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SECURITIES AND EXCHANGE COMMISSION Washington, D.C.
20549-1004
   FORM 10-K (Mark One)þ
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2003 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transaction period from _______ to ________ Commission File No. 0-27646 MATRIXX INITIATIVES, INC.  Delaware(State or Other Jurisdiction
    
    87-0482806of Incorporation or Organization)
    
    (I.R.S. Employer Identification No.)
 4742 N. 24th
Street 
Suite 455
Phoenix, AZ 85016
602-385-8888
(Address of principal executive
offices, Issuer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




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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). YES
o   NO þ As of March 1, 2004, 9,479,601 shares of the Registrants Common Stock
were outstanding. As of March 1, 2004, the market value of the Registrants
Common Stock (based on the closing price of the shares on the Nasdaq National
Market), excluding shares held by affiliates, was approximately $95 million. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrants definitive proxy statement prepared in
connection with the Registrants 2004 annual meeting of stockholders are
incorporated by reference into Part III, Items 10, 11, 12, 13 and 14 of this
Form 10-K.




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PagePART
I
    
    
    2ITEM 1. BUSINESS
    
    
    2ITEM 2. DESCRIPTION OF PROPERTY
    
    
    7ITEM 3. LEGAL PROCEEDINGS
    
    
    8ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    8EXECUTIVE OFFICERS OF MATRIXX
    
    
    8PART II
    
    
    10ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
    
    
    10ITEM 6. SELECTED FINANCIAL DATA
    
    
    11ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
    
    
    12CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS AND RISK FACTORS
    
    
    21ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    27ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
    
    
    28ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
    
    
    28ITEM 9A. CONTROLS AND PROCEDURES
    
    
    28PART III
    
    
    28ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
    
    
    28ITEM 11. EXECUTIVE COMPENSATION
    
    
    28ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
    
    
    29ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
    
    
    30ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    30ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
    
    
    30SIGNATURES
    
    
    61EX-10.1EX-14EX-21EX-23.1EX-23.2EX-31.1EX-31.2EX-32.1EX-32.2
  Unless otherwise indicated in this Form 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. -i-




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PART I 
 ITEM 1. BUSINESS Introduction We develop, produce, market and sell innovative, over-the-counter (OTC)
pharmaceutical products with an emphasis on those which utilize unique or novel
delivery systems. Through our subsidiary, Zicam, LLC, we produce, market and
sell 10 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; and Zicam
Nasal Moisturizer, a non-medicated nasal moisturizer. 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 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 were relocated in February 2004 to 4742 N.
24th Street, Suite 455, Phoenix, AZ 85016 and our telephone number has changed
to (602) 385-8888. Markets and Company Products All 10 of our Zicam products are targeted at the cough and cold market
category. That market, which is estimated at more than $3 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, which accounted for
approximately 40% of net sales during 2003 is a homeopathic nasal gel product
based on our patented zincum gluconicum delivery system. The original product
in a nasal pump bottle was introduced in 1999. Sales of Zicam Cold Remedy have
grown steadily since its introduction as customer awareness of the product has
increased as 2




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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, zincum gluconicum 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 two other products in the cough and
cold category (including competing generic copies of that product) are able to
make a similar claim. 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, though we have been limited in meeting
consumer demand, particularly for the adult swab product, due to production
constraints of our supplier. We experienced a backlog in orders 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. We will continue to receive
shipments of the old product design until the expiration of the manufacturing
contract on March 31, 2004. Because of the time required for start-up,
deliveries of the new swab did not alleviate the most recent backlog until
early March 2004. The kids size swab product has not been in a back-order
situation. We expect that the manufacturer of the new swab design will be able
to meet our future requirements in the next cold season, but we intend to build
inventory of swab products prior to the next cold season to further ensure our
ability to meet future demand for the swab products. The two swab products
accounted for approximately 25% of net sales for 2003. We introduced 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. We expect future distribution of these
three products will increase significantly, as initially most major national
retailers sold only one or two of these new products. These three products
accounted for almost 15% of our net sales in 2003. 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. Zicam
Allergy Relief accounted for almost 10% of net sales for 2003. Three other Zicam nasal gel products were introduced 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 3




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gel matrix to help ensure constant, soothing relief for irritated nasal
membranes. While greater retail distribution opportunities exist, these three
products contributed approximately 10% of total 2003 net sales. We believe
continued growth in sales from these three products is dependent on achieving
much wider distribution among retailers, and in particular, among large
nation-wide food, drug and mass marketers. Business Strategy Our objective is to become a recognized leader in providing OTC
pharmaceutical products which utilize unique or novel delivery systems. To
achieve our objective, the key elements of our business strategy include the
following: Expanding Marketing Efforts for Existing Products: We intend to continue
to develop and refine our sales and marketing efforts to increase market
penetration of our Zicam products in U.S. 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. Capitalizing on Our Nasal Gel Technology and Know-How: We intend to
leverage our nasal gel technology and know-how to develop additional gel
delivery system product offerings that complement the current Zicam products.
Additional gel technology products may include over-the-counter pharmaceutical
ingredients that can be effectively delivered through our nasal gel delivery
system. We believe extending the Zicam product line in this way will bring
additional consumer awareness and expand our product presence and support from
retailers. 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
unique and proprietary consumer healthcare product 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 the cough and cold market category in which we
currently operate. Extending Sales Into New Markets: We continue to explore expanding sales
into appropriate international markets where sales prospects are favorable.
Because of the complex and multiple regulatory environments, languages,
customs, logistics and working capital requirements involved in developing
these markets, we are exploring possible relationships with multi-national
business organizations and established international distributors capable of
introducing products and competing in international markets. However, we do
not expect any revenue or net income impact in the near future. 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 retail outlet in the country. Our
seven other Zicam products have not achieved the same level of distribution,
though two national retailers currently carry all 10 Zicam products. We are
highly dependent on a small group of large national retailers for our product
distribution, such that our top fifteen customers accounted for more than 80%
of our net sales in 2003, 4




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and two customers, Wal-Mart and Walgreens, each accounted for more than
10% of our net sales in 2003. Our agreements with our customers generally
provide for their ability to return unsaleable merchandise, including 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, other than that which occurred in
connection with excess production of Zicam Cold Remedy in late 1999 and early
2000 in connection with the original introduction of the product, which
resulted in out-of-date products two years later. 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
10 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 is responsible for sourcing all raw materials used in its production of
our products from third party suppliers, which are widely available. With the
exception of a contract with Innovative Swab Technologies for the old swab
design, which expires on March 31, 2004, we rely on individual production
orders to meet our needs from these suppliers. However, 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,
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
manufacturers 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 and December 31, 2002, we had a backlog of swab
orders of approximately $0.4 million and $1.3 million, respectively. The
backlog in 2002 was not alleviated until the end of the cold season in late
March 2003. The backlog in December 2003 was eliminated in early March 2004
due to the additional supply of swab products which became available through
the production of the new swab design. The backorder situation that occurred
in December 2003 was due to the inability of our original swab
product manufacturer, Innovative Swab Technologies, to
increase production, and the extreme demand for the product that was
experienced in December 2003 as a result of the severe cold season. We believe
we should be able to meet our anticipated higher demand for this product in the
2004-2005 cold season by building inventories throughout the year. In
addition, we possess a license for the new swab design from DEKA development,
which allows us to control the production of the new swab product. We incurred 5




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approximately $100,000 in fines from retailers as a result of our failure
to meet their order requirements in December 2002. It is possible that
additional fines may be incurred in 2004 as a result of the back order in late
2003 that continued into early 2004, though none have as yet been assessed. Research and Development Research and development is an important part of our business.
Expenditures in 2003 reflect costs associated with the three new products that
we introduced in 2003, costs associated with developing the new swab design and
expenditures on products that we intend to introduce in 2004 and future years.
We expect to continue to commit 6% of net sales on research and development in
2004 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 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 new 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 and Zicam Sinus Relief 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 by the FDA of such an inquiry. Environmental Matters Compliance with environmental rules and regulations did not significantly
affect our earnings or competitive position during 2003. 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. Trademarks, Trade Names, and Proprietary Rights We have been issued two patents (#6,080,783 and #6,365,624 B1) from the
U.S. Patent and Trademark Office 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 have filed applications for similar patents for Zicam Cold
Remedy in several other countries, including Canada, Mexico, the European
Union, Hong Kong, Japan, Korea, China, Brazil and India, as well as additional
applications in the United States. 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 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 a registered
trademark for Zicam in the United States, the European Union, Japan and
Australia and have applied for similar trademark protection in other countries,
including Mexico, China, 6




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Taiwan and Brazil. We anticipate that we will continue to file for patent
and trademark protection for the other products that 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 on
intellectual property of others. Further, patent 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, 2003 we employed 15 people in our Phoenix, Arizona
headquarters office. The 15 employees consist of six executive officers and
individuals responsible for administrative, operations, marketing, sales,
research and development, regulatory compliance, investor relations 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. Backlog Except as described above regarding the backlog we experienced in 2002 and
again experienced in December 2003 with respect to our swab products, we did
not experience any product backlog in 2003. As of each of year-end 2003 and
2002, the backlog was $0.4 million and $1.3 million, respectively for our swab
product. Competition All of the Zicam products compete in the highly competitive cough and cold
and allergy markets with a vast number of well-established brands marketed by
large pharmaceutical and consumer products companies. Participants in the
cough and cold and allergy 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.
Specifically, regarding Zicam Cold Remedy, our flagship product, we emphasize
its ability to reduce the duration and severity of the common cold. Only two
other products in the category (including competing generic copies) are able to
make a similar claim. 
 ITEM 2. DESCRIPTION OF PROPERTY Prior to February 2004, we leased office space at 2375 E. Camelback Road
in Phoenix, Arizona for our corporate offices. In February 2004 we vacated our
Camelback Road offices and commenced leasing office space at 4742 N. 24th
Street in Phoenix, Arizona for a period of four years. The new offices will provide
needed space for the additional personnel we intend to hire in 2004 while
reducing our monthly rental expense. Warehouse storage and shipping of our
finished goods are provided by contract 7




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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 its products. From December 2003 through early
March 2004, we were sued by over seventy individuals in six different lawsuits
(including one lawsuit which has not yet been served on the Company) generally
alleging that our Zicam Cold Remedy nasal pump product caused damage to the
sense of smell and/or taste. The cases are Christensen et al. vs.
Matrixx Initiatives, Inc. et al, filed October 13, 2003 in the
United States District Court, Western District of Michigan, Southern
Division, Case No. 4:03DV0146; Sutherland vs. Matrixx
Initiative, Inc. et al., filed December 18, 2003 in the Circuit
Court of Etowah, Alabama, Case No. CV-2003-1635-WHR (moved to United
States District Court for the Northern District of Alabama, Middle
Division); Nelson vs. Matrixx Initiatives, Inc. et al., filed
December 8, 2003 in the Los Angeles Superior Court, Case No.
YC048136; 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; 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 (moved to United States District Court for the District of
Arizona, Case No. 04-CV-513);
and 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. An investigative news report by a national network program that was
subsequently featured by several local stations across the country, which
suggested the possibility of Zicam Cold Remedy negatively impacting a persons
sense of smell and/or taste seemed to be related to the filing of the lawsuits.
Also, to our knowledge, at least two plaintiffs law firms are actively
soliciting potential claimants through the internet and other media. As a
result, additional lawsuits may be filed against the Company. It is very early
in the discovery phase of the six lawsuits so it is unlikely than any of the
cases will proceed to trial before the first quarter of 2005. It appears that
each of the lawsuits, as well as the news media reports, is based on research
and allegations regarding a connection between zinc sulfate and loss of sense
of smell. Zicam Cold Remedy contains zinc gluconate, not zinc sulfate, which
has very different properties than zinc sulfate. We believe the
allegations
relating to Zicam Cold Remedy are inappropriate and misleading. 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 were no indications in
either group of an impairment to 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 cause 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 have submitted all six lawsuits
to our insurance carrier. 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 to the extent that such liability is not covered by
insurance, as well as by the adverse publicity that may result. 
 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 2003, 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 his 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. 8




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Carl J. Johnson, 55
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 20 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, 50
Executive Vice President, Operations,
Chief Financial Officer, Treasurer
and Secretary
    
    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. 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 49
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 2003, Mr. Clarot was
named Director, Research and
Development. He 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, 39
Vice President of Administration
    
    Ms. Romero joined Matrixx in May
2000 as Manager of Investor
Relations. She was promoted to
Director of Administration in 2002
and Vice President of
Administration in January 2004.
As Vice President of
Administration, she 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
positions with Athletes Village,
Christensen & Associates and
MicroAge, Inc. Ms. Romero holds a
Bachelor of Science from Northern
Arizona University in Computer
Information Systems.
 9




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##### Table of Contents



James A. Marini, 42
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. He 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.Mike Voevodsky, 39
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 2000 to 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 has a
Masters of Business Administration
from Harvard Business School.
 
 PART II 
 ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 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 closing prices of our common stock as reported by the Nasdaq
National Market. Market PriceHigh
    
    LowFiscal Year 2002First Quarter
    
    $
    8.64
    
    
    $
    6.52Second Quarter
    
    $
    10.55
    
    
    $
    8.00Third Quarter
    
    $
    10.66
    
    
    $
    9.50Fourth Quarter
    
    $
    10.00
    
    
    $
    7.80Fiscal 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 (through March 1, 2004)
    
    $
    19.45
    
    
    $
    8.60
 As of March 1, 2004, we had approximately 7,300 record and beneficial
stockholders. 10




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##### Table of Contents



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. 
 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, 2003,
and where appropriate reflects results on a continuing and discontinued
operations basis. The financial data presented below is derived from Matrixxs
financial statements audited by independent auditors. 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)
    
    2003
    
    2002
    
    2001
    
    2000
    
    1999Net sales
    
    $
    43,496
    
    
    $
    23,548
    
    
    $
    16,072
    
    
    $
    10,817
    
    
    $
    9,593Net income (loss) Continuing Operations
    
    $
    3,344
    
    
    
    4,757
    *
    
    $
    (4,799
    )
    
    $
    (6,166
    )
    
    $
    (172
    ) Discontinued Operations
    
    $
    
    
    
    $
    
    
    
    $
    17,412
    
    
    $
    (1,971
    )
    
    $
    (601
    )Net income (loss) per share of
commonstock - basic Continuing Operations
    
    $
    .36
    
    
    $
    .50
    *
    
    $
    (0.52
    )
    
    $
    (0.69
    )
    
    $
    (0.06
    ) Discontinued Operations
    
    $
    
    
    
    $
    
    
    
    $
    1.88
    
    
    $
    (0.22
    )
    
    $
    (0.08
    )Net income (loss) per share of
commonstock - diluted Continuing Operations
    
    $
    .35
    
    
    $
    .50
    *
    
    $
    (0.52
    )
    
    $
    (0.69
    )
    
    $
    (0.06
    ) Discontinued Operations
    
    $
    
    
    
    $
    
    
    
    $
    1.88
    
    
    $
    (0.22
    )
    
    $
    (0.08
    )Dividends per share
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0Shares outstanding at year end
    
    
    9,475
    
    
    
    9,441
    
    
    
    9,432
    
    
    
    9,047
    
    
    
    8,321Total assets
    
    $
    50,077
    
    
    $
    47,185
    
    
    $
    42,507
    
    
    $
    16,981
    
    
    $
    20,028Long term obligations
    
    $
    0
    
    
    $
    0
    
    
    $
    5,254
    
    
    $
    0
    
    
    $
    2,241Stockholders equity
    
    $
    38,790
    
    
    $
    35,155
    
    
    $
    24,369
    
    
    $
    10,448
    
    
    $
    12,702
  *    Earnings for 2002 include the one-time recording of a deferred tax asset of
approximately $3.4 million. Earnings per share for 2002 exclusive of this
one-time accrual were $.14 per share. 11




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##### Table of Contents



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. We owned 60% of Zicam prior
to December 5, 2001 and 100% on and subsequent to that date. 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. Executive Summary Net sales for 2003 increased to approximately $43.5 million, or 85% above
net sales in 2002. Approximately one-half of the increase was attributable to
increased sales of Zicam Cold Remedy nasal gel products and approximately 35%
of the increase was attributable to the three new Zicam Cold Remedy oral
products introduced in September 2003. Net sales in 2003 were impacted by a
severe cold season that peaked in December 2003. However, we expect this trend
of increasing net sales to continue as we improve consumer awareness of our
products, increase distribution of our products, and introduce new products. Net income for 2003 was approximately $3.3 million. Net income in 2002
was $4.8 million including a one-time tax benefit of approximately $3.4
million. Net income in future periods will be significantly affected by the
level of sales, and the timing and amount of our advertising and research and
development expenses. Expenditures for advertising and research and
development will vary by quarter throughout the year and could be significantly
different in 2004 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s management reviews several key performance indicators.
First, we compare our annual sales and net income performance against our
stated goal of 30% annual growth for each. For 2003, we exceeded both goals
(ignoring the one-time tax benefit in 2002). We also monitor our share of the
cough and cold market. For the twelve months ended December 28, 2003, sales of
our products achieved a share of about 1.3% of the entire cough and cold market
compared to a share of 0.8% a year ago. We also measure our ability to
maintain strong gross margins on our products. During 2003, our products
averaged a gross margin of 69%, which was slightly below our target minimum of
70% due to the higher cost of the old swab product. In 2002, our gross margin
averaged 71%. In addition, we evaluate our operating performance by reviewing,
over time, our ability to decrease administrative and general costs as a
percentage of net sales. In 2003, our administrative and general costs were
50% of our net sales compared to 66% for 2002. Finally, we review the
distribution of our products by key national 12




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##### Table of Contents



retailers. In 2003, our 15 largest customers carried, on average, six of
our 10 Zicam products compared to three of our seven products in 2002. 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 generally accepted accounting principles applied on
a consistent basis. The preparation of financial statements in conformity with
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 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 142, goodwill must be tested
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. The goodwill was recently
evaluated in the third quarter of 2003 by an independent valuation firm and no
impairment was found. Accounting for 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, 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 on a quarterly basis. Should there be
a significant change in our expectations of future income, the impact of
adjusting the deferred tax valuation allowance could be significant which would
negatively impact our earnings. 13




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##### Table of Contents



Accounting for customer returns and allowances:We recognize revenues on
the sale of our products when they are shipped from our warehouse facility, 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 the liability associated
with 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 cold season, which resulted in out-of-date product two
years later. Currently, we are recording a provision of 3% of gross sales for
the seven Zicam products introduced in 2002 or earlier for potential returns
and allowances. In establishing the appropriate reserve level for the three
new Zicam products introduced in the third quarter of 2003, we reviewed the
similarities and differences of the three products relative to the seven Zicam
products for which we now have several years of product return experience.
Based on that review, we are recording a 7% provision of gross sales for these
products. We will review the return provision regularly 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
in the future 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. While the outcome of
legal proceedings cannot be predicted with certainty, 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, 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: 14




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##### Table of Contents



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
    
    
    
    15,544
    
    
    
    66Research and development
    
    
    2,557
    
    
    
    6
    
    
    
    294
    
    
    
    1Income (loss) from operations
    
    
    5,843
    
    
    
    13
    
    
    
    958
    
    
    
    4Interest and
other income - net
    
    
    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. On average, our top 15 customers, which account for approximately 85% of
our sales, carried six of our 10 products in 2003 compared to three of our
seven products in 2002. We expect to expand the distribution of our existing
products in 2004. Our principal sales focus is to secure additional retail
acceptance, particularly among the major national drug, food and mass market
retailers of all 10 of our products. We expect sales increases in future
periods from continued, albeit lower, growth rates for our existing 10 products
and from the sale of new products that we plan to introduce in 2004 and future
years. We ended the year 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. In February 2004, we began shipping our new swab
product, while we also continued to ship our old swab product. As a result, we
have eliminated the backlog for our adult swab product that existed in December
2003 and continued through February 2004. We will continue to ship the old
swab product through the end of March 2004. We believe the new swab product
can be produced at a higher rate than was possible for the old swab product and
consequently we anticipate being able to avoid swab backlog issues in the
2004-2005 cold season. 15




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##### Table of Contents



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. We expect that the cost of the new swab product that we introduced
in the first quarter of 2004 will result in a lower per unit cost of that
product in the future. 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. We believe that expense levels in future periods
will be primarily affected by the timing and amount of advertising expenses and
costs associated with new product introductions. Also, as a result of the
recent litigation against the Company described in more detail in Item 3 of
this Annual Report on Form 10-K, we expect our insurance costs will increase
when our product liability insurance policy is up for renewal in April 2004. Research and Development Research and development expense amounted to $2.6 million for 2003
compared to $294,000 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. We expect to continue to invest approximately 6% of net
sales in research and development activities in order to continue to introduce
new products in the future. Interest and Other Income - Net 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. We currently have no debt outstanding. 16




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##### Table of Contents



Income (Loss) 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. We expect that net income in future periods
will be significantly impacted by the success of our 10 current products, new
product introductions (including new products that we plan to introduce in
2004) and year-over-year changes in our advertising and research and
development budgets. 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. Results Of Operations For The Year Ended December 31, 2002 Compared To The Year Ended December 31, 2001 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 31,2002
    
    2001Net sales
    
    $
    23,548
    
    
    
    100
    %
    
    $
    16,072
    
    
    
    100
    %Cost of sales
    
    
    6,752
    
    
    
    29
    
    
    
    4,215
    
    
    
    26Gross profit
    
    
    16,796
    
    
    
    71
    
    
    
    11,857
    
    
    
    74Operating expenses
    
    
    15,544
    
    
    
    66
    
    
    
    16,964
    
    
    
    106Research and development
    
    
    294
    
    
    
    1
    
    
    
    716
    
    
    
    4Income (loss) from operations
    
    
    958
    
    
    
    4
    
    
    
    (5,823
    )
    
    
    (36
    )Interest and
other income - net
    
    
    681
    
    
    
    3
    
    
    
    174
    
    
    
    1Interest expense
    
    
    592
    
    
    
    3
    
    
    
    163
    
    
    
    1Income (loss) before provision (benefit)
income taxes andminority interest
    
    
    1,047
    
    
    
    4
    
    
    
    (5,812
    )
    
    
    (36
    )Provision for income taxes
    
    
    (3,710
    )
    
    
    (16
    )
    
    
    
    
    
    
    Minority interest
    
    
    
    
    
    
    
    
    
    
    1,013
    
    
    
    6Net income (loss) from continuing
operations
    
    $
    4,757
    
    
    
    20
    %
    
    $
    (4,799
    )
    
    
    (30
    )%
 Net Sales Net sales for 2002 increased to approximately $23.5 million, or 47% above
the 2001 sales level. Approximately one third of the $7.5 million increase in
net sales is attributable to increases in sales of Zicam Cold Remedy and
Allergy Relief, and the remaining two-thirds to sales of the five new Zicam
products introduced in late 2002. Sales of Zicam Cold Remedy and Allergy
Relief increased due 17




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##### Table of Contents



primarily to increased sales to end-use customers, and additionally, with
respect to sales of the Cold Remedy product, to the addition of sales to two
major club warehouse outlets. We introduced five new Zicam products in the third quarter of 2002: Cold
Remedy Swabs, Cold Remedy Swabs - Kids Size, Extreme Congestion Relief, Sinus
Relief and Nasal Moisturizer. The swab products in December 2002 were in a
back order situation due to the inability of our supplier to increase
production, and to higher than expected demand for the adult swab product. Cost of Sales The cost of sales for 2002 increased approximately $2.5 million or 60%
over 2001. The increase was primarily due to a 45% increase in unit sales.
The higher per unit cost of the swab products and premium production cost
associated with the two swab products contributed to the increase in cost of
sales. A decrease in manufacturing costs of Zicam Cold Remedy and Zicam
Allergy Relief partially offset this increase from the swab products. Gross Profit Gross profit for 2002 increased to approximately $16.8 million, or 42%
above the 2001 level, due to the higher sales level. Offsetting the higher
sales was the higher unit cost of sales, primarily due to the new swab
products, which is reflected in a decrease in gross profit percentage of sales
to 71% in 2002 from 74% in 2001. Operating Expenses Operating expenses decreased from approximately $17.0 million in 2001 to
$15.5 million in 2002. The decrease is largely due to the settlement and
legal expenses of $2.0 million that we incurred in 2001 related to a patent
infringement lawsuit filed against the Company by The Quigley Corporation. Our
royalty obligations to Quigley, which formed part of the settlement, ended in
March 2002. A decrease in advertising and public relations expenses of
approximately $0.6 million between the two years also contributed to our lower
operating expenses in 2002. Offsetting these decreases were increased sales
commission expense of $252,000 related to the higher level of sales, an
increase of quality control expenses primarily due to the new product analysis,
an increase in total labor expense of $223,000, higher rent expense of $169,000
reflecting a full year at our new corporate office location and higher
depreciation and amortization of $141,000. Research and Development Research and development expense amounted to $294,000 for 2002, reflecting
costs associated with the five new Zicam products that were introduced in the
year. Expenses in 2001 primarily reflect costs associated with our nicotine
gum development which we undertook in conjunction with Swedish Match AB
(Swedish Match). This development was terminated in the third quarter of
2001 following our exit from the gum business. Interest and Other Income - Net Interest and other income for 2002 amounted to approximately $681,000 or
approximately $507,000 above 2001. Approximately $391,000 of the 2002 amount
is royalty income and the remainder is largely interest income on our invested
cash. Virtually all of the 2001 income was interest income reduced by a
$250,000 write-down of an investment in a company that Matrixx had evaluated
and rejected as a possible acquisition candidate. 18




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Our interest income is largely due to the Companys invested cash position
arising from the sale of our gum business in July 2001 to Wrigley, reduced in
2002 by payments made in conjunction with our acquisition of the remaining 40%
interest in Zicam, LLC. Royalty income is from a dental gum product sold by Wrigley. We entered
into the royalty agreement with Wrigley in conjunction with the sale of our gum
assets in July 2001. Interest Expense Interest expense increased to approximately $592,000 for 2002 from
approximately $163,000 in 2001. The increase is entirely attributable to
imputed interest accrued under the note that we issued to Zensano, Inc. (now
Zengen, Inc.) in connection with our acquisition of Zensanos 40% interest in
Zicam, LLC in December 2001. Income (Loss) From Continuing Operations Before Income Tax and Minority
Interest Our income before income taxes and minority interest in 2002 was
approximately $1.0 million, an increase of more than $6.8 million from the net
loss of $5.8 million reported for 2001. The increase is due to a higher gross
profit resulting from higher net sales and a decrease in operating expenses. 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.
Income tax expense was further reduced in the period by an income tax refund of
approximately $325,000 related to a change in tax laws in 2002. Liquidity and Capital Resources Our working capital increased $7.4 million to approximately $17.6 million
at December 31, 2003 from approximately $10.2 million at December 31, 2002, due
primarily to cash provided from operations. During 2003, we experienced an increase in cash from operations of $4.5
million due to an increase in net income of $3.3 million, and various non-cash
charges to income of $2.9 million including $2.2 million of deferred income tax
expense. Also contributing to the increase in cash from operations was an
increase in accounts payable of $3.8 million and sales returns and allowances
of $0.7 million. These increases in cash were offset by an increase in
accounts receivable of $4.4 million and inventories of $1.7 million. Cash flows from investing activities used $0.4 million of cash due
principally to tooling costs and prepayment for production of our new swab
product. Cash flows from financing activities used $5.5 million due to the
repayment of our outstanding debt. We have very little capital expenditures since we rely on contract
manufacturers to produce our products. Therefore, 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 2004 and 2005. We do have working capital requirements
arising from the increase of inventory and accounts 19




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receivable in excess of the increase in accounts payable, but these vary
throughout the year reflecting the seasonal nature of our business. Currently, we do not have any debt outstanding and do not have plans to
incur additional debt in the future. We have a $2.5 million credit facility in
place with Comerica Bank which was renewed for a two-year term in May 2003. We
do not currently have any borrowings outstanding under the facility and, due to
our cash position, do not anticipate borrowing under the facility to meet our
working capital requirements. 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 are
sufficient to fund our operations and capital requirements for the next twelve
months. 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, 2003Less than
    
    
    
    
    
    
    
    
    
    AfterTotal
    
    1 year
    
    1-3 years
    
    4-5 years
    
    5 yearsLong-Term Debt Obligations
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0Capital Lease Obligations
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Operating Lease Obligations
    
    
    368,886
    
    
    
    112,772
    
    
    
    256,114
    
    
    
    0
    
    
    
    0Purchase Obligations
    
    
    1,921,000
    
    
    
    1,921,000
    
    
    
    0
    
    
    
    0
    
    
    
    0Other Long-Term
Liabilities Reflected on
the Companys Balance
Sheet under GAAP
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0Total
    
    $
    2,289,886
    
    
    $
    2,033,772
    
    
    $
    256,114
    
    
    $
    0
    
    
    $
    0
 Recently Issued Accounting Standards In July 2002, the Financial Accounting Standards Board (FASB) issued SFAS No.
146, Accounting for Costs Associated with Exit or Disposal Activities, which
replaces Emerging Issues Task Force (EITF) Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (Including Certain Costs Incurred in a Restructuring). The new
standard requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan. The statement is to be applied prospectively to exit or
disposal activities initiated after December 31, 2002. The Company adopted
SFAS No. 146 on January 1, 2003. This did not result in any impact on the
Companys financial position or results of operations. In November 2002, the FASB issued Financial Interpretation No. (FIN) 45,
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. Among other things, the
Interpretation requires guarantors to recognize, at fair value, their
obligations to stand ready to perform under certain guarantees. FIN 45 became
effective for guarantees issued or modified on or after January 1, 2003 and had
no effect on the Companys financial position or results of operations. 20




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In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest
Entities. In general, a variable entity is a corporation, partnership, trust
or any other legal structure used for business purposes that either (a) does
not have equity investors with voting rights or (b) has equity investors that
do not provide sufficient financial resources for the entity to support its
activities. FIN 46 requires a variable interest entity to be consolidated by a
company if that company is subject to a majority of the risk of loss from the
variable interest entitys activities or entitled to receive a majority of the
entitys residual returns or both. The consolidation requirements of FIN 46
apply immediately to variable interest entities created after January 31, 2003.
The consolidation requirements apply to transactions entered into prior to
February 1, 2003 in the first fiscal year or interim period beginning after
June 15, 2003, which was subsequently delayed until the fourth quarter of 2003.
Certain of the disclosure requirements apply in all financial statements
issued after January 31, 2003, regardless of when the variable interest entity
was established. The adoption of the interpretation did not have any impact on
the Companys financial statements. In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, which amends and clarifies
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under SFAS No. 133.
The Statement is effective (with certain exceptions) for contracts entered into
or modified after June 30, 2003. The adoption of this Statement had no effect
on the Companys financial position or results of operations. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. It requires
that an issuer classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances). It is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period after June 15, 2003.
The adoption of SFAS No. 150 on July 1, 2003 had no effect on the Companys
financial position or results of operations. In December 2003, the Securities and Exchange Commission (SEC) released Staff
Accounting Bulletin (SAB) No. 104, Revenue Recognition. SAB No. 104 revises
or rescinds portions of the interpretive guidance related to revenue
recognitions included in Topic 13 of the codification of the staff accounting
bulletins. SAB No. 104 became effective when issued, and adoption by the
Company did not have a material impact on its financial position or results of
operations. 
 CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS AND RISK FACTORS Forward Looking Statements This 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 expectation that the manufacturer of the new swab design will
be able to meet our requirements for the next cold season;  
    
    our intention to build inventory of swab products in 2004; 21




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
    
    our expectation that future distribution of our three new products
will increase significantly;  
    
    our belief that continued growth of our Extreme Congestion Relief,
Sinus Relief, and Nasal Moisturizer products depends on achieving wider
retail distribution;  
    
    our intention to further develop and expand our marketing efforts
to expand the market presence of our existing Zicam products and our
belief that such efforts will build brand awareness, trial and sales;  
    
    our intention to develop additional gel delivery system products
and other new products;  
    
    our expectation of committing 6% of net sales to research and
development efforts in 2004 and subsequent years;  
    
    anticipated expansion into international markets for our Zicam
products and our expectations that such international markets will not
provide any sales or revenue impact in the near future;  
    
    our expectation that net income in future periods will be
significantly impacted by the success of our 10 current products, our
future products, and year over year changes in our advertising and
research and development budgets;  
    
    our belief that our expansion of the Zicam product line will expand
our support from retailers;  
    
    our belief that our marketing efforts will continue to build brand
awareness and increase product sales;  
    
    our expectation that the trend of increasing net sales will
continue;  
    
    our belief that future Company expense levels will be primarily
affected by advertising and new product development costs and that
advertising expenses will be highest in the fourth and first quarters;  
    
    our expectation that environmental compliance-related expenses will
remain low for the foreseeable future;  
    
    our intention to vigorously defend the lawsuits that have been
recently filed against us based on claims of loss of or damage to sense
of smell and/or taste and our belief that any liability resulting from
these or other lawsuits, including any related publicity, could
materially impact our financial results;  
    
    our expectation that the cost of the new swab product will result
in a lower per unit cost of the product in the future;  
    
    our expectation as to the future expiration dates for our two
United States patents, and our intention to continue to file patent and
trademark applications in the United States and in jurisdictions
outside the United States to protect the Companys products;  
    
    our ongoing relationship with our product suppliers including,
their ability to meet our production needs in the future; 22




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
    
    our having no plans to directly manufacture and store our products;  
    
    our expectation of net income in future periods;  
    
    the effects of interest rate changes on our financial position;  
    
    our expectation that we will not pay dividends in the foreseeable future;  
    
    our belief that we will not need to borrow on our credit facility; and  
    
    our belief that our current capital resources and credit line are
sufficient to fund the Company for the next 12 months. 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 Form 10-K, including those set forth in the sections
entitled Business and Managements Discussion and Analysis of Financial
Condition and Results of Operations, and under the subheading below entitled
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) lack of market acceptance for or uncertainties concerning the efficacy or
safety of our current and future products or regulatory actions involving our
products, (iii) difficulties in increasing production or maintaining sufficient
inventories to meet unexpectedly high demand in the short term, including our
inability to resolve product backlog and product pricing issues, (iv) financial
difficulties encountered by one or more of our principal customers, (v)
difficulties in obtaining additional capital for marketing, research and
development, and other expenses, and (vii) material litigation involving patent
and contractual claims, product liabilities and consumer issues. Forward-looking statements contained in this Form 10-K speak only as of
the date of this 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 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 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 23




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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, 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, we
cannot be certain that demand for these products will grow. If any
unanticipated problem arises concerning the efficacy or safety of any of our
products, 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. 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 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 FDA and FTC rules, we are required to obtain
scientific data to support any health claims we make concerning our products.
Although we have neither provided nor been requested to provide any scientific
data to the FDA or FTC in support of claims regarding our Zicam products, we
have obtained scientific data for our products. We cannot be certain, however,
that the scientific data we have obtained in support of our claims will be
deemed acceptable to 24




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the FDA or FTC, should either agency request any such data in the future.
If the FDA or the FTC requests any supporting information, and we are unable to
provide support that is acceptable to the FDA or the FTC, either agency 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 comply with these regulations, 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. 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, causing our business
and operating results to suffer The consumer health products industry is highly competitive. We compete
with companies in the United States and abroad 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
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 25




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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 We are subject to significant liability should use or consumption of our
products cause injury, illness or death. 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 on reasonable terms. In such regard, we may
be required to structure self-insurance against product liability claims. Any
substantial increase in insurance premiums and/or the costs of any
such self-insurance program would have a material adverse effect
on our results of operations and financial condition. A product liability claim, such
as those described above in this Report on Form 10-K, 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 a claim, 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. This in turn could materially adversely affect
our results of operations and financial condition. 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 continue to experience product backlogs At the end of fiscal 2002, we had approximately $1.3 million in backlog of
swab orders and at the end of fiscal 2003, we had approximately $0.4 million in
backlog of swab orders. We have undertaken significant measures to remedy the
manufacturing problems that led to our backlog in 2002 and 2003, including
replacing our swab manufacturer and redesigning our swab product to permit
higher volume production. We also intend to build a substantial inventory of
swab products to reduce the likelihood of any backlog of swab products
occurring in 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: 26




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
    
    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 and general economic and
stock market conditions. These fluctuations have particularly affected the
market prices of equity securities of small capitalization companies, like
Matrixx. Often, the effect on the price of such securities is disproportionate
to the operating performance of such companies. In our case, such broad market
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. In addition, we believe our stock price has been
impacted by a sizeable short position and resulting covering by investors with
a short position in our stock. 
 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-California, which is described in the notes
to our consolidated financial statements contained in this Form 10-K. As of
December 31, 2003, we did not have any outstanding balance against this line of
credit. During fiscal 2002, the average outstanding balance on our prior line
of credit on a daily basis was approximately $100,000. Assuming future
borrowings consistent with our average borrowings in 2002, a hypothetical
interest rate change of 1% would increase our interest expense approximately
$1,000 per year from the expense levels that we experienced in 2002.
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 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 27




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Standards No. 107. We presently hold approximately $4.5 million in
short-term U.S. treasury securities which are not subject to material risk.
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 2003) or commodity price risk. 
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Independent Auditors Report and Consolidated Financial Statements of
Matrixx, including the Notes to those statements, are included in Part III,
Item 15 of this 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 Rule 13a-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 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. 
 PART III 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS The information required by this Item for our executive officers is set
forth in Part I of this 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 2004 annual meeting of stockholders to
be held on April 28, 2004 (the 2004 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 is attached as an exhibit
to this Report on Form 10-K. We intend to make a copy of the Code of Ethics
available for viewing on the Companys internet website at www.matrixxinc.com.
or www.zicam.com. 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 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 2004 Proxy Statement, under the heading, Executive Compensation,
and is incorporated herein by this reference as 28




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if set forth in full. The information set forth in the 2004 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 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 2004 Proxy Statement, under the heading, Security
Ownership of Certain Beneficial Owners, and is incorporated herein by this
reference as if set forth in full. Securities Authorized for Issuance Under Equity Compensation Plans The following table sets forth information as of December 31, 2003 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 of securitiesremaining availableNumber of
    
    
    
    
    
    for future issuancesecurities to be
    
    
    
    
    
    under equityissued upon
    
    Weighted-average
    
    compensation plansexercise of
    
    exercise price of
    
    (excludingoutstanding
    
    outstanding
    
    securitiesoptions, warrants
    
    options, warrants
    
    reflected inPlan category
    
    and rights
    
    and rights
    
    column (a))(a)
    
    (b)
    
    (c)Equity compensation
plans approved by
security holders
    
    
    445,800
    
    
    $
    8.85
    
    
    
    685,850Equity compensation
plans not approved
by security holders
    
    
    50,000
    
    
    $
    14.72
    
    
    
    0Total
    
    
    495,800
    
    
    $
    9.44
    
    
    
    685,850
 The 50,000 securities (all of which are shares of our common stock)
referred to in column (a) of the above table were issuable as of December 31,
2002 under the following individual compensation arrangements:  
    
    10,000 shares issuable upon exercise of stock options
issued to Edward E. Faber in September 2000 as board member
compensation, with an exercise price of $14.31 per share, and
expire in September 2004;  
    
    10,000 shares issuable upon exercise of stock options
issued to Edward J. Walsh in September 2000 as board member
compensation, with an exercise price of $14.31 per share, and
expire in September 2004; and,  
    
    30,000 shares issuable upon exercise of warrants issued
to C.J.B. Consulting, Inc. and Next Millenium Capital Holdings,
LLC in June 1999 in connection with financing activities
undertaken by the Company at that time, which warrants have an
exercise price of $15.00 per share and expire in June 2004.
15,000 warrants held by Next Millennium Capital were exercised in
January 2004. 29




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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is set forth in the 2004 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 2004 Proxy
Statement, under the heading, Accountant Fees and Services and is
incorporated herein by this reference as if set forth in full. 
 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K (a)1. Financial Statements and Supplementary Data INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Financial Statements
    
    PageIndependent Auditors Report
    
    31Consolidated Balance Sheets as of December 31,
2003 and 2002
    
    33Consolidated Statements of Operations for the
years ended December 31, 2003, 2002 and 2001
    
    35Consolidated Statements of Changes in StockholdersEquity for the years ended December 31, 2003, 2002
and 2001
    
    37Consolidated Statements of Cash Flows for the years
ended December 31, 2003, 2002 and 2001
    
    39Notes To Consolidated Financial Statements
    
    41
 30




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MATRIXX INITIATIVES, INC. AND SUBSIDIARY
(formerly Gum Tech International, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INDEPENDENT AUDITORS REPORT To the Board of Directors and Shareholders of
Matrixx Initiatives, Inc. We have audited the accompanying consolidated balance sheets of Matrixx
Initiatives, Inc. and Subsidiary as of December 31, 2003 and 2002 and the
related consolidated statements of operations, changes in stockholders equity
and cash flows for the years then ended. 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 auditing standards generally
accepted in the United States of America. 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 Matrixx Initiatives, Inc. and
Subsidiary as of December 31, 2003 and 2002 and the results of their operations
and their cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States of America. Mayer Hoffman McCann P.C.Certified Public AccountantsGreenwood Village, ColoradoJanuary 23, 2004
(except for the second to last paragraph of Note 11,
as to which the date is March 12, 2004) 31




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INDEPENDENT AUDITORS REPORT

To the Board of Directors and Shareholders of
Matrixx Initiatives, Inc.

We have audited the accompanying consolidated statements of operations, changes
in stockholders equity and cash flows of Matrixx Initiatives, Inc. and
Subsidiary for the year ended December 31, 2001. 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 audit.

We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Matrixx
Initiatives, Inc. and Subsidiary for the year ended December 31, 2001 in
conformity with accounting principles generally accepted in the United States
of America.

|                 |  |                             
|---------------- |  | ----------------------------
|                 |  | Angell & Deering            
|                 |  | Certified Public Accountants
|                 |  |                             
|Denver, Colorado |  |                             
|February 8, 2002 |  |                             

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MATRIXX INITIATIVES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND 2002

ASSETS

| |  | 
| |  | 

|                                 |                                                                             |                                                                        |                            |            |            |            |         |            |           |            | 
|-------------------------------- | --------------------------------------------------------------------------- | ---------------------------------------------------------------------- | -------------------------- | ---------- | ---------- | ---------- | ------- | ---------- | --------- | ---------- | 
|                                 |                                                                             |                                                                        |                            |            | 2003       |            | 2002   
|                                 |                                                                             |                                                                        |                            |            |            |            |        
|Current Assets:                  |                                                                             |                                                                        |                            |            |            |            |         |           
|                                 | Cash and cash equivalents                                                   |                                                                        | $                          | 10,682,614 |            |            | $       | 12,010,091 |          
|                                 | Accounts receivable:                                                        |                                                                        |                            |            |            |            |         |            |          
|                                 |                                                                             | Trade, net of allowance for doubtful
accounts of $601,357 and $647,280 |                            |            | 11,471,511 |            |         |            | 7,037,596 |           
|                                 | Inventories                                                                 |                                                                        |                            | 3,267,604  |            |            |         | 1,573,034  |          
|                                 | Prepaid expenses                                                            |                                                                        |                            | 615,790    |            |            |         | 523,829    |          
|                                 | Deferred tax asset                                                          |                                                                        |                            | 2,829,556  |            |            |         | 1,073,765  |          
|                                 |                                                                             |                                                                        |                            |            |            |            |         |           
|                                 |                                                                             |                                                                        | Total Current Assets       |            |            | 28,867,075 |         |            |           | 22,218,315 | 
|                                 |                                                                             |                                                                        |                            |            |            |            |         |           
|Property and Equipment, at cost: |                                                                             |                                                                        |                            |            |            |            |         |           
|                                 | Office furniture and equipment                                              |                                                                        |                            | 681,528    |            |            |         | 588,395    |          
|                                 | Machine tooling                                                             |                                                                        |                            | 150,000    |            |            |         |           |          
|                                 | Leasehold improvements                                                      |                                                                        |                            | 37,202     |            |            |         | 39,314     |          
|                                 |                                                                             |                                                                        |                            |            |            |            |         |           
|                                 |                                                                             |                                                                        | 868,730                    |            |            |            | 627,709 |           
|                                 | Less accumulated depreciation                                               |                                                                        |                            | (247,728   | )          |            |         | (89,795    | )        
|                                 |                                                                             |                                                                        |                            |            |            |            |         |           
|                                 |                                                                             |                                                                        | Net Property and Equipment |            |            | 621,002    |         |            |           | 537,914    | 
|                                 |                                                                             |                                                                        |                            |            |            |            |         |           
|Other Assets:                    |                                                                             |                                                                        |                            |            |            |            |         |           
|                                 | Deposits                                                                    |                                                                        |                            | 212,697    |            |            |         | 37,697     |          
|                                 | Debt issuance costs, net of accumulated amortization
of $35,000 and $20,417 |                                                                        |                            |           |            |            |         | 14,583     |          
|                                 | Deferred tax asset                                                          |                                                                        |                            | 4,351,810  |            |            |         | 8,284,720  |          
|                                 | Patents, net of accumulated amortization of $138,780
and $71,700            |                                                                        |                            | 984,820    |            |            |         | 1,051,900  |          
|                                 | Goodwill                                                                    |                                                                        |                            | 15,039,836 |            |            |         | 15,039,836 |          
|                                 |                                                                             |                                                                        |                            |            |            |            |         |           
|                                 |                                                                             |                                                                        | Total Other Assets         |            |            | 20,589,163 |         |            |           | 24,428,736 | 
|                                 |                                                                             |                                                                        |                            |            |            |            |         |           
|                                 |                                                                             |                                                                        | Total Assets               |            | $          | 50,077,240 |         |            | $         | 47,184,965 | 
|                                 |                                                                             |                                                                        |                            |            |            |            |         |           

The accompanying notes are an integral
part of these consolidated financial statements.

33



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MATRIXX INITIATIVES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
(CONTINUED)

LIABILITIES AND STOCKHOLDERS EQUITY

| |  | 
| |  | 

|                                                                      |                                                                                                                    |                                            |            |            |            |      |            |            |            | 
|--------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------ | ------------------------------------------ | ---------- | ---------- | ---------- | ---- | ---------- | ---------- | ---------- | 
|                                                                      |                                                                                                                    |                                            |            | 2003       |            | 2002
|                                                                      |                                                                                                                    |                                            |            |            |            |     
|Current Liabilities:                                                  |                                                                                                                    |                                            |            |            |            |      |            |           
|                                                                      | Accounts payable and accrued expenses                                                                              |                                            | $          | 9,552,218  |            |      | $          | 5,771,407  |           
|                                                                      | Sales returns and allowances                                                                                       |                                            |            | 1,734,568  |            |      |            | 1,004,713  |           
|                                                                      | Current portion of long-term debt                                                                                  |                                            |            |           |            |      |            | 5,253,643  |           
|                                                                      |                                                                                                                    |                                            |            |            |            |      |            |           
|                                                                      |                                                                                                                    | Total Current Liabilities                  |            |            | 11,286,786 |      |            |            | 12,029,763 | 
|                                                                      |                                                                                                                    |                                            |            |            |            |      |            |           
|Long-Term Debt, net of current portion above:                         |                                                                                                                    |                                            |            |            |            |      |            |           
|                                                                      | Financial institutions and other                                                                                   |                                            |            |           |            |      |            | 5,253,643  |           
|                                                                      | Less current portion above                                                                                         |                                            |            |           |            |      |            | (5,253,643 | )         
|                                                                      |                                                                                                                    |                                            |            |            |            |      |            |           
|                                                                      |                                                                                                                    | Total Long-Term Debt                       |            |            |           |      |            |            |           | 
|                                                                      |                                                                                                                    |                                            |            |            |            |      |            |           
|Commitments and Contingencies                                         |                                                                                                                    |                                            |            |            |            |      |            |           
|                                                                     
|Stockholders 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, 9,474,601 and 9,441,451 shares
issued and outstanding |                                            |            | 9,475      |            |      |            | 9,442      |           
|                                                                      | Additional paid in capital                                                                                         |                                            |            | 41,993,189 |            |      |            | 41,524,921 |           
|                                                                      | Accumulated deficit                                                                                                |                                            |            | (2,972,987 | )          |      |            | (6,317,305 | )         
|                                                                      |                                                                                                                    |                                            |            |            |            |      |            |           
|                                                                      |                                                                                                                    |                                            | 39,029,677 |            |            |      | 35,217,058 |           
|                                                                     
|Less common stock held in treasury, at cost
(35,900 and 9,600 shares) |                                                                                                                    |                                            | (239,223   | )          |            |      | (61,856    | )         
|                                                                      |                                                                                                                    |                                            |            |            |            |      |            |           
|                                                                      |                                                                                                                    | Total Stockholders Equity                 |            |            | 38,790,454 |      |            |            | 35,155,202 | 
|                                                                      |                                                                                                                    |                                            |            |            |            |      |            |           
|                                                                      |                                                                                                                    | Total Liabilities and Stockholders Equity |            | $          | 50,077,240 |      |            | $          | 47,184,965 | 
|                                                                      |                                                                                                                    |                                            |            |            |            |      |            |           

The accompanying notes are an integral
part of these consolidated financial statements.

34



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MATRIXX INITIATIVES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

|                                                                                |                                                                     |                                         |            |          |            |      |            |          |            |   |            |            |            |  
|------------------------------------------------------------------------------- | ------------------------------------------------------------------- | --------------------------------------- | ---------- | -------- | ---------- | ---- | ---------- | -------- | ---------- | - | ---------- | ---------- | ---------- | -
|                                                                                |                                                                     |                                         |            | 2003     |            | 2002 |            | 2001    
|                                                                                |                                                                     |                                         |            |          |            |      |            |         
|Net sales                                                                       |                                                                     | $                                       | 43,495,763 |          |            | $    | 23,547,636 |          |            | $ | 16,072,162 |           
|Cost of sales                                                                   |                                                                     |                                         | 13,454,331 |          |            |      | 6,752,041  |          |            |   | 4,214,812  |           
|                                                                                |                                                                     |                                         |            |          |            |      |            |          |            |   |            |           
|                                                                                |                                                                     | Gross Profit                            |            |          | 30,041,432 |      |            |          | 16,795,595 |   |            |            | 11,857,350 |  
|                                                                                |                                                                     |                                         |            |          |            |      |            |          |            |   |            |            |            |  
|Operating expenses                                                              |                                                                     |                                         | 21,641,749 |          |            |      | 15,543,890 |          |            |   | 16,963,958 |           
|Research and development                                                        |                                                                     |                                         | 2,557,072  |          |            |      | 293,486    |          |            |   | 716,390    |           
|                                                                                |                                                                     |                                         |            |          |            |      |            |          |            |   |            |           
|                                                                                |                                                                     | Income (Loss) From Operations           |            |          | 5,842,611  |      |            |          | 958,219    |   |            |            | (5,822,998 | )
|                                                                                |                                                                     |                                         |            |          |            |      |            |          |            |   |            |           
|Other Income (Expense):                                                         |                                                                     |                                         |            |          |            |      |            |          |            |   |            |           
|                                                                                | Interest and other income, net                                      |                                         |            | 175,533  |            |      |            | 680,544  |            |   |            | 174,023    |           
|                                                                                | Interest expense                                                    |                                         |            | (246,479 | )          |      |            | (592,055 | )          |   |            | (162,882   | )         
|                                                                                |                                                                     |                                         |            |          |            |      |            |          |            |   |            |           
|                                                                                |                                                                     | Total Other Income (Expense)            |            |          | (70,946    | )    |            |          | 88,489     |   |            |            | 11,141     |  
|                                                                                |                                                                     |                                         |            |          |            |      |            |          |            |   |            |           
|Income (Loss) Before Provision (Benefit) For
Income Taxes and Minority Interest |                                                                     |                                         | 5,771,665  |          |            |      | 1,046,708  |          |            |   | (5,811,857 | )         
|                                                                                |                                                                     |                                         |            |          |            |      |            |          |            |   |            |            |            |  
|Provision (benefit) for income taxes                                            |                                                                     |                                         | 2,427,347  |          |            |      | (3,709,947 | )        |            |   |           |           
|Minority interest in earnings of
consolidated affiliate                         |                                                                     |                                         |           |          |            |      |           |          |            |   | 1,012,543  |           
|                                                                                |                                                                     |                                         |            |          |            |      |            |          |            |   |            |           
|Net Income (Loss) From Continuing Operations                                    |                                                                     |                                         | 3,344,318  |          |            |      | 4,756,655  |          |            |   | (4,799,314 | )         
|                                                                                |                                                                     |                                         |            |          |            |      |            |          |            |   |            |           
|Discontinued Operations:                                                        |                                                                     |                                         |            |          |            |      |            |          |            |   |            |           
|                                                                                | Loss from discontinued operations                                   |                                         |            |         |            |      |            |         |            |   |            | (305,415   | )         
|                                                                                | Gain on disposal of gum operations, net of
income taxes of $325,000 |                                         |            |         |            |      |            |         |            |   |            | 17,717,362 |           
|                                                                                |                                                                     |                                         |            |          |            |      |            |          |            |   |            |           
|                                                                                |                                                                     | Total Gain From Discontinued Operations |            |          |           |      |            |          |           |   |            |            | 17,411,947 |  
|                                                                                |                                                                     |                                         |            |          |            |      |            |          |            |   |            |           
|Net Income                                                                      |                                                                     | $                                       | 3,344,318  |          |            | $    | 4,756,655  |          |            | $ | 12,612,633 |           
|                                                                                |                                                                     |                                         |            |          |            |      |            |          |            |   |            |           

The accompanying notes are an integral
part of these consolidated financial statements.

35



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MATRIXX INITIATIVES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(CONTINUED)

|                                             |        |                                                      |                                              |                                              |           |      |     |      |           |      |     |  |           |   |      |  
|-------------------------------------------- | ------ | ---------------------------------------------------- | -------------------------------------------- | -------------------------------------------- | --------- | ---- | --- | ---- | --------- | ---- | --- |  | --------- | - | ---- | -
|                                             |        |                                                      |                                              |                                              |           | 2003 |     | 2002 |           | 2001
|                                             |        |                                                      |                                              |                                              |           |      |     |      |           |     
|Net Income (Loss) Per Share of Common Stock: |        |                                                      |                                              |                                              |           |      |     |      |           |      |     | 
|                                             | Basic: |                                                      |                                              |                                              |           |      |     |      |           |      |     |  |          
|                                             |        | Weighted Average Number of Common Shares
Outstanding |                                              |                                              | 9,420,059 |      |     |      | 9,422,873 |      |     |  | 9,284,234 |  
|                                             |        |                                                      |                                              | Net Income (Loss) Per Share of Common Stock: |           |      |     |      |           |      |     |  |           |   |      |  
|                                             |        |                                                      |                                              | Continuing operations                        |           | $    | .36 |      |           | $    | .50 |  |           | $ | (.52 | )
|                                             |        |                                                      |                                              | Discontinued operations                      |           |      |    |      |           |      |    |  |           |   | 1.88 |  
|                                             |        |                                                      |                                              |                                              |           |      |     |      |           |      |     |  |           |  
|                                             |        |                                                      |                                              | Net Income (Loss)                            |           | $    | .36 |      |           | $    | .50 |  |           | $ | 1.36 |  
|                                             |        |                                                      |                                              |                                              |           |      |     |      |           |      |     |  |           |  
|Diluted:                                     |        |                                                      |                                              |                                              |           |      |     |      |           |      |     | 
|                                             |        | Weighted Average Number of Common Shares
Outstanding |                                              |                                              | 9,473,082 |      |     |      | 9,455,403 |      |     |  | 9,284,234 |  
|                                             |        |                                                      | Net Income (Loss) Per Share of Common Stock: |                                              |           |      |     |      |           |      |     |  |           |   |     
|                                             |        |                                                      |                                              | Continuing operations                        |           | $    | .35 |      |           | $    | .50 |  |           | $ | (.52 | )
|                                             |        |                                                      |                                              | Discontinued operations                      |           |      |    |      |           |      |    |  |           |   | 1.88 |  
|                                             |        |                                                      |                                              |                                              |           |      |     |      |           |      |     |  |           |  
|                                             |        |                                                      |                                              | Net Income (Loss)                            |           | $    | .35 |      |           | $    | .50 |  |           | $ | 1.36 |  
|                                             |        |                                                      |                                              |                                              |           |      |     |      |           |      |     |  |           |  

The accompanying notes are an integral
part of these consolidated financial statements.

36



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MATRIXX INITIATIVES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

|                                                                                      |  |                 |   |              |  |                   |   |          |  |             |           |       |  |         |       |  |  |   |            |   |  |   |         |   |  |   |             |  
|------------------------------------------------------------------------------------- |  | --------------- | - | ------------ |  | ----------------- | - | -------- |  | ----------- | --------- | ----- |  | ------- | ----- |  |  | - | ---------- | - |  | - | ------- | - |  | - | ----------- | -
|                                                                                      |  | Series A        |   |              |  |                   |   |          |  |             |           |       |  |         |       |  |  |   |            |  
|                                                                                      |  | Preferred Stock |   | Common Stock |  | AdditionalPaid In |   | Treasury |  | Accumulated
|                                                                                      |  | Shares          |   | Amount       |  | Shares            |   | Amount   |  | Capital     |           | Stock |  | Deficit
|                                                                                      |  |                 |   |              |  |                   |   |          |  |             |           |       |  |        
|Balance at December 31, 2000                                                          |  |                 |  |              |  | $                 |  |          |  |             | 9,047,047 |       |  | $       | 9,047 |  |  | $ | 34,126,014 |   |  | $ |        |   |  | $ | (23,686,593 | )
|                                                                                      |  |                 |   |              |  |                   |   |          |  |             |           |       |  |         |       |  |  |   |            |   |  |   |         |   |  |   |             |  
|Issuance of common stock upon exercise of stock options and
warrants                  |  |                 |  |              |  |                   |  |          |  |             | 185,204   |       |  |         | 185   |  |  |   | 1,159,228  |   |  |   |        |   |  |   |            |  
|                                                                                      |  |                 |   |              |  |                   |   |          |  |             |           |       |  |         |       |  |  |   |            |   |  |   |         |   |  |   |             |  
|Issuance of common stock for cash                                                     |  |                 |  |              |  |                   |  |          |  |             | 200,000   |       |  |         | 200   |  |  |   | 1,501,676  |   |  |   |        |   |  |   |            |  
|                                                                                      |  |                 |   |              |  |                   |   |          |  |             |           |       |  |         |       |  |  |   |            |   |  |   |         |   |  |   |             |  
|Compensation from issuance of stock options                                           |  |                 |  |              |  |                   |  |          |  |             |          |       |  |         |      |  |  |   | 25,830     |   |  |   |        |   |  |   |            |  
|                                                                                      |  |                 |   |              |  |                   |   |          |  |             |           |       |  |         |       |  |  |   |            |   |  |   |         |   |  |   |             |  
|Repurchase
shares of the Companys common stock (8,100 shares)                        |  |                 |  |              |  |                   |  |          |  |             |          |       |  |         |      |  |  |   |           |   |  |   | (52,436 | ) |  |   |            |  
|                                                                                      |  |                 |   |              |  |                   |   |          |  |             |           |       |  |         |       |  |  |   |            |   |  |   |         |   |  |   |             |  
|Acquisition of subsidiary                                                             |  |                 |  |              |  |                   |  |          |  |             |          |       |  |         |      |  |  |   | (1,326,785 | ) |  |   |        |   |  |   |            |  
|                                                                                      |  |                 |   |              |  |                   |   |          |  |             |           |       |  |         |       |  |  |   |            |   |  |   |         |   |  |   |             |  
|Net income                                                                            |  |                 |  |              |  |                   |  |          |  |             |          |       |  |         |      |  |  |   |           |   |  |   |        |   |  |   | 12,612,633  |  
|                                                                                      |  |                 |   |              |  |                   |   |          |  |             |           |       |  |         |       |  |  |   |            |   |  |   |         |   |  |   |             |  
|Balance 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                                                                            |  |                 |  |              |  |                   |  |          |  |             |          |       |  |         |      |  |  |   |           |   |  |   |        |   |  |   | 4,756,655   |  
|                                                                                      |  |                 |   |              |  |                   |   |          |  |             |           |       |  |         |       |  |  |   |            |   |  |   |         |   |  |   |             |  
|Balance at December 31, 2002                                                          |  |                 |  |              |  |                   |  |          |  |             | 9,441,451 |       |  |         | 9,442 |  |  |   | 41,524,921 |   |  |   | (61,856 | ) |  |   | (6,317,305  | )

The accompanying notes are an integral
part of these consolidated financial statements.

37



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MATRIXX INITIATIVES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(CONTINUED)

|                                                                                      |  |                 |   |              |  |                   |   |          |  |             |           |       |  |         |       |  |  |   |            |  |  |   |          |   |  |   |            |  
|------------------------------------------------------------------------------------- |  | --------------- | - | ------------ |  | ----------------- | - | -------- |  | ----------- | --------- | ----- |  | ------- | ----- |  |  | - | ---------- |  |  | - | -------- | - |  | - | ---------- | -
|                                                                                      |  | Series A        |   |              |  |                   |   |          |  |             |           |       |  |         |       |  |  |   |            | 
|                                                                                      |  | Preferred
Stock |   | Common Stock |  | AdditionalPaid In |   | Treasury |  | Accumulated
|                                                                                      |  | Shares          |   | Amount       |  | Shares            |   | Amount   |  | Capital     |           | Stock |  | Deficit
|                                                                                      |  |                 |   |              |  |                   |   |          |  |             |           |       |  |        
|                                                                                     
|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                                                                            |  |                 |  |              |  |                   |  |          |  |             |          |       |  |         |      |  |  |   |           |  |  |   |         |   |  |   | 3,344,318  |  
|                                                                                      |  |                 |   |              |  |                   |   |          |  |             |           |       |  |         |       |  |  |   |            |  |  |   |          |   |  |   |            |  
|Balance at December 31, 2003                                                          |  |                 |  |              |  | $                 |  |          |  |             | 9,474,601 |       |  | $       | 9,475 |  |  | $ | 41,993,189 |  |  | $ | (239,223 | ) |  | $ | (2,972,987 | )
|                                                                                      |  |                 |   |              |  |                   |   |          |  |             |           |       |  |         |       |  |  |   |            |  |  |   |          |   |  |   |            |  

The accompanying notes are an integral
part of these consolidated financial statements.

38



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MATRIXX INITIATIVES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

|                                      |                                                                                          |                                                         |                                       |                                                  |           |            |           |            |            |            |            |             |             |           |            |  
|------------------------------------- | ---------------------------------------------------------------------------------------- | ------------------------------------------------------- | ------------------------------------- | ------------------------------------------------ | --------- | ---------- | --------- | ---------- | ---------- | ---------- | ---------- | ----------- | ----------- | --------- | ---------- | -
|                                      |                                                                                          |                                                         |                                       |                                                  |           | 2003       |           | 2002       |            | 2001      
|                                      |                                                                                          |                                                         |                                       |                                                  |           |            |           |            |            |           
|Cash Flows From Operating Activities: |                                                                                          |                                                         |                                       |                                                  |           |            |           |            |            |            |            |            
|                                      | Net income                                                                               |                                                         | $                                     | 3,344,318                                        |           |            | $         | 4,756,655  |            |            | $          | 12,612,633  |            
|                                      | Adjustments to reconcile net income to net
cash provided (used) by operating activities: |                                                         |                                       |                                                  |           |            |           |            |            |            |            |             |            
|                                      |                                                                                          | Depreciation                                            |                                       |                                                  | 157,933   |            |           |            | 78,770     |            |            |             | 225,853     |          
|                                      |                                                                                          | Amortization                                            |                                       |                                                  | 81,663    |            |           |            | 87,498     |            |            |             | 4,619       |          
|                                      |                                                                                          | Amortization of discount on notes payable               |                                       |                                                  | 246,357   |            |           |            | 576,118    |            |            |             | 46,906      |          
|                                      |                                                                                          | Provision for bad debts                                 |                                       |                                                  | (45,923   | )          |           |            | 209,913    |            |            |             | 450,115     |          
|                                      |                                                                                          | Deferred income taxes                                   |                                       |                                                  | 2,195,309 |            |           |            | (3,397,687 | )          |            |             |            |          
|                                      |                                                                                          | Loss on disposal of assets                              |                                       |                                                  |          |            |           |            | 20,104     |            |            |             | 530         |          
|                                      |                                                                                          | Impairment of investment                                |                                       |                                                  |          |            |           |            |           |            |            |             | 250,000     |          
|                                      |                                                                                          | Gain on disposal of gum operations                      |                                       |                                                  |          |            |           |            |           |            |            |             | (17,717,362 | )        
|                                      |                                                                                          | Compensation from issuance of stock options             |                                       |                                                  |          |            |           |            |           |            |            |             | 25,830      |          
|                                      |                                                                                          | Common stock issued for compensation                    |                                       |                                                  | 230,361   |            |           |            | 78,169     |            |            |             |            |          
|                                      |                                                                                          | Minority interest in earnings of consolidated affiliate |                                       |                                                  |          |            |           |            |           |            |            |             | (1,012,543  | )        
|                                      |                                                                                          | Changes in assets and liabilities:                      |                                       |                                                  |           |            |           |            |            |            |            |             |             |          
|                                      |                                                                                          |                                                         | Restricted cash                       |                                                  |           |           |           |            |            | 1,503,150  |            |             |             | (316,036  | )         
|                                      |                                                                                          |                                                         | Accounts receivable                   |                                                  |           | (4,387,992 | )         |            |            | (2,786,352 | )          |             |             | (712,540  | )         
|                                      |                                                                                          |                                                         | Employee receivables                  |                                                  |           |           |           |            |            |           |            |             |             | 911       |           
|                                      |                                                                                          |                                                         | Inventories                           |                                                  |           | (1,694,570 | )         |            |            | 7,878      |            |             |             | 869,518   |           
|                                      |                                                                                          |                                                         | Prepaid expenses and other            |                                                  |           | (91,961    | )         |            |            | (15,367    | )          |             |             | (397,418  | )         
|                                      |                                                                                          |                                                         | Interest receivable                   |                                                  |           |           |           |            |            |           |            |             |             | (111,912  | )         
|                                      |                                                                                          |                                                         | Accounts payable and accrued expenses |                                                  |           | 3,780,811  |           |            |            | (752,263   | )          |             |             | 2,148,721 |           
|                                      |                                                                                          |                                                         | Customer deposits                     |                                                  |           |           |           |            |            |           |            |             |             | (64,862   | )         
|                                      |                                                                                          |                                                         | Sales returns and allowances          |                                                  |           | 729,855    |           |            |            | (27,184    | )          |             |             | 176,137   |           
|                                      |                                                                                          |                                                         | Deferred revenue                      |                                                  |           |           |           |            |            |           |            |             |             | (936,141  | )         
|                                      |                                                                                          |                                                         |                                       |                                                  |           |            |           |            |            |            |            |            
|                                      |                                                                                          |                                                         |                                       | Net Cash Provided (Used) By Operating Activities |           |            | 4,546,161 |            |            |            | 339,402    |             |             |           | (4,457,041 | )
|                                      |                                                                                          |                                                         |                                       |                                                  |           |            |           |            |            |            |            |            
|Cash Flows From Investing Activities: |                                                                                          |                                                         |                                       |                                                  |           |            |           |            |            |            |            |            
|                                      | Capital expenditures                                                                     |                                                         |                                       | (241,021                                         | )         |            |           | (573,679   | )          |            |            | (1,190,871  | )          
|                                      | Proceeds from sale of gum operations                                                     |                                                         |                                       |                                                 |           |            |           |           |            |            |            | 25,000,000  |            
|                                      | Costs of sale of gum operations                                                          |                                                         |                                       |                                                 |           |            |           |           |            |            |            | (1,527,922  | )          
|                                      | Notes receivable                                                                         |                                                         |                                       |                                                 |           |            |           | 200,000    |            |            |            | (200,000    | )          
|                                      | Cash paid for purchase of Zicam                                                          |                                                         |                                       |                                                 |           |            |           |           |            |            |            | (6,239,512  | )          
|                                      | Deposits and other                                                                       |                                                         |                                       | (175,000                                         | )         |            |           | (5,297     | )          |            |            | 661,698     |            
|                                      | Purchase of marketable securities                                                        |                                                         |                                       |                                                 |           |            |           |           |            |            |            | (17,543,105 | )          
|                                      | Maturity of marketable securities                                                        |                                                         |                                       |                                                 |           |            |           | 10,656,380 |            |            |            | 6,998,637   |            
|                                      | Investment in corporation                                                                |                                                         |                                       |                                                 |           |            |           |           |            |            |            | (250,000    | )          
|                                      |                                                                                          |                                                         |                                       |                                                  |           |            |           |            |            |            |            |            
|                                      |                                                                                          |                                                         |                                       | Net Cash Provided (Used) By Investing Activities |           |            | (416,021  | )          |            |            | 10,277,404 |             |             |           | 5,708,925  |  
|                                      |                                                                                          |                                                         |                                       |                                                  |           |            |           |            |            |            |            |            

The accompanying notes are an integral
part of these consolidated financial statements.

39



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MATRIXX INITIATIVES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(CONTINUED)

|                                                                        |                                     |                                                                            |                                                      |            |         |            |      |            |         |            |   |           |            |           | 
|----------------------------------------------------------------------- | ----------------------------------- | -------------------------------------------------------------------------- | ---------------------------------------------------- | ---------- | ------- | ---------- | ---- | ---------- | ------- | ---------- | - | --------- | ---------- | --------- | 
|                                                                        |                                     |                                                                            |                                                      |            | 2003    |            | 2002 |            | 2001   
|                                                                        |                                     |                                                                            |                                                      |            |         |            |      |            |        
|Cash Flows From Financing Activities:                                   |                                     |                                                                            |                                                      |            |         |            |      |            |         |            |   |          
|                                                                        | Proceeds from borrowing             |                                                                            | $                                                    |           |         |            | $    |           |         |            | $ | 600,000   |           
|                                                                        | Principal payments on notes payable |                                                                            |                                                      | (5,500,000 | )       |            |      | (5,905,280 | )       |            |   | (602,956  | )         
|                                                                        | Debt issuance costs                 |                                                                            |                                                      |           |         |            |      | (35,000    | )       |            |   |          |           
|                                                                        | Issuance of common stock            |                                                                            |                                                      | 219,750    |         |            |      |           |         |            |   | 2,661,289 |           
|                                                                        | Purchase of treasury stock          |                                                                            |                                                      | (177,367   | )       |            |      | (9,420     | )       |            |   | (52,436   | )         
|                                                                        |                                     |                                                                            |                                                      |            |         |            |      |            |         |            |   |          
|                                                                        |                                     |                                                                            | Net Cash Provided (Used) By Financing Activities     |            |         | (5,457,617 | )    |            |         | (5,949,700 | ) |           |            | 2,605,897 | 
|                                                                        |                                     |                                                                            |                                                      |            |         |            |      |            |         |            |   |          
|                                                                        |                                     |                                                                            | Net Increase (Decrease) in Cash and Cash Equivalents |            |         | (1,327,477 | )    |            |         | 4,667,106  |   |           |            | 3,857,781 | 
|                                                                       
|                                                                        |                                     |                                                                            | Cash and Cash Equivalents at Beginning of Year       |            |         | 12,010,091 |      |            |         | 7,342,985  |   |           |            | 3,485,204 | 
|                                                                        |                                     |                                                                            |                                                      |            |         |            |      |            |         |            |   |          
|                                                                        |                                     |                                                                            | Cash and Cash Equivalents at End of Year             |            | $       | 10,682,614 |      |            | $       | 12,010,091 |   |           | $          | 7,342,985 | 
|                                                                        |                                     |                                                                            |                                                      |            |         |            |      |            |         |            |   |          
|Supplemental Disclosure of Cash Flow Information:                       |                                     |                                                                            |                                                      |            |         |            |      |            |         |            |   |          
|                                                                        | Cash paid during the year for:      |                                                                            |                                                      |            |         |            |      |            |         |            |   |           |           
|                                                                        |                                     | Interest                                                                   |                                                      | $          | 246,479 |            |      | $          | 610,657 |            |   | $         | 136,492    |          
|                                                                        |                                     | Income taxes                                                               |                                                      |            |         | 996        |      |            |         | 12,740     |   |           |            | 336,127   | 
|Supplemental Disclosure of Non-cash Investing
and Financing Activities: |                                     |                                                                            |                                                      |            |         |            |      |            |         |            |   |          
|                                                                        |                                     | Note payable incurred in connection with purchase of 40%
interest in Zicam |                                                      | $          |        |            |      | $          |        |            |   | $         | 10,130,619 |          

The accompanying notes are an integral
part of these consolidated financial statements.

40



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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
(Note 2). 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 2002 and 2003 is 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 Years
| |                                |  |                     
| | Machine tooling                |  |                      | 3    | 
| | Office furniture and equipment |  |                      | 3-5  | 
| | Leasehold improvements         |  |                      | 2-10 | 



| | Depreciation of property and equipment charged to operations was
$157,933, $78,770 and $225,853 for the years ended December 31, 2003,
2002 and 2001, respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

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MATRIXX INITIATIVES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|1. |  | Organization and Summary of
Significant Accounting Policies (Continued)
|-- |  | -----------------------------------------------------------------------
|  

| | Intangible Assets
| | -----------------
|

| | Debt issuance costs are being amortized using the straight-line method
over the term of the notes, which approximates the effective interest
method.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------
|

| | The 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.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|

| | 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 regular 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:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                                                                                                     |          |             |           |      |     |      |           |      |     |   |            |   |      |  | 
| | ----------------------------------------------------------------------------------------------------------------------------------- | -------- | ----------- | --------- | ---- | --- | ---- | --------- | ---- | --- | - | ---------- | - | ---- |  | 
| |                                                                                                                                     |          |             |           | 2003 |     | 2002 |           | 2001
| |                                                                                                                                     |          |             |           |      |     |      |           |     
| | Net income (loss) applicable to
common shareholders, as reported                                                                    |          | $           | 3,344,318 |      |     | $    | 4,756,655 |      |     | $ | 12,612,633 |  
| | Less stock based employee compensation
expense determined under fair value
based methods for all awards, net
of related tax effects |          |             | 402,871   |      |     |      | 715,409   |      |     |   | 154,821    |  
| |                                                                                                                                     |          |             |           |      |     |      |           |      |     |   |            |  
| | Proforma Net Income (Loss)                                                                                                          |          | $           | 2,941,447 |      |     | $    | 4,041,246 |      |     | $ | 12,457,812 |  
| |                                                                                                                                     |          |             |           |      |     |      |           |      |     |   |            |  
| | Net income (loss) per share of
common stock:                                                                                        |          |             |           |      |     |      |           |      |     |   |            |  
| |                                                                                                                                     | Basic:   |             |           |      |     |      |           |      |     |   |            |   |     
| |                                                                                                                                     |          | As reported |           | $    | .36 |      |           | $    | .50 |   |            | $ | 1.36 | 
| |                                                                                                                                     |          | Pro forma   |           | $    | .31 |      |           | $    | .43 |   |            | $ | 1.34 | 
| |                                                                                                                                     | Diluted: |             |           |      |     |      |           |      |     |   |            |   |     
| |                                                                                                                                     |          | As reported |           | $    | .35 |      |           | $    | .50 |   |            | $ | 1.36 | 
| |                                                                                                                                     |          | Pro forma   |           | $    | .31 |      |           | $    | .43 |   |            | $ | 1.34 | 

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MATRIXX INITIATIVES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|1. |  | Organization and Summary of
Significant Accounting Policies (Continued)
|-- |  | -----------------------------------------------------------------------
|  

| | Stock-Based Compensation
(Continued)
| | ------------------------------------
|

| | 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, 2003, 2002 and 2001.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

2003
    
    2002
    
    2001Risk-free interest rate
    
    3.12%
    
    3.80%
    
    4.22%Expected life
    
    4.88 years
    
    3.66 years
    
    3.13 yearsExpected volatility
    
    62.96%
    
    63.80%
    
    66.29%Expected dividend yield
    
    0%
    
    0%
    
    0%




| | Long-Lived Assets
| | -----------------
|

| | When facts and circumstances indicate that the cost 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, and 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 there is an impairment, 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|

| | 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. Research and
development costs were $2,557,072, $293,486 and $974,447 for the years
ended December 31, 2003, 2002 and 2001, respectively. The portion of
these costs associated with the Companys gum operations that were
sold, are included in discontinued operations for 2001.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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MATRIXX INITIATIVES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|1. |  | Organization and Summary of
Significant Accounting Policies (Continued)
|-- |  | -----------------------------------------------------------------------
|  

| | 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 $11,690,166,
$7,736,982 and $8,867,239 for the years ended December 31, 2003, 2002
and 2001, respectively.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|

| | Net Income (Loss) Per Share of Common Stock
| | -------------------------------------------
|

| | Basic earnings per share is calculated using the average number of
common shares outstanding. Diluted earnings per share is computed on
the basis of the average number of common shares outstanding plus the
dilutive effect of outstanding stock options using the treasury stock
method.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|

| | The basic and diluted earnings per share are the same for 2001 since the Company had a
net loss from continuing operations, and the inclusion of stock options and other
incremental shares would be anti-dilutive. The schedule below summarizes the elements
included in the calculation of basic and diluted net income (loss) per common share for
the years ended December 31, 2003, 2002 and 2001. Options, warrants and other
incremental shares to purchase 108,000, 389,500 and 654,960 shares of common stock at
December 31, 2003, 2002 and 2001, respectively were excluded from the computation of
diluted earnings per share because their effect would be anti-dilutive.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Year Ended December 31,2003
    
    2002
    
    2001Net income (loss) applicable to common
shareholders
    
    $
    3,344,318
    
    
    $
    4,756,655
    
    
    $
    12,612,633Weighted average common shares
outstanding - Basic
    
    
    9,420,059
    
    
    
    9,422,873
    
    
    
    9,284,234Dilutive securities
    
    
    53,023
    
    
    
    32,530
    
    
    
    Weighted average common shares
outstanding - Diluted
    
    
    9,473,082
    
    
    
    9,455,403
    
    
    
    9,284,234Net income (loss) per common share:Basic
    
    $
    .36
    
    
    $
    .50
    
    
    $
    1.36Diluted
    
    $
    .35
    
    
    $
    .50
    
    
    $
    1.36




| | Cash and Cash Equivalents
| | -------------------------
|

| | For purposes of the 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 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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MATRIXX INITIATIVES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|1. |  | Organization and Summary of Significant Accounting Policies (Continued)
|-- |  | -----------------------------------------------------------------------
|  

| | Recently Issued Accounting Standards
| | ------------------------------------
|

| | In July 2002, the Financial Accounting Standards Board (FASB) issued
SFAS No. 146, Accounting for Costs Associated with Exit or Disposal
Activities, which replaces Emerging Issues Task Force (EITF) Issue
No. 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (Including Certain Costs
Incurred in a Restructuring). The new standard requires companies to
recognize costs associated with exit or disposal activities when they
are incurred rather than at the date of a commitment to an exit or
disposal plan. The statement is to be applied prospectively to exit or
disposal activities initiated after December 31, 2002. The Company
adopted SFAS No. 146 on January 1, 2003, which did not result in any
impact on the Companys financial position or results of operations.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|

| | In November 2002, the FASB issued Financial Interpretation No. (FIN)
45, Guarantors Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others. Among other
things, the Interpretation requires guarantors to recognize, at fair
value, their obligations to stand ready to perform under certain
guarantees. FIN 45 became effective for guarantees issued or modified
on or after January 1, 2003 and had no effect on the Companys
financial position or results of operations.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|

| | In January 2003, the FASB issued FIN 46, Consolidation of Variable
Interest Entities. In general a variable entity is a corporation,
partnership, trust, or any other legal structure used for business
purposes that either (a) does not have equity investors with voting
rights or (b) has equity investors that do not provide sufficient
financial resources for the entity to support its activities. FIN 46
requires a variable interest entity to be consolidated by a company if
that company is subject to a majority of the risk of loss from the
variable interest entitys activities or entitled to receive a majority
of the entitys residual returns or both. The consolidation
requirements of FIN 46 apply immediately to variable interest entities
created after January 31, 2003. The consolidation requirements apply to
transactions entered into prior to February 1, 2003 in the first fiscal
year or interim period beginning after June 15, 2003, which was
subsequently delayed until the fourth quarter of 2003. Certain of the
disclosure requirements apply in all financial statements issued after
January 31, 2003, regardless of when the variable interest entity was
established. The adoption of the interpretation did not have any impact
on the Companys financial statements.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|

| | In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133
on Derivative Instruments and Hedging Activities, which amends and
clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities under SFAS No. 133. The Statement is effective (with certain
exceptions) for contracts entered into or modified after June 30, 2003.
The adoption of this Statement had no effect on the Companys financial
position or results of operations.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|

| | In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity. It requires that an issuer classify a financial instrument that
is within its scope as a liability (or an asset in some circumstances).
It is effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of the
first interim period after June 15, 2003. The adoption of SFAS No. 150
on July 1, 2003 had no effect on the Companys financial position or
results of operations.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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MATRIXX INITIATIVES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|1. |  | Organization and Summary of Significant Accounting Policies (Continued)
|-- |  | -----------------------------------------------------------------------
|  

| | Recently Issued Accounting Standards (Continued)
| | ------------------------------------------------
|

| | In December 2003, the Securities and Exchange Commission (SEC)
released Staff Accounting Bulletin (SAB) No. 104, Revenue
Recognition. SAB No. 104 revises or rescinds portions of the
interpretive guidance related to revenue recognitions included in Topic
13 of the codification of the staff accounting bulletins. SAB No. 104
became effective when issued, and adoption by the Company did not have
a material impact on its financial position or results of operations.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|

| | Reclassifications
| | -----------------
|

| | Certain prior period amounts have been reclassified to conform with the
current period presentation. The results of the Companys
operations for 2001 have been restated for the discontinued
operations of the Companys gum operations.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|

|2. |  | Discontinued Operations
|-- |  | -----------------------
|  

| | Sale of Gum Operations
| | ----------------------
|

| | On July 20, 2001, the Company sold substantially all of its assets
related to its gum operations to Wm. Wrigley Jr. Company (Wrigley),
for $25,000,000 in cash and other consideration. The Company retained
certain assets, including cash, accounts receivable, its 60% interest
in Zicam and its 49% interest in a joint venture with Swedish Match AB.
In addition, Wrigley purchased 200,000 shares of the Companys common
stock at a price of $7.50938 per share, or approximately $1,501,876.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|

| | The results of operations for 2001 have been restated for the
discontinued gum operations, which are summarized below. In addition,
the Company recorded an after-tax gain of approximately $17,717,362 as
a result of the asset sale in 2001.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|

| | Summary of Operating Results of Discontinued Operations for the year
ended December 31, 2001:
| | ---------------------------------------------------------------------------------------------

Net sales
    
    $
    2,064,457Cost of sales
    
    
    2,233,272Gross profit
    
    
    (168,815
    )Operating expenses
    
    
    814,684Research and development
    
    
    258,057Income (loss) from operations
    
    
    (1,241,556
    )Other income (expense)
    
    
    936,141Net Income (Loss)
    
    $
    (305,415
    )




|3. |  | Inventories
|-- |  | -----------
|  

| | Inventories consist of the following:
| | -------------------------------------

2003
    
    2002Raw materials and packaging
    
    $
    1,137,584
    
    
    $
    506,823Finished goods
    
    
    2,130,020
    
    
    
    1,066,211Total
    
    $
    3,267,604
    
    
    $
    1,573,034


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MATRIXX INITIATIVES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|  
|--
|4.
|  

| | Bank
| | ----
|

| | The Company has a $2,500,000 line of credit due in 2005 with interest
at .75% above prime (or 4.75% at December 31, 2003), collateralized by
accounts receivable, inventory, property and equipment, intangible
assets and other assets of the Company. The loan 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|

|  
|--
|5.
|  

| | Long-term debt consists of the following:
| | -----------------------------------------

2003
    
    2002Financial Institutions and OtherNon-interest bearing installment note
with imputed interest at 6.5% due in
2003, payable in four installments of
$2,750,000 on June 30, 2002, November
30, 2002, June 30, 2003 and November 30,
2003. Collateralized by forty percent
ownership interest in Zicam
    
    $
    
    
    
    $
    5,253,643Total Long-Term Debt
    
    
    
    
    
    
    5,253,643Less current portion of long-term debt
    
    
    
    
    
    
    (5,253,643
    )Long-Term Debt
    
    $
    
    
    
    $
    




|6. |  | 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:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(C)(B)
    
    AdditionsBalance at
    
    Charged to
    
    
    
    
    
    (E)(A)
    
    Beginning of
    
    Costs and
    
    (D)
    
    Balance atDescription
    
    Period
    
    Expenses
    
    Deductions
    
    End of PeriodReserves for Sales Returns
and AllowancesDecember 31, 2001
    
    $
    845,760
    
    
    $
    2,893,679
    
    
    $
    2,409,289
    
    
    $
    1,330,150December 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
    
    
    
    1,734,568


(C)(B)
    
    AdditionsBalance at
    
    Charged to
    
    
    
    
    
    (E)(A)
    
    Beginning of
    
    Costs and
    
    (D)
    
    Balance atDescription
    
    Period
    
    Expenses
    
    Deductions
    
    End of PeriodAllowance for Doubtful
AccountsDecember 31, 2001
    
    $
    306,835
    
    
    $
    450,115
    
    
    $
    288,561
    
    
    $
    468,389December 31, 2002
    
    
    468,389
    
    
    
    244,834
    
    
    
    65,943
    
    
    
    647,280December 31, 2003
    
    
    647,280
    
    
    
    114,353
    
    
    
    160,276
    
    
    
    601,357


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MATRIXX INITIATIVES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|7. |  | Income Taxes
|-- |  | ------------



| | The components of the provision (benefit) for income taxes are as
follows:
| | --------------------------------------------------------------------------

|          |         |  |                                            |           |      |           |      |            |      |            |   |         |   |         | 
|--------- | ------- |  | ------------------------------------------ | --------- | ---- | --------- | ---- | ---------- | ---- | ---------- | - | ------- | - | ------- | 
|          |         |  |                                            |           | 2003 |           | 2002 |            | 2001
|          |         |  |                                            |           |      |           |      |            |     
|Current:  |         |  |                                            |           |      |           |      |            |      |            |   |        
|          | Federal |  | $                                          | 110,309   |      |           | $    | (325,000   | )    |            | $ | 325,000 |  
|          | State   |  |                                            | 121,729   |      |           |      | 12,740     |      |            |   |        |  
|          |         |  |                                            |           |      |           |      |            |      |            |   |         |  
|          |         |  | Total                                      |           |      | 232,038   |      |            |      | (312,260   | ) |         |   | 325,000 | 
|          |         |  |                                            |           |      |           |      |            |      |            |   |         |  
|Deferred: |         |  |                                            |           |      |           |      |            |      |            |   |        
|          | Federal |  |                                            | 2,122,462 |      |           |      | (3,208,806 | )    |            |   |        |  
|          | State   |  |                                            | 72,847    |      |           |      | (188,881   | )    |            |   |        |  
|          |         |  |                                            |           |      |           |      |            |      |            |   |         |  
|          |         |  | Total                                      |           |      | 2,195,309 |      |            |      | (3,397,687 | ) |         |   |        | 
|          |         |  |                                            |           |      |           |      |            |      |            |   |         |  
|          |         |  | Total Provision (Benefit) For Income Taxes |           | $    | 2,427,347 |      |            | $    | (3,709,947 | ) |         | $ | 325,000 | 
|          |         |  |                                            |           |      |           |      |            |      |            |   |         |  



| | 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:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                            |  |      |    |      |  |      |      |    |  |  |     |  
|------------------------------------------- |  | ---- | -- | ---- |  | ---- | ---- | -- |  |  | --- | -
|                                            |  | 2003 |    | 2002 |  | 2001
|                                            |  |      |    |      |  |     
|Federal statutory rate                      |  |      | 34 | %    |  |      | 34   | %  |  |  | 34  | %
|State income taxes, net of federal benefits |  |      | 5  |      |  |      | 5    |    |  |  | 5   |  
|Valuation allowance                         |  |      | (5 | )    |  |      | (324 | )  |  |  |    |  
|Other                                       |  |      | 8  |      |  |      | (31  | )  |  |  |    |  
|Net operating loss carryover                |  |      |   |      |  |      | (38  | )  |  |  | (39 | )
|                                            |  |      |    |      |  |      |      |    |  |  |     |  
|Total                                       |  |      | 42 | %    |  |      | (354 | )% |  |  |    | %
|                                            |  |      |    |      |  |      |      |    |  |  |     |  



| | The income taxes for the year ended December 31, 2001 was comprised of
federal alternative minimum tax that was due as a result of the gain on
the sale of the Companys gum operations.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | Significant components of deferred income taxes as of December
31, 2003 and 2002 are as follows:                                                                                        

|                                  |  |      |           |      |  |   |           |  
|--------------------------------- |  | ---- | --------- | ---- |  | - | --------- | -
|                                  |  | 2003 |           | 2002
|                                  |  |      |           |     
|Net operating loss carryforwards  |  | $    | 6,923,700 |      |  | $ | 9,435,500 |  
|Reserve for bad debts             |  |      | 246,400   |      |  |   | 265,200   |  
|Inventory valuation reserve       |  |      | 68,200    |      |  |   | 36,700    |  
|Reserves and accrued expenses     |  |      | 795,400   |      |  |   | 513,400   |  
|Research and development credit   |  |      | 106,700   |      |  |   |          |  
|Other                             |  |      | 122,600   |      |  |   | 29,300    |  
|Valuation allowance               |  |      | (100,000  | )    |  |   | (400,100  | )
|                                  |  |      |           |      |  |   |           |  
|Total Deferred Tax Asset          |  |      | 8,163,000 |      |  |   | 9,880,000 |  
|                                  |  |      |           |      |  |   |           |  
|Amortization of intangible assets |  |      | (862,800  | )    |  |   | (448,900  | )
|Depreciation                      |  |      | (118,800  | )    |  |   | (72,600   | )
|                                  |  |      |           |      |  |   |           |  
|Total Deferred Tax Liability      |  |      | (981,600  | )    |  |   | (521,500  | )
|                                  |  |      |           |      |  |   |           |  
|Net Deferred Tax Asset            |  | $    | 7,181,400 |      |  | $ | 9,358,500 |  
|                                  |  |      |           |      |  |   |           |  

48



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MATRIXX INITIATIVES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|7. |  | Income Taxes (Continued)
|-- |  | ------------------------
|  

| | 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
deferred tax assets will be realized and the valuation allowance had
been reduced to $400,100. During 2003, the Company further reduced the
valuation allowance to $100,000. The net change in the valuation
allowance for deferred tax assets in 2003 and 2002 was a decrease of
$300,100, and $3,902,800, respectively. The Company will continue to
review this valuation allowance on a quarterly basis and make
adjustments as appropriate.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|

| | 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.
However, no benefits were recorded to additional paid in capital in
2001 because their realization was not more likely than not to occur
and consequently, a valuation allowance was recorded against the entire
benefit. 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 2003 and 2002 of $18,190
and $5,960,799, respectively.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|

| | At December 31, 2003, the Company had federal and state net operating
loss carryforwards of approximately $18,000,000 and $16,000,000,
respectively. Such carryforwards expire in the years 2018 through 2020
and 2004 through 2005 for federal and state purposes, respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|

|8. |  | 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.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|

|9. |  | 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.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|

| | 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.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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MATRIXX INITIATIVES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|9. |  | Stockholders Equity (Continued)
|-- |  | --------------------------------
|  

| | Shareholder Rights Plan (Continued)
| | -----------------------------------
|

| | 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.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|

| | 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|

|10. |  | 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.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

50



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MATRIXX INITIATIVES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|10. |  | Stock Options and Warrants (Continued)
|--- |  | --------------------------------------



| | 1995 Stock Option Plan (Continued)
| | ----------------------------------



| | 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.
|
| | 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, 2001, 2002 and
2003. The outstanding options expire from April 2004 to July 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

Number of
    
    Weighted AverageShares
    
    Exercise PriceOptions outstanding at December 31, 2000
    
    
    591,500
    
    
    $
    10.34Granted
    
    
    95,000
    
    
    
    7.94Exercised
    
    
    (158,500
    )
    
    
    5.96Cancelled
    
    
    (205,000
    )
    
    
    11.43Options 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
    
    
    $
    9.73




| | 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

51



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MATRIXX INITIATIVES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|10. |  | Stock Options and Warrants (Continued)
|--- |  | --------------------------------------



| | 2001 Long-Term Incentive Plan (Continued)
| | -----------------------------------------



| | The following table contains information on the stock options under the
Companys 2001 Plan for the years ended December 31, 2001, 2002, and
2003. The outstanding options expire from March 2007 to July 2010.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Number of
    
    Weighted AverageShares
    
    Exercise PriceOptions outstanding at December 31, 2000
    
    
    
    
    
    $
    Granted
    
    
    12,000
    
    
    
    6.90Exercised
    
    
    
    
    
    
    Cancelled
    
    
    
    
    
    
    Options 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
    
    
    $
    8.39




| | Other Stock Options
| | -------------------



| | The Company has granted non-qualified stock options to consultants,
directors and other individuals. The outstanding options expire in
September 2004.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | The following table contains information on all of the Companys non-plan
stock options for the years ended December 31, 2001, 2002 and 2003.         

Number of
    
    Weighted AverageShares
    
    Exercise PriceOptions outstanding at December 31, 2000
    
    
    176,786
    
    
    $
    10.12Granted
    
    
    10,000
    
    
    
    8.88Exercised
    
    
    
    
    
    
    Cancelled
    
    
    (14,286
    )
    
    
    11.44Options 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
    
    
    $
    14.31


52



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MATRIXX INITIATIVES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|10. |  | Stock Options and Warrants (Continued)
|--- |  | --------------------------------------



| | Other Stock Option Information
| | ------------------------------



| | The weighted average fair value of options granted was $4.59, $4.14 and
$3.61 in 2003, 2002 and 2001, respectively.                
| | -----------------------------------------------------------------------------------------------------------------------------------
|
| | The following table summarizes information about the Companys two
stock-based compensation plans outstanding at December 31, 2003:
|
| | Options Outstanding and Exercisable by Price Range as of December 31,
2003:                                                        

|                 |  |                     |         |                     |  |           |      |             |  |          |       |  |  |          |         |  |  |   |       | 
|---------------- |  | ------------------- | ------- | ------------------- |  | --------- | ---- | ----------- |  | -------- | ----- |  |  | -------- | ------- |  |  | - | ----- | 
|                 |  | Options Outstanding |         | Options Exercisable
|                 |  |                     |         |                    
|                 |  |                     |         |                     |  | Weighted  |      |             |  |          |       |  |  |          |         |  |  |  
|                 |  |                     |         |                     |  | Average   |      | Weighted    |  |          |       |  |  | Weighted
|Range of         |  |                     |         |                     |  | Remaining |      | Average     |  |          |       |  |  | Average 
|Exercise         |  | Number              |         | Contractual         |  | Exercise  |      | Number      |  | Exercise
|Prices           |  | Outstanding         |         | Life In Years       |  | Price     |      | Exercisable |  | Price   
|                 |  |                     |         |                     |  |           |      |             |  |         
|$6.90 -     9.00 |  |                     | 317,800 |                     |  |           | 4.70 |             |  | $        | 8.02  |  |  |          | 145,800 |  |  | $ | 7.79  | 
|$9.01 -   16.13  |  |                     | 128,000 |                     |  |           | 2.87 |             |  | $        | 10.92 |  |  |          | 84,333  |  |  | $ | 11.66 | 
|                 |  |                     |         |                     |  |           |      |             |  |          |       |  |  |          |         |  |  |   |       | 
|$6.90 -    16.13 |  |                     | 445,800 |                     |  |           | 4.17 |             |  | $        | 8.85  |  |  |          | 230,133 |  |  | $ | 9.21  | 
|                 |  |                     |         |                     |  |           |      |             |  |          |       |  |  |          |         |  |  |   |       | 



| | Compensation Expense
| | --------------------



| | The Company recorded compensation
expense of $0, $0, and $25,830 for
the years ended December 31, 2003, 2002 and 2001, respectively for the
value of certain options granted to non-employees of the Company. 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-Scholes 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. 



| | 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. As of December
31, 2003 and 2002, 30,000 warrants are outstanding and 30,000 warrants
expired unexercised in 2002.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|11. |  | 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, 2003 under the Companys operating leases that
have initial or remaining noncancellable lease terms in excess of one
year, including the office lease agreement signed in January of 2004:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

53



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MATRIXX INITIATIVES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|11. |  | Commitments and Contingencies (Continued)
|--- |  | -----------------------------------------



| | Leases (Continued)
| | ------------------

|             |                              |            |   |         | 
|------------ | ---------------------------- | ---------- | - | ------- | 
|Year Ending  |                              |            |   |        
|December 31, |                              | Facilities
|             |                              |           
|             | 2004                         |            | $ | 112,772 | 
|             | 2005                         |            |   | 82,096  | 
|             | 2006                         |            |   | 85,371  | 
|             | 2007                         |            |   | 88,647  | 
|             |                              |            |   |        
|             | Total Minimum Lease Payments |            | $ | 368,886 | 
|             |                              |            |   |        



| | Rental expense charged to operations was $267,596, $256,804 and
$280,838 for the years ended December 31, 2003, 2002 and 2001,
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. However, based on experience, the Company expects the risk
of loss to be remote.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 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. Litigation is inherently unpredictable, and
excessive verdicts do occur. Although the Company believes it has valid
defenses in these matters, the Company could in the future incur
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 that the clinical studies performed on
the product are sufficient evidence to refute such claims.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | As of December 31, 2003, suits involving three users of the Zicam®
Cold Remedy nasal gel products had been filed in various federal and
state courts. All of these suits are at a preliminary stage and the
Company has not yet obtained and reviewed complete information
regarding the plaintiffs and their medical conditions, and
consequently, the Company is unable to fully evaluate the claims.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | On March 12, 2004, the Company was served with a complaint that
was filed in the Superior Court of Maricopa County, Arizona, whereby
sixty-four plaintiffs alleged that the use of the Zicam® Cold
Remedy nasal gel products resulted in anosmia, the loss of their sense
of smell. Specific damages have not been requested and the Company
has turned the lawsuit over to its product liability insurance
carrier.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | The Company is actively engaged in defending these various lawsuits.
| | --------------------------------------------------------------------



|12. |  | Related Party Transactions
|--- |  | --------------------------



| | In 2000, the Company loaned $150,000 to the Companys former President.
The note included interest at 10% per annum. The $150,000 note
receivable from the Companys former President plus accrued interest of
$8,671 was forgiven in 2001 in connection with the sale of the
Companys gum operations in 2001.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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MATRIXX INITIATIVES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|13. |  | 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, $20,539 and $32,988 for the years ended
December 31, 2003, 2002 and 2001, respectively. Each employee shall be
fully vested at all times in their contribution and the Companys
matching contributions.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|14. |  | 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 ten 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| | The Company currently relies on five different manufacturers to produce
its ten products, but has identified alternative suppliers for each of
the products. However, the Company has not made any purchases from
these alternative suppliers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| | Sales to major customers, which comprised 10% or more of net sales, for
the years ended December 31, 2003, 2002 and 2001 were as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

2003
    
    2002
    
    2001Customer A
    
    
    16.9
    %
    
    
    18.2
    %
    
    
    10.6
    %Customer B
    
    
    14.4
    %
    
    
    *
    
    
    
    10.3
    %Customer C
    
    
    *
    
    
    
    11.0
    %
    
    
    *




| | *     Less than 10%
| | -------------------



|15. |  | 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, 2003
and 2002:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

55



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MATRIXX INITIATIVES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|15. |  | Fair Value of Financial Instruments (Continued)
|--- |  | -----------------------------------------------

2003
    
    2002Carrying
    
    Estimated
    
    Carrying
    
    EstimatedAmount
    
    Fair Value
    
    Amount
    
    Fair ValueFinancial Assets:Cash and cash equivalents
    
    $
    10,682,614
    
    
    $
    10,682,614
    
    
    $
    12,010,091
    
    
    $
    12,010,091Financial Liabilities:Long-term debt
    
    
    
    
    
    
    
    
    
    
    5,253,643
    
    
    
    5,253,643




| | 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. The carrying value of
long-term debt approximates fair value because the note is non-interest
bearing and has been recorded by the Company on a discounted basis
using a market rate of interest.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|16. |  | Selected Quarterly Financial Data (Unaudited)
|--- |  | ---------------------------------------------



| |  | Selected unaudited quarterly financial data for the years 2003 and 2002
are summarized below:
| |  | ---------------------------------------------------------------------------------------------

Fiscal Year 2003 Quarters1st
    
    2nd
    
    3rd
    
    4th
    
    TotalNet sales
    
    $
    8,901,675
    
    
    $
    2,994,419
    
    
    $
    13,374,004
    
    
    $
    18,225,665
    
    
    $
    43,495,763Gross profit
    
    
    6,252,630
    
    
    
    1,848,835
    
    
    
    9,158,970
    
    
    
    12,780,997
    
    
    
    30,041,432Net income (loss) from
continuing operations
    
    
    117,354
    
    
    
    (566,999
    )
    
    
    2,762,998
    
    
    
    1,030,965
    
    
    
    3,344,318Net income (loss) per
basic share from
continuing operations
    
    
    .01
    
    
    
    (.06
    )
    
    
    .29
    
    
    
    .11
    
    
    
    .36Net income (loss) per
diluted share from
continuing operations
    
    
    .01
    
    
    
    (.06
    )
    
    
    .29
    
    
    
    .11
    
    
    
    .35Net income (loss)
    
    
    117,354
    
    
    
    (566,999
    )
    
    
    2,762,998
    
    
    
    1,030,965
    
    
    
    3,344,318




| | (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.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

56



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##### Table of Contents



MATRIXX INITIATIVES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|16. |  | Selected Quarterly Financial Data (Unaudited) (Continued)
|--- |  | ---------------------------------------------------------

| |                                                                |  |                           |           |     |  |     |           |     |  |       |           |  |  |   |            |  |  |   |            | 
| | -------------------------------------------------------------- |  | ------------------------- | --------- | --- |  | --- | --------- | --- |  | ----- | --------- |  |  | - | ---------- |  |  | - | ---------- | 
| |                                                                |  | Fiscal Year 2002 Quarters |           |     |  |    
| |                                                                |  |                           |           |     |  |    
| |                                                                |  | 1st                       |           | 2nd |  | 3rd |           | 4th |  | Total
| |                                                                |  |                           |           |     |  |     |           |     |  |      
| | Net sales                                                      |  | $                         | 5,067,511 |     |  | $   | 1,825,696 |     |  | $     | 5,078,596 |  |  | $ | 11,575,833 |  |  | $ | 23,547,636 | 
| | Gross profit                                                   |  |                           | 3,820,275 |     |  |     | 1,300,809 |     |  |       | 3,410,443 |  |  |   | 8,264,068  |  |  |   | 16,795,595 | 
| | Net income (loss) from
continuing operations                   |  |                           | 928,863   |     |  |     | (871,394  | )   |  |       | 1,022,734 |  |  |   | 3,676,452  |  |  |   | 4,756,655  | 
| | Net income (loss) per
basic share from
continuing operations   |  |                           | .10       |     |  |     | (.09      | )   |  |       | .11       |  |  |   | .39        |  |  |   | .50        | 
| | Net income (loss) per
diluted share from
continuing operations |  |                           | .10       |     |  |     | (.09      | )   |  |       | .11       |  |  |   | .39        |  |  |   | .50        | 
| | Net income (loss)                                              |  |                           | 928,863   |     |  |     | (871,394  | )   |  |       | 1,022,734 |  |  |   | 3,676,452  |  |  |   | 4,756,655  | 



| | (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.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

57



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##### Table of Contents



(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 Form 10-K. (a)3. Exhibits Exhibit No.
    
    Title3.01
    
    Articles 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
    
    **Buy-Out Agreement between the Registrant and Gary S. Kehoe10.02
    
    *1995 Stock Option Plan (5)10.03
    
    *Amendment to 1995 Stock Option Plan (5)10.04
    
    Credit Agreement among the Registrant, Gel Tech, L.L.C. (now
Zicam, LLC) and Comerica Bank (6)10.05
    
    Second Modification Agreement dated May 15, 2003 among the
Registrant, Zicam, LLC and Comerica Bank (4)10.06
    
    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)10.07
    
    *Employment Agreement between the Registrant and Carl J.
Johnson (8)10.08
    
    *First Amendment to Employment Agreement between the
Registrant and Carl J. Johnson (2)10.09
    
    *2001 Stock Incentive Plan (9)10.10
    
    *Summary of Matrixx Initiatives, Inc. Director Restricted
Stock Purchase Program (6)14
    
    **Code of Ethics21
    
    **Subsidiaries of the Registrant23.1
    
    **Consent of Mayer Hoffman McCann P.C., independent auditor
of the Company23.2
    
    **Consent of Angell & Deering, Certified Public Accountants,
former independent auditor of the Company.31.1
    
    **Certification of CEO Pursuant to
Section 302 of the Sarbanes-Oxley Act of 200232.2
    
    **Certification of CFO Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
 58




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##### Table of Contents



Exhibit No.
    
    Title32.1
    
    **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 Registrants 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.(9)
    
    Incorporated by reference to the Registrants definitive proxy statement
on Schedule 14A, filed October 17, 2001, file number 000-27646.  (b) Reports on Form 8-K On September 30, 2003, we filed a Current Report on Form 8-K with the SEC
in connection with a press release that we issued to provide updated earnings
guidance for fiscal 2003. On October 23, 2003, we filed a Current Report on Form 8-K with the SEC in
connection with a press release that we issued to report our earnings for the
third quarter of fiscal 2003. On January 8, 2004, we filed a Current Report on Form 8-K with the SEC in
connection with a press release that we issued to revise our earnings guidance
upward for fiscal 2003. On February 11, 2004, we filed a Current Report on Form 8-K with the SEC
in connection with two press releases that we issued affirming the safety of
our Zicam Cold Remedy product. On February 17, 2004, we filed a Current Report on Form 8-K with the SEC
in connection with a press release that we issued to announce our fiscal 2003
financial results. 59




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##### Table of Contents



On February 27, 2004, we filed a Current Report on Form 8-K with the SEC
to announce the conclusion reached by a panel of physicians and scientists. 60




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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 19, 2004. 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
Edward E. Faber
    
    Chairman of the Board of
Directors
    
    March 19, 2004/s/  Carl J. Johnson
Carl J. Johnson
    
    President, Chief Executive
Officer and Director
    
    March 19, 2004/s/  William C. Egan
William C. Egan
    
    Director
    
    March 19, 2004/s/  Edward J. Walsh
Edward J. Walsh
    
    Director
    
    March 19, 2004/s/  L. White Matthews, III
L. White Matthews, III
    
    Director
    
    March 19, 2004/s/  Michael A. Zeher
Michael A. Zeher
    
    Director
    
    March 19, 2004/s/  William J. Hemelt
William J. Hemelt
    
    Executive Vice President,
Chief Financial Officer
(Principal Financial
Officer & Principal
Accounting Officer),
Treasurer and Secretary
    
    March 19, 2004
 61