed to
provide fast-acting, long-lasting relief of nasal congestion; Zicam Sinus Relief, a nasal gel
formula that enhances the benefits of Extreme Congestion Relief with menthol and eucalyptus for
improved feeling of sinus pressure relief; Zicam Nasal Moisturizer, a non-medicated nasal
moisturizer; and six new Zicam Cough Mist products introduced in 2004  Zicam Cough Mist Adult
Cherry, Zicam Cough Mist Adult Honey Lemon, Zicam Cough Mist Adult Plus Decongestant, Zicam Cough
Mist Adult Nite, Zicam Cough Mist Kids Plus Decongestant, and Zicam Cough Mist Kids Cherry. We were incorporated in Utah in 1991. Prior to July 2001, as Gum Tech International, Inc., our
principal business was the development, manufacture and sale of nutritional and healthcare-related
chewing gum products. In 1999, we formed Gel Tech, L.L.C., in which we owned 60%. The business of
Gel Tech was to develop and produce homeopathic nasal gel products based on a proprietary zincum
gluconicum (zinc gluconate) delivery system. In July 2001, we exited the chewing gum business with
the sale of substantially all of our chewing gum assets and business to the Wm. Wrigley Jr. Company
(Wrigley). In December 2001, we acquired the remaining 40% of Gel Tech and changed its name to
Zicam, LLC. On June 18, 2002, we reincorporated in Delaware and changed our name from Gum Tech
International, Inc. to Matrixx Initiatives, Inc. Our principal executive offices are at 4742 N. 24th Street, Suite 455, Phoenix, AZ
85016 and our telephone number is (602) 385-8888. Markets and Company Products All 16 of our Zicam products are targeted at the cough and cold market category. That market,
which is estimated at more than $3.5 billion annually in retail sales in the United States,
includes a wide variety of tablets, liquids, nasal sprays and syrups that remedy and/or provide
relief to cold, allergy and sinus congestion sufferers. The largest sub-segment of the cough and
cold category includes products formulated to relieve symptoms associated with the common cold. It
is estimated that more than one billion common colds occur in the United States each year, with
over 100 million of these colds resulting in lost days of school or work, or some level of
restricted activity. Colds are estimated to occur at a rate of two to five per person (six to eight
per child) each year. The market for allergy relief products covers a much smaller segment of the
population, estimated at 35 million people in the United States. However, allergy sufferers,
compared to cold sufferers, are more likely to require medication for a much longer period of time
to relieve allergy symptoms. Our biggest selling product, Zicam Cold Remedy nasal pump, which accounted for approximately
27% of net sales during 2004 is a homeopathic nasal gel product based on our patented zinc
gluconate delivery system. The original product in a nasal pump bottle was introduced in 1999.
Sales of Zicam Cold Remedy have grown continuously since its introduction as customer awareness of
the product has increased as a result of our marketing and public relations efforts, and
word-of-mouth experience by consumers. Zicam Cold Remedy was formulated to reduce the duration and
severity of the common cold. In a study published in the October 2000 issue of the ENT- Ear, Nose &
Throat Journal, Zicam Cold Remedy was shown to reduce the duration of the common cold when taken at
the onset of symptoms. In a separate study published in the January 2003 issue of QJM: An
International Journal of Medicine, zinc gluconate nasal gel (Zicam Cold Remedy) was shown to reduce
the duration and symptoms of the common cold when treatment was started as late as the second day
of illness. We believe Zicam Cold Remedy is unique in the cough and cold market category due to the
claims that we are able to make regarding the products ability to reduce the duration of the
common cold. To our knowledge, only one other product in the cough and cold category (including
competing generic copies of that product) is able to make a similar claim. - 2 -




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Zicam Cold Remedy Swabs and Zicam Cold Remedy Swabs  Kids Size contain the same ingredients
as Zicam Cold Remedy and were introduced in late 2002 to appeal to consumers who dislike nasal
sprays. Both of these swab products have been well received by the retail trade. Due to production
constraints of our former supplier, we previously experienced backlogs in orders for the adult swab
product in late December 2002 and again in December 2003. As a result of the manufacturers
inability to meet our swab production requirements in 2002 and higher costs imposed unilaterally by
the manufacturer, we developed a new swab product in 2003 that is produced by a different
manufacturer. We began shipping the new swab product to retailers in February 2004 and we
alleviated the backlog in early March 2004. The swab products accounted for approximately 18% of
net sales in 2004. We introduced the three oral delivery forms of Zicam Cold Remedy products in late 2003  Zicam
Cold Remedy Chewables, Zicam Cold Remedy RapidMelts, and Zicam Cold Remedy Oral Mist. These
products were designed to meet the needs of customers who dislike nasal applications. All three
rapidly deliver a dose of ionic zinc to the oral mucosa in contrast with zinc lozenges which
require approximately 15-20 minutes to dissolve. We believe that this feature allows the consumer
to avoid much or all of the stomach upset that has been associated with the zinc lozenges on the
market. These three products accounted for approximately 20% of net sales in 2004. Zicam Allergy Relief, also a homeopathic nasal gel formula, was introduced in 2000. Zicam
Allergy Relief is designed to control allergy symptoms for sufferers of hay fever and other upper
respiratory allergies. An initial double-blind scientific study indicated that Zicam Allergy Relief
reduced the severity of symptoms resulting from these types of allergies. We believe Zicam Allergy
Relief is distinctive from most allergy products available on the market due to the absence of side
effects such as drowsiness or jitters. We introduced three other Zicam nasal gel products in late
2002  Extreme Congestion Relief, Sinus Relief and Nasal Moisturizer. Zicam Extreme Congestion
Relief is a nasal gel that combines the active ingredient oxymetazoline hydrochloride into our gel
matrix and soothing aloe vera to provide fast-acting, long-lasting relief of nasal congestion and
sinus pressure. Zicam Sinus Relief provides all of the benefits of the Extreme product with the
aromatic strength of a cooling menthol/eucalyptus blend. Zicam Nasal Moisturizer is a non-medicated
moisturizer that suspends aloe and eight other moisturizers in the gel matrix to help ensure
constant, soothing relief for irritated nasal membranes. While greater retail distribution
opportunities exist, these four products accounted for approximately 22% of net sales in 2004. We
believe continued growth in sales from these products is dependent on achieving wider distribution
among retailers, and in particular, among large nation-wide food, drug and mass marketers. During 2004, we introduced six new Zicam Cough Mist products, which we began shipping in July
2004. The Zicam Cough Mist products are designed to deliver fast, effective cough relief and soothe
throat irritation. Zicam Cough Mist utilizes a unique spray mist delivery system that is convenient
and portable, with no messy measuring or sticky syrups, to deliver the active ingredient most
recommended by doctors to quiet a cough. Additionally, the Cough Mist Plus D products deliver a
leading decongestant along with cough relief. The six new Cough Mist products are: Zicam Cough Mist
Adult Cherry, Zicam Cough Mist Adult Honey Lemon, Zicam Cough Mist Adult Plus Decongestant, Zicam
Cough Mist Adult Nite, Zicam Cough Mist Kids Plus Decongestant, and Zicam Cough Mist Kids Cherry.
Net sales from these six products accounted for approximately 13% of net sales in 2004. Greater
retail distribution opportunities exist for these six products and we believe there will be
increased sales of these products as consumers become more aware of the new Zicam Cough Mist
product line and greater distribution is achieved. Although Zicam Cough Mist products are priced at
a level below the pricing of other Zicam products, the gross margin on sales of Cough Mist are in
line with the gross margin of other Zicam products. In February 2005, the Company announced Nasal Comfort, a new brand and product for nasal
health. The initial offering under the new brand is a unique product designed to help maintain the
critical functions of the nasal cavity and its role in the respiratory process. Nasal Comfort is a
preservative free, sterile, hyper-tonic aqueous solution with essential salts and oils that
cleanses and moisturizes the nose. The new product will be packaged in a pharmaceutical grade
dispenser, employing a patented one-way, micro-filtration pump. The Company anticipates initial
sales and shipments will begin in the second quarter of 2005. Business Strategy Our
business objective is to be a high growth over the counter (OTC)
healthcare company marketing products that utilize novel, unique and
proprietary delivery systems that provide consumers with better
ways to get better. To achieve our objective, the key elements of our business strategy
include the following: Expanding Marketing Efforts for Existing and New Products: We intend to continue to develop
and refine our sales and marketing efforts to increase market penetration of our Zicam and Nasal
Comfort products in U.S. - 3 -




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households. Such efforts include improving the timing and consistency of
marketing activities compared to previous
years, executing effective trial generating programs, implementing programs with retailers to
enhance consumer awareness of our products and seeking to increase recommendations from healthcare
professionals. We are also implementing new, creative advertising approaches and public relations
efforts. We believe these efforts will continue to build brand awareness, trial and sales of our
products. Pursuing Additional Delivery Systems: Our success in expanding consumer acceptance of our
nasal gel delivery system and growing the Zicam franchise confirms our belief that opportunities
exist to pursue development of other healthcare products that deliver consumer benefits
utilizing unique, novel and/or proprietary delivery systems. We are seeking to identify, through
internal research and development efforts and through consideration of external opportunities,
other growth opportunities for Matrixx and are specifically targeting product concepts in the
analgesic and oral care markets as well as in the cough and cold market category in which we
currently operate. Customers We sell our products directly to major food, drug, mass market (e.g. Wal-Mart, Target)
and wholesale warehouse retailers throughout the United States, and to distributors that sell to
smaller retail establishments. Zicam Cold Remedy nasal pump, Zicam Cold Remedy Swabs  Adult Size
and Zicam Allergy Relief are sold in virtually every major food, drug, and mass merchant retail
outlet in the country. Our 13 other Zicam products have not achieved the same level of
distribution, though two national retailers currently carry all 16 Zicam products. We are highly
dependent on a small group of large national retailers for our product distribution, such that our
top 15 customers accounted for more than 80% of our net sales in 2004, and three customers,
Wal-Mart, Walgreens, and CVS each accounted for more than 10% of our net sales in 2004. Our
agreements with our customers generally provide for their ability to return unsaleable merchandise,
limited to damaged product or out-of-date product. We provide in our financial results, as an
offset against sales, an estimate for expected returns. Due to the continuing growth and success of
the Zicam products, we have not experienced unusual or excessive amounts of product returns. To the
extent that any of our largest customers were to stop carrying our products for any reason, or were
to fail to pay us for our products, our sales and financial results would be negatively impacted. Manufacturing and Distribution Our 16 products are manufactured by six contract manufacturers. Each of the manufacturers
is registered with the federal Food and Drug Administration (FDA) and has confirmed to us that it
adheres to current Good Manufacturing Practices (cGMPs) in its production processes and
procedures. Each manufacturer is responsible for sourcing all raw materials used in its production
of our products from third party suppliers, which are widely available. We rely on individual
production orders to meet our needs from these suppliers. However, we do have contracts executed
with two of our manufacturing partners, Applied Laboratories, Inc. and Biozone Laboratories. We are
in the process of negotiating contracts with certain manufacturers at this time. We have some
flexibility in securing other manufacturers to produce our products, however, in some circumstances
we may be limited in our alternatives due to proprietary technologies that are utilized in some of
the products. We source all packaging materials, including the bottles and sprayers for our pump products,
from third parties. Each manufacturer of our products is responsible for all other aspects of the
production process, including formulating and producing product mixtures, filling bottles,
assembling finished product and packing finished product in master cases. We also ship the nasal
gel formula in bulk containers to our swab product manufacturer for production of the swab
products. Generally, finished products are shipped to independent warehouses in Arizona and Indiana
for storage prior to shipment to our customers. At December 31, 2003, we had a backlog of swab orders of approximately $0.4 million which was
eliminated in March 2004. There were no product backlogs at December 31, 2004. Research and Development Research and development is an important part of our business. Expenditures in 2004
reflect costs associated with the six new Cough Mist products that we introduced in 2004, costs
associated with developing a new swab design and expenditures on products that we intend to
introduce in 2005 and future years. We had previously announced our intention to spend 6% of net
sales annually on research and development efforts; however, due to research and development
efforts being diverted as a result of product liability litigation matters, we did not spend at
that level in 2004. We expect to commit 4-6% of net sales on research and development in 2005 and
subsequent years in order to develop a pipeline of new products to be introduced in the future to
meet our sales growth targets. FDA and Other Government Regulation - 4 -




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We are subject to various federal, state and local laws and regulations affecting our
business. All of our products are subject to regulation by the FDA, including regulations with
respect to the approval of manufacturing processes and procedures, ingredients in the products,
labeling and claims made. All of our Zicam Cold Remedy products, the three oral delivery products,
and Zicam Allergy Relief, are further subject to the requirements of the Homeopathic Pharmacopeia
of the United States. Zicam Extreme Congestion Relief, Zicam Sinus Relief, and the six new Zicam
Cough Mist products are subject to the requirements of the FDA as allopathic drugs. All of our
claims and advertising are subject to the rules of the Federal Trade Commission (FTC). Although we
believe that our products and claims comply in all material respects with the regulatory
requirements, if the FDA or FTC were to determine that we are in violation of any such requirement,
either agency could restrict our ability to market the products, change the claims that we make or
cause us to remove the products from the market. It has been reported in the press that the FDA is
looking into customer complaints about our Cold Remedy nasal products, although we have not been
advised of such an inquiry by the FDA. Environmental Matters Compliance with environmental rules and regulations did not significantly affect our
earnings or competitive position during 2004. All of our Zicam product manufacturing and
warehousing operations are currently outsourced to third party contractors and as a result, we do
not incur any direct expenses related to environmental monitoring and regulatory compliance. With
our continued outsourcing of Zicam product manufacturing and storage, and no present plans to
return to direct manufacturing or storage of products, we expect these expenses to remain low in
the foreseeable future. To the extent higher costs are incurred by our manufacturers for
environmental compliance, they could impact our cost of goods. Trademarks, Trade Names, and Proprietary Rights We have been issued three United States patents (U.S. Patent Nos. 6,080,783, 6,365,624,
and 6,673,835) for the Zicam Cold Remedy nasal technology. We believe these patents, which are
expected to be effective until 2018, afford significant protection from competitors that may wish
to sell similar cold remedy products. We also have additional patent applications on file in the
United States to seek further rights in the cold remedy technology. We have related issued patents
in Australia (no. 774410), Canada (No. 2,308,513) and Korea (No. 439,323) and have pending
applications in several other countries and regions, including Mexico, the European Union, Hong
Kong, Japan, China, Brazil and India. We have also filed applications for patents in the United
States for compositions and methods relating to Zicam Nasal Moisturizer, Zicam Extreme Congestion
Relief, Zicam Sinus Relief, Zicam Cold Remedy Rapidmelts, Zicam Cold Remedy Chewables, Zicam Cold
Remedy Oral Mist, and Zicam products dispensed with the swab system, while preserving our rights to
file applications in other foreign countries at a later date. We hold registrations for the Zicam
trademark in the United States, the European Union, Japan and Australia and have applied for
similar trademark protection in other countries, including Mexico, China, Taiwan and Brazil. We
anticipate that we will continue to file for patent and trademark protection for the other products
we expect to develop and introduce in the future. There can be no assurance, however, that our
existing patents, or any additional patents that we may secure in the future, will be adequate to
protect the Companys intellectual property from a competitors actions or that the Companys
products will not be found to infringe the intellectual property rights of others. Further, patent
infringement litigation can be very time-consuming and costly. Even if we prevail in such
litigation, the cost of litigation could adversely affect our operating results and financial
condition. Employees As of December 31, 2004, we employed 18 people in our Phoenix, Arizona headquarters
office. The 18 employees consist of six executive officers and individuals responsible for
administrative, operations, marketing, sales, research and development, regulatory compliance,
investor relations, finance, and accounting. Seasonality Sales of Zicam products to end-use consumers are highly seasonal, with most sales
occurring during the cold and allergy seasons. The cold season generally runs from September
through April, while the allergy season runs from April through October. Both of these seasons vary
in intensity and duration from year to year. Our sales to retailers generally mirror this pattern
of consumer demand, but are impacted by the level of promotional support we commit to retailers and
by their inventory management practices. Generally the second quarter of the year accounts for
less than ten percent of annual sales and the Company has historically recorded negative earnings
in the second quarter. Backlog - 5 -




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Except as described above regarding the backlog we experienced with respect to our swab
products, we did not experience any product backlog in 2004. At December 31, 2003, we had a backlog
of swab orders of approximately $0.4 million which was eliminated in March 2004. Competition All of the Zicam products compete in the highly competitive cold, allergy/sinus, or cough
market groups of the overall cough and cold category with a vast number of well-established brands
marketed by large pharmaceutical and consumer products companies. Participants in the cold,
allergy/sinus, and cough markets compete primarily on the basis of price, quality of product, and
consumer awareness. Most of our competitors have substantially greater financial, marketing and
other resources, longer operating histories, larger product portfolios and greater brand
recognition than we do. With our limited resources, we are aiming to succeed in this category by
emphasizing the unique claims regarding our products and providing consumers with innovative
delivery systems. Specifically, regarding Zicam Cold Remedy, our flagship product, we emphasize its
ability to reduce the duration and severity of the common cold. Only one other product in the
category (including competing generic copies) is able to make a similar claim. 
 ITEM 2. PROPERTIES In February 2004, we commenced leasing office space at 4742 N. 24th Street in Phoenix,
Arizona for a period of four years. The new offices provide needed space for the additional
personnel we intend to hire in 2005 while reducing our monthly rental expense. Warehouse storage
and shipping of our finished goods are provided by contract warehouses in Phoenix, Arizona and
Plainfield, Indiana through month-to-month agreements. We consider our existing facilities to be
adequate and suitable for their intended use. 
 ITEM 3. LEGAL PROCEEDINGS The Company is subject, from time to time, to legal proceedings and claims regarding
adverse reactions to our products. From late 2003 through February 2004, we have been sued by over
340 individuals in approximately 32 different lawsuits generally alleging that our Zicam Cold
Remedy nasal products caused damage to the sense of smell and/or taste. Two of these lawsuits were
filed as class action lawsuits covering named and unnamed plaintiffs, although one of the class
action lawsuits has been dismissed, as have the claims of several individual plaintiffs. The
current cases that have been filed against the Company are: Abramsen et al. vs. Matrixx
Initiatives, Inc., et al., filed March 8, 2004, in the Superior Court of Arizona (Maricopa County),
Case No. CV2004-04415; Adams, et al., vs. Matrixx Initiatives, Inc., et al., filed May 6, 2004, in
the Superior Court of Arizona (Maricopa County), Case No. CV2004-008929;; Adamson, et al. vs.
Matrixx Initiatives, Inc., et al., filed February 1, 2005, in the Superior Court of Arizona
(Maricopa County), Case No. CV2005-001880; Akers, et al. vs. Matrixx Initiatives, Inc., et al.,
filed August 20, 2004, in the Superior Court of Arizona (Maricopa County), Case No. CV2004-016010;
Benkwith, et al. vs. Matrixx Initiatives, Inc., et al., filed May 3, 2004, in the Circuit Court for
Montgomery County, Alabama, Case No. CV04-1180 CNP; removed to United States District Court for the
Middle District of Alabama, Case No. 2:04 CV-00623-F; Bentley et al. vs. Matrixx Initiatives, Inc.,
et al., filed January 23, 2004, in the Superior Court of Arizona (Maricopa County), Case No.
CV2004-001338; Bryant vs. Matrixx Initiatives, Inc., et al., filed June 9, 2004, in the District
Court, Boulder County, Colorado, Case No. 04-MK-2317 (BNB); Cappy, et al. vs. Matrixx Initiatives,
Inc., et al., filed November 17, 2004, in the Superior Court of Arizona (Maricopa County), Case No.
CV2004-021668; Cash, Katie and David vs. Matrixx Initiatives, Inc., et al., filed January 13, 2005,
in the Superior Court of California (Fresno County, Central Division), Case No. 05 CE CG 00124;
Connolly, Gay vs. Matrixx Initiatives, Inc., et al., filed October 22, 2004, in the Superior Court
of Georgia (Cobb County), Case No. 2004A 9564-5; Douillard, John R. vs. Matrixx Initiatives, Inc.,
et al., filed May 6, 2004, in the Superior Court of Arizona (Maricopa County), Case No.
CV2004-008950; Flores vs. Matrixx Initiatives, Inc., et al., filed on December 30, 2004, in Santa
Clara County, Case No. 1:04-CV033194; Gillespie, Julie vs. Matrixx Initiatives, Inc., et al., filed
December 8, 2004, in the Superior Court of California (Orange County), Case No. 04CC11976; Hans, et
al. vs. Matrixx Initiatives, Inc., et al., filed September 13, 2004, in the United States District
Court, Western District of Kentucky, Case No. 3:04CV540-R; Hilton, Heather vs. Matrixx Initiatives,
Inc., et al., filed June 17, 2004, in the State of Texas District Court, Tarrant County, Case No.
048-206162-04; Hood, Michael and Terri vs. Matrixx Initiatives, Inc., et al., filed April 14, 2004,
in the Circuit Court of the 17th Judicial Circuit in and for Broward County, Florida, General
Jurisdiction Division, Case No. 04006193; Hudson, et al. vs. Matrixx Initiatives, Inc., et al.,
filed February 11, 2005, in the Superior Court of Arizona (Maricopa County), Case No.
CV2005-002569; Hunter, et al. vs. Matrixx Initiatives, Inc., et al., filed June 4, 2004, in the
Superior Court of Arizona (Maricopa County), Case No. CV2004-010830; Kalfian, Carol A. vs. Matrixx
Initiatives, Inc., et al., filed April 20, 2004, in the United States District Court for the
District of Rhode Island, Case No. 04-119-ML; Lusch, Barbara A. vs. Matrixx Initiatives, Inc., et
al., filed February 9, 2005, in the Circuit Court of the State of Oregon, Case No. 0501-00588;
Lutche, Lucy B. vs. vs. Matrixx Initiatives, Inc., et al., filed May 7, 2004, in the Superior Court
of Arizona - 6 -




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(Maricopa County), Case No. CV2004-008704; Mayo, Derek vs. Matrixx Initiatives, Inc., et
al., filed May 26, 2004,
in the Superior Court of New Jersey, Law Division: Essex County, Docket No. ESX-L-3551-04;
removed to the United States District Court for the District of New Jersey, Case No. 2:04-cv-3197;
Nelson vs. Matrixx Initiatives, Inc., et al., filed December 8, 2003, in the Los Angeles Superior
Court, Case No. YC048136; OHanlon, Dennis and Bonnie vs. Matrixx Initiatives, Inc., et al., filed
October 29, 2004, in the Superior Court of California (Los Angeles County), Case No. BC322039;
Ringbauer et al. vs. Matrixx Initiatives, Inc., et al., filed February 11, 2004, in the Superior
Court of Arizona (Maricopa County), Case No. CV2004-002822; removed to the United States District
Court for the District of Arizona, Case No. 04-CV-513; remanded to the Superior Court of Arizona
(Maricopa County); Rostron, et al. vs. Matrixx Initiatives, Inc., et al., filed November 4, 2004,
in the United States District Court for the Northern District of Alabama, Middle Division, Case No.
CV-04-AR-3136-M; Sutherland, Janie vs. Matrixx Initiatives, Inc., et al., filed December 18, 2003,
in the Circuit Court of Etowah, Alabama, Case No. CV-2003-1635-WHR; removed to United States
District Court for the Northern District of Alabama, Middle Division, Case No. CV2003-1635-WHR;
Swanbeck, Steven vs. Matrixx Initiatives, Inc., et al., filed November 18, 2004, in the Superior
Court of New Jersey Law Division: Morris County, Dock No. L-3096-04; Williams, et al. vs. Matrixx
Initiatives, Inc., et al., filed December 29, 2004, in the United States District Court for the
Northern District of Alabama, Middle Division, Case No. CV-04-c-3548-M; Wyatt, Susan vs. Matrixx
Initiatives, Inc., et al., filed June 15, 2004, in the United States District Court for the
Northern District of Alabama, Southern Division, Case No. CV-04-AR-1230-S; Bourgeois, Deborah
vs. Matrixx Initiatives, Inc., et al., filed February 22, 2005, in the United States District Court
for the Northern District of Alabama, Middle Division, Case
No. CV-05-PT-0393-M; and Orlansky, Robin vs. Matrixx
Initiatives, Inc., et al., filed February 9, 2005, in the
Superior Court of California (San Diego County), Case
No. GIC 842519. Generally, the
cases filed in the Sueprior Court of Arizona have been or we expect will be consolidated under In
Re Consolidated Zicam Product Liability Cases, Case No. CV 2004-001338. Various defendants in the
lawsuits, including manufacturers and retailers, have sought indemnification or other recovery from
us for damages related to the lawsuits. Also, plaintiffs law firms continue to solicit potential
claimants through the Internet and other media. As a result, we expect additional lawsuits to be
filed against us. We believe the allegations relating to Zicam Cold Remedy are unfounded. Zicam Cold Remedy has
been studied in two independent, placebo-control studies. In those studies, there was no
statistically significant difference in adverse events between the placebo and non-placebo group,
and there was no indication in either group of impairment to the sense of smell. Further, the
incidence of smell disorders is reported at 1-2% of the population on average, and is very common
in those over age 50. Upper respiratory infections are among the most common causes of impairment
to sense of smell. Therefore, any product such as Zicam Cold Remedy designed to treat upper
respiratory illnesses may be mistakenly associated with distortion of sense of smell. The rate of
reported complaints of distortion of sense of smell associated with Zicam Cold Remedy is well below
these national incidence levels. We convened a two-day meeting of our Scientific Advisory Board in September 2004 to review the
findings of studies initiated in the first quarter of fiscal 2004. The Scientific Advisory Board
is comprised of medical doctors and researchers that are independent of the Company. Matrixx
provided honorariums for members attendance at meetings, travel expenses, and funded grants to
design and perform research studies investigating the contention that Zicam Cold Remedy zinc
gluconate nasal gel is associated with disorders of smell. Members of the Scientific Advisory Board
presented the results of their studies on the epidemiology, anatomy, and physiology of smell
disorders. It was the unanimous opinion of the Scientific Advisory Board that the cumulative
scientific evidence does not support the contention that Zicam Cold Remedy zinc gluconate nasal gel
is associated with disorders of smell. The Scientific Advisory Board plans to do further testing
of the zinc gluconate nasal gel on human volunteers and animal models. Panel members are expected
to reconvene in the first half of 2005 to review the findings of the additional research. We have submitted all of the existing lawsuits to our insurance carriers. In April 2004, the
Company established a self structured product liability insurance program. If the self structured
policy were to incur any liability the Companys financial results could be materially impacted. We
cannot predict the outcome of the litigation, but we will defend ourselves vigorously. If any
liability were to result from one or more of these or future lawsuits, we believe our financial
results could be materially impacted. Our financial results could also be materially impacted by
the adverse publicity that may result from the lawsuits. Additionally, two class action lawsuits were filed in April and May 2004 against the Company,
our President and Chief Executive Officer, Carl J. Johnson, and our Executive Vice President and
Chief Financial Officer, William J. Hemelt, alleging violations of federal securities laws. On
January 18, 2005 the cases were consolidated and the court appointed James V. Sircusano 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 Sircusano,
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 product, - 7 -




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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 of the product liability lawsuits described above. We
believe the claims made in these lawsuits are without merit. We intend to vigorously defend
ourselves in these matters. In accordance with and subject to the provisions of the Companys
Certificate of Incorporation, Messrs. Johnson, Hemelt, and Clarot will be indemnified by the
Company for their expenses incurred in defending these lawsuits and for any other losses which they
may suffer as a result of these lawsuits. If any liability were to result from these lawsuits, we
believe our financial results could be materially impacted. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of our security holders during the fourth quarter of
fiscal 2004, through the solicitation of proxies or otherwise. 
 Executive Officers of Matrixx The names, ages, positions and business experience of each of our executive officers are
listed below. Each executive officer is appointed by our board of directors to hold office until
his or her successor is appointed and qualified or until such earlier time as such officer may
resign or be removed by the board. Carl J. Johnson, 56 President and Chief Executive Officer Mr. Johnson joined Matrixx in July 2001 as President and Chief Executive Officer and as a
member of the board of directors. Mr. Johnsons professional experience spans 30 years in the
product development, marketing, and sales arenas with several large pharmaceutical and consumer
goods companies. From 1993 to 2001, Mr. Johnson was Vice President, Commercial Development with
Perrigo Company, a public company and leading manufacturer of over-the-counter pharmaceutical and
nutritional products for the store brand market. In that capacity he was responsible for procuring
new products and technologies and contract manufacturing services emphasizing Abbreviated New Drug
Applications (ANDA) products. Mr. Johnson also worked at Johnson & Johnson from 1973 to 1989 where
he held a number of high level marketing and sales positions, including responsibility for the
national launch of the Acuvue® disposable contact lens product. Mr. Johnson also provided marketing
leadership for a special team tasked to re-engineer Johnson & Johnsons sales, administrative and
operational functions. Mr. Johnson earned a Master of Business Administration  Marketing from the
Fairleigh Dickinson University and a Bachelor of Science in Economics from Wagner College. William J. Hemelt, 51 Executive Vice President, Operations, Chief Financial Officer, and Treasurer Mr. Hemelt joined Matrixx in June 1998 as our Chief Financial Officer, Treasurer, and
Secretary. The additional title of Executive Vice President, Operations was added in 2001. Mr.
Hemelt served as Secretary until February 2005. From 1980 to 1997, Mr. Hemelt held a variety of
financial positions with Arizona Public Service Company, Arizonas largest utility, including six
years as Treasurer and four years as Controller. Mr. Hemelt earned a Master of Business
Administration and a Bachelor of Science in Electrical Engineering from Lehigh University. Timothy L. Clarot, 50 Vice President of Research & Development Mr. Clarot joined Matrixx in 1999 and became Director of Operations in 2001, overseeing our
manufacturing and distribution processes and development of new products. In June 2003, Mr. Clarot
was named Director, Research and Development. Mr. Clarot was promoted to Vice President, Research
and Development in January 2004. Mr. Clarot oversees product-related regulatory compliance
activities, product development and consumer affairs. From 1981 to 1998, Mr. Clarot held positions
of increasing responsibility, including Quality Control Manager, with Reckitt Benckiser, a world
leader in consumer products. Mr. Clarot holds a Bachelor of Science in Chemistry from California
State University at Fresno. Lynn Romero, 40 Vice President of Administration and Secretary Ms. Romero joined Matrixx in May 2000 as Manager of Investor Relations. Ms. Romero was
promoted to Director of Administration in April 2002, Vice President of Administration in January
2004, and Secretary in February 2005. As Vice President of Administration, Ms. Romero oversees
human resources, information technology and intellectual property matters. Ms. Romeros
professional experience spans 20 years in administration, marketing and investor relations. Prior
to joining Matrixx, Ms. Romero held administrative positions with Athletes Village, Christensen &
Associates and MicroAge, Inc. Ms. Romero holds a Bachelor of Science from Northern Arizona
University in Computer Information Systems. - 8 -




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James A. Marini, 43 Vice President of Sales Mr. Marini joined Matrixx in July 1997 as National Sales Manager and was promoted to Vice
President of Sales in January 2004. Mr. Marini has directed the introduction and development of the
national sales program for Zicam Cold Remedy since 1999. Mr. Marini is responsible for Matrixxs
sales efforts and oversight of the Emerson Group, Matrixxs principal sales contractor. From 1977
to 1997 Mr. Marini held a variety of positions with Dominos Supermarkets in New York, including six
years as Vice President. Mr. Marini attended Mercy College. Mike Voevodsky, 40 Vice President of Marketing Mr. Voevodsky joined Matrixx in January 2004 as Vice President of Marketing. Mr. Voevodsky has
17 years of experience in product marketing and business development. From July 2000 to December
2004, Mr. Voevodsky was Vice President of Business Development for Hextek Corporation, a
manufacturer of lightweight optics used in research, high energy lasers and military applications.
Mr. Voevodsky worked at Perrigo Company from 1994 to 2000 where he held a number of strategic
positions including Director, Pharmaceutical Business Development. Mr. Voevodsky holds a Bachelor
of Science from the University of Arizona and a Master of Business Administration from Harvard
Business School. 
 PART II 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES Our common stock has been quoted for trading on the Nasdaq National Market since April
24, 1996. From then until June 19, 2002, our stock traded under the symbol GUMM. Effective on
June 20, 2002, in connection with our name change to Matrixx Initiatives, Inc., our stock trading
symbol changed to MTXX. The following table sets forth, for the quarters indicated, the range of
high and low prices of our common stock as reported by the Nasdaq National Market. Market PriceHigh
    
    
    LowFiscal Year 2003First Quarter
    
    $
    8.75
    
    
    $
    6.56Second Quarter
    
    $
    8.65
    
    
    $
    6.61Third Quarter
    
    $
    11.39
    
    
    $
    6.75Fourth Quarter
    
    $
    18.28
    
    
    $
    10.99Fiscal Year 2004First Quarter
    
    $
    20.89
    
    
    $
    8.31Second Quarter
    
    $
    11.19
    
    
    $
    8.45Third Quarter
    
    $
    10.60
    
    
    $
    7.25Fourth Quarter
    
    $
    14.74
    
    
    $
    10.35Fiscal Year 2005First Quarter (through March 8, 2005)
    
    $
    12.60
    
    
    $
    9.00
 As of March 1, 2005, we had approximately 7,600 record and beneficial stockholders. Dividend Policy Since our initial public offering in 1996, we have not paid dividends on our common stock
and do not expect to pay dividends in the foreseeable future. We intend to retain any earnings to
fund the expansion of our business. The amount of future dividends, if any, will be determined by
the board of directors based upon our earnings, financial condition, capital requirements and other
factors, including any contractual or statutory restrictions on our ability to pay dividends. In
addition, under the terms of our credit facility with Comerica Bank-California, as long as we have
any outstanding loan balance or other obligations under the credit facility, we cannot pay any
dividend without Comerica Bank-Californias consent. In April 2004, the Companys Board of Directors authorized a Common Stock Repurchase Program
for up to 1.0 million shares of the Companys common stock. During 2004, the Company purchased
17,900 shares of common stock at an aggregate cost of $157,081. - 9 -




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##### Table of Contents



ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected historical financial data for Matrixx for each of
the years in the five-year period ended December 31, 2004, and where appropriate reflects results
on a continuing and discontinued operations basis. The financial data presented below is derived
from Matrixxs audited consolidated financial statements. We report Matrixxs and Zicam, LLCs
financial results on a consolidated basis. On July 20, 2001, we sold substantially all of our
chewing gum assets and business to Wrigley. Our financial results following this date reflect our
former chewing gum operations as discontinued operations. On December 5, 2001, we acquired the
remaining 40% interest in Gel Tech, L.L.C., making it a wholly-owned subsidiary of Matrixx. (In
July 2002, the name of Gel Tech, L.L.C. was changed to Zicam, LLC). For additional information, see
the financial statements of Matrixx and the notes thereto included elsewhere in this report. The
following table should be read in conjunction with Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations and is qualified by reference thereto and to
Matrixxs financial statements and notes thereto. (000s, except per share data)
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Net sales
    
    $
    60,231
    
    
    $
    43,496
    
    
    $
    23,548
    
    
    $
    16,072
    
    
    $
    10,817Net income (loss)- Continuing Operations
    
    $
    4,957
    
    
    $
    3,344
    
    
    $
    4,757
    *
    
    $
    (4,799
    )
    
    $
    (6,166
    )- Discontinued Operations
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    17,412
    
    
    $
    (1,971
    )Net income
(loss) per share of common stock - basic- Continuing Operations
    
    $
    0.52
    
    
    $
    0.36
    
    
    $
    0.50
    *
    
    $
    (0.52
    )
    
    $
    (0.69
    )- Discontinued Operations
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    1.88
    
    
    $
    (0.22
    )Net income
(loss) per share of common stock - diluted- Continuing Operations
    
    $
    0.52
    
    
    $
    0.35
    
    
    $
    0.50
    *
    
    $
    (0.52
    )
    
    $
    (0.69
    )- Discontinued Operations
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    1.88
    
    
    $
    (0.22
    )Dividends per share
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Shares outstanding at year end
    
    
    9,520
    
    
    
    9,475
    
    
    
    9,441
    
    
    
    9,432
    
    
    
    9,047Total assets
    
    $
    60,134
    
    
    $
    50,077
    
    
    $
    47,185
    
    
    $
    42,507
    
    
    $
    16,981Long term obligations
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    5,254
    
    
    $
    Stockholders equity
    
    $
    44,126
    
    
    $
    38,790
    
    
    $
    35,155
    
    
    $
    24,369
    
    
    $
    10,448
   *
    
    Earnings for 2002 include the one-time recording of a deferred tax asset of approximately
$3.4 million. 
 ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview In Fiscal 2001, we undertook a significant change in our strategic plan and related
business operations by exiting the chewing gum business and refocusing entirely on the development,
production and sale of over-the-counter pharmaceutical products. In July 2001, we sold
substantially all of our assets and business related to our chewing gum operations to Wrigley. In
December 2001, we acquired the remaining 40% interest of Gel Tech, making it a wholly-owned
subsidiary of Matrixx. In July 2002, the name Gel Tech, L.L.C. was changed to Zicam, LLC. Our
financial results reflect our former chewing gum operations as discontinued operations, and
consequently these operations are not reflected in the following discussion and analysis. We report
Zicam, LLCs financial results on a consolidated basis. Our restructuring process continued in 2002 as we reincorporated in Delaware, changed our name
to Matrixx Initiatives, Inc. and consolidated our operations in our Phoenix office. Moreover, as
part of our focus on over-the-counter pharmaceutical products, we introduced five new Zicam nasal
gel products in 2002, improved package graphics for the entire Zicam product line and engaged a new
sales team to represent our products to retailers. We continued to expand the Zicam product line in
2003 by introducing three Zicam Cold Remedy oral products  Chewables, RapidMelts and Oral Mist.
Furthering our growth, we introduced six Zicam Cough Mist products in the third quarter of 2004. Executive Summary The Company currently markets 16 products within the $3.5 billion overall cough and cold
category at retail. The products we market are seasonal in nature, and sales at retail generally
increase as the level of population - 10 -




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suffering from colds rises. The Company records sales when we
ship products from our warehouse facilities. During the third quarter the Company usually realizes
increased sales volume as retailers stock our products and order displays to prepare for the
upcoming cough and cold season. Additional sales (re-orders) to retailers are highly dependent upon
the incidence of illness within the population. Retail consumption of our products is highest
during the cough and cold season, which usually runs from September through April. The Company
begins extensive advertising campaigns to coincide with the cough and cold season and generally
realizes higher advertising expense in the fourth and first quarters of each year. The second
quarter of each year generally accounts for less than 10% of annual sales. Our products are
currently available at all of the major food, drug, and mass merchant retailers. Net sales for 2004 increased to approximately $60.2 million, or 38% above net sales in 2003 of
$43.5 million. Approximately 45% of the increase was attributable to the six new Zicam Cough Mist
products that we began shipping in July 2004. Additionally, approximately 31% of the increased
sales were due to increased sales of Zicam Cold Remedy products and approximately 24% of the
increase was attributable to higher sales of our allergy and sinus products. We expect the trend of
increasing net sales will continue as we improve consumer awareness of our products, increase
distribution of our products, and introduce new products. The Company expects 2005 annual net sales
will increase 25-35% over the $60.2 million recorded in 2004. Net income for 2004 was approximately $5.0 million, an increase of approximately $1.6 million
over net income in 2003 of approximately $3.3 million. We expect net income in future periods will
be significantly affected by the level of sales, the timing and amount of our advertising and
research and development expenses, and the timing and amount of expenses incurred in the defense of
product liability and securities litigation matters. Expenditures for advertising and research and
development will vary by quarter throughout the year and could be significantly different in 2005
than the amounts incurred in the same periods in earlier years. We expect that advertising expenses
will be highest in the fourth and first quarters in conjunction with the cough and cold season. The
Company expects annual net income in 2005 will grow 10-20% above the level realized in 2004. We
anticipate quarterly earnings will continue to vary along with the seasonality of sales. We believe
the second quarter of 2005 may result in a significant loss due to increased marketing support for
the new Nasal Comfort brand, increased research and development expense, and continued high levels
of legal expense. Since the introduction of our new Zicam Cough Mist products, we now market Zicam products in
the cold (3 nasal delivery products and 3 oral delivery products), allergy/sinus (4 nasal delivery
products), and cough (6 oral delivery products) market groups of the overall cough and cold
category. We expect that our mix of products sold will change due to seasonality and varying
growth rates within the market groups. For the year ended December 31, 2004 our mix of products
sold (units) was cold (nasal and oral)  62%, allergy/sinus  21%, and cough  17%, compared to
cold  77% and allergy/sinus  23% for the year ending December 31, 2003. In February 2005, the Company announced Nasal Comfort, a new brand and product for nasal
health. The initial offering under the new brand is a unique product designed to help maintain the
critical functions of the nasal cavity and its role in the respiratory process. Nasal Comfort is a
preservative free, sterile, hyper-tonic aqueous solution with essential salts and oils that
cleanses and moisturizes the nose. The new product will be packaged in a pharmaceutical grade
dispenser, employing a patented one-way, micro-filtration pump. The Company anticipates initial
sales and shipments will begin in the second quarter of 2005. The Companys management reviews several key performance indicators. First, we compare our
annual sales and net income performance against our goals for growth, which for 2004, we stated as
30% annual growth for each. We exceeded both goals in 2004. Second, we monitor our share of the
cough and cold market. For the 52 weeks ended December 26, 2004, retail sales of our products (as
measured by three outlet syndicated scanner data, not including our customer Wal-Mart) increased
approximately 25% over the comparable period in the previous year, while the entire cough and cold
category declined approximately 5% over the same period. The increased sales of our products
achieved a share of approximately 1.8% of the entire cough and cold market compared to a share of
1.3% in the previous year. Third, we measure our ability to maintain strong gross margins on our
products. During 2004, we achieved an average gross margin of 69%, which is slightly below our goal
of 70%, due to the mix of products sold (gross margin on our current products varies between 65%
and 80%). Fourth, we evaluate our operating performance by reviewing, over time, our ability to
decrease administrative and general costs as a percentage of net sales. For fiscal 2004, our
operating expenses were approximately 53% of our net sales compared to 50% for fiscal 2003.
Operating expenses have been negatively impacted by an increase in legal expense ($5.1 million in
2004, compared to $0.9 million in 2003) primarily related to the product liability lawsuits which
have been filed against the Company (see Part II, Item 1- Legal Proceedings). Finally, we review
the distribution of our products by key national retailers. In 2004, our ten largest retail
customers carried, on average, 12 of our 16 Zicam
products compared to seven of our ten products in 2003. Those customers accounted for
approximately 73% of net - 11 -




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sales in 2004 and 75% of net sales in 2003. We expect to expand the
distribution of our existing products among these retailers during the next year. Critical Accounting Policies and Estimates Our consolidated financial statements and accompanying notes have been prepared in
accordance with U.S. generally accepted accounting principles applied on a consistent basis. The
preparation of financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting
periods. We regularly evaluate the accounting policies and estimates that we use to prepare our
consolidated financial statements. In general, managements estimates are based on historical
experience, on information from third party professionals, and on various other assumptions that
are believed to be reasonable under the facts and circumstances. Actual results could differ from
those estimates made by management. We believe that our critical accounting policies and estimates include the accounting for
intangible assets and goodwill, accounting for income taxes, accounting for returns and allowances
associated with our products, accounting for sales discounts and promotional programs, and
accounting for legal contingencies. Intangible Assets and Goodwill:We recorded approximately $15.0 million in goodwill in
connection with the 40% Zicam, LLC interest that we acquired from Zensano, Inc. in December 2001.
Under SFAS No. 142, goodwill must be tested when a triggering event occurs or at least annually to
identify a potential impairment and the amount of any impairment loss. Factors that could affect
this analysis would be significant loss of market share, a general decline in Zicam product sales,
higher than expected increases in expenses and various other matters. Any change in key
assumptions about the business or prospects of Zicam, LLC, or any change in market conditions or
other externalities affecting Zicam, LLC, could result in an impairment charge, and such a charge
could have a material adverse effect on our financial condition and results of operations. Our
annual evaluation of goodwill was completed in the third quarter of 2004 and no impairment was
identified. Income Taxes:Due to our significant operating losses prior to 2001, we possess a sizeable
tax loss carry-forward which can be used to reduce our taxable income in future periods. Due to
our history of operating losses, we recorded a deferred tax valuation allowance in 2001 and prior
years to offset the entire deferred tax asset arising from our tax loss carry-forward. However,
due to the significant improvement in our net income in 2002, together with our expectation of
continuing profitability in future years, we determined that we are more likely than not to realize
the tax benefit associated with our tax loss carry-forward. Consequently, we reduced the deferred
tax valuation allowance and recorded a large portion of the deferred tax asset in 2002. The effect
of this change was a decrease in our income tax expense of approximately $3.4 million in 2002. In 2003 and 2004, we recorded income tax expense based on our estimated effective income tax
rate for the year and will continue to do so in future periods. In addition, we will continue to
evaluate the deferred tax valuation allowance regularly and adjust the amount to reflect our
expectation of our ability to realize the tax benefit arising from our tax loss carry-forward and
other deferred tax items on a quarterly basis. Should there be a significant change in our
expectations of future income or the ability to realize the deferred tax asset, the impact of
increasing the deferred tax valuation allowance could be significant which would negatively impact
our earnings. Customer Returns and Allowances:We recognize revenues on the sale of our products when they
are shipped from our warehouse facilities, and at that time record a provision for estimated
product returns. The estimate for product returns is based on our historical experience of sales
to retailers and is reviewed regularly to ensure that it reflects potential product returns. To
date, our sales returns experience has been consistent with our estimate for returns, except for
returns of outdated products arising from excess production during the introduction of Zicam Cold
Remedy in the 1999-2000 cough and cold season, which resulted in out-of-date product two years
later. In July 2004, we reviewed the return provision for the three oral delivery Cold Remedy
products that were introduced in the third quarter of 2003. Based on our product return experience
we reduced the return provision from 7% to 3% on sales of these three products in mid 2004.
Currently, we are recording a provision of 3% of gross sales for the ten Zicam products introduced
in 2003 or earlier for potential returns and allowances. In establishing the appropriate reserve
level for the six new Zicam Cough Mist products, that began shipping in July 2004, we reviewed the
similarities and differences of the six products relative to the ten Zicam products for which we
have longer product return experience. Based on that review, we believe that our past experiences
with other products is a good indicator of the estimate of returns to be expected from the new
products and are recording a provision of 7% of - 12 -




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gross sales for these products. We will review the return provision at least quarterly and
adjust these reserve amounts as actual product return experience continues to develop. Should the
actual level of product returns vary significantly from our estimates, our operating and financial
results would be materially affected. In addition, we expect that a higher sales returns allowance
will be recorded for any other new products that we introduce until such products achieve market
acceptance. Legal Contingencies:We are subject to lawsuits, investigations and claims arising out of the
normal conduct of our business. We are being sued by over 340
individuals in approximately 32
different lawsuits generally alleging that our Zicam Cold Remedy nasal products caused damage to
their sense of smell and/or taste. Two of these lawsuits have been filed as class action lawsuits,
although one has been dismissed. Various defendants in the lawsuits, including manufacturers and
retailers, have sought indemnification or other recovery from us for damages related to the
lawsuits. In addition, two class action lawsuits (which have been consolidated) have been filed
against Matrixx, our President and Chief Executive Officer, Carl J. Johnson, our Executive Vice
President and Chief Financial Officer, William J. Hemelt, and our Vice President of Research and
Development, Timothy L. Clarot, alleging violation of federal securities laws (see Part II, Item 1-
Legal Proceedings). While we intend to defend ourselves vigorously in each of these proceedings,
the outcome of these and any other proceedings that may arise cannot be predicted with certainty.
Therefore, loss provisions arising from such matters will be recorded when a loss outcome is
probable and can be reasonably estimated, to the extent not provided for through insurance or
otherwise. At present, we have not been able to determine the probability of a loss outcome in any
of the litigation to which we are currently subject. Accordingly, we have not recorded any loss
provisions related to such litigation. Results Of Operations For The Year Ended December 31, 2004 Compared To The Year Ended December
31, 2003 Certain information is set forth below for our operations expressed in dollars and as a
percentage of net sales for the periods indicated: Years Ended December 31,2004
    
    
    2003Net sales
    
    $
    60,231
    
    
    
    100
    %
    
    $
    43,496
    
    
    
    100
    %Cost of sales
    
    
    18,405
    
    
    
    31
    
    
    
    13,454
    
    
    
    31Gross profit
    
    
    41,826
    
    
    
    69
    
    
    
    30,042
    
    
    
    69Operating expenses
    
    
    31,862
    
    
    
    53
    
    
    
    21,642
    
    
    
    50Research & development
    
    
    1,887
    
    
    
    3
    
    
    
    2,557
    
    
    
    6Income from operations
    
    
    8,077
    
    
    
    13
    
    
    
    5,843
    
    
    
    13Interest and other income
    
    
    370
    
    
    
    1
    
    
    
    175
    
    
    
    Interest expense
    
    
    40
    
    
    
    
    
    
    
    247
    
    
    
    Income
before income taxes
    
    
    8,407
    
    
    
    14
    
    
    
    5,771
    
    
    
    13Provision for income taxes
    
    
    3,450
    
    
    
    6
    
    
    
    2,427
    
    
    
    5Net income
    
    $
    4,957
    
    
    
    8
    %
    
    $
    3,344
    
    
    
    8
    %
 Net Sales Net sales for 2004 increased to approximately $60.2 million, or 38% above net sales in 2003.
Approximately 46% of the $16.7 million increase in net sales was attributable to sales of the six
new Zicam Cough Mist products introduced in the third quarter of 2004; approximately 30% of the
increase was due to increased sales of our Zicam Cold Remedy products, particularly the oral
products introduced in 2003; and the remainder of the increase was due to increased sales of Zicam
allergy and sinus products. We believe increased sales of our products is primarily due to greater
brand awareness and marketing efforts. Cost of Sales The cost of sales for 2004 increased approximately $5 million or 37% over the cost of sales in
2003. The increase is due to the higher number of units sold in 2004. The cost per unit sold in
2004 decreased approximately 4% compared to the cost per unit sold in 2003. The lower cost per unit
sold is due to lower costs across our entire product line, including the new swab product
introduced in the first quarter of 2004. Gross Profit Gross profit for 2004 increased to approximately $42 million or 40% above gross profit in
2003, primarily due to the increase in sales. The gross margin achieved in 2004 remained unchanged
from the prior years gross - 13 -




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##### Table of Contents



margin of 69%. The gross margin on our current products varies between
65% and 80%. Gross margin will continue to be affected by the relative mix of products sold. Operating Expenses Operating expense for 2004 increased to approximately $31.9 million from $21.6 million in
2003. The increase is primarily due to a $4.1 million increase in legal expense associated with
product liability and securities litigation claims. Total legal expense in 2004 was approximately
$5.1 million compared to $0.9 million in 2003. Also contributing to the higher expenses were
increases in advertising expense of $3.0 million (approximately $14.7 million in 2004 compared to
$11.7 million in 2003); non-advertising marketing expense of $1.1 million (primarily related to
consumer research as well as public relations expense associated with the anosmia claims); higher
insurance expense of $0.3 million; higher sales commission expense of $0.4 million; higher labor
expense of approximately $0.75 million; and increased quality control and customer service expense
of $0.2 million. The Company also recorded an increase in charitable contributions of $0.2 million. We expect expenses in future periods will vary largely in relation to the level of our
advertising expenditures, which are heaviest in the first and fourth quarters. We anticipate that
we will continue to incur approximately $1.0 million to $1.5 million in higher legal expense each
quarter as a result of the Zicam Cold Remedy product liability and securities litigation matters in
which we are engaged (see Part I, Item 3 - Legal
Proceedings.) The Company continues to pursue an
agreement with various of its insurers concerning recovery of defense costs relating to these
matters. Research and Development Research and development expense decreased from approximately $2.6 million in 2003 to $1.8
million in 2004. We had previously announced our intention to spend 6% of net sales annually on
research and development efforts; however, due to research and development efforts being diverted
as a result of product liability litigation matters, we did not spend at that level in 2004. We
continue to maintain research and development efforts and remain focused on developing new
products. Interest & Other Income Other income increased to almost $0.4 million in 2004, approximately $0.2 million higher than
2003. The increase is attributable to royalty income associated with a gum product marketed by Wrigley. We do not anticipate any future royalty income under this agreement. Interest Expense Interest expense of $40,000 for 2004 was approximately $207,000 below the level incurred in
2003. The decrease was attributable to the repayment of the debt of 10.2 million we incurred in
connection with the acquisition of the 40% interest in Gel Tech, LLC in December 2001. This debt
with imputed interest of 6.5% was fully repaid in November 2003. In July 2004, we borrowed $2
million against our credit facility with Comerica Bank, which we repaid in the fourth quarter of
2004. We ended the year with no debt outstanding. Our credit facility included interest at 0.75%
above prime (or 6% at December 31, 2004). Income Before Income Taxes Income before income tax for 2004 increased 46% to approximately $8.4 million from $5.8
million in 2003. The increase is due to higher gross profit resulting from higher sales, which was
partially offset by an increase in operating expenses. We expect that net income in future periods
will be significantly impacted by the success of our 16 current products, new product introductions
(including new products we plan to introduce in 2005), and year over year changes in our
advertising, research and development, and legal expenses. Provision for Income Tax Expense In 2004, we recorded a provision for income tax expense at our combined federal and state
estimated, effective tax rates. Due to operating income recorded in 2004, we recognized income tax
expense of approximately $3.4 million. Net Income Net income increased approximately $1.6 million, or 48%, to approximately $5.0 million in 2004
compared to net income for 2003 of approximately $3.3 million. - 14 -




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Results Of Operations For The Year Ended December 31, 2003 Compared To The Year Ended December
31, 2002 Certain information is set forth below for our operations expressed in dollars and as a
percentage of net sales for the periods indicated: Years Ended December 31,2003
    
    
    2002Net sales
    
    $
    43,496
    
    
    
    100
    %
    
    $
    23,548
    
    
    
    100
    %Cost of sales
    
    
    13,454
    
    
    
    31
    
    
    
    6,752
    
    
    
    29Gross profit
    
    
    30,042
    
    
    
    69
    
    
    
    16,796
    
    
    
    71Operating expenses
    
    
    21,642
    
    
    
    50
    
    
    
    15,444
    
    
    
    66Research & development
    
    
    2,557
    
    
    
    6
    
    
    
    294
    
    
    
    1Income from operations
    
    
    5,843
    
    
    
    13
    
    
    
    958
    
    
    
    4Interest and other income
    
    
    175
    
    
    
    
    
    
    
    681
    
    
    
    3Interest expense
    
    
    247
    
    
    
    
    
    
    
    592
    
    
    
    3Income before income taxes
    
    
    5,771
    
    
    
    13
    
    
    
    1,047
    
    
    
    4Provision (benefit) for income taxes
    
    
    2,427
    
    
    
    5
    
    
    
    (3,710
    )
    
    
    (16
    )Net income
    
    $
    3,344
    
    
    
    8
    %
    
    $
    4,757
    
    
    
    20
    %
 Net Sales Net sales for 2003 increased to approximately $43.5 million, or 85% above net sales in 2002.
Approximately one-half of the $19.9 million increase in net sales was attributable to increases in
sales of Zicam Cold Remedy nasal gel products, particularly the swab products; approximately 35% of
the increase was due to the three new Zicam Cold Remedy oral products introduced in 2003; and the
remainder of the increase was due to increased sales of Zicam Extreme Congestion Relief. Sales of
Zicam Cold Remedy nasal swab products increased due to the greater distribution and availability of
supply in 2003 and a severe cold season. Zicam Extreme Congestion Relief sales increased due to
greater retail distribution of the product in 2003. Sales of all of the products increased due to
greater brand awareness resulting from our increased marketing efforts. We ended 2003 with a backlog in orders of $0.4 million for our adult swab product. In
anticipation of year end demand, we built inventory of adult swab products starting in April 2003,
but it was not sufficient as demand for all of our products, including the swab products, spiked in
December 2003 due to the severe cold season. Cost of Sales The cost of sales for 2003 increased approximately $6.7 million or 99% over 2002. The increase
was primarily due to an 80% increase in unit sales. The higher per unit cost of the swab products,
including the higher cost agreed to in our previously announced settlement with Innovative Swab
Technologies, the manufacturer of the old swab product, contributed to the increase in cost of
sales. Gross Profit Gross profit for 2003 increased to approximately $30.0 million, or 79% above the 2002 level,
due to the higher sales level. Offsetting the higher sales was the higher unit cost of sales,
primarily due to the higher cost of the swab products, which is reflected in a decrease in gross
profit percentage of sales to 69% in 2003 from 71% in 2002. Operating Expenses Operating expenses increased from approximately $15.5 million in 2002 to $21.6 million in
2003. The increase is largely due to higher advertising expense ($11.7 million in 2003 compared to
$7.7 million in 2002), higher sales commission expense of $1.4 million related to the increase in
sales, and higher labor costs of $0.8 million. Research and Development Research and development expense amounted to $2.6 million for 2003 compared to $0.3 million
for 2002, reflecting costs associated with the three new Zicam products that were introduced in
2003, development cost of the new swab product, and research expense of product concepts that we
expect to introduce in 2004 and beyond. Interest and Other Income - Net - 15 -




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Interest and other income for 2003 amounted to approximately $175,000 or approximately
$506,000 less than the 2002 level. Approximately $300,000 of the decrease is due to a decline in
royalty income associated with a gum product marketed by Wrigley and $200,000 is due to a decrease
in interest income from a lower invested cash balance. Interest Expense Interest expense decreased to approximately $247,000 for 2003 from approximately $592,000 in
2002. The decrease is entirely attributable to the repayment of the debt incurred with our
acquisition of the 40% interest in Zicam, LLC in December 2001. This debt was paid in full in
November 2003. Income From Continuing Operations Before Income Tax and Minority Interest Our income before income taxes and minority interest in 2003 was approximately $5.8 million,
an increase of approximately $4.7 million from the $1.0 million reported for 2002. The increase is
due to a higher gross profit resulting from higher net sales. Provision For Income Tax Expense Due to the income we recorded in 2002 and our expectation of net income in future periods, we
concluded that, more likely than not, we will be able to utilize the accumulated tax loss
carry-forward that had been generated in prior years but not reflected as an asset. Based on this
determination, we recorded a decrease in the provision for income taxes of almost $3.4 million in
2002. The income tax expense in 2003 reflects a full provision for income tax expenses at our
combined federal and state tax rates. Liquidity and Capital Resources Our working capital increased to $23.2 million as of December 31, 2004 from $17.6 million
as of December 31, 2003, an increase of approximately $5.6 million. During 2004, we experienced an
increase in available cash of approximately $2 million. In addition, we restricted $5.0 million of
cash for a self-structured product liability insurance program. The overall increase in cash from
operations was almost $7.0 million. The increase in cash from operations was driven by higher sales
during 2004. The Company generates cash from sales of Zicam products to retailers and distributors.
The majority of sales are given 30 day credit terms; however payment terms are occasionally
extended, as retailers begin to increase inventory of our products prior to the onset of the cough
and cold season. The Company recognizes an allowance for bad debt at the time of sale. The bad debt
allowance is reviewed on a monthly basis and we believe our allowance is sufficient to cover
outstanding receivables. The annual change in accounts receivable, inventory, accounts payable and accrued expenses
largely reflects the increase in the Companys business and the number of new products. On a
quarterly basis, changes in these items reflect the seasonal nature of the Companys business. The
Company records the bulk of its sales, which is reflected in higher accounts receivable, in the
third, fourth and first quarters; builds inventory during the second through fourth quarter
periods; and advertises its products, which is the largest component of accrued expenses, in the
fourth and first quarters. Although affected by the build-up of inventory in the second through
fourth quarters, accounts payable and accrued expenses are more significantly affected by
advertising spending which largely occurs in the fourth and first quarters. During 2004, investing activities used approximately $5.3 million of cash. The use of cash
was primarily due to $5.0 million being restricted to secure a $5.0 million letter of credit
related to the new product liability insurance program, as discussed below. The Company also
invested approximately $240,000 for capital purchases related to information systems, office
improvements, and new laboratory equipment. Cash flow from financing activities provided
approximately $350,000 from exercise of stock options. We have very little capital expenditures since we rely on contract manufacturers to produce
our products. Generally, to the extent our operations are profitable, our business is cash-flow
positive. Additionally, due to our sizeable tax loss carryforward, we are able to avoid sizeable
income tax payments. We expect that this ability to avoid large tax payments should continue
through 2005. We do have working capital requirements arising from the
increase of inventory and accounts receivable in excess of the increase in accounts payable,
but these vary throughout the year reflecting the seasonal nature of our business. In April 2004, we established a fully-funded deductible insurance program through a product
liability insurance carrier. Under the program, we have agreed to reimburse our insurer for its
claims administration expenses and for amounts paid out by it in settlement of product liability
claims filed after the initial date of the - 16 -




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##### Table of Contents



program and which are not covered by insurance programs
from prior years. The terms of the program require us to maintain an irrevocable, evergreen letter
of credit issued by a bank or other financial institution to secure our reimbursement obligations
to our insurer. We have a $5.0 million letter of credit with Comerica Bank and have reserved an
equal amount of cash to secure repayments of amounts that become due under the letter of credit.
The $5.0 million reserve is noted as Restricted Cash on the consolidated balance sheet and has been
placed in an interest-bearing certificate of deposit. We have a $4.0 million credit facility with Comerica Bank which was renewed for a two-year
term in May 2003. The credit facility includes interest at 0.75% above prime (or 6% at December 31,
2004) In July 2004, we borrowed $2.0 million under the facility to meet our working capital needs
in the third quarter. The borrowing was used to pay for the substantial inventory increase needed
for sales during the peak cough and cold season. We repaid the debt in the fourth quarter of 2004
and ended the year with no debt. We are in compliance with the earnings and financial covenants
contained in our credit agreement. We believe that our existing capital resources and our credit
line will be sufficient to fund our operations and capital requirements for the next 12 months. - 17 -




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Contractual Obligations We have entered into certain long-term contractual obligations that will require various
payments over future periods as follows: Contractual Cash Obligations(In thousands of dollars)Payments due by Period as of December 31, 2004Less than
    
    
    
    
    
    
    
    
    
    
    AfterTotal
    
    
    1 year
    
    
    1-3 years
    
    
    3-5 years
    
    

5
yearsLong-Term Debt Obligations
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0Capital Lease Obligations
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Operating Lease Obligations
    
    
    366
    
    
    
    119
    
    
    
    247
    
    
    
    0
    
    
    
    0Purchase Obligations
    
    
    1,214
    
    
    
    1,214
    
    
    
    0
    
    
    
    0
    
    
    
    0Other Long-Term Liabilities Reflected on the
Companys Balance Sheet under GAAP
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Total
    
    $
    1,580
    
    
    $
    1,333
    
    
    $
    247
    
    
    $
    0
    
    
    $
    0
 Recently Issued Accounting Standards The Financial Accounting Standards Board (FASB) issued SFAS No. 123R, Share-Based
Payment, which is effective for reporting periods beginning after June 15, 2005 (third quarter
adoption for the Company). Statement 123R replaces FASB Statement No. 123, Accounting for
Stock-Based Compensation, and supersedes ABP Opinion No. 25, Accounting for Stock Issued to
Employees. Statement 123, as originally issued in 1995, established as preferable a
fair-value-based method of accounting for share-based payment transactions with employees.
However, the statement permitted entities the option of continuing to apply the guidance in Opinion
25, as long as the footnotes to the financial statements disclosed what net income would have been
had the preferable fair-value-based method been used. Currently, in accordance with APB Opinion
25, the Company records the intrinsic value of stock based compensation as expense. Accordingly,
no compensation expense is currently recognized for fixed stock plans as the exercise price equals
the stock price on the date of grant. Under SFAS 123R, the Company will be required to measure
compensation expense over the options vesting period based on the stock options fair value at the
date the options are granted. SFAS 123R allows for the use of the Black-Scholes or a lattice
option-pricing model to value such options. The Company has not determined which option-pricing
model will be used in valuing such options. As allowed by SFAS 123R, the Company can also elect
either the Modified Prospective Application (MPA) or the Modified Retrospective Application (MRA),
to determine the presentation of expense. The MPA applies the Statement to new awards and modified
awards after the effective date, and to any unvested awards as service is rendered on or after the
effective date. The MRA can apply the Statement to either all prior years for which SFAS123 was
effective or only to prior interim periods in the year of adoption. The Company has chosen to
apply the MPA method. Note 1 of the Consolidated Financial Statements illustrates the effects on
net income and earnings per share if the Company had adopted SFAS No. 123, Accounting for
Stock-Based Compensation, using the Black-Scholes option-pricing model. On February 7, 2005, the Companys Compensation Committee approved the immediate vesting of
all outstanding stock options previously granted under the Companys option plans, including those
granted to executive officers and directors, for which the option exercise price was above the
Closing Price on February 7, 2005 (refer to Form 8-K filing dated February 7, 2005). We are evaluating the requirements under SFAS 123R and expect the adoption will result in
additional compensation expense in our consolidated statements of income. The pro forma impact of
recognizing compensation expense for options previously issued is included in the footnotes to the
consolidated financial statements. In December 2004, the FASB issued FASB Staff Position No. FAS 109-1, Application of FASB
Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production
Activities Provided by the American Jobs Creation Act of 2004 (AJCA). The AJCA was signed into law
in October 2004 and includes a tax deduction of up to 9 percent (when fully phased-in) of the
lesser of a) qualified production activities income as defined in the Act, or b) taxable income
(after the deduction for the utilization of any net operating loss carryforwards). The FASB
concluded that the tax relief (special tax deduction for domestic manufacturing) from this
legislation should be accounted for as a special deduction instead of a tax rate reduction. The
Company will be able to start claiming this tax benefit in 2005. The Company expects the adoption
of SFAS No. 109-1 will not have a material impact on the Companys financial position or results of
operations. - 18 -




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In
November 2004, the FASB issued FASB Statement No. 151, Inventory Costs - An amendment of
ARB No. 43, Chapter 4. Statement 151 clarifies that abnormal amounts of idle facility expense,
freight, handling costs and spoilage should be expensed as incurred and not included in overhead.
The provisions in Statement 151 are effective for inventory costs incurred during fiscal years
beginning after June 15, 2005 and companies must apply the standard prospectively. The Company
expects the adoption of SFAS No. 151 will not have a material impact on the Companys financial
position or results of operations. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS AND RISK FACTORS Forward Looking Statements This Report on Form 10-K, including documents incorporated herein by reference, contains
forward-looking statements within the meaning of the Private Securities Litigation Reform Act of
1995. The words believe, expect, estimate, anticipate, intend, may, might, will,
would, could, project and predict, or similar words and phrases generally identify
forward-looking statements. Forward looking statements contained herein and in documents
incorporated by reference herein include, but are not limited to statements regarding:  
    Our expectations regarding 2005 net sales and net income and our expectations for the
second quarter of 2005;
    our belief that growth in sales of the six new Cough Mist products will occur as
consumers become more aware of the products and greater retail distribution is achieved;
    our belief that new advertising approaches and public relations efforts will continue to
build brand awareness;
    our expectation that the trend of growth in sales in future periods will continue as we
expand consumer awareness and acceptance of our entire Zicam brand of products, increase
distribution, introduce new products, and avoid additional adverse publicity;
    our expectation regarding future net income, our belief that expenditures for
advertising and research and development will vary by quarter throughout the year, and our
expectation that advertising expenses will be heaviest in our first and fourth fiscal
quarters;
    our anticipation that initial sales and shipments of the Nasal Comfort brand will begin
in the second quarter of 2005;
    our expectation of the effect of recently issued accounting standards;
    our expectation that our mix of products sold will change due to seasonality and varying
growth rates within our three market categories;
    our expectation of expanding distribution of our products among our largest 10
retailers;
    our expectation that slower product development activity coupled with continuing high
legal expenses may lessen the rate of net income growth in 2005;
    our expectation of continuing profitability in future years;
    our intention to review our product return reserve provision monthly and adjust the
reserve amounts as actual product return experience continues to develop, and our
expectation that a higher sales returns allowance will be recorded in the future for new
products that we introduce until such products achieve market acceptance;
    our intention to evaluate and adjust as appropriate the deferred tax valuation allowance
and expectation of realizing the tax benefit arising from our tax loss carryforward;
    our anticipation that we will not receive any future royalty income under our agreement
with Wrigley;
    our expectation that our Cough Mist product manufacturer will have inventory available
for sales of the Cough Mist products through the 2004-2005 cough and cold season; - 19 -




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##### Table of Contents




    our expectation that the average unit cost of goods sold and gross margin will continue
to be affected by the relative mix of products sold;
    our expectation of achieving a 70% gross margin for the year;
    our expectation that our net income and operating expenses in future periods will vary
largely in connection with the level of our advertising, research and development, and
legal expenses;
    our expectation that research and development spending will be between 4-6% of net sales
for 2005 and in subsequent years;
    our expectation that earnings in future periods will be significantly impacted by the
seasonality of our sales, the severity of the cold season, the revenues and expenses
associated with new products, and the timing and amount of advertising, research and
development, and legal expenses;
    our intention to vigorously defend the Zicam Cold Remedy product liability and
securities litigation claims, our expectation that additional product liability lawsuits
will be filed against us, and our belief that any liability resulting from these or other
lawsuits, including any adverse publicity, could materially impact our financial results;
    our anticipation that we will continue to incur approximately $1.0 to $1.5 million in
higher legal expense each quarter as a result of the Zicam Cold Remedy product liability
and securities litigation in which we are engaged;
    our Scientific Advisory Boards plan to do further testing of the zinc gluconate nasal
gel on human volunteers and animal models, and our expectation that members of the
Scientific Advisory Board will reconvene in the first half of 2005 to review the findings
of such research;
    our belief that our existing capital resources and our credit line will be sufficient to
fund our operations and capital requirements for the next 12 months;
    our having no plans to directly manufacture and store our products; and
    our belief that moderate interest rate increases will not have a material adverse impact
on our results of operations or financial position in the foreseeable future. We may make additional written or oral forward-looking statements from time to time in filings
with the Securities and Exchange Commission or in public news releases. Such additional statements
may include, but not be limited to, projections of revenues, income or loss, capital expenditures,
acquisitions, plans for future operations, financing needs or plans, the impact of inflation and
plans relating to our products or services, as well as assumptions relating to the foregoing.
Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot
be predicted or quantified. Future events and actual results could differ materially from those
set forth in, contemplated by, or underlying our forward-looking statements. Statements in this Report on Form 10-K, including those set forth in the section entitled
Managements Discussion and Analysis of Financial Condition and Results of Operations, and under
the subheading Risk Factors, describe factors that could contribute to or cause actual results to
differ materially from our expectations. Other such factors include (i) less than anticipated
demand for our current and future products, (ii) a weak cough and cold season, (iii) lack of market
acceptance for or uncertainties concerning the efficacy or safety of our current and future
products or regulatory actions involving our products, (iv) difficulties in increasing production
or maintaining sufficient inventories to meet unexpectedly high demand in the short term, (v)
financial difficulties encountered by one or more of our principal customers, (vi) difficulties in
obtaining additional capital for marketing, research and development, and other expenses, (vii)
material litigation involving patent and contractual claims, product liability claims, consumer
issues and securities violation claims, and (viii) adverse publicity regarding our products or
advertising restrictions. Forward-looking statements contained in this Report on Form 10-K speak only as of the date of
this Report on Form 10-K or, in the case of any document incorporated by reference, the date of
that document. We do not undertake, and we specifically disclaim any obligation, to publicly
update or revise any forward-looking statement contained in this Report on Form 10-K or in any
document incorporated herein by reference to reflect changed assumptions, the occurrence of
unanticipated events or changes to future operating results over time. Risk Factors Our new business focus means we have a limited operating history on which to assess our
current and prospective performance - 20 -




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##### Table of Contents



Although we have been in operations for a number of years, the significant change of direction
and focus in our business that we made in 2001 by exiting the chewing gum business and refocusing
entirely on the development, production and sale of over-the-counter pharmaceutical products
presents a limited operating history upon which you may evaluate our current and prospective
performance. The possibility of our future success must be considered relative to the problems,
challenges, complications and delays frequently encountered in connection with the development and
operation of a new business, and the development and marketing of relatively new products such as
the Zicam products. If our Zicam products do not gain widespread market acceptance or receive additional adverse
publicity, our anticipated sales and results of operations will suffer Although we believe that each of our products, and in particular our Zicam Cold Remedy nasal
products, offer unique benefits to consumers, we cannot be certain that any of these products will
achieve widespread acceptance by the market. In addition, given their recent introduction in late
2003, our three new oral Zicam products have not yet reached the level of market recognition
achieved by the original Zicam Cold Remedy nasal gel pump or swab products. While we are working
to increase the market presence of all of our products, including our new Cough Mist products, we
cannot be certain that demand for these products will grow. If problems arise concerning the
efficacy or safety of any of our products, or if any of our products receives additional adverse
publicity, or if any of our products fails to achieve widespread market acceptance for any other
reason, our operating results and prospects would be materially adversely affected. Our results
could also be affected by fluctuations in buying patterns and inventory levels of major customers. Unanticipated problems associated with product development and commercialization could adversely
affect our operating results Our successful development of existing and new products is subject to the risks of failure and
delay inherent in the development and commercialization of products based on innovative
technologies. These risks include the possibilities that:  
    we may experience unanticipated or otherwise negative research and development results;
    existing or proposed products may be found to be ineffective or unsafe, or may otherwise
fail to receive required regulatory clearances or approvals;
    we may find that existing or proposed products, while effective, are uneconomical to
commercialize or market;
    we may be unable to produce sufficient product inventories to meet customer demand;
    existing or proposed products do not achieve broad market acceptance; or
    proprietary rights held by third parties preclude us from developing or marketing
existing or proposed products. Our inability to develop and commercialize our existing products or any new products,
including our Nasal Comfort product, on a timely basis and within our financial budgets could have
a material adverse effect on our operating results and future prospects. Our inability to provide scientific proof for product claims may adversely affect our sales The marketing of our Zicam products involves claims that these products assist in reducing the
duration and severity of the common cold (in the case of Zicam Cold Remedy products) and
controlling allergy symptoms (in the case of Zicam Allergy Relief). Under Food and Drug
Administration (FDA) and Federal Trade Commission (FTC) rules, we are required to obtain
scientific data to support any health claims we make concerning our products. We have obtained
scientific data for our product claims, however, we cannot be certain that the scientific data we
have obtained in support of our claims will be deemed acceptable to the FDA, FTC or other
regulatory bodies. If any regulatory body requests supporting information and we are unable to
provide support that is acceptable, either the FDA or FTC could force us to stop making the claims
in question or restrict us from selling the affected products. FDA and other government regulation may restrict our ability to sell our products We are subject to various federal, state and local laws and regulations affecting our
business. Our Zicam products are subject to regulation by the FDA, including regulations with
respect to labeling of products, approval of ingredients in products, claims made regarding the
products, and disclosure of product ingredients. If we do not - 21 -




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comply with these regulations or if these regulations change in the future, the FDA could
force us to stop selling the affected products or require us to incur substantial costs in adopting
measures to maintain compliance with these regulations. If the FDA came to believe that any of our
products caused harm to consumers, we could be required to stop selling that product or subject the
product to a recall. Our advertising claims regarding our products are subject to the jurisdiction
of the FTC as well as the FDA. In both cases we are required to obtain scientific data to support
any advertising or labeling health claims we make concerning our products, although no
pre-clearance or filing is required to be made with either agency. If we are unable to provide the
required support for such claims, the FTC may stop us from making such claims or require us to stop
selling the affected products. We may fail to compete effectively, particularly against, larger more established pharmaceutical
and health products companies, or low cost generic drug manufacturers, causing our business and
operating results to suffer The consumer health products industry is highly competitive. We compete with companies with
sales in the United States that are engaged in the development of both traditional and innovative
healthcare products. Many of these companies have much greater financial and technical resources
and production and marketing capabilities than we do. As well, many of these companies have
already achieved significant product acceptance and brand recognition with respect to products that
compete directly with our Zicam and new products. Our competitors may successfully develop and
market superior or less expensive products which could render our Zicam and other future products
less valuable or unmarketable. If we are unable to protect our intellectual property or if we infringe the intellectual property
of others, our financial condition and future prospects could be materially harmed We rely significantly on the protections afforded by patent and trademark registrations that
we routinely seek from the U.S. Patent and Trademark Office (USPTO) and from similar agencies in
foreign countries. We cannot be certain that any patent or trademark application that we file will
be approved by the USPTO or other foreign agencies. In addition, we cannot be certain that we will
be able to successfully defend any trademark, trade name or patent that we hold against claims
from, or use by, competitors or other third parties. No consistent policy has emerged from the
USPTO or the courts regarding the breadth of claims allowed or the degree of protection afforded
under biotechnology and similar patents. Our future success will depend on our ability to prevent
others from infringing on our proprietary rights, as well as our ability to operate without
infringing upon the proprietary rights of others. We may be required at times to take legal action
to protect our proprietary rights and, despite our best efforts, we may be sued for infringing on
the patent rights of others. Patent litigation is costly and, even if we prevail, the cost of such
litigation could adversely affect our financial condition. If we do not prevail, in addition to
any damages we might have to pay, we could be required to stop the infringing activity or obtain a
license. We cannot be certain that any required license would be available to us on acceptable
terms, or at all. If we fail to obtain a license, our business might be materially adversely
affected. In addition to seeking patent protection, we rely upon a combination of non-disclosure
agreements, other contractual restrictions and trade secrecy laws to protect proprietary
information. There can be no assurance that these steps will be adequate to prevent
misappropriation of our proprietary information or that our competitors will not independently
develop technology or trade secrets that compete with our proprietary information. We may incur significant costs resulting from product liability claims or securities litigation We are subject to significant liability should use or consumption of our products cause
injury, illness or death. Presently, we are being sued by over 340
individuals in approximately 32
different product liability lawsuits (two of which have been filed as class action lawsuits,
although one of the class action suits has been dismissed) relating to our Zicam Cold Remedy
product. Various defendants in the lawsuits, including manufacturers and retailers, have sought
indemnification or other recovery from us for damages related to the lawsuits. Although we carry
product liability insurance, we cannot be sure that our insurance will be adequate to protect us
against product liability claims or that insurance coverage will continue to be available. Product
liability claims, such as those described in the Annual Report on Form 10-K for our 2004 fiscal
year and in our subsequent Reports on Form 10-Q, even if without merit or for which we have
substantial coverage, could result in significant legal defense costs, thereby increasing our
expenses and lowering our earnings. Such claims, whether or not proven to be valid, could have a
material adverse effect on our product branding and goodwill, resulting in reduced market
acceptance of our products. In addition, any adverse decision in such litigation could require
significant damages to be paid or result in adverse publicity, either of which could materially
adversely affect our results of operations and financial condition. Separately, the Company and
three of its Officers are also subject to two class action lawsuits (which have been consolidated)
alleging violations of securities laws. Any adverse decision in such litigation could materially
adversely affect our results of operations and financial condition. - 22 -




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We do not have manufacturing capabilities of our own We currently do not have the physical or human resources to independently manufacture our
Zicam products or any other products that we may develop. We currently outsource all of our
product manufacturing and packaging operations and intend to continue this outsourcing for the
foreseeable future. If we are unable to enter into cost-effective or otherwise suitable
arrangements for manufacturing of our Zicam products or any other products, or if our third-party
contractors fail to adequately perform their manufacturing operations (as occurred with our old
swab products), our sales and related financial results could be materially adversely affected.
If, in the future, we decide to establish our own manufacturing facilities, we will require
substantial additional funds and significant additional personnel to undertake such operations. We
cannot be certain that such funding or a sufficient number of such qualified persons will be
available for such an undertaking. We may experience product backlogs At the end of fiscal 2003, we had approximately $0.4 million in backlog of swab orders. This
backlog continued into March of fiscal 2004. We have undertaken significant measures to remedy the
manufacturing problems that led to this backlog, including replacing our swab manufacturer and
redesigning our swab product to permit higher volume production. We built a substantial inventory
of swab products to reduce the likelihood of any backlog occurring in the 2004-2005 cough and cold
season. We increased the inventory of our other products in preparation of anticipated sell-in
during the third quarter of 2004, and we established inventory plans to support sales through the
2004-2005 cough and cold season. However, we cannot be certain that these measures will be
sufficient to prevent future backlog of these products or that other product backlogs will not
occur in the future. Any such future backlogs will potentially result in higher production costs,
higher freight costs to expedite shipment of raw materials and finished goods, fines from certain
retailers, cancelled orders and lost opportunity costs. These in turn could materially affect our
results of operations and financial condition. Our board of directors is authorized to issue shares of preferred stock that could have rights
superior to our outstanding shares of common stock, and, if issued, could adversely impact the
value of our common stock Our certificate of incorporation permits our board of directors, in its sole discretion, to
issue up to 2,000,000 shares of authorized but unissued preferred stock. These shares may be
issued by our board without further action by our shareholders, and may include any of the
following rights (among others) as our board may determine, which rights may be superior to the
rights of our outstanding common stock:  
    voting rights, including the right to vote as a class on particular matters;
    preferences as to dividends and liquidation rights;
    conversion rights;
    anti-dilution protections; and
    redemption rights Since our board of directors has the authority to determine, from time to time, the terms of
our authorized preferred stock, there is no limit on the amount of common stock that could be
issuable upon conversion of any future series of preferred stock that may be issued. The rights of
holders of our common stock will be subject to, and may be adversely affected by, the rights of the
holders of any series of preferred stock that may be issued in the future. In addition, the market
price of our common stock may be adversely affected by the issuance of any series of preferred
stock with voting or other rights superior to those of our common stock. The issuance of any
series of preferred stock could also have the effect of making it more difficult for a third party
to acquire a majority of our outstanding common stock. The price of our stock may continue to be volatile The market price of our common stock, which is quoted for trading on the Nasdaq National
Market, has been highly volatile and may continue to be volatile in the future. Any or a
combination of the following factors could cause the market value of our common stock to decline
quickly: operating results that differ from market expectations, negative or other unanticipated
results of clinical trials or other testing, delays in product development, technological
innovations or commercial product introductions by our competitors, changes in government
regulations, developments concerning proprietary rights, including pending or threatened patent
litigation, public concerns regarding the safety of any of our products, the outcome of litigation
against the Company, and general economic and stock market conditions. Since the Spring of 2000,
the stock market has experienced, and it may continue to experience, significant price and volume
fluctuations. These fluctuations have particularly affected the market prices of equity securities
of small capitalization companies, like Matrixx. Often, the effect on the price of - 23 -




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such securities is disproportionate to the operating performance of such companies. In
addition, we believe our stock price may fluctuate as investors increase and cover short positions
in the stock. In our case, such fluctuations may adversely affect our stockholders ability to
dispose of their shares of Matrixx at a price equal to or above the price at which they purchased
such shares. 
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our primary market risk exposure relates to our variable rate revolving line of credit
with Comerica Bank. At no time during fiscal 2003 or the first six months of fiscal 2004 did we
have any outstanding balance against this line of credit. In July 2004, we borrowed $2 million
against our credit facility with Comerica Bank. The primary purpose for the borrowing was to
provide additional liquidity as we built inventory for expected increases in sales during the
second half of 2004. We generally extend payment terms for customers during the third quarter as
customers purchase new products and build inventory for the upcoming cough and cold season. We
repaid the debt in the fourth quarter of 2004 and ended fiscal 2004 with no debt. Consequently, we
believe that moderate interest rate increases will not have a material adverse impact on our
results of operations or financial position in the foreseeable future. As of December 30, 2004 and December 31, 2003, we did not participate in any market
risk-sensitive commodity instruments for which fair value disclosure would be required under
Statement of Financial Accounting Standards No. 107. We believe that we are not subject in any
material way to other forms of market risk, such as foreign currency exchange risk or foreign
customer purchases (of which there were none in fiscal 2004) or commodity price risk. 
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Report of Independent Registered Public Accounting Firm and Consolidated Financial
Statements of Matrixx, including the Notes to those statements, are included in Part III, Item 15
of this Annual Report on Form 10-K. 
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE We have had no disagreements with our independent accountants with respect to accounting
and financial disclosure. 
 ITEM 9A. CONTROLS AND PROCEDURES We carried out an evaluation, under the supervision and with the participation of our
Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures pursuant to Rules 13a-15 and 15d-15 of the
Securities Exchange Act of 1934. Based upon that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that, as of the end of the period covered by this report, our
disclosure controls and procedures are effective in timely alerting them to material information
relating to the Company and required to be included in our periodic SEC filings. There were no
significant changes in our internal controls over financial reporting during our most recently
completed quarter that have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting, or other factors that could significantly affect these
controls subsequent to the date of their evaluation, and there were no corrective actions taken
with regard to significant deficiencies or material weaknesses in our controls. Managements Annual Report on Internal Control Over Financial Reporting Management of the Company is responsible for establishing and maintaining adequate internal
control over financial reporting as defined by rules 13a-15(f) and 15d-15(f) under the Securities
Exchange Act of 1934. The Companys internal control over financial reporting is designed to
provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted accounting
principles. The Companys internal control over financial reporting includes those policies and
procedures that:  (i)
    pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the Company; - 24 -




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(ii)
    provide reasonable assurance that the transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the Company are being made
only in accordance with the authorizations of management and directors of the Company;
and(iii)
    provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Companys assets that could have a
material effect of the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate. Management assessed the
effectiveness of the Companys internal control over financial reporting as of December 31, 2004.
In making this assessment, management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on our assessment of those criteria, management believes that the Company maintained
effective internal control over financial reporting as of December 31, 2004. Mayer Hoffman McCann, P.C., the independent registered public accounting firm that audited the
consolidated financial statements of the Company included in this Annual Report on Form 10-K, has
issued a report on managements assessment of the effectiveness of the Companys internal control
over financial reporting as of December 31, 2004. The report is included below in this Item under
the heading Report of Independent Registered Public Accounting Firm. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of
Matrixx Initiatives, Inc. We have audited managements assessment, included in the accompanying Managements Annual Report on
Internal Control Over Financial Reporting, that Matrixx Initiatives, Inc. and subsidiary (the
Company) maintained effective internal control over financial reporting as of December 31, 2004,
based on the criteria established in Internal ControlIntegrated Frameworkissued by the Committee
of Sponsoring Organizations of the Treadway Commission. The Companys management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility is to express an
opinion on managements assessment and an opinion on the effectiveness of the Companys internal
control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating managements assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinions. A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements. - 25 -




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Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate. In our opinion, managements assessment that the Company maintained effective internal control over
financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on
the criteria established in Internal ControlIntegrated Frameworkissued by the Committee of
Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained,
in all material respects, effective internal control over financial reporting as of December 31,
2004, based on the criteria established in Internal ControlIntegrated Frameworkissued by the
Committee of Sponsoring Organizations of the Treadway Commission. We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated financial statements as of and for the year ended December
31, 2004 of the Company and our report dated February 8, 2005 expressed an unqualified opinion on
those consolidated financial statements. /s/ Mayer Hoffman McCann, P.C. Phoenix, Arizona
February 8, 2005 
 ITEM 9B. OTHER INFORMATION None. 
 PART III 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item for our executive officers is set forth in Part I
of this Annual Report on Form 10-K under the heading Executive Officers of Matrixx. The
information required by this Item for our directors is set forth in our Proxy Statement relating to
our 2005 annual meeting of stockholders to be held on May 24, 2005 (the 2005 Proxy Statement),
under the headings, Proposal No. 1 - Election of Directors and Section 16(a) Beneficial
Ownership Reporting Compliance, and is incorporated herein by this reference as if set forth in
full. We have adopted a Code of Ethics which applies to our principal executive officer, our
principal financial officer and our controller, as well as to all of our other employees. A copy of
the Code of Ethics was attached as an exhibit to our Annual Report on Form 10-K for the period
ended December 31, 2003. We will make a copy of the Code of Ethics available to any person without
charge, upon request, by writing to Matrixx Initiatives, Inc., 4742 N. 24th Street, Suite 455,
Phoenix, AZ 85016, Attn: Corporate Secretary. If we make any substantive amendment to the Code of
Ethics or grant any waiver, including any implicit waiver, we will disclose the nature of such
amendment or waiver either on the Companys internet web site
(www.matrixxinc.com) or in a Report on Form 8-K within
five days after such amendment is made or such waiver is given. 
 ITEM 11. EXECUTIVE COMPENSATION The information required by this Item for our executive officers is set forth in the 2005
Proxy Statement, under the heading, Executive Compensation, and is incorporated herein by this
reference as if set forth in full. The information set forth in the 2005 Proxy Statement under the
headings, Report of the Audit Committee and Report of the Compensation Committee is not
incorporated herein by reference. 
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item for certain of our beneficial owners is set forth
in the 2005 Proxy Statement, under the heading, Security Ownership of Certain Beneficial Owners,
and is incorporated herein by this reference as if set forth in full. - 26 -




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Securities Authorized for Issuance Under Equity Compensation Plans The following table sets forth information as of December 31, 2004 with respect to our
compensation plans and individual compensation arrangements under which our equity securities were
authorized for issuance to directors, officers, employees, consultants and certain other persons
and entities in exchange for the provision to us of goods or services. Number ofSecuritiesNumber of
    
    
    
    
    
    
    Remaining AvailableSecurities to be
    
    
    Weighted-
    
    
    for Future IssuanceIssued Upon
    
    
    Average
    
    
    Under EquityExercise of
    
    
    Exercise Price
    
    
    CompensationOutstanding
    
    
    of Outstanding
    
    
    Plans (ExcludingOptions,
    
    
    Options,
    
    
    SecuritiesWarrants, and
    
    
    Warrants,
    
    
    ReflectedPlan Category
    
    Rights
    
    
    and Rights
    
    
    in Column (a)(a)
    
    
    
    (b)
    
    
    
    (c)Equity compensation plans approved by security holders
    
    
    781,400
    
    
    $
    11.80
    
    
    
    239,521Equity compensation plans not approved by security holders
    
    
    0
    
    
    
    N/A
    
    
    
    N/ATotal
    
    
    781,400
    
    
    $
    11.80
    
    
    
    239,521
 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is set forth in the 2005 Proxy Statement, under the
headings, Compensation Committee Interlocks and Insider Participation and Certain Relationships
and Related Transactions and is incorporated herein by this reference as if set forth in full. 
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required by this Item is set forth in the 2005 Proxy Statement, under the
heading, Accountant Fees and Services and is incorporated herein by this reference as if set
forth in full. - 27 -




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PART IV 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a)1. Financial Statements INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Financial Statements
    
    PageReport of Independent Registered Public Accounting FirmConsolidated Balance Sheets as of December 31, 2004 and 2003Consolidated Statements of Income for the years ended December 31, 2004, 2003,
and 2002Consolidated Statements of Changes in Stockholders Equity for the years ended
December 31, 2004, 2003, and 2002Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003, 2002Notes to Consolidated Financial Statements
 - 28 -




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of
Matrixx Initiatives, Inc. We have audited the accompanying consolidated balance sheets of Matrixx Initiatives, Inc. and
subsidiary (the Company) as of December 31, 2004 and 2003 and the related consolidated statements
of operations, changes in stockholders equity and cash flows for each of the three years in the
period ended December 31, 2004. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial statements based on our
audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of the Company as of December 31, 2004 and 2003 and the results of
their operations and their cash flows for each of the three years in the period ended December 31,
2004 in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of the Companys internal control over financial reporting
as of December 31, 2004, based on the criteria established in Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated
February 8, 2005 expressed an unqualified opinion on managements assessment of the effectiveness
of the Companys internal control over financial reporting and an unqualified opinion on the
effectiveness of the Companys internal control over financial reporting. /s/ Mayer Hoffman McCann, P.C. Phoenix,
ArizonaFebruary 8, 2005 - 29 -




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MATRIXX INITIATIVES, INC. AND SUBSIDIARY 
 
 2004
    
    2003Current Assets:Cash and cash equivalents
    
    $
    12,694,486
    
    
    $
    10,682,614Accounts receivable:Trade, net of allowance for doubtful
accounts of $555,240 and $601,357
    
    
    12,386,026
    
    
    
    11,471,511Inventories
    
    
    7,241,434
    
    
    
    3,267,604Prepaid expenses
    
    
    887,586
    
    
    
    615,790Interest receivable
    
    
    57,658
    
    
    
    Deferred tax asset
    
    
    5,029,600
    
    
    
    2,829,556Total Current Assets
    
    
    38,296,790
    
    
    
    28,867,075Property and Equipment, at cost:Office furniture and equipment
    
    
    780,961
    
    
    
    681,528Machine tooling
    
    
    150,000
    
    
    
    150,000Leasehold improvements
    
    
    179,644
    
    
    
    37,2021,110,605
    
    
    
    868,730Less accumulated depreciation
    
    
    (457,718
    )
    
    
    (247,728
    )Net Property and Equipment
    
    
    652,887
    
    
    
    621,002Other Assets:Deposits
    
    
    220,190
    
    
    
    212,697Restricted cash
    
    
    5,000,000
    
    
    
    Debt issuance costs, net of accumulated amortization
of $18,750 and $35,000
    
    
    6,250
    
    
    
    Deferred tax asset
    
    
    
    
    
    
    4,351,810Patents, net of accumulated amortization of $205,861
and $138,780
    
    
    917,739
    
    
    
    984,820Goodwill
    
    
    15,039,836
    
    
    
    15,039,836Total Other Assets
    
    
    21,184,015
    
    
    
    20,589,163Total Assets
    
    $
    60,133,692
    
    
    $
    50,077,240
 The accompanying notes are an integral part of these consolidated financial statements. - 30 -




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MATRIXX INITIATIVES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
(CONTINUED) LIABILITIES AND STOCKHOLDERS EQUITY 2004
    
    
    2003Current Liabilities:Accounts payable
    
    $
    4,699,316
    
    
    $
    5,826,848Accrued expenses
    
    
    6,314,971
    
    
    
    2,370,127Sales commissions
    
    
    1,261,899
    
    
    
    1,113,604Sales returns and allowances
    
    
    2,605,260
    
    
    
    1,734,568Accrued taxes
    
    
    209,946
    
    
    
    241,639Total Current Liabilities
    
    
    15,091,392
    
    
    
    11,286,786Deferred tax liability
    
    
    916,738
    
    
    
    Total Liabilities
    
    
    16,008,130
    
    
    
    11,286,786Commitments and ContingenciesStockholders Equity:Preferred stock: $.001 par value, 2,000,000 shares
authorized, none issued or outstanding
    
    
    
    
    
    
    Common stock: $.001 par value, 30,000,000 shares
authorized, 9,520,198 and 9,474,601 shares
issued and outstanding
    
    
    9,520
    
    
    
    9,475Additional paid in capital
    
    
    42,527,862
    
    
    
    41,993,189Accumulated earnings (deficit)
    
    
    1,984,484
    
    
    
    (2,972,987
    )44,521,866
    
    
    
    39,029,677Less common stock held in treasury, at cost
(53,800 and 35,900 shares)
    
    
    (396,304
    )
    
    
    (239,223
    )Total Stockholders Equity
    
    
    44,125,562
    
    
    
    38,790,454Total Liabilities and Stockholders Equity
    
    $
    60,133,692
    
    
    $
    50,077,240
 The accompanying notes are an integral part of these consolidated financial statements. - 31 -




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MATRIXX INITIATIVES, INC. AND SUBSIDIARY 
 
 2004
    
    
    2003
    
    
    2002Net sales
    
    $
    60,230,935
    
    
    $
    43,495,763
    
    
    $
    23,547,636Cost of sales
    
    
    18,404,822
    
    
    
    13,454,331
    
    
    
    6,752,041Gross Profit
    
    
    41,826,113
    
    
    
    30,041,432
    
    
    
    16,795,595Operating expenses
    
    
    31,861,745
    
    
    
    21,641,749
    
    
    
    15,543,890Research and development
    
    
    1,886,906
    
    
    
    2,557,072
    
    
    
    293,486Income From Operations
    
    
    8,077,462
    
    
    
    5,842,611
    
    
    
    958,219Other Income (Expense):Interest and other income
    
    
    369,412
    
    
    
    175,533
    
    
    
    680,544Interest expense
    
    
    (39,778
    )
    
    
    (246,479
    )
    
    
    (592,055
    )Total Other Income (Expense)
    
    
    329,634
    
    
    
    (70,946
    )
    
    
    88,489Income Before Provision (Benefit) For
Income Taxes
    
    
    8,407,096
    
    
    
    5,771,665
    
    
    
    1,046,708Provision (benefit) for income taxes
    
    
    3,449,625
    
    
    
    2,427,347
    
    
    
    (3,709,947
    )Net Income
    
    $
    4,957,471
    
    
    $
    3,344,318
    
    
    $
    4,756,655Net Income Per Share of Common Stock:Basic:Weighted Average Number of Common
Shares
Outstanding
    
    
    9,494,210
    
    
    
    9,420,059
    
    
    
    9,422,873Net Income Per Share of Common Stock
    
    $
    .52
    
    
    $
    .36
    
    
    $
    .50Diluted:Weighted Average Number of Common Shares
Outstanding
    
    
    9,580,765
    
    
    
    9,473,082
    
    
    
    9,455,403Net Income Per Share of Common Stock
    
    $
    .52
    
    
    $
    .35
    
    
    $
    .50
 The accompanying notes are an integral part of these consolidated financial statements. - 32 -




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MATRIXX INITIATIVES, INC. AND SUBSIDIARY 
 
 Series A
    
    
    
    
    
    
    
    
    
    
    AdditionalPreferred Stock
    
    
    Common Stock
    
    
    Paid In
    
    
    Treasury
    
    
    AccumulatedShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Stock
    
    
    DeficitBalance at December 31, 2001
    
    
    
    
    
    $
    
    
    
    
    9,432,251
    
    
    $
    9,432
    
    
    $
    35,485,963
    
    
    $
    (52,436
    )
    
    $
    (11,073,960
    )Issuance of common stock for services
    
    
    
    
    
    
    
    
    
    
    700
    
    
    
    
    
    
    
    6,683
    
    
    
    
    
    
    
    Repurchase shares of the Companys common stock (1,500 shares)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,420
    )
    
    
    Issuance of restricted stock pursuant to the Companys
restricted stock bonus program
    
    
    
    
    
    
    
    
    
    
    8,500
    
    
    
    10
    
    
    
    71,476
    
    
    
    
    
    
    
    Income tax benefit from the exercise of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,960,799
    
    
    
    
    
    
    
    Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,756,655Balance at December 31, 2002
    
    
    
    
    
    
    
    
    
    
    9,441,451
    
    
    
    9,442
    
    
    
    41,524,921
    
    
    
    (61,856
    )
    
    
    (6,317,305
    )Issuance of common stock for services
    
    
    
    
    
    
    
    
    
    
    300
    
    
    
    
    
    
    
    2,402
    
    
    
    
    
    
    
    Issuance of common stock upon exercise of stock options
    
    
    
    
    
    
    
    
    
    
    20,000
    
    
    
    20
    
    
    
    219,730
    
    
    
    
    
    
    
    Repurchase shares of the Companys common stock (26,300 shares)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (177,367
    )
    
    
    Issuance of restricted stock pursuant to the Companys
restricted stock bonus program
    
    
    
    
    
    
    
    
    
    
    12,850
    
    
    
    13
    
    
    
    227,946
    
    
    
    
    
    
    
    Income tax benefit from the exercise of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,190
    
    
    
    
    
    
    
    Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,344,318Balance at December 31, 2003
    
    
    
    
    
    
    
    
    
    
    9,474,601
    
    
    
    9,475
    
    
    
    41,993,189
    
    
    
    (239,223
    )
    
    
    (2,972,987
    )Issuance of common stock upon exercise of stock options
    
    
    
    
    
    
    
    
    
    
    47,334
    
    
    
    47
    
    
    
    503,892
    
    
    
    
    
    
    
    Repurchase shares of the Companys common stock (17,900 shares)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (157,081
    )
    
    
    Forfeiture of restricted stock pursuant to the Companys
restricted stock bonus program
    
    
    
    
    
    
    
    
    
    
    (1,737
    )
    
    
    (2
    )
    
    
    (23,349
    )
    
    
    
    
    
    
    Income tax benefit from the exercise of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    54,130
    
    
    
    
    
    
    
    Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,957,471Balance at December 31, 2004
    
    
    
    
    
    $
    
    
    
    
    9,520,198
    
    
    $
    9,520
    
    
    $
    42,527,862
    
    
    $
    (396,304
    )
    
    $
    1,984,484
 The accompanying notes are an integral part of these consolidated financial statements. - 33 -




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##### Table of Contents



MATRIXX INITIATIVES, INC. AND SUBSIDIARY 
 
 2004
    
    
    2003
    
    
    2002Cash Flows From Operating Activities:Net income
    
    $
    4,957,471
    
    
    $
    3,344,318
    
    
    $
    4,756,655Adjustments to reconcile net income to net
cash provided by operating activities:Depreciation
    
    
    209,990
    
    
    
    157,933
    
    
    
    78,770Amortization
    
    
    60,831
    
    
    
    81,663
    
    
    
    87,498Amortization of discount on notes payable
    
    
    
    
    
    
    246,357
    
    
    
    576,118Provision for bad debts
    
    
    (46,117
    )
    
    
    (45,923
    )
    
    
    209,913Deferred income taxes
    
    
    3,122,634
    
    
    
    2,195,309
    
    
    
    (3,397,687
    )Loss on disposal of assets
    
    
    
    
    
    
    
    
    
    
    20,104Common stock issued for compensation
    
    
    (23,351
    )
    
    
    230,361
    
    
    
    78,169Changes in assets and liabilities:Restricted cash
    
    
    
    
    
    
    
    
    
    
    1,503,150Accounts receivable
    
    
    (868,398
    )
    
    
    (4,387,992
    )
    
    
    (2,786,352
    )Interest receivable
    
    
    (57,658
    )
    
    
    
    
    
    
    Inventories
    
    
    (3,973,830
    )
    
    
    (1,694,570
    )
    
    
    7,878Prepaid expenses and other
    
    
    (271,796
    )
    
    
    (91,961
    )
    
    
    (15,367
    )Accounts payable
    
    
    (1,127,532
    )
    
    
    2,912,960
    
    
    
    1,660,413Accrued expenses
    
    
    4,061,446
    
    
    
    867,851
    
    
    
    (2,412,676
    )Sales returns and allowances
    
    
    870,692
    
    
    
    729,855
    
    
    
    (27,184
    )Net Cash Provided By Operating Activities
    
    
    6,914,382
    
    
    
    4,546,161
    
    
    
    339,402Cash Flows From Investing Activities:Capital expenditures
    
    
    (241,875
    )
    
    
    (241,021
    )
    
    
    (573,679
    )Notes receivable
    
    
    
    
    
    
    
    
    
    
    200,000Deposits and other
    
    
    (7,493
    )
    
    
    (175,000
    )
    
    
    (5,297
    )Restricted cash
    
    
    (5,000,000
    )
    
    
    
    
    
    
    Maturity of marketable securities
    
    
    
    
    
    
    
    
    
    
    10,656,380Net Cash Provided (Used) By Investing
Activities
    
    
    (5,249,368
    )
    
    
    (416,021
    )
    
    
    10,277,404
 The accompanying notes are an integral part of these consolidated financial statements. - 34 -




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##### Table of Contents



MATRIXX INITIATIVES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(CONTINUED) 2004
    
    
    2003
    
    
    2002Cash Flows From Financing Activities:Proceeds from borrowing
    
    
    2,000,000
    
    
    
    
    
    
    
    Principal payments on notes payable
    
    
    (2,000,000
    )
    
    
    (5,500,000
    )
    
    
    (5,905,280
    )Debt issuance costs
    
    
    
    
    
    
    
    
    
    
    (35,000
    )Issuance of common stock
    
    
    503,939
    
    
    
    219,750
    
    
    
    Purchase of treasury stock
    
    
    (157,081
    )
    
    
    (177,367
    )
    
    
    (9,420
    )Net Cash Provided (Used) By Financing Activities
    
    
    346,858
    
    
    
    (5,457,617
    )
    
    
    (5,949,700
    )Net Increase (Decrease) in Cash and Cash Equivalents
    
    
    2,011,872

    
    
    
    (1,327,477
    )
    
    
    4,667,106Cash and Cash Equivalents at Beginning of Year
    
    
    10,682,614
    
    
    
    12,010,091
    
    
    
    7,342,985Cash and Cash Equivalents at End of Year
    
    $
    12,694,486
    
    
    $
    10,682,614
    
    
    $
    12,010,091Supplemental Disclosure of Cash Flow Information:Cash paid during the year for:Interest
    
    $
    39,778
    
    
    $
    246,479
    
    
    $
    610,657Income taxes
    
    
    356,739
    
    
    
    996
    
    
    
    12,740
 The accompanying notes are an integral part of these consolidated financial statements. - 35 -




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##### Table of Contents



MATRIXX INITIATIVES, INC. AND SUBSIDIARY 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Organization and Summary of Significant Accounting Policies  Organization Gum Tech International, Inc. (the Company) was incorporated in Utah on February 4, 1991 to
develop, market and distribute specialty chewing gum products for branded and private label
customers, as well as products marketed under the Companys brand. The Company sold its gum
operations in July 2001. On June 18, 2002, the Company completed its previously announced plans to
reincorporate in Delaware and change its name to Matrixx Initiatives, Inc. (Matrixx or the
Company). The reincorporation and name change were effectuated through a merger of the Company
(then Gum Tech International, Inc.) with and into its wholly-owned Delaware subsidiary, Matrixx
Initiatives, Inc. The timing of the merger (including the resulting reincorporation and name
change) immediately followed the receipt of approval of the Companys shareholders at its regularly
scheduled annual meeting held on such date. The authorized capital stock of Matrixx consists of (i)
30,000,000 shares of common stock, $.001 par value, (common stock) and (ii) 2,000,000 shares of
preferred stock $.001 par value. Upon the effectiveness of the merger, each share of Gum Tech
International, Inc. common stock issued and outstanding immediately before the merger, was
extinguished and converted into one issued and outstanding share of Matrixx common stock. All
dollar amounts have been retroactively restated for the change in the capital structure. The Companys sole business segment in 2004, 2003, and 2002 was developing, marketing and
selling over the counter products with an emphasis on those that utilize unique or novel delivery
systems through a wholly-owned subsidiary, Gel Tech, L.L.C. (Gel Tech). On July 12, 2002, Gel
Tech changed its name to Zicam, LLC (Zicam).  Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned
subsidiary, Zicam. All significant intercompany accounts and transactions have been eliminated.  Inventories Inventories are stated at the lower of cost or market. Cost is determined using the first-in,
first-out pricing method.  Marketable Securities Management determines the appropriate classification of its investments in marketable debt and
equity securities at the time of each purchase and re-evaluates such determination at each balance
sheet date.  Property and Equipment Depreciation of the primary asset classifications is calculated based on the following
estimated useful lives using the straight-line method. Classification
    
    Useful Life in YearsMachine Tooling
    
    3Office Furniture and equipment
    
    3-5Leasehold improvements
    
    2-3
 Depreciation of property and equipment charged to operating expenses was $248,250, $157,933,
and $78,770 for the years ended December 31, 2004, 2003 and 2002, respectively.  Intangible Assets The original patent is being amortized using the straight-line method over the remaining term
of the patent at the date of purchase of 16.75 years. The estimated aggregate amortization expense
for the Companys patent is $67,081 on an annual basis for each of the next five years.
Amortization expense was $67,081 for each of the years ending December, 31, 2004, 2003, and 2002
respectively. - 36 -




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##### Table of Contents



MATRIXX INITIATIVES,
INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) The Company recorded debt issuance costs of $19,000 in 2004, which related to the $5.0 million
letter of credit established for the self structured product liability insurance policy that began
in April 2004. These costs are amortized over one year and are charged to operating activities. The
Company recorded $18,299 and $20,212 in 2003 and 2002, respectively, for amortization of expenses
related to the Companys credit facility with Comerica Bank. Goodwill is considered to have an indefinite life, and therefore, it is not amortized, but
instead is tested for impairment at least annually.  Revenue Recognition The Company recognizes revenue from product sales when earned, that is, when the risks and
rewards of ownership have transferred to the customer, which is considered to have occurred upon
shipment of the finished project. Sales incentives and returns are estimated and recognized at the
date of shipment based upon historical activity and current agreements with customers. The Company
evaluates these estimates on a monthly basis and revises them as necessary.  Stock-Based Compensation The Company adopted Statement of Financial Accounting Standard (SFAS) No. 123, Accounting
for Stock-Based Compensation. The Company will continue to measure compensation expense for its
stock-based employee compensation plans using the intrinsic value method prescribed by APB Opinion
No. 25, Accounting for Stock Issued to Employees and related interpretations in accounting for
its plans and does not recognize compensation expense for its stock-based compensation plans other
than for options granted to non-employees. If the Company had elected to recognize compensation
expense based upon the fair value at the grant date for awards under its stock-based compensation
plans consistent with the methodology prescribed by SFAS No. 123, the Companys net income and
earnings per share would be reduced to the following pro forma amounts: 2004
    
    
    2003
    
    
    2002Net income applicable to common shareholders, as
reported
    
    $
    4,957,471
    
    
    $
    3,344,318
    
    
    $
    4,756,655Less stock based employee compensation expense
determined under fair value based methods for all awards,
net of related tax effects
    
    
    1,475,313
    
    
    
    402,871
    
    
    
    715,409Proforma Net Income
    
    $
    3,482,158
    
    
    $
    2,941,447
    
    
    $
    4,041,246Net income per share of common stock:Basic:As reported
    
    $
    0.52
    
    
    $
    0.36
    
    
    $
    0.50Pro forma
    
    $
    0.37
    
    
    $
    0.31
    
    
    $
    0.43DilutedAs reported
    
    $
    0.52
    
    
    $
    0.35
    
    
    $
    0.50Pro forma
    
    $
    0.36
    
    
    $
    0.31
    
    
    $
    0.43
 The fair value for these options was estimated at the date of grant using the Black-Scholes
option pricing model with the following assumptions for the years ended December 31, 2004, 2003,
and 2002. - 37 -




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##### Table of Contents



MATRIXX INITIATIVES,
INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) 2004
    
    2003
    
    2002Risk-free interest rate
    
    3.25%
    
    3.12%
    
    3.80%Expected life
    
    4.95 years
    
    4.88 years
    
    3.66 yearsExpected volatility
    
    66.44%
    
    62.96%
    
    63.80%Expected dividend yield
    
    0%
    
    0%
    
    0%
  Long-Lived Assets When facts and circumstances indicate that the carrying value of long-lived assets may be
impaired, an evaluation of the recoverability is performed by comparing the carrying value of the
assets to the estimated undiscounted future cash flows. A forecast showing lack of long-term
profitability, a significant decline in market share, or a current period operating or cash flow
loss combined with a history of operating or cash flow losses are conditions, among others, that
would trigger an impairment assessment of the carrying amount of enterprise goodwill. Upon indication that the carrying value of such assets may not be recoverable, the Company
recognizes an impairment loss by a charge against current operations. If an impairment exists, an
impairment charge would be determined by comparing the carrying amount of the assets to the
applicable estimated future cash flows, discounted at a risk-adjusted rate or market appraisals. In
addition, the remaining amortization period for the impaired asset would be reassessed and revised
if necessary. In accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets (SFAS 142), goodwill is assessed at least annually for impairment using the
fair value methodology. The Company completed its annual assessment in the third quarter. There
were no impairments recorded in any period presented.  Comprehensive Income Comprehensive income consists of net income (loss) and other gains and losses affecting
stockholders equity that, under accounting principles generally accepted in the United States of
America are excluded from net income (loss). Such items consist primarily of unrealized gains and
losses on marketable equity securities and foreign translation gains and losses. The Company has
not had any such items in the prior three years and, consequently, net income (loss) and
comprehensive income (loss) are the same.  Shipping and Handling Costs The Company includes shipping and handling costs in cost of sales.  Income Taxes Deferred income taxes are provided for temporary differences between the financial reporting
and tax basis of assets and liabilities using enacted tax laws and rates for the years when the
differences are expected to reverse.  Research and Development Research and development costs are expensed as incurred.  Advertising The Company advertises primarily through television and print media. The Companys policy is
to expense advertising costs, including production costs, as incurred. Advertising expense was
$14,761,776, $11,690,166, and $7,736,982 for the years ended December 31, 2004, 2003, and 2002,
respectively. - 38 -




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##### Table of Contents



MATRIXX INITIATIVES,
INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  Net Income Per Share of Common Stock Basic earnings per share is calculated using the weighted average number of common shares
outstanding. Diluted earnings per share is computed on the basis of the weighted average number of
common shares outstanding plus the dilutive effect of outstanding stock options using the treasury
stock method. The schedule below summarizes the elements included in the calculation of basic and diluted
earnings per common share for the years ended December 31, 2004, 2003 and 2002. Options, warrants
and other incremental shares to purchase 341,938, 108,000, and 389,500 shares of common stock at
December 31, 2004, 2003 and 2002, respectively, were excluded from the computation of diluted
earnings per share because their effect would be anti-dilutive. Year Ended December 31,2004
    
    
    2003
    
    
    2002Net income applicable to common shareholders
    
    $
    4,957,471
    
    
    $
    3,344,318
    
    
    $
    4,756,655Weighted
average common shares outstanding - Basic
    
    
    9,494,210
    
    
    
    9,420,059
    
    
    
    9,422,873Dilutive securities
    
    
    86,555
    
    
    
    53,023
    
    
    
    32,530Weighted
average common shares outstanding - Diluted
    
    
    9,580,765
    
    
    
    9,473,082
    
    
    
    9,455,403Net Income per common share:Basic
    
    $
    0.52
    
    
    $
    0.36
    
    
    $
    0.50Diluted
    
    $
    0.52
    
    
    $
    0.35
    
    
    $
    0.50
  Cash and Cash Equivalents For purposes of the consolidated statements of cash flows, the Company considers all highly
liquid investments with a maturity of three months or less at the date of purchase to be cash
equivalents.  Estimates The preparation of the Companys consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America requires the Companys
management to make estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting period. Actual
results could differ from those estimates.  Recently Issued Accounting Standards The Financial Accounting Standards Board (FASB) issued SFAS No. 123R, Share-Based Payment,
which is effective for reporting periods beginning after June 15, 2005 (third quarter adoption for
the Company). Statement 123R replaces FASB Statement No. 123, Accounting for Stock-Based
Compensation, and supersedes ABP Opinion No. 25, Accounting for Stock Issued to Employees.
Statement 123, as originally issued in 1995, established as preferable a fair-value-based method of
accounting for share-based payment transactions with employees. However, the statement permitted
entities the option of continuing to apply the guidance in Opinion 25, as long as the footnotes to
the financial statements disclosed what net income would have been had the preferable
fair-value-based method been used. Currently, in accordance with APB Opinion 25, the Company
records the intrinsic value of stock based compensation as expense. Accordingly, no compensation
expense is currently recognized for fixed stock plans as the exercise price equals the stock price
on the date of grant. Under SFAS 123R, the Company will be required to measure compensation
expense over the options vesting period based on the stock options fair value at the date the
options are granted. SFAS 123R allows for the use of the Black-Scholes or a lattice option-pricing
model to value such options. The Company has not determined which option-pricing model will be
used in valuing such options. As allowed by SFAS 123R, the Company can also elect either the
Modified Prospective Application (MPA) or the Modified Retrospective Application (MRA), to
determine the presentation of expense. The MPA - 39 -




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##### Table of Contents



MATRIXX INITIATIVES,
INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) applies the Statement to new awards and modified awards after the effective date, and to any
unvested awards as service is rendered on or after the effective date. The MRA can apply the
Statement to either all prior years for which SFAS123 was effective or only to prior interim
periods in the year of adoption. The Company has chosen to apply the MPA method. Note 1 of the
Consolidated Financial Statements illustrates the effects on net income and earnings per share if
the Company had adopted SFAS No. 123, Accounting for Stock-Based Compensation, using the
Black-Scholes option-pricing model. On February 7, 2005, the Companys Compensation Committee approved the immediate vesting of
all outstanding stock options previously granted under the Companys option plans, including those
granted to executive officers and directors, for which the option exercise price was above the
Closing Price on February 7, 2005 (refer to Form 8-K filing dated February 7, 2005). We are evaluating the requirements under SFAS 123R and expect the adoption will result in
additional compensation expense in our consolidated statements of income. The pro forma impact of
recognizing compensation expense for options previously issued is illustrated in Note 1 of the
Consolidated Financial Statements, Accounting for Stock-Based
Compensation. In December 2004, the FASB issued FASB Staff Position No. FAS 109-1, Application of FASB
Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production
Activities Provided by the American Jobs Creation Act of 2004 (AJCA). The AJCA was signed into law
in October 2004 and includes a tax deduction of up to 9 percent (when fully phased-in) of the
lesser of a) qualified production activities income as defined in the Act, or b) taxable income
(after the deduction for the utilization of any net operating loss carryforwards). The FASB
concluded that the tax relief (special tax deduction for domestic manufacturing) from this
legislation should be accounted for as a special deduction instead of a tax rate reduction. The
Company will be able to start claiming this tax benefit in 2005. The Company expects the adoption
of SFAS No. 109-1 will not have a material impact on the Companys financial position or results of
operations. In November 2004, the FASB issued FASB Statement No. 151, Inventory Costs  An amendment of
ARB No. 43, Chapter 4. Statement 151 clarifies that abnormal amounts of idle facility expense,
freight, handling costs and spoilage should be expensed as incurred and not included in overhead.
The provisions in Statement 151 are effective for inventory costs incurred during fiscal years
beginning after June 15, 2005 and companies must apply the standard prospectively. The Company
expects the adoption of SFAS No. 151 will not have a material impact on the Companys financial
position or results of operations.  Reclassifications Certain prior period amounts have been reclassified to conform to the current period
presentation. - 40 -




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MATRIXX INITIATIVES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  2.
    Inventories Inventories consist of the following: 2004
    
    
    2003Raw materials and packaging
    
    $
    2,140,915
    
    
    $
    1,137,584Finished goods
    
    
    5,100,519
    
    
    
    2,130,020Total
    
    $
    7,241,434
    
    
    $
    3,267,604
  3.
    Current Notes Payable The Company has a $4,000,000 line of credit due in July 2005 with interest at .75% above
prime (or 6.0% at December 31, 2004), collateralized by accounts receivable, inventory, property
and equipment, intangible assets and other assets of the Company. The line also contains various
financial covenants regarding liquidity, tangible net worth, and other financial ratios. Also,
the Companys quarterly net income cannot be less than $0 for any two consecutive quarters and
the Company must not have a loss for any fiscal year. The Company is also restricted from paying
dividends without the consent of the Companys lender. As of December 31, 2004, the Company had
no borrowings outstanding under the line of credit.  4.
    Reserves The following schedules summarize the activity in the reserves for sales returns and
allowances and allowance for doubtful accounts reserve for each of the years ended: AdditionsBalance at
    
    
    Charged to
    
    
    
    
    
    
    Balance atBeginning
    
    
    Costs and
    
    
    
    
    
    
    End ofDescription
    
    of Period
    
    
    Expenses
    
    
    Deductions
    
    
    PeriodReserves for Sales Returns and
AllowancesDecember 31, 2002
    
    $
    1,330,150
    
    
    $
    4,054,491
    
    
    $
    4,379,928
    
    
    $
    1,004,713December 31, 2003
    
    
    1,004,713
    
    
    
    5,879,542
    
    
    
    5,149,687
    
    
    
    1,734,568December 31, 2004
    
    
    1,734,568
    
    
    
    8,134,044
    
    
    
    7,263,352
    
    
    
    2,605,260
 AdditionsBalance at
    
    
    Charged to
    
    
    
    
    
    
    Balance atBeginning
    
    
    Costs and
    
    
    
    
    
    
    End ofDescription
    
    of Period
    
    
    Expenses
    
    
    Deductions
    
    
    PeriodAllowance for Doubtful AccountsDecember 31, 2002
    
    $
    468,389
    
    
    $
    244,834
    
    
    $
    65,943
    
    
    $
    647,280December 31, 2003
    
    
    647,280
    
    
    
    114,353
    
    
    
    160,276
    
    
    
    601,357December 31, 2004
    
    
    601,357
    
    
    
    87,934
    
    
    
    134,051
    
    
    
    555,240
 - 41 -




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MATRIXX INITIATIVES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)  5.
    Income Taxes The components of the provision (benefit) for income taxes are as follows: 2004
    
    
    2003
    
    
    2002Current:Federal
    
    $
    204,834
    
    
    $
    110,309
    
    
    $
    (325,000
    )State
    
    
    124,157
    
    
    
    121,729
    
    
    
    12,740Total
    
    
    326,991
    
    
    
    232,038
    
    
    
    (312,260
    )Deferred:Federal
    
    
    2,779,584
    
    
    
    2,122,462
    
    
    
    (3,208,806
    )State
    
    
    343,050
    
    
    
    72,847
    
    
    
    (188,881
    )Total
    
    
    3,122,634
    
    
    
    2,195,309
    
    
    
    (3,397,687
    )Total Provision (Benefit) For Income Taxes
    
    $
    3,449,625
    
    
    $
    2,427,347
    
    
    $
    (3,709,947
    )
 - 42 -




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##### Table of Contents



MATRIXX INITIATIVES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) The provision (benefit) for income taxes reconciles to the amount computed by applying the
federal statutory rate to income before the provision (benefit) for income taxes as follows: 2004
    
    
    2003
    
    
    2002Income taxes
at the federal statutory rate
    
    
    34
    %
    
    
    34
    %
    
    
    34
    %State income taxes, net of
federal benefits
    
    
    5
    
    
    
    5
    
    
    
    5Valuation allowance
    
    
    
    
    
    
    (5
    )
    
    
    (324
    )Other
    
    
    2
    
    
    
    8
    
    
    
    (31
    )Net operating loss carryover
    
    
    
    
    
    
    
    
    
    
    (38
    )Total
    
    
    41
    %
    
    
    42
    %
    
    
    (354
    )%
 Significant components of deferred income taxes as of December 31, 2004 and 2003 are as
follows: 2004
    
    
    2003Net operating loss carryforwards
    
    $
    3,523,500
    
    
    $
    6,923,700Reserve for bad debts
    
    
    227,500
    
    
    
    246,400Inventory valuation reserve
    
    
    196,800
    
    
    
    68,200Reserves and accrued expenses
    
    
    1,218,300
    
    
    
    795,400Research and development credit
    
    
    165,500
    
    
    
    106,700Other
    
    
    230,600
    
    
    
    122,600Valuation allowance
    
    
    
    
    
    
    (100,000
    )Total Deferred Tax Asset
    
    
    5,562,200
    
    
    
    8,163,000Amortization of intangible assets
    
    
    (1,276,800
    )
    
    
    (862,800
    )Depreciation
    
    
    (172,500
    )
    
    
    (118,800
    )Total Deferred Tax Liability
    
    
    (1,449,300
    )
    
    
    (981,600
    )Net Deferred Tax Asset
    
    $
    4,112,900
    
    
    $
    7,181,400
 The Company records a valuation allowance for certain temporary differences for which it is
more likely than not that it will not receive future tax benefits. The Company assesses its past
earnings history and trends, sales backlog and projections of future net income. The Company
recorded a valuation allowance for the entire amount of the net deferred asset in 2001 as it had
determined that it was more likely than not that no deferred tax assets would be realized. In 2002,
the Company determined that it is more likely than not that the majority of its deferred tax assets
would be realized and the valuation allowance had been reduced to $400,100. During 2003, the
Company further reduced the valuation allowance to $100,000 and in 2004 the valuation allowance was
eliminated entirely. The net change in the valuation allowance for deferred tax assets in 2004 and
2003 was a decrease of $100,000, and $300,100, respectively. The tax benefits associated with employee exercises of non-qualified stock options and
disqualifying dispositions of stock acquired with incentive stock options reduces income taxes
currently payable. In 2002, the Company determined that it is more likely than not that the amounts
would be realized and has recorded a benefit that is charged to additional paid-in-capital in 2004
and 2003 of $54,130, and $18,190 respectively. - 43 -




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MATRIXX INITIATIVES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) At December 31, 2004, the Company had federal and state net operating loss carryforwards of
approximately $9,100,000, and $9,400,000, respectively. The carryforwards expire in the year 2020
for federal purposes and 2005 for state purposes.  6.
    Preferred Stock The authorized preferred stock of the Company consists of 2,000,000 shares, $.001 par value.
The preferred stock may be issued in separate series from time to time as the Board of Directors of
the Company may determine by resolution, unless the nature of a particular transaction and
applicable statutes require shareholder approval. The rights, preferences and limitations of each
series of preferred stock may differ, including without limitation, the rate of dividends, method
and nature of payment of dividends, terms of redemption, amounts payable on liquidation, sinking
fund provisions (if any), conversion rights (if any), and voting rights.  7.
    Stockholders Equity Stock Repurchase Plan In September 2001, the Company began acquiring shares of its common stock in connection with
its stock repurchase plan approved in August 2001 and expired in August 2002. The plan authorized
the Company to repurchase up to 1,000,000 outstanding common shares. During 2001, the Company
purchased 8,100 shares of common stock at an aggregate cost of $52,436. During 2002, the Company
purchased 1,500 shares of common stock at an aggregate cost of $9,420. In December 2002, the Companys Board of Directors authorized a Common Stock Repurchase
Program for up to 250,000 shares of the Companys common stock, which expired on December 31, 2003.
During 2003, the Company purchased 26,300 shares of common stock at an aggregate cost of $177,367. In April 2004, the Companys Board of Directors authorized a Common Stock Repurchase Program
for up to 1.0 million shares of the Companys common stock. During 2004, the Company purchased
17,900 shares of common stock at an aggregate cost of $157,081. Shareholder Rights Plan On July 12, 2002, the Board of Directors of the Company adopted a shareholder rights plan in
the form of a Rights Agreement dated as of July 22, 2002 by and between the Company and Corporate
Stock Transfer, Inc., as Rights Agent (the Rights Agreement). On July 12, 2002, the Board of
Directors of the Company declared a dividend of one preferred share purchase right (a Right) for
each outstanding share of common stock. The dividend was paid on July 22, 2002 to the Companys
stockholders of record on that date. The Rights also apply to, and will be issued in the same
proportion in connection with, all future common stock issuances until the Distribution Date
(defined below) or the expiration or earlier redemption or exchange of the Rights. Each Right
permits the registered holder thereof to purchase from the Company, at any time after the
Distribution Date, one one-thousandth of a share of the Companys Series A Junior Participating
Preferred Stock for a purchase price of $50.79 per such one one-thousandth of a share, subject to
certain possible adjustments provided for in the Rights Agreement. The Board of Directors of the
Company has authorized the issuance of up to 20,000 shares of Series A Junior Participating
Preferred Stock upon the exercise of Rights. - 44 -




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##### Table of Contents



MATRIXX INITIATIVES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Initially the Rights will be attached to all certificates representing shares of common stock
then outstanding, and no separate Rights certificates will be distributed. The Rights will separate
from the common stock upon the earlier to occur of (i) 10 days after the public announcement of a
persons or group of affiliated or associated persons having acquired beneficial ownership of 15%
or more of the outstanding common stock (such person or group being an Acquiring Person), or (ii)
10 business days (or such later date as the Companys Board may determine) following the
commencement of, or announcement of an intention to make, a tender offer or exchange offer for the
common stock, the consummation of which would result in a person or groups becoming an Acquiring
Person (the earlier of such dates being the Distribution Date). The Rights are not exercisable
until the Distribution Date. If any person (or group of persons) becomes an Acquiring Person,
except in a tender or exchange offer which is for all outstanding common stock at a price and on
terms which a majority of the Companys Board determines to be adequate and in the best interests
of the Company, its shareholders and other relevant constituencies (other than such Acquiring
Person, its affiliates and associates), each holder of a Right will thereafter be entitled to
acquire, for each Right so held, one share of common stock for a purchase price equal to 50% of the
then current market price for such share of common stock. All Rights beneficially owned by an
Acquiring Person or any affiliate or associate thereof will be null and void and not exercisable.
The Rights expire on July 22, 2012 provided that, prior to a person (or group of persons) becoming
an Acquiring Person, the Company may redeem the Rights for $0.01 per Right. All of the provisions
of the Rights Agreement may be amended before the Distribution Date by the Board of Directors of
the Company for any reason it deems appropriate. After the Distribution Date, the provisions of the
Rights Agreement may be amended by the Board in order to cure any ambiguity, defect or
inconsistency, to make changes which do not adversely affect the interest of Rights (excluding the
interest of any Acquiring Person) or, subject to certain limitations, to shorten or lengthen any
time period under the Rights Agreement. Directors Restricted Stock Purchase Program In 2002, the Company established a Director Restricted Stock Purchase Program (the Program).
Under the Program the number of shares to which the Director will be entitled is equal to the cash
portion of compensation payable to him for Directors fees by the Company that he wishes to apply to
the purchase of shares under the Program divided by 80% of the closing price of the Companys stock
price on the date the cash consideration would be paid. Shares issued under the Program are
restricted until the first to occur of (i) the expiration of three years from the date the shares
are issued, (ii) a change in control of the Company, and (iii) the Directors death or disability.  8.
    Stock Options and Warrants 1995 Stock Option Plan In March 1995, the Company adopted a stock option plan (the 1995 Plan) which provides for
the grant of both incentive stock options and non-qualified options. A total of 2,000,000 shares of
common stock have been reserved for issuance under the 1995 Plan. Options under the Companys 1995 Plan are issuable only to eligible officers, directors, key
employees and consultants of the Company. The 1995 Plan is administered by a committee selected by
the Board of Directors, which determines those individuals who shall receive options, the time
period during which the options may be exercised, the number of shares of common stock that may be
purchased under each option, and the option price. Unless sooner terminated, the 1995 Plan shall
remain in effect until January 1, 2005. The per share exercise price of the common stock may not be less than the fair market value of
the common stock on the date the option is granted. The aggregate fair market value (determined as
of the date the option is granted) of the common stock that any employee may purchase in any
calendar year pursuant to the exercise of incentive stock options may not exceed $100,000. No
person who owns, directly or indirectly, at the time of the granting of an incentive stock option
to him, more than 10% of the total combined voting power of all classes of stock of the Company
shall be eligible to receive any incentive stock options under the 1995 Plan unless the option
price is at least 110% of the fair market value of the common stock subject to the option,
determined on the date of grant. - 45 -




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##### Table of Contents



MATRIXX INITIATIVES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) All options granted under the 1995 Plan provide for the payment of the exercise price in cash
or, with the prior written consent of the Company, by delivery to the Company of shares of common
stock already owned by the optionee having a fair market value equal to the exercise price of the
options being exercised, or by a combination of such methods of payment. The following table contains information on the stock options under the Companys 1995 Plan
for the years ended December 31, 2002, 2003 and 2004. The outstanding options expire July 2006. WeightedAverageNumber of
    
    
    ExerciseShares
    
    
    PriceOptions outstanding at December 31, 2001
    
    
    323,000
    
    
    $
    11.10Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Cancelled
    
    
    (111,000
    )
    
    
    12.12Options outstanding at December 31, 2002
    
    
    212,000
    
    
    
    10.57Granted
    
    
    
    
    
    
    Exercised
    
    
    (15,000
    )
    
    
    12.25Cancelled
    
    
    (44,000
    )
    
    
    12.89Options outstanding at December 31, 2003
    
    
    153,000
    
    
    
    9.73Granted
    
    
    
    
    
    
    Exercised
    
    
    (20,000
    )
    
    
    8.38Cancelled
    
    
    (58,000
    )
    
    
    12.67Options outstanding at December 31, 2004
    
    
    75,000
    
    
    
    7.83
 - 46 -




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MATRIXX INITIATIVES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) 2001 Long-Term Incentive Plan In November 2001, the Company adopted the 2001 Long-Term Incentive Plan (the 2001 Plan). The
2001 Plan provides for the grant of incentive stock options, non-qualified options, restricted
common stock, performance based awards, tandem awards and substitute awards. A total of 1,000,000
shares of common stock have been reserved for issuance under the 2001 Plan. The following table contains information on the stock options under the Companys 2001 Plan
for the years ended December 31, 2002, 2003, and 2004. The outstanding options expire from October
2008 to July 2011. WeightedAverageNumber of
    
    
    ExerciseShares
    
    
    PriceOptions outstanding at December 31, 2001
    
    
    12,000
    
    
    $
    6.90Granted
    
    
    178,800
    
    
    
    8.86Exercised
    
    
    
    
    
    
    Cancelled
    
    
    
    
    
    
    Options outstanding at December 31, 2002
    
    
    190,800
    
    
    
    8.74Granted
    
    
    170,000
    
    
    
    8.34Exercised
    
    
    (5,000
    )
    
    
    7.20Cancelled
    
    
    (63,000
    )
    
    
    9.39Options outstanding at December 31, 2003
    
    
    292,800
    
    
    
    8.39Granted
    
    
    440,000
    
    
    
    14.68Exercised
    
    
    (12,334
    )
    
    
    9.04Cancelled
    
    
    (14,066
    )
    
    
    12.15Options outstanding at December 31, 2004
    
    
    706,400
    
    
    
    12.22
 - 47 -




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##### Table of Contents



MATRIXX INITIATIVES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Other Stock Options The Company has granted non-qualified stock options to consultants, directors and other
individuals. There were no options outstanding as of December 31, 2004. The following table contains information on all of the Companys non-plan stock options for
the years ended December 31, 2002, 2003 and 2004. WeightedAverageNumber of
    
    
    ExerciseShares
    
    
    PriceOptions outstanding at December 31, 2001
    
    
    172,500
    
    
    $
    10.11Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Cancelled
    
    
    (57,500
    )
    
    
    9.48Options
outstanding at December 31, 2002
    
    
    115,000
    
    
    
    10.43Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Cancelled
    
    
    (95,000
    )
    
    
    9.61Options outstanding at December 31, 2003
    
    
    20,000
    
    
    
    14.31Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Cancelled
    
    
    (20,000
    )
    
    
    14.31Options outstanding at December 31, 2004
    
    
    0
    
    
    
    N/A
 - 48 -




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##### Table of Contents



MATRIXX INITIATIVES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Other Stock Option Information The weighted average fair value of options granted was $8.49, $4.59 and $4.14 in 2004, 2003
and 2002, respectively. The following table summarizes information about the Companys two stock-based compensation
plans outstanding at December 31, 2004: Options Outstanding
    
    

Options ExercisableWeighted
    
    
    WeightedRemaining
    
    
    Average
    
    
    
    
    
    
    WeightedRange of
    
    Number
    
    
    Contractual
    
    
    Exercise
    
    
    Number
    
    
    AverageExercise Prices
    
    Outstanding
    
    
    Life in Years
    
    
    Price
    
    
    Exercisable
    
    
    Exercise Price$6.90-$8.59
    
    
    436,400
    
    
    
    4.79
    
    
    $
    8.04
    
    
    
    215,027
    
    
    $
    7.90$9.63-$12.30
    
    
    60,000
    
    
    
    3.54
    
    
    
    10.08
    
    
    
    41,666
    
    
    
    10.27$17.90-$18.02
    
    
    285,000
    
    
    
    6.03
    
    
    
    17.92
    
    
    
    25,000
    
    
    
    18.02$6.90-$18.02
    
    
    781,400
    
    
    
    5.14
    
    
    
    11.80
    
    
    
    281,693
    
    
    
    9.15
 Compensation Expense The valuation of the options and warrants granted to employees is based on the difference
between the exercise price and the market value of the stock on the measurement date. The valuation
of the options granted to non-employees is estimated using the Black-Schools option pricing model. The Company issued 12,850 and 8,500 shares of its restricted common stock to employees in 2003
and 2002, respectively, pursuant to the Companys restricted stock bonus program. The Company
recorded compensation expense of $227,959, and $71,486 in 2003 and 2002, respectively, for the
value of the shares issued. The weighted average fair value of the restricted common stock at the
date of grant for the shares issued in 2003 was $17.74 per share, and $8.41 per share for shares
issued in 2002. During 2004 1,737 shares of the Companys restricted stock, that had been
previously granted, were forfeited and the Company recorded an expense reversal of $23,350. In
2004, the Company recorded $255,853 in compensation expense for shares of restricted stock to be
issued to employees in early 2005. Financing Warrants In connection with the Companys Securities Purchase Agreement for the sale of senior notes
and Series A preferred stock in 1999, the Company issued warrants to the lenders. The Company
issued a total of 60,000 common stock purchase warrants as a finders fee in connection with the
financing. Each warrant is exercisable to purchase one share of the Companys common stock, 30,000
at $11.70 per share through June 1, 2002 and 30,000 at $15.00 per share through June 1, 2004.
During 2004, 15,000 warrants were exercised and 45,000 warrants expired unexercised. - 49 -




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##### Table of Contents



MATRIXX INITIATIVES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) 9. Commitments and Contingencies Leases The Company leases its office facilities under a long-term leasing arrangement. The following
is a schedule of future minimum lease payments at December 31, 2004 under the Companys operating
leases that have initial or remaining non-cancelable lease terms in excess of one year, including
the office lease agreement signed in January 2004: Year EndingDecember 31,
    
    Leases2005
    
    $
    118,5872006
    
    
    121,8522007
    
    
    125,1272008
    
    
    2009
    
    
    Total Minimum Lease Payments
    
    $
    365,566
 Rental expense charged to operations was $154,738, $267,596, and $256,804 for the years ended
December 31, 2004, 2003, and 2002, respectively. Officer Indemnification Under the organizational documents, the Companys officers, employees, and directors are
indemnified against certain liability arising out of the performance of their duties to the
Company. The Company also has an insurance policy for its directors and officers to insure them
against liabilities arising from the performance of their duties required by their positions with
the Company. The Companys maximum exposure under these arrangements is unknown as this would
involve future claims that may be made against the Company that have not yet occurred. Litigation The Company is involved in various product liability claims and other legal proceedings that
arise from time to time in the ordinary course of business. The Company does not believe any of
them will have a material adverse affect on the Companys financial position but continue to have a
significant impact on the results of operations as the Company defends itself against the various
claims. Litigation is inherently unpredictable, and excessive verdicts do occur. Although the
Company believes it has valid defenses in these matters, the Company could incur, in the future,
judgments or enter into settlements of claims that could have a material adverse affect on the
Companys financial position or results of operations in any particular period. Among the principal matters pending to which the Company is a party are the following: Product Liability Matters Litigation relating to Zicam Cold Remedy nasal gel arises from claims that the product causes
the permanent loss of taste and smell, or anosmia. The Company feels the studies that have been
conducted and reviewed by independent medical experts and other evidence support our contention
that these claims are unfounded. From late 2003 through February 2004, we have been sued by over 340 individuals in
approximately 32 different lawsuits generally alleging that our Zicam Cold Remedy product caused
damage to the sense of smell and/or taste. Two of these lawsuits were filed as class action
lawsuits covering named and unnamed plaintiffs, although one of the class action lawsuits has been
dismissed, as have the claims of several individual plaintiffs. - 50 -




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MATRIXX INITIATIVES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Various defendants in the lawsuits, including manufacturers and retailers, have sought
indemnification or other recovery from us for damages related to the lawsuits. Theses cases are all
in the early stages and we expect the first trial to begin towards the end of March, 2005. Securities Litigation Matters Two class action lawsuits were filed in April and May 2004 against the Company, our President
and Chief Executive Officer, Carl J. Johnson, and our Executive Vice President and Chief Financial
Officer, William J. Hemelt, alleging violations of federal securities laws. On January 18, 2005
the cases were consolidated and the court appointed James V. Sircusano 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 Sircusano, 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 product,
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 of the product liability lawsuits described
above. We believe the claims made in these lawsuits are without merit. We intend to vigorously
defend ourselves in these matters. In accordance with and subject to the provisions of the
Companys Certificate of Incorporation, Messrs. Johnson, Hemelt, and Clarot will be indemnified by
the Company for their expenses incurred in defending these lawsuits and for any other losses which
they may suffer as a result of these lawsuits. If any liability were to result from these
lawsuits, we believe our financial results could be materially impacted. 10. Employee Benefit Plan Effective September 1, 1997, the Company adopted a Simple Retirement Account Plan for
employees. The Company shall make a matching contribution for each employee in an amount equal to
each employees Salary Reduction Contributions for the Plan year of up to 3% of the employees
compensation for the Plan year. The Company made matching contributions of $35,255 and $20,539 for
the years ended December 31, 2003 and 2002, respectively. Each employee shall be fully vested at
all times in their contribution and the Companys matching contributions. Effective January 1, 2004, the Company adopted a Qualified 401K Retirement Account Plan,
meeting the Safe Harbor Provisions of the IRS, for employees. The Company shall make a matching
contribution for each employee in an amount relative to each employees Salary Reduction
Contributions for the year of up to 4% of the employees compensation for the Plan year. The
Company made matching contributions of $53,133 for the year ended December 31, 2004. Each employee
shall be fully vested at all times in their contribution and the Companys matching contributions. 11. Concentration of Credit Risk and Major Customers Financial instruments which potentially subject the Company to concentrations of credit risk
consist principally of temporary cash investments and accounts receivable. The Company places its
cash equivalents with high credit quality financial institutions and limits its credit exposure
with any one financial institution. The Companys cash in its banks exceeds the federally insured
limits. The Company provides credit in the normal course of business to many of the nations top
drug stores and mass merchandisers. The Companys accounts receivable are due from customers
located throughout the United States. The Company performs periodic credit evaluations of its
customers financial condition and generally requires no collateral. The Company maintains reserves
for potential credit losses, and such losses have not exceeded managements expectations. The Companys sales are from 16 products marketed under the Zicam brand name, with a majority
of its sales attributable to its Cold Remedy products, which subjects the Company to significant
financial exposure. If future sales of these products decrease, and in particular sales of its Cold
Remedy formula, the Companys operations could be materially adversely affected. - 51 -




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The Company currently relies on six different manufacturers to produce its 16 products, but
has identified alternative suppliers for each of the products. However, the Company has not made
any purchases from these alternative suppliers. MATRIXX INITIATIVES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) Sales to major customers, which comprised 10% or more of net sales, for the years ended
December 31, 2004, 2003 and 2002 were as follows: 2004
    
    
    2003
    
    
    2002Customer A
    
    
    20.3
    %
    
    
    16.9
    %
    
    
    18.2
    %Customer B
    
    
    12.9
    %
    
    
    14.4
    %
    
    
    *Customer C
    
    
    11.7
    %
    
    
    *
    
    
    
    11.0
    %
   *
    
    Less than 10% 12. Fair Value of Financial Instruments Disclosures about Fair Value of Financial Instruments for the Companys financial instruments
are presented in the table below. These calculations are subjective in nature and involve
uncertainties and significant matters of judgment and do not include income tax considerations.
Therefore, the results cannot be determined with precision and cannot be substantiated by
comparison to independent market values and may not be realized in actual sale or settlement of the
instruments. There may be inherent weaknesses in any calculation technique, and changes in the
underlying assumptions used could significantly affect the results. The following table presents a
summary of the Companys financial instruments as of December 31, 2004 and 2003: 2004
    
    
    2003Carrying
    
    
    Estimated
    
    
    Carrying
    
    
    EstimatedAmount
    
    
    Fair Value
    
    
    Amount
    
    
    Fair ValueFiancial AssetsCash and cash equivalents
    
    $
    12,694,486
    
    
    $
    12,694,486
    
    
    $
    10,682,614
    
    
    $
    10,682,614Restricted cash
    
    $
    5,000,000
    
    
    $
    5,000,000
    
    
    $
    
    
    
    $
    Financial LiabilitiesLong-term debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 The carrying amounts for cash and cash equivalents, receivables, accounts payable and accrued
expenses approximate fair value because of the short maturities of these instruments. - 52 -




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MATRIXX INITIATIVES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued) 13. Selected Quarterly Financial Data (Unaudited) Selected unaudited quarterly financial data for the years 2004 and 2003 are summarized below: Fiscal Year 2004 Quarters1st
    
    
    2nd
    
    
    3rd
    
    
    4thNet sales
    
    $
    12,932,566
    
    
    $
    3,391,721
    
    
    $
    16,904,856
    
    
    $
    27,001,792Gross profit
    
    
    8,833,341
    
    
    
    2,320,176
    
    
    
    11,670,250
    
    
    
    19,002,346Net income (loss) from
operations
    
    
    596,638
    
    
    
    (989,396
    )
    
    
    3,676,984
    
    
    
    1,673,245Net income (loss) per basic
share from operations
    
    
    0.06
    
    
    
    (0.10
    )
    
    
    0.39
    
    
    
    0.18Net income (loss) per diluted
share from operations
    
    
    0.06
    
    
    
    (0.10
    )
    
    
    0.39
    
    
    
    0.17Net income (loss)
    
    
    596,638
    
    
    
    (989,396
    )
    
    
    3,676,984
    
    
    
    1,673,245
   (1)
    
    Net income (loss) per common share is computed individually for each of the quarters
presented, therefore, the sum of the quarterly net income (loss) per share may not
necessarily equal the total for the year. Fiscal Year 2003 Quarters1st
    
    
    2nd
    
    
    3rd
    
    
    4thNet sales
    
    $
    8,901,675
    
    
    $
    2,994,419
    
    
    $
    13,374,004
    
    
    $
    18,225,665Gross profit
    
    
    6,252,630
    
    
    
    1,848,835
    
    
    
    9,158,970
    
    
    
    12,780,997Net income (loss) from
operations
    
    
    117,354
    
    
    
    (566,999
    )
    
    
    2,762,998
    
    
    
    1,030,965Net income (loss) per basic
share from operations
    
    
    0.01
    
    
    
    (0.06
    )
    
    
    0.29
    
    
    
    0.11Net income (loss) per diluted
share from operations
    
    
    0.01
    
    
    
    (0.06
    )
    
    
    0.29
    
    
    
    0.11Net income (loss)
    
    
    117,354
    
    
    
    (566,999
    )
    
    
    2,762,998
    
    
    
    1,030,965
    - 53 -




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##### Table of Contents



ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (cont.) (a)2. Financial Statement Schedules Financial statement schedules have been omitted because either they are not required or are
not applicable, or because the information has been included in the consolidated financial
statements or notes thereto contained in this Annual Report on Form 10-K. (a)3. Exhibits Exhibit No.
    
    Title3.01
    
    Certificate of Incorporation and Amendments thereto of the
Registrant (1)3.02
    
    Bylaws of the Registrant (1)4.01
    
    Rights Agreement dated as of July 22, 2002 by and between the
Registrant and Corporate Stock Transfer, Inc. (3)10.01
    
    *1995 Stock Option Plan (5)10.02
    
    *Amendment to 1995 Stock Option Plan (5)10.03
    
    Credit Agreement among the Registrant, Gel Tech, L.L.C. (now
Zicam, LLC) and Comerica Bank (6)10.04
    
    Second Modification Agreement dated May 15, 2003 among the
Registrant, Zicam, LLC and Comerica Bank (4)10.05
    
    Confidentiality and Non-Competition Agreement among the
Registrant, Gel Tech, L.L.C. (now Zicam, LLC), Zensano, Inc.,
Zengen, Inc. and certain other individuals (7)10.06
    
    *Employment Agreement between the Registrant and Carl J.
Johnson (8)10.07
    
    *First Amendment to Employment Agreement between the
Registrant and Carl J. Johnson (2)10.08
    
    *2001 Stock Incentive Plan (9)10.09
    
    *Summary of Matrixx Initiatives, Inc. Director Restricted
Stock Purchase Program (6)10.10
    
    Manufacturing Agreement with BioZone Laboratories (11)10.11
    
    ** *Summary of Revised Director Compensation Structure for
Non-Employee Directors10.12
    
    *Matrixx Initiatives, Inc. 2001 Long-Term Incentive Plan Grant
of Incentive Stock Option (12)
 - 54 -




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##### Table of Contents



Exhibit No.
    
    Title10.13
    
    *Matrixx Initiatives, Inc. 2001 Long-Term Incentive Plan
Restricted Stock Program Agreement (12)10.14
    
    Code of Ethics (10).10.15
    
    Manufacturing Agreement with Applied Laboratories, Inc. (13)10.16
    
    ** Third Modification Agreement
dated August 4, 2004 among the Registrant, Zicam, LLC and Comerica Bank21
    
    Subsidiaries of the Registrant (10)23.1
    
    **Consent of Mayer Hoffman McCann P.C., independent auditor of
the Company31.1
    
    **Certification of CEO Pursuant to Section 302 of the
Sarbanes-Oxley Act of 200231.2
    
    **Certification of CFO Pursuant to Section 302 of the
Sarbanes-Oxley Act of 200232.1
    
    **Certification of CEO pursuant to 18 U.S.C. Section 1350.32.2
    
    **Certification of CFO pursuant to 18 U.S.C. Section 1350.
   *
    
    Indicates management compensatory contract, plan or arrangement.**
    
    Filed with this Form 10-K.  (1)
    Incorporated by reference to the Registrants Amendment No. 1 to Form
8-A, file No. 000-27646, as filed on June 18, 2002.(2)
    Incorporated by reference to the Registrants Report on Form 10-K for
the fiscal year ended December 31, 2001, file number 000-27646.(3)
    Incorporated by reference to the Registrants registration statement
on Form 8-A, filed July 23, 2002, file number 000-27646.(4)
    Incorporated by reference to the Registrants Report on Form 10-Q for
the quarter ended June 30, 2003, file number 000-27646.(5)
    Incorporated by reference to the Registrants Registration Statement
on Form SB-2 declared effective by the Commission on April 24, 1996,
file number 333-870.(6)
    Incorporated by reference to the Registrants Report on Form 10-Q for
the quarter ended June 30, 2002, file number 000-27646.(7)
    Incorporated by reference to the Registrants Report on Form 8-K
filed December 14, 2001, file number 000-27646.(8)
    Incorporated by reference to the Registrants Report on Form 10-Q for
the quarter ended June 30, 2001, file number 000-27646. - 55 -




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##### Table of Contents



(9)
    Incorporated by reference to the Registrants definitive proxy
statement on Schedule 14A, filed October 17, 2001, file number
000-27646.(10)
    Incorporated by reference to the Registrants Report on Form 10-K for
the fiscal year ended December 31, 2003, file number 001-31404.(11)
    Incorporated by reference to the Registrants Report on Form 8-K
filed October 28, 2004, file number 001-31404.(12)
    Incorporated by reference to the Registrants Report on Form 8-K
filed February 11, 2005 file number 001-31404.(13)
    Incorporated by reference to the Registrants Report on Form
10-Q filed November 10, 2004 file number 001-31404. - 56 -




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##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto
duly authorized, in Phoenix, Arizona, on March 14, 2005. MATRIXX INITIATIVES, INC.By:
    
    /s/ Carl J. JohnsonCarl J. JohnsonPresident and Chief Executive Officer
 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been
signed below by the following persons on behalf of the Registrant and in the capacities and on the
dated indicated: Signature
    
    Title
    
    Date/s/ Edward E. Faber
    
    Chairman of the Board of Directors
    
    March 14, 2005Edward E. Faber/s/ Carl J. Johnson
    
    President, Chief Executive Officer and Director
    
    March 14, 2005Carl J. Johnson/s/ William C. Egan
    
    Director
    
    March 14, 2005William C. Egan/s/ Edward J. Walsh
    
    Director
    
    March 14, 2005Edward J. Walsh/s/ L. White Matthews, III
    
    Director
    
    March 14, 2005L. White Matthews, III/s/ Michael A. Zeher
    
    Director
    
    March 14, 2005Michael A. Zeher/s/ Lori Bush
    
    Director
    
    March 14, 2005Lori Bush/s/ William J. Hemelt
    
    Executive Vice President,
    
    March 14, 2005Chief Financial OfficerWilliam J. Hemelt
    
    (Principal FinancialOfficer & PrincipalAccounting Officer), andTreasurer
 - 57 -




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##### Table of Contents



Exhibit Index Exhibit No.
    
    Title3.01
    
    Certificate of Incorporation and Amendments thereto of the
Registrant (1)3.02
    
    Bylaws of the Registrant (1)4.01
    
    Rights Agreement dated as of July 22, 2002 by and between the
Registrant and Corporate Stock Transfer, Inc. (3)10.01
    
    *1995 Stock Option Plan (5)10.02
    
    *Amendment to 1995 Stock Option Plan (5)10.03
    
    Credit Agreement among the Registrant, Gel Tech, L.L.C. (now
Zicam, LLC) and Comerica Bank (6)10.04
    
    Second Modification Agreement dated May 15, 2003 among the
Registrant, Zicam, LLC and Comerica Bank (4)10.05
    
    Confidentiality and Non-Competition Agreement among the
Registrant, Gel Tech, L.L.C. (now Zicam, LLC), Zensano, Inc.,
Zengen, Inc. and certain other individuals (7)10.06
    
    *Employment Agreement between the Registrant and Carl J.
Johnson (8)10.07
    
    *First Amendment to Employment Agreement between the
Registrant and Carl J. Johnson (2)10.08
    
    *2001 Stock Incentive Plan (9)10.09
    
    *Summary of Matrixx Initiatives, Inc. Director Restricted
Stock Purchase Program (6)10.10
    
    Manufacturing Agreement with BioZone Laboratories (11)10.11
    
    ** *Summary of Revised Director Compensation Structure for
Non-Employee Directors10.12
    
    *Matrixx Initiatives, Inc. 2001 Long-Term Incentive Plan Grant
of Incentive Stock Option (12)




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##### Table of Contents



Exhibit No.
    
    Title10.13
    
    *Matrixx Initiatives, Inc. 2001 Long-Term Incentive Plan
Restricted Stock Program Agreement (12)10.14
    
    Code of Ethics (10).10.15
    
    Manufacturing Agreement with Applied Laboratories, Inc. (13)10.16
    
    ** Third Modification Agreement
dated August 4, 2004 among the Registrant, Zicam, LLC and Comerica Bank21
    
    Subsidiaries of the Registrant (10)23.1
    
    **Consent of Mayer Hoffman McCann P.C., independent auditor of
the Company31.1
    
    **Certification of CEO Pursuant to Section 302 of the
Sarbanes-Oxley Act of 200231.2
    
    **Certification of CFO Pursuant to Section 302 of the
Sarbanes-Oxley Act of 200232.1
    
    **Certification of CEO pursuant to 18 U.S.C. Section 1350.32.2
    
    **Certification of CFO pursuant to 18 U.S.C. Section 1350.
   *
    
    Indicates management compensatory contract, plan or arrangement.**
    
    Filed with this Form 10-K.  (1)
    Incorporated by reference to the Registrants Amendment No. 1 to Form
8-A, file No. 000-27646, as filed on June 18, 2002.(2)
    Incorporated by reference to the Registrants Report on Form 10-K for
the fiscal year ended December 31, 2001, file number 000-27646.(3)
    Incorporated by reference to the Registrants registration statement
on Form 8-A, filed July 23, 2002, file number 000-27646.(4)
    Incorporated by reference to the Registrants Report on Form 10-Q for
the quarter ended June 30, 2003, file number 000-27646.(5)
    Incorporated by reference to the Registrants Registration Statement
on Form SB-2 declared effective by the Commission on April 24, 1996,
file number 333-870.(6)
    Incorporated by reference to the Registrants Report on Form 10-Q for
the quarter ended June 30, 2002, file number 000-27646.(7)
    Incorporated by reference to the Registrants Report on Form 8-K
filed December 14, 2001, file number 000-27646.(8)
    Incorporated by reference to the Registrants Report on Form 10-Q for
the quarter ended June 30, 2001, file number 000-27646.




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##### Table of Contents



(9)
    Incorporated by reference to the Registrants definitive proxy
statement on Schedule 14A, filed October 17, 2001, file number
000-27646.(10)
    Incorporated by reference to the Registrants Report on Form 10-K for
the fiscal year ended December 31, 2003, file number 001-31404.(11)
    Incorporated by reference to the Registrants Report on Form 8-K
filed October 28, 2004, file number 001-31404.(12)
    Incorporated by reference to the Registrants Report on Form 8-K
filed February 11, 2005 file number 001-31404.(13)
    Incorporated by reference to the Registrants Report on Form
10-Q filed November 10, 2004 file number 001-31404.