##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 Form 10-K
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 For the Fiscal year ended December 31, 2005
 or
 o
    
    FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For
the transaction period from  to
 Commission File No. 001-31404
 Matrixx Initiatives, Inc.
  Delaware(State or Other Jurisdiction
of Incorporation or Organization)
    
    87-0482806(I.R.S. Employer
Identification No.)
 4742 N. 24th Street
Suite 455
Phoenix, AZ 85016
602-385-8888
 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
 o þ
 o þ
 þ o
 þ
  Large accelerated filer
    
    Yes o
    
    No þAccelerated filer
    
    Yes þ
    
    No oNon-accelerated filer
    
    Yes o
    
    No þ
 o þ
  March 9, 2006, 9,814,629
   - 1 -




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DOCUMENTS INCORPORATED BY REFERENCE
  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.
 - 2 -




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##### 



TABLE OF CONTENTS
 PagePART IItem 1.
    
    Business
    
    4Item 1A.
    
    Risk Factors
    
    9Item 1B.
    
    Unresolved Staff Comments
    
    13Item 2.
    
    Properties
    
    13Item 3.
    
    Legal Proceedings
    
    13Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    16Supplemental
Item.Executive Officers of Matrixx
    
    16PART IIItem 5.
    
    Market for the
Registrants Common Stock, Related Stockholder Matters and Issuer Purchases of Equity  Securities
    
    17Item 6.
    
    Selected Financial Data
    
    18Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    18Item 7A.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    31Item 8.
    
    Financial Statements and Supplementary Data
    
    31Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    31Item 9A.
    
    Controls and Procedures
    
    31Item 9B.
    
    Other Information
    
    34PART IIIItem 10.
    
    Directors and Executive Officers of the Registrant
    
    34Item 11.
    
    Executive Compensation
    
    34Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management
    
    34Item 13.
    
    Certain Relationships and Related Transactions
    
    35Item 14.
    
    Principal Accountant Fees and Services
    
    35PART IVItem 15.
    
    Exhibits, Financial Statement Schedules
    
    36SIGNATURES
    
    
    
    64EX-10.12EX-23.1EX-31.1EX-31.2EX-32.1EX-32.2
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PART I
 
 ITEM 1. BUSINESS
 Introduction
  
    
    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 Zicam 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.
    
    Seven Zicam Cough Mist products that use a unique spray mist delivery to
provide effective cough relief. The cough products are: Zicam Cough Mist Adult
Cherry, Zicam Cough Mist Adult Honey Lemon, Zicam Cough Mist Adult Plus
Decongestant, Zicam Cough Mist Adult Nite, Zicam Cough Mist Kids Plus Decongestant,
Zicam Cough Mist Kids Cherry, and Zicam Cough Mist Max.
    
    Four new Zicam Flu relief products were introduced in 2005. The flu products
utilize a spoon dose delivery that provides relief of common cold and flu symptoms.
The flu products are: Zicam Cold & Flu Day, Zicam Cold & Flu Night, Zicam Flu Day,
and Zicam Flu Night.
    
    Two Nasal Comfort moisture therapy products designed to help maintain the
critical functions of the nasal cavity and its role in the respiratory process
began shipping in the third quarter of 2005. Nasal Comfort is a new brand with two
initial products, Nasal Comfort Scented and Nasal Comfort Unscented, targeted to
consumers suffering from allergies, asthma, and sinusitis.
   4




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th
 Markets and Company Products
   Product Class
    
    2003
    
    2004
    
    2005Cold Remedy
    
    $
    34,197,499
    
    
    $
    39,249,136
    
    
    $
    55,292,673Allergy/Sinus
    
    $
    9,298,267
    
    
    $
    13,357,491
    
    
    $
    15,914,495Cough
    
    $
    0
    
    
    $
    7,624,308
    
    
    $
    6,514,769Flu
    
    $
    0
    
    
    $
    0
    
    
    $
    8,489,465Nasal Comfort
    
    $
    0
    
    
    $
    0
    
    
    $
    4,249,193Total Net Sales
    
    $
    43,495,766
    
    
    $
    60,230,935
    
    
    $
    90,460,595
 Cold
Remedy Pump
  Cold
Remedy Swabs
  Cold
Remedy, Oral Delivery
  5




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Allergy/Sinus
  Cough
  Flu
  Nasal
Comfort
  Business Strategy
  6




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Expanding Marketing Efforts for Existing and New Products
 Pursuing Additional Delivery Systems and Expansion into New OTC Categories
 Customers
  Manufacturing and Distribution
   Research and Development
  7




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FDA and Other Government Regulation
  Environmental Matters
  Trademarks, Trade Names, and Proprietary Rights
 ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ® ®
 Employees
  8




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Seasonality
  Backlog
  Competition
  
 ITEM 1A. RISK FACTORS
 We may fail to compete effectively, particularly against, larger more established pharmaceutical
and health products companies, or low cost generic drug manufacturers, causing our business and
operating results to suffer
  Our business is subject to seasonality that may cause our quarterly operating results to fluctuate
materially and cause the market price of our stock to decline
  We may continue to incur significant costs resulting from product liability claims or securities
litigation
  9




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Because a significant portion of our business depends substantially on a small group of large
national retailers, our sales, operating margins and income would be adversely affected by any
disruption of our relationship with these retailers, or any other material adverse change in such
retailers businesses.
  We
believe that growth in the over-the-counter healthcare products market is driven, in part, by
factors beyond our control, such as media attention and adverse publicity. If the factors currently
having a positive impact on this market disappear or diminish, our sales in this market may suffer.
  Our future growth will depend in part upon our ability to develop and achieve sales of our new
products, including our new brand, Nasal Comfort
  Our new business focus means we have a limited operating history on which to assess our current and
prospective performance
  10




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Unanticipated problems associated with product development and commercialization could adversely
affect our operating results
  
    
    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;
    
    existing or proposed products do not attain broad distribution or retail shelf space; or
    
    proprietary rights held by third parties preclude us from developing or marketing
existing or proposed products.
  Our inability to provide scientific proof for product claims may adversely affect our sales
  FDA and other government regulation may restrict our ability to sell our products
  11




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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 do not have manufacturing capabilities of our own
  We may experience product backlogs
  Loss of key personnel
  To protect against various potential liabilities, we maintain a variety of insurance programs.
Significant increases in the cost or decreases in the availability of such insurance could
adversely impact our financial condition.


12



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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
  
    
    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
  The price of our stock may continue to be volatile
  
 ITEM 1B. UNRESOLVED STAFF COMMENTS
  
 ITEM 2. PROPERTIES
  
 13




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ITEM 3. LEGAL PROCEEDINGS
 Litigation
    Product Liability Matters
   14




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15




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16



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Litigation Reserves
  Securities Litigation Matters
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 Executive Officers of Matrixx
  17




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President and Chief Executive Officer
  Executive Vice President, Operations, Chief Financial Officer, and Treasurer
  Vice President of Research & Development
  Vice President of Administration and Secretary
  Vice President of Sales
  Vice President of Marketing
  18




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PART II





ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES




Market PriceHigh
    
    LowFiscal Year 2004First Quarter
    
    $
    20.89
    
    
    $
    8.31Second Quarter
    
    $
    11.19
    
    
    $
    8.45Third Quarter
    
    $
    10.60
    
    
    $
    7.25Fourth Quarter
    
    $
    14.74
    
    
    $
    10.35Fiscal Year 2005First Quarter
    
    $
    12.60
    
    
    $
    9.00Second Quarter
    
    $
    12.97
    
    
    $
    9.70Third Quarter
    
    $
    14.87
    
    
    $
    10.83Fourth Quarter
    
    $
    22.65
    
    
    $
    13.91




Dividend Policy




19




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ITEM 6. SELECTED FINANCIAL DATA




(000s, except per share data)
    
    2005
    
    2004
    
    2003
    
    2002
    
    2001Net sales
    
    $
    90,461
    
    
    $
    60,231
    
    
    $
    43,496
    
    
    $
    23,548
    
    
    $
    16,072Net income (loss)- Continuing Operations
    
    $
    3,078
    
    
    $
    4,957
    
    
    $
    3,344
    
    
    $
    4,757
    
    
    $
    (4,799
    )- Discontinued Operations
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    17,412Net income (loss) per share of common stock  basic- Continuing Operations
    
    $
    0.32
    
    
    $
    0.52
    
    
    $
    0.36
    
    
    $
    0.50
    
    
    $
    (0.52
    )- Discontinued Operations
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    1.88Net income (loss) per share of common stock  diluted- Continuing Operations
    
    $
    0.32
    
    
    $
    0.52
    
    
    $
    0.35
    
    
    $
    0.50
    
    
    $
    (0.52
    )- Discontinued Operations
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    1.88Dividends per share
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Shares outstanding at year end
    
    
    9,600
    
    
    
    9,520
    
    
    
    9,475
    
    
    
    9,441
    
    
    
    9,432Total assets
    
    $
    88,751
    
    
    $
    60,134
    
    
    $
    50,077
    
    
    $
    47,185
    
    
    $
    42,507Long term obligations
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    5,254Stockholders equity
    
    $
    48,110
    
    
    $
    44,126
    
    
    $
    38,790
    
    
    $
    35,155
    
    
    $
    24,369







ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


Overview




20



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Executive Summary






Product Class
    
    2003
    
    2004
    
    2005Cold Remedy
    
    $
    34,197,499
    
    
    $
    39,249,136
    
    
    $
    55,292,673Allergy/Sinus
    
    $
    9,298,267
    
    
    $
    13,357,491
    
    
    $
    15,914,495Cough
    
    $
    0
    
    
    $
    7,624,308
    
    
    $
    6,514,769Flu
    
    $
    0
    
    
    $
    0
    
    
    $
    8,489,465Nasal Comfort
    
    $
    0
    
    
    $
    0
    
    
    $
    4,249,192Total Net Sales
    
    $
    43,495,766
    
    
    $
    60,230,935
    
    
    $
    90,460,595








21



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1)
    
    We compare our year to date sales and net income performance against our stated annual
goal for each. For fiscal 2005, our stated goal was to grow sales 25%  35% and net income
10%  20% above the level realized in 2004. We realized net sales growth of 50% in 2005. As
noted previously, net income for 2005 reflects recognition of approximately $8.5 million as
expense related to settling the Arizona litigation and creating a reserve for the remaining lawsuits, and $477,000 in tax credits. Net income
grew by 54% exclusive of these one-time items.2)
    
    We monitor our share of the cough and cold market. For the 52 weeks ended December 25,
2005, retail sales of our products (as measured by three outlet syndicated scanner data,
not including our largest customer, Wal-Mart) increased approximately 48% over the
comparable period in the previous year, while the entire cough and cold category increased
approximately 13% over the same period. The increased sales of our products for the 52
weeks ended December 25, 2005 achieved a share of approximately 2.4% of the entire cough
and cold market compared to a share of 1.8% in the previous year.3)
    
    We measure our ability to maintain strong gross margins on our products. During 2005 we
achieved an average gross margin of 69%, which is below our goal of 70%, and equal to the
average gross margin of 69% realized in 2004 (gross margins on our existing products vary
between 50% and 80%). Average gross margins remaining below 70% is primarily attributable
to higher start-up costs related to new products and increased freight costs.4)
    
    We evaluate our operating performance by reviewing, over time, our ability to decrease
administrative and general costs as a percentage of net sales. For 2005, our operating
expenses (excluding R&D and litigation settlement charges) were approximately 50% of our
net sales compared to 53% in 2004. Operating expenses for the year, as a percentage of net
sales, have been positively impacted by operating expense increasing at a lower rate than
sales growth. Although we recognized $2.0 million in 2005 for reimbursement of legal
expenses, legal expense continues to negatively impact results. Legal expense in 2005
increased to $5.2 million (net of the $2.0 million insurance reimbursement discussed in
Part I Item 3 Legal Proceedings) compared to $5.1 million in 2004. The increased legal
expense is primarily related to the product liability lawsuits which have been filed
against the Company (see Part I, Item 3  Legal
Proceedings).5)
    
    We review the distribution of our products by key national retailers. Our ten largest
retail customers carry, on average, 14 of our 23 products (Zicam & Nasal Comfort) compared
to 12 of our 16 products in 2004. Those customers accounted for approximately 75% of our
net sales in 2005, and 73% of net sales in 2004.
 Seasonality and Quarterly Results
  22




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Quarterly Results:
 2005$000s
    

Q1 2005
    

% NS
    

Q2 2005
    

% NS
    

Q3 2005
    

% NS
    

Q4 2005
    

% NS
    

FY 2005
    

% NSNet Sales
    
    $
    14,982
    
    
    
    
    
    
    $
    6,255
    
    
    
    
    
    
    $
    25,203
    
    
    
    
    
    
    $
    44,022
    
    
    
    
    
    
    $
    90,461R&D
    
    $
    500
    
    
    
    3
    %
    
    $
    966
    
    
    
    15
    %
    
    $
    784
    
    
    
    3
    %
    
    $
    1,820
    
    
    
    4
    %
    
    $
    4,069
    
    
    
    4
    %Marketing
    
    $
    5,069
    
    
    
    34
    %
    
    $
    1,668
    
    
    
    27
    %
    
    $
    1,981
    
    
    
    8
    %
    
    $
    16,284
    
    
    
    37
    %
    
    $
    25,002
    
    
    
    28
    %Sales
    
    $
    614
    
    
    
    4
    %
    
    $
    431
    
    
    
    7
    %
    
    $
    1,233
    
    
    
    5
    %
    
    $
    3,038
    
    
    
    7
    %
    
    $
    5,316
    
    
    
    6
    %General & Administrative
    
    $
    1,868
    
    
    
    12
    %
    
    $
    1,611
    
    
    
    26
    %
    
    $
    2,059
    
    
    
    8
    %
    
    $
    4,639
    
    
    
    11
    %
    
    $
    10,176
    
    
    
    11
    %Legal
    
    $
    1,273
    
    
    
    8
    %
    
    $
    819
    
    
    
    13
    %
    
    $
    1,735
    
    
    
    7
    %
    
    $
    9,875
    
    
    
    22
    %
    
    $
    13,702
    
    
    
    15
    %Total Op
Expenses
    
    $
    9,323
    
    
    
    62
    %
    
    $
    5,495
    
    
    
    88
    %
    
    $
    7,792
    
    
    
    31
    %
    
    $
    35,656
    
    
    
    81
    %
    
    $
    58,266
    
    
    
    64
    %
  2004$000s
    

Q1 2004
    

% NS
    

Q2 2004
    

% NS
    

Q3 2004
    

% NS
    

Q4 2004
    

% NS
    

FY 2004
    

% NSNet Sales
    
    $
    12,933
    
    
    
    
    
    
    $
    3,392
    
    
    
    
    
    
    $
    16,905
    
    
    
    
    
    
    $
    27,002
    
    
    
    
    
    
    $
    60,231R&D
    
    $
    470
    
    
    
    4
    %
    
    $
    522
    
    
    
    15
    %
    
    $
    354
    
    
    
    2
    %
    
    $
    541
    
    
    
    2
    %
    
    $
    1,887
    
    
    
    3
    %Marketing
    
    $
    4,771
    
    
    
    37
    %
    
    $
    1,216
    
    
    
    36
    %
    
    $
    1,313
    
    
    
    8
    %
    
    $
    9,427
    
    
    
    35
    %
    
    $
    16,726
    
    
    
    28
    %Sales
    
    $
    665
    
    
    
    5
    %
    
    $
    123
    
    
    
    4
    %
    
    $
    862
    
    
    
    5
    %
    
    $
    1,406
    
    
    
    5
    %
    
    $
    3,056
    
    
    
    5
    %General & Administrative
    
    $
    1,546
    
    
    
    12
    %
    
    $
    1,037
    
    
    
    31
    %
    
    $
    1,442
    
    
    
    9
    %
    
    $
    2,962
    
    
    
    11
    %
    
    $
    6,987
    
    
    
    12
    %Legal
    
    $
    435
    
    
    
    3
    %
    
    $
    1,096
    
    
    
    32
    %
    
    $
    1,812
    
    
    
    11
    %
    
    $
    1,750
    
    
    
    6
    %
    
    $
    5,093
    
    
    
    8
    %Total Op
Expenses
    
    $
    7,887
    
    
    
    61
    %
    
    $
    3,993
    
    
    
    118
    %
    
    $
    5,783
    
    
    
    34
    %
    
    $
    16,086
    
    
    
    60
    %
    
    $
    33,749
    
    
    
    56
    %
 2003$000s
    

Q1 2003
    
    % NS
    

Q2 2003
    

% NS
    

Q3 2003
    

% NS
    

Q4 2003
    

% NS
    

FY 2003
    

% NSNet Sales
    
    $
    8,902
    
    
    
    
    
    
    $
    2,994
    
    
    
    
    
    
    $
    13,374
    
    
    
    
    
    
    $
    18,226
    
    
    
    
    
    
    $
    43,496R&D
    
    $
    311
    
    
    
    3
    %
    
    $
    596
    
    
    
    20
    %
    
    $
    795
    
    
    
    6
    %
    
    $
    855
    
    
    
    5
    %
    
    $
    2,557
    
    
    
    6
    %Marketing
    
    $
    3,899
    
    
    
    44
    %
    
    $
    743
    
    
    
    25
    %
    
    $
    1,149
    
    
    
    9
    %
    
    $
    6,661
    
    
    
    37
    %
    
    $
    12,452
    
    
    
    29
    %Sales
    
    $
    568
    
    
    
    6
    %
    
    $
    226
    
    
    
    8
    %
    
    $
    761
    
    
    
    6
    %
    
    $
    1,059
    
    
    
    6
    %
    
    $
    2,613
    
    
    
    6
    %General & Administrative
    
    $
    1,085
    
    
    
    12
    %
    
    $
    989
    
    
    
    33
    %
    
    $
    1,638
    
    
    
    12
    %
    
    $
    1,924
    
    
    
    11
    %
    
    $
    5,636
    
    
    
    13
    %Legal
    
    $
    141
    
    
    
    2
    %
    
    $
    214
    
    
    
    7
    %
    
    $
    207
    
    
    
    2
    %
    
    $
    378
    
    
    
    2
    %
    
    $
    940
    
    
    
    2
    %Total Op
Expenses
    
    $
    6,003
    
    
    
    67
    %
    
    $
    2,768
    
    
    
    92
    %
    
    $
    4,551
    
    
    
    34
    %
    
    $
    10,877
    
    
    
    60
    %
    
    $
    24,199
    
    
    
    56
    %
 23




---



##### Table of Contents



Critical Accounting Policies and Estimates
    Intangible Assets and Goodwill:
 Income Taxes:
  Revenue Recognition:
 Customer Sales Returns and Allowances:
 24




---



##### Table of Contents



Legal Contingencies: Accounting for
Contingencies
 Results Of Operations For The Year Ended December 31, 2005 Compared To The Year Ended December
31, 2004
  Years Ended December 31,2005
    
    
    2004Net sales
    
    $
    90,460
    
    
    
    100
    %
    
    $
    60,231
    
    
    
    100
    %Cost of sales
    
    
    28,201
    
    
    
    31
    
    
    
    18,405
    
    
    
    31Gross profit
    
    
    62,259
    
    
    
    69
    
    
    
    41,826
    
    
    
    69Operating expenses
    
    
    54,196
    
    
    
    60
    
    
    
    31,862
    
    
    
    53Research & development
    
    
    4,069
    
    
    
    4
    
    
    
    1,887
    
    
    
    3Income from operations
    
    
    3,994
    
    
    
    4
    
    
    
    8,077
    
    
    
    13Interest and other income
    
    
    417
    
    
    
    
    
    
    
    370
    
    
    
    1Interest expense
    
    
    
    
    
    
    
    
    
    
    40
    
    
    
    Income before income taxes
    
    
    4,411
    
    
    
    5
    
    
    
    8,407
    
    
    
    14Provision for income taxes
    
    
    1,333
    
    
    
    1
    
    
    
    3,450
    
    
    
    6Net income
    
    $
    3,078
    
    
    
    3
    %
    
    $
    4,957
    
    
    
    8
    %
 Net Sales
  25




---



##### Table of Contents



Cost of Sales
  Gross Profit
  Operating Expenses
    Research and Development
  Interest & Other Income
  Interest Expense
  Income Before Income Taxes
  26




---



##### Table of Contents



Provision for Income Tax Expense
  Net Income
  Results Of Operations For The Year Ended December 31, 2004 Compared To The Year Ended December
31, 2003
  Years Ended December 31,2004
    
    
    2003Net sales
    
    $
    60,231
    
    
    
    100
    %
    
    $
    43,496
    
    
    
    100
    %Cost of sales
    
    
    18,405
    
    
    
    31
    
    
    
    13,454
    
    
    
    31Gross profit
    
    
    41,826
    
    
    
    69
    
    
    
    30,042
    
    
    
    69Operating expenses
    
    
    31,862
    
    
    
    53
    
    
    
    21,642
    
    
    
    50Research & development
    
    
    1,887
    
    
    
    3
    
    
    
    2,557
    
    
    
    6Income from operations
    
    
    8,077
    
    
    
    13
    
    
    
    5,843
    
    
    
    13Interest and other income
    
    
    370
    
    
    
    1
    
    
    
    175
    
    
    
    Interest expense
    
    
    40
    
    
    
    
    
    
    
    247
    
    
    
    Income before income taxes
    
    
    8,407
    
    
    
    14
    
    
    
    5,771
    
    
    
    13Provision for income taxes
    
    
    3,450
    
    
    
    6
    
    
    
    2,427
    
    
    
    5Net income
    
    $
    4,957
    
    
    
    8
    %
    
    $
    3,344
    
    
    
    8
    %
 Net Sales
  Cost of Sales
  Gross Profit
  27




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##### Table of Contents



Operating Expenses
  Research and Development
  Interest & Other Income
  Interest Expense
  Income Before Income Taxes
  Provision for Income Tax Expense
  Net Income
  Liquidity and Capital Resources
   28




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##### Table of Contents



29




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##### Table of Contents



Contractual Obligations
  Contractual Cash Obligations(In thousands of dollars)Payments due by Period as of December 31, 2005Less than
    
    
    
    
    
    
    
    
    
    
    AfterTotal
    
    
    1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    5 yearsLong-Term Debt
Obligations
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0Capital Lease Obligations
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Operating Lease Obligations
    
    
    324
    
    
    
    160
    
    
    
    164
    
    
    
    0
    
    
    
    0Purchase Obligations
    
    
    10,693
    
    
    
    10,693
    
    
    
    0
    
    
    
    0
    
    
    
    0Other Long-Term Liabilities Reflected on the
Companys Balance Sheet under
GAAP
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Total
    
    $
    11,017
    
    
    $
    10,853
    
    
    $
    164
    
    
    $
    0
    
    
    $
    0
 Recently Issued Accounting Standards
 Share-Based Payment Accounting for Stock-Based Compensation, Accounting for Stock Issued to Employees
  Amendment
to Rule 4- 01(a) of Regulation S-X Regarding the Compliance Date for Statement of Financial
Accounting Standards No. 123 (Revised 2004), Share-Based Payment
 30




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##### Table of Contents



Inventory Costs  An Amendment of ARB No. 43,
Chapter 4
 Accounting Changes and Error Corrections  A
Replacement of APB Opinion No. 20 and FASB Statement No. 3.
 CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS AND RISK FACTORS
 Forward Looking Statements
  
    
    Our belief that the reserve for litigation losses will be sufficient to resolve the
remaining cases;
    
    our expectations regarding 2006 net sales and net income and our expectations for the
second quarter of 2006;
    
    our belief that growth in sales of the Cough products will occur;
    
    our belief that new advertising approaches and public relations efforts will continue to
build brand awareness;
    
    our anticipation that we will continue to incur approximately $1.0 to $1.2 million in
legal expense each quarter as a result of the Zicam Cold Remedy product liability and
securities litigation in which we are engaged;
    
    our intention to vigorously defend the Zicam Cold Remedy product liability and
securities litigation claims, our expectation that additional product liability lawsuits
may be filed against us, and our belief that any liability resulting from these or other
lawsuits, including any adverse publicity, could materially impact our financial results;
    
    our expectation that the trend of growth in sales in future periods will continue as we
expand consumer awareness and acceptance of our entire Zicam brand of products, increase
distribution, introduce new products, and avoid additional adverse publicity;
    
    our expectation regarding future net income, our belief that expenditures for
advertising and research and development will vary by quarter throughout the year, and our
expectation that advertising expenses will be heaviest in our first and fourth fiscal
quarters;
    
    our belief that the new brand, Nasal Comfort, will gain consumer acceptance and retail distribution;
 31




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##### Table of Contents




    
    our expectation of the effect of recently issued accounting standards;
    
    our expectation that our mix of products sold will change due to seasonality and varying
growth rates within our three market categories;
    
    our expectation of our 10 largest retailers adding new products;
    
    our expectation of continuing profitability in future years;
    
    our intention to review our product return reserve provision monthly and adjust the
reserve amounts as actual product return experience continues to develop, and our
expectation that a higher sales returns allowance will be recorded in the future for new
products that we introduce until such products achieve market acceptance;
    
    our expectation of making income tax payments at our
statutory rates in future years;
    
    our expectation that the average unit cost of goods sold and gross margin will continue
to be affected by the relative mix of products sold;
    
    our expectation that our net income and operating expenses in future periods will vary
largely in connection with the level of our advertising, research and development, and
legal expenses;
    
    our expectation that research and development spending will be between 4-6% of net sales
for 2006 and in subsequent years;
    
    our expectation that earnings in future periods will be significantly impacted by the
seasonality of our sales, the severity of the cold season, the revenues and expenses
associated with new products, and the timing and amount of advertising, research and
development, and legal expenses;
    
    our belief that our existing capital resources and our credit line will be sufficient to
fund our operations and capital requirements for the next 12 months;
    
    our expectation regarding reimbursement for legal expense from our insurance carriers;
    
    our having no plans to directly manufacture and store our products;
    
    our belief that acquiring Viridians assets and intellectual property will assist in
improving the swab design, achieving cost reductions, and ensuring capacity;
    
    our expectation of investing $4 million to build new swab
manufacturing equipment;
    
    our anticipation that initial sales and shipments of the Zicam Rapid Melts +C and Zicam
Cough Melts will begin in the second half of 2006;
    
    our expectation that our manufacturers will have produced inventory available for sales
of products through the 2006-2007 cough and cold season;
    
    our expectation of achieving a 70% gross margin in the future;
    
    our anticipation of entering into a new insurance program and dissolving the Company
funded program; and
    
    our belief that moderate interest rate increases will not have a material adverse impact
on our results of operations or financial position in the foreseeable future.
  32




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##### Table of Contents



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
  
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
 ITEM 9A. CONTROLS AND PROCEDURES
  33




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##### Table of Contents



Managements Annual Report on Internal Control Over Financial Reporting
  (i)
    
    pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the Company;(ii)
    
    provide reasonable assurance that the transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the Company are being made
only in accordance with the authorizations of management and directors of the Company;
and(iii)
    
    provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Companys assets that could have a
material effect of the financial statements.
    34




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 Internal ControlIntegrated Framework
    Internal ControlIntegrated Framework Internal ControlIntegrated Framework
  
 35




---



##### Table of Contents



ITEM 9B. OTHER INFORMATION
   
 PART III
 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
   
 ITEM 11. EXECUTIVE COMPENSATION
  
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
  Securities Authorized for Issuance Under Equity Compensation Plans
  36




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##### Table of Contents



Number of SecuritiesNumber of Securities
    
    
    Weighted- Average
    
    
    Remaining Available forto be Issued Upon
    
    
    Exercise Price of
    
    
    Future Issuance Under EquityExercise of
    
    
    Outstanding
    
    
    Compensation PlansOutstanding Options,
    
    
    Options, Warrants,
    
    
    (Excluding SecuritiesPlan Category
    
    Warrants, and Rights
    
    
    and Rights
    
    
    Reflected in Column (a))(a)
    
    
    (b)
    
    
    (c)Equity compensation plans approved by security holders
    
    
    941,200
    
    
    $
    11.70
    
    
    
    521,524Equity compensation plans not approved by security holders
    
    
    0
    
    
    
    N/A
    
    
    
    N/ATotal
    
    
    941,200
    
    
    $
    11.70
    
    
    
    521,524
 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
  
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
  37




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##### Table of Contents



PART IV
 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 (a)1. Financial Statements
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 Financial Statements
    
    PageReport of Independent Registered Public Accounting Firm
    
    
    37Consolidated Balance Sheets as of December 31, 2005 and 2004
    
    
    38Consolidated Statements of Income for the years ended December 31, 2005, 2004,
and 2003
    
    
    40Consolidated Statements of Changes in Stockholders Equity for the years ended
December 31, 2005, 2004, and 2003
    
    
    41Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004, 2003
    
    
    42Notes to Consolidated Financial Statements
    
    
    44
 38




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
    Internal ControlIntegrated Framework
 /s/ Mayer Hoffman McCann, P.C.
  Phoenix, Arizona   February 9, 2006
 39




---



##### Table of Contents



ASSETS
 2005
    
    
    2004Current Assets:Cash and cash equivalents
    
    $
    12,266,671
    
    
    $
    12,694,486Accounts receivable:Trade, net of allowance for doubtful
accounts of $642,915 and $555,240
    
    
    28,719,382
    
    
    
    12,386,026Other receivable
    
    
    1,234,886
    
    
    
    Insurance receivable
    
    
    4,800,000
    
    
    
    Inventories
    
    
    8,803,135
    
    
    
    7,241,434Prepaid expenses
    
    
    837,877
    
    
    
    887,586Interest receivable
    
    
    124,533
    
    
    
    57,658Deferred tax asset
    
    
    7,797,299
    
    
    
    5,029,600Total Current Assets
    
    
    64,583,783
    
    
    
    38,296,790Property and Equipment, at cost:Office furniture and computer equipment
    
    
    1,248,427
    
    
    
    780,961Machine tooling and manufacturing equipment
    
    
    616,645
    
    
    
    150,000Leasehold improvements
    
    
    178,757
    
    
    
    179,6442,043,829
    
    
    
    1,110,605Less accumulated depreciation
    
    
    (803,479
    )
    
    
    (457,718
    )Net Property and Equipment
    
    
    1,240,350
    
    
    
    652,887Other Assets:Deposits
    
    
    1,008,309
    
    
    
    220,190Other assets
    
    
    57,963
    
    
    
    Restricted cash
    
    
    5,000,000
    
    
    
    5,000,000Debt issuance costs, net of accumulated amortization
of $29,166 and $18,750
    
    
    46,262
    
    
    
    6,250Patents, net of accumulated amortization of $283,437
and $205,861
    
    
    1,774,235
    
    
    
    917,739Goodwill
    
    
    15,039,836
    
    
    
    15,039,836Total Other Assets
    
    
    22,926,605
    
    
    
    21,184,015Total Assets
    
    $
    88,750,738
    
    
    $
    60,133,692
  40




---



##### Table of Contents



LIABILITIES AND STOCKHOLDERS EQUITY
 2005
    
    
    2004Current Liabilities:Accounts payable
    
    $
    8,741,651
    
    
    $
    4,699,316Accrued expenses
    
    
    7,774,871
    
    
    
    6,314,971Sales commission
    
    
    2,600,467
    
    
    
    1,261,899Sales returns and allowances
    
    
    3,880,552
    
    
    
    2,605,260Legal liability
    
    
    13,245,000
    
    
    
    Accrued taxes
    
    
    882,611
    
    
    
    209,946Total Current Liabilities
    
    
    37,125,152
    
    
    
    15,091,392Deferred tax liability
    
    
    3,515,951
    
    
    
    916,738Total Liabilities
    
    
    40,641,103
    
    
    
    16,008,130Commitments and ContingenciesStockholders Equity:Preferred stock: $.001 par value, 2,000,000 shares
authorized, none issued or outstanding
    
    
    
    
    
    
    Common stock: $.001 par value, 30,000,000 shares
authorized, 9,599,529 and 9,520,198 shares
issued and outstanding
    
    
    9,599
    
    
    
    9,520Additional paid in capital
    
    
    43,433,364
    
    
    
    42,527,862Retained earnings
    
    
    5,062,976
    
    
    
    1,984,48448,505,939
    
    
    
    44,521,866Less common stock held in treasury, at cost
(53,800 and 53,800 shares)
    
    
    (396,304
    )
    
    
    (396,304
    )Total Stockholders Equity
    
    
    48,109,635
    
    
    
    44,125,562Total Liabilities and Stockholders Equity
    
    $
    88,750,738
    
    
    $
    60,133,692
  41




---



##### Table of Contents



2005
    
    
    2004
    
    
    2003Net sales
    
    $
    90,460,595
    
    
    $
    60,230,935
    
    
    $
    43,495,763Cost of sales
    
    
    28,201,154
    
    
    
    18,404,822
    
    
    
    13,454,331Gross Profit
    
    
    62,259,441
    
    
    
    41,826,113
    
    
    
    30,041,432Selling, general and administrative expenses
    
    
    54,196,370
    
    
    
    31,861,745
    
    
    
    21,641,749Research and development
    
    
    4,069,367
    
    
    
    1,886,906
    
    
    
    2,557,072Income From Operations
    
    
    3,993,704
    
    
    
    8,077,462
    
    
    
    5,842,611Other Income (Expense):Interest and other income
    
    
    417,724
    
    
    
    369,412
    
    
    
    175,533Interest expense
    
    
    
    
    
    
    (39,778
    )
    
    
    (246,479
    )Total Other Income (Expense)
    
    
    417,724
    
    
    
    329,634
    
    
    
    (70,946
    )Income Before Provision For
Income Taxes
    
    
    4,411,428
    
    
    
    8,407,096
    
    
    
    5,771,665Provision for income taxes
    
    
    1,332,936
    
    
    
    3,449,625
    
    
    
    2,427,347Net Income
    
    $
    3,078,492
    
    
    $
    4,957,471
    
    
    $
    3,344,318Net Income Per Share of Common Stock:Basic:Weighted Average Number of Common Shares
Outstanding
    
    
    9,486,288
    
    
    
    9,494,210
    
    
    
    9,420,059Net Income Per Share of Common Stock
    
    $
    .32
    
    
    $
    .52
    
    
    $
    .36Diluted:Weighted Average Number of Common Shares
Outstanding
    
    
    9,769,922
    
    
    
    9,580,765
    
    
    
    9,473,082Net Income Per Share of Common Stock
    
    $
    .32
    
    
    $
    .52
    
    
    $
    .35
  42




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##### Table of Contents



Series A
    
    
    
    
    
    
    
    
    
    
    Additional
    
    
    
    
    
    
    
    
    
    
    TotalPreferred Stock
    
    
    Common Stock
    
    
    Paid In
    
    
    Treasury
    
    
    Retained
    
    
    StockholdersShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Stock
    
    
    Earnings
    
    
    EquityBalance at December 31, 2002
    
    
    
    
    
    $
    
    
    
    
    9,441,451
    
    
    $
    9,442
    
    
    $
    41,524,921
    
    
    $
    (61,856
    )
    
    $
    (6,317,305
    )
    
    $
    35,155,202Issuance of common stock for services
    
    
    
    
    
    
    
    
    
    
    300
    
    
    
    
    
    
    
    2,402
    
    
    
    
    
    
    
    
    
    
    
    2,402Issuance of common stock upon exercise of stock options
    
    
    
    
    
    
    
    
    
    
    20,000
    
    
    
    20
    
    
    
    219,730
    
    
    
    
    
    
    
    
    
    
    
    219,750Repurchase shares of the Companys common stock (26,300 shares)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (177,367
    )
    
    
    
    
    
    
    (177,367
    )Issuance of restricted stock pursuant to the Companys
restricted stock bonus program
    
    
    
    
    
    
    
    
    
    
    12,850
    
    
    
    13
    
    
    
    227,946
    
    
    
    
    
    
    
    
    
    
    
    227,959Income tax benefit from the exercise of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,190
    
    
    
    
    
    
    
    
    
    
    
    18,190Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,344,318
    
    
    
    3,344,318Balance at December 31, 2003
    
    
    
    
    
    
    
    
    
    
    9,474,601
    
    
    
    9,475
    
    
    
    41,993,189
    
    
    
    (239,223
    )
    
    
    (2,972,987
    )
    
    
    38,790,454Issuance of common stock upon exercise of stock options
    
    
    
    
    
    
    
    
    
    
    47,334
    
    
    
    47
    
    
    
    503,892
    
    
    
    
    
    
    
    
    
    
    
    503,939Repurchase shares of the Companys common stock (17,900 shares)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (157,081
    )
    
    
    
    
    
    
    (157,081
    )Forfeiture of restricted stock pursuant to the Companys
restricted stock bonus program
    
    
    
    
    
    
    
    
    
    
    (1,737
    )
    
    
    (2
    )
    
    
    (23,349
    )
    
    
    
    
    
    
    
    
    
    
    (23,351
    )Income tax benefit from the exercise of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    54,130
    
    
    
    
    
    
    
    
    
    
    
    54,130Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,957,471
    
    
    
    4,957,471Balance at December 31, 2004
    
    
    
    
    
    
    
    
    
    
    9,520,198
    
    
    
    9,520
    
    
    
    42,527,862
    
    
    
    (396,304
    )
    
    
    1,984,484
    
    
    
    44,125,562Issuance of common stock upon exercise of stock options
    
    
    
    
    
    
    
    
    
    
    23,134
    
    
    
    23
    
    
    
    184,106
    
    
    
    
    
    
    
    
    
    
    
    184,129Issuance of restricted stock pursuant to the Companys
restricted stock bonus program
    
    
    
    
    
    
    
    
    
    
    56,197
    
    
    
    56
    
    
    
    641,052
    
    
    
    
    
    
    
    
    
    
    
    641,108Income tax benefit from the exercise of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    80,344
    
    
    
    
    
    
    
    
    
    
    
    80,344Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,078,492
    
    
    
    3,078,492Balance at December 31, 2005
    
    
    
    
    
    $
    
    
    
    
    9,599,529
    
    
    $
    9,599
    
    
    $
    43,433,364
    
    
    $
    (396,304
    )
    
    $
    5,062,976
    
    
    $
    48,109,635
  43




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##### Table of Contents



2005
    
    
    2004
    
    
    2003Cash Flows From Operating Activities:Net income
    
    $
    3,078,492
    
    
    $
    4,957,471
    
    
    $
    3,344,318Adjustments to reconcile net income to net
cash provided by operating activities:Depreciation
    
    
    345,761
    
    
    
    209,990
    
    
    
    157,933Amortization
    
    
    83,415
    
    
    
    60,831
    
    
    
    81,663Amortization of discount on notes payable
    
    
    
    
    
    
    
    
    
    
    246,357Provision for bad debts
    
    
    87,675
    
    
    
    (46,117
    )
    
    
    (45,923
    )Deferred income taxes
    
    
    (88,142
    )
    
    
    3,122,634
    
    
    
    2,195,309Common stock issued for compensation
    
    
    641,108
    
    
    
    (23,351
    )
    
    
    230,361Changes in assets and liabilities:Accounts receivable
    
    
    (17,655,917
    )
    
    
    (868,398
    )
    
    
    (4,387,992
    )Insurance receivable
    
    
    (4,800,000
    )
    
    
    
    
    
    
    Interest receivable
    
    
    (66,875
    )
    
    
    (57,658
    )
    
    
    Inventories
    
    
    (1,561,701
    )
    
    
    (3,973,830
    )
    
    
    (1,694,570
    )Prepaid expenses and other
    
    
    (8,254
    )
    
    
    (271,796
    )
    
    
    (91,961
    )Accounts payable
    
    
    4,042,335
    
    
    
    (1,127,532
    )
    
    
    2,912,960Accrued expenses
    
    
    3,471,133
    
    
    
    4,061,446
    
    
    
    867,851Legal liability
    
    
    13,245,000
    
    
    
    
    
    
    
    Sales returns and allowances
    
    
    1,275,292
    
    
    
    870,692
    
    
    
    729,855Net Cash Provided By Operating Activities
    
    
    2,089,322
    
    
    
    6,914,382
    
    
    
    4,546,161Cash Flows From Investing Activities:Capital expenditures
    
    
    (1,867,296
    )
    
    
    (241,875
    )
    
    
    (241,021
    )Deposits and other
    
    
    (788,119
    )
    
    
    (7,493
    )
    
    
    (175,000
    )Restricted cash
    
    
    
    
    
    
    (5,000,000
    )
    
    
    Net Cash Used By Investing Activities
    
    
    (2,655,415
    )
    
    
    (5,249,368
    )
    
    
    (416,021
    )
  44




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##### Table of Contents



2005
    
    
    2004
    
    
    2003Cash Flows From Financing Activities:Proceeds from borrowing
    
    
    
    
    
    
    2,000,000
    
    
    
    Principal payments on notes payable
    
    
    
    
    
    
    (2,000,000
    )
    
    
    (5,500,000
    )Debt issuance costs
    
    
    (45,851
    )
    
    
    
    
    
    
    Issuance of common stock
    
    
    184,129
    
    
    
    503,939
    
    
    
    219,750Purchase of treasury stock
    
    
    
    
    
    
    (157,081
    )
    
    
    (177,367
    )Net Cash Provided (Used) By Financing Activities
    
    
    138,278
    
    
    
    346,858
    
    
    
    (5,457,617
    )Net Increase (Decrease) in Cash and Cash Equivalents
    
    
    (427,815
    )
    
    
    2,011,872
    
    
    
    (1,327,477
    )Cash and Cash Equivalents at Beginning of Year
    
    
    12,694,486
    
    
    
    10,682,614
    
    
    
    12,010,091Cash and Cash Equivalents at End of Year
    
    $
    12,266,671
    
    
    $
    12,694,486
    
    
    $
    10,682,614Supplemental Disclosure of Cash Flow Information:Cash paid during the year for:Interest
    
    $
    
    
    
    $
    39,778
    
    
    $
    246,479Income taxes
    
    
    814,164
    
    
    
    356,739
    
    
    
    996
  45




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##### Table of Contents



MATRIXX INITIATIVES, INC. AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1. Organization and Summary of Significant Accounting Policies
 Organization
   Principles of Consolidation
  Cash and Cash Equivalents
  Accounts Receivable and Allowance for Doubtful Accounts
  Inventories
  Marketable Securities
  Property and Equipment
 Classification
    
    Useful Life in YearsMachine tooling and manufacturing equipment
    
    
    3-7Office furniture and computer equipment
    
    
    3-5Leasehold improvements
    
    
    2-3
  Intangible Assets
  46




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##### Table of Contents



MATRIXX INITIATIVES, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 Long-Lived Assets
       47




---



##### Table of Contents



MATRIXX INITIATIVES, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 Revenue Recognition
  Stock-Based Compensation
  2005
    
    
    2004
    
    
    2003Net income applicable to common shareholders, as
reported
    
    $
    3,078,492
    
    
    $
    4,957,471
    
    
    $
    3,344,318Add Stock-based employee compensation expense included
in net earnings, net of tax
    
    
    
    
    
    
    
    
    
    
    Less stock based employee compensation expense
determined under fair value based methods for all awards,
net of related tax effects
    
    
    1,546,183
    
    
    
    1,475,313
    
    
    
    402,871Proforma Net Income
    
    $
    1,532,309
    
    
    $
    3,482,158
    
    
    $
    2,941,447Net income per share of common stock:Basic:As reported
    
    $
    0.32
    
    
    $
    0.52
    
    
    $
    0.36Pro forma
    
    $
    0.16
    
    
    $
    0.37
    
    
    $
    0.31DilutedAs reported
    
    $
    0.32
    
    
    $
    0.52
    
    
    $
    0.35Pro forma
    
    $
    0.16
    
    
    $
    0.36
    
    
    $
    0.31
  2005
    
    2004
    
    2003Risk-free interest rate
    
    
    3.66
    %
    
    
    3.25
    %
    
    
    3.12
    %Expected life
    
    5.00 years
    
    4.95 years
    
    4.88 yearsExpected volatility
    
    
    61.40
    %
    
    
    66.44
    %
    
    
    62.96
    %Expected dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
 48




---



##### Table of Contents



MATRIXX INITIATIVES, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 Comprehensive Income
  Shipping and Handling Costs
  Income Taxes
  Research and Development
  Advertising
  Net Income Per Share of Common Stock
   Year Ended December 31,2005
    
    
    2004
    
    
    2003Net income applicable to common shareholders
    
    $
    3,078,492
    
    
    $
    4,957,471
    
    
    $
    3,344,318Weighted average common shares outstanding  Basic
    
    
    9,486,288
    
    
    
    9,494,210
    
    
    
    9,420,059Dilutive securities
    
    
    283,634
    
    
    
    86,555
    
    
    
    53,023Weighted average common shares outstanding  Diluted
    
    
    9,769,922
    
    
    
    9,580,765
    
    
    
    9,473,082Net Income per common share:Basic
    
    $
    0.32
    
    
    $
    0.52
    
    
    $
    0.36Diluted
    
    $
    0.32
    
    
    $
    0.52
    
    
    $
    0.35
 49




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##### Table of Contents



MATRIXX INITIATIVES, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 Estimates
  Recently Issued Accounting Standards
 Share-Based Payment Accounting for Stock-Based
Compensation, Accounting for
Stock Issued to Employees
   Amendment
to Rule 4- 01(a) of Regulation S-X Regarding the Compliance Date for Statement of Financial
Accounting Standards No. 123 (Revised 2004), Share-Based Payment
 50




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##### Table of Contents



MATRIXX INITIATIVES, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  Inventory Costs  An amendment of ARB No. 43,
Chapter 4
 Accounting Changes and Error Corrections  A
Replacement of APB Opinion No. 20 and FASB Statement No. 3.
 Reclassifications
  2. Inventories
  2005
    
    
    2004Raw materials and packaging
    
    $
    3,520,013
    
    
    $
    2,140,915Finished goods
    
    
    5,283,122
    
    
    
    5,100,519Total
    
    $
    8,803,135
    
    
    $
    7,241,434
 3. Current Notes Payable
  51




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##### Table of Contents



MATRIXX INITIATIVES, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 4. Reserves
  AdditionsBalance at
    
    Charged to
    
    
    
    
    
    Balance atBeginning of
    
    Costs and
    
    
    
    
    
    End ofDescription
    
    Period
    
    Expenses
    
    Deductions
    
    PeriodReserves for Sales Returns and AllowancesDecember 31, 2003
    
    $
    1,004,713
    
    
    $
    5,879,542
    
    
    $
    5,149,687
    
    
    $
    1,734,568December 31, 2004
    
    
    1,734,568
    
    
    
    8,134,044
    
    
    
    7,263,352
    
    
    
    2,605,260December 31, 2005
    
    
    2,605,260
    
    
    
    11,796,458
    
    
    
    10,521,165
    
    
    
    3,880,553
 AdditionsBalance at
    
    Charged to
    
    
    
    
    
    Balance atBeginning of
    
    Costs and
    
    
    
    
    
    End ofDescription
    
    Period
    
    Expenses
    
    Deductions
    
    PeriodAllowance for Doubtful AccountsDecember 31, 2003
    
    $
    647,280
    
    
    $
    114,353
    
    
    $
    160,276
    
    
    $
    601,357December 31, 2004
    
    
    601,357
    
    
    
    87,934
    
    
    
    134,051
    
    
    
    555,240December 31, 2005
    
    
    555,240
    
    
    
    92,568
    
    
    
    4,893
    
    
    
    642,915
 5. Income Taxes
  2005
    
    
    2004
    
    
    2003Current:Federal
    
    $
    1,107,248
    
    
    $
    204,834
    
    
    $
    110,309State
    
    
    394,137
    
    
    
    124,157
    
    
    
    121,729Total
    
    
    1,501,385
    
    
    
    326,991
    
    
    
    232,038Deferred:Federal
    
    
    131,506
    
    
    
    2,779,584
    
    
    
    2,122,462State
    
    
    36,943
    
    
    
    343,050
    
    
    
    72,847Total
    
    
    168,449
    
    
    
    3,122,634
    
    
    
    2,195,309Total Provision For Income Taxes
    
    $
    1 ,332,936
    
    
    $
    3 ,449,625
    
    
    $
    2,427,347
 52




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##### Table of Contents



MATRIXX INITIATIVES, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  2005
    
    2004
    
    2003Federal statutory rate
    
    
    34
    %
    
    
    34
    %
    
    
    34
    %State income taxes, net of federal benefits
    
    
    5
    
    
    
    5
    
    
    
    5Current year tax credits
    
    
    (11
    )
    
    
    
    
    
    
    Valuation allowance
    
    
    
    
    
    
    
    
    
    
    (5
    )Other
    
    
    2
    
    
    
    2
    
    
    
    8Net operating loss carryover
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    30
    %
    
    
    41
    %
    
    
    42
    %
  2005
    
    
    2004Net operating loss carryforwards
    
    $
    
    
    
    $
    3,523,500Reserve for bad debts
    
    
    247,500
    
    
    
    227,500Inventory valuation reserve
    
    
    210,500
    
    
    
    196,800Reserves and accrued expenses
    
    
    1,600
    
    
    
    1,218,300Research and development credit
    
    
    1,777,800
    
    
    
    165,500Other
    
    
    460,600
    
    
    
    230,600Accrued legal liabilities
    
    
    5,099,300
    
    
    
    Total Deferred Tax Asset
    
    
    7,797,300
    
    
    
    5,562,200Amortization of intangible assets
    
    
    (1,590,900
    )
    
    
    (1,276,800
    )Accrued receivable
    
    
    (1,848,000
    )
    
    
    Depreciation
    
    
    (77,100
    )
    
    
    (172,500
    )Total Deferred Tax Liability
    
    
    (3,516,000
    )
    
    
    (1,449,300
    )Net Deferred Tax Asset
    
    $
    4,281,300
    
    
    $
    4,112,900
  53




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##### Table of Contents



MATRIXX INITIATIVES, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
   6. Preferred Stock
  7. Stockholders Equity
 Stock Repurchase Plan
   Shareholder Rights Plan
  54




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##### Table of Contents



MATRIXX INITIATIVES, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  Directors Restricted Stock Purchase Program
  8. Stock Options and Warrants
 1995 Stock Option Plan
    55




---



##### Table of Contents



MATRIXX INITIATIVES, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 WeightedNumber of
    
    AverageShares
    
    Exercise PriceOptions
outstanding at December 31, 2002
    
    
    212,000
    
    
    $
    10.57Granted
    
    
    
    
    
    
    Exercised
    
    
    (15,000
    )
    
    
    12.25Cancelled
    
    
    (44,000
    )
    
    
    12.89Options outstanding at December 31, 2003
    
    
    153,000
    
    
    
    9.73Granted
    
    
    
    
    
    
    Exercised
    
    
    (20,000
    )
    
    
    8.38Cancelled
    
    
    (58,000
    )
    
    
    12.67Options outstanding at December 31, 2004
    
    
    75,000
    
    
    
    7.83Granted
    
    
    
    
    
    
    Exercised
    
    
    (22,000
    )
    
    
    7.83Cancelled
    
    
    
    
    
    
    Options outstanding at December 31, 2005
    
    
    53,000
    
    
    $
    7.83
 2001 Long-Term Incentive Plan
   56




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##### Table of Contents



MATRIXX INITIATIVES, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 WeightedNumber of
    
    AverageShares
    
    Exercise PriceOptions outstanding at December 31, 2002
    
    
    190,800
    
    
    $
    8.74Granted
    
    
    170,000
    
    
    
    8.34Exercised
    
    
    (5,000
    )
    
    
    7.20Cancelled
    
    
    (63,000
    )
    
    
    9.39Options outstanding at December 31, 2003
    
    
    292,800
    
    
    
    8.39Granted
    
    
    440,000
    
    
    
    14.68Exercised
    
    
    (12,334
    )
    
    
    9.04Cancelled
    
    
    (14,066
    )
    
    
    12.15Options outstanding at December 31, 2004
    
    
    706,400
    
    
    
    12.22Granted
    
    
    188,000
    
    
    
    10.98Exercised
    
    
    (1,134
    )
    
    
    10.47Cancelled
    
    
    (5,066
    )
    
    
    17.78Options outstanding at December 31, 2005
    
    
    888,200
    
    
    
    11.93
 Other Stock Options
   WeightedNumber of
    
    AverageShares
    
    Exercise PriceOptions outstanding at December 31, 2002
    
    
    115,000
    
    
    $
    10.43Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Cancelled
    
    
    (95,000
    )
    
    
    9.61Options outstanding at December 31, 2003
    
    
    20,000
    
    
    
    14.31Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Cancelled
    
    
    (20,000
    )
    
    
    14.31Options outstanding at December 31, 2004
    
    
    
    
    
    
    N/AGranted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Cancelled
    
    
    
    
    
    
    Options outstanding at December 31, 2005
    
    
    
    
    
    
    N/A
 57




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##### Table of Contents



MATRIXX INITIATIVES, INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 Other Stock Option Information
   Options Outstanding
    
    
    Options ExercisableWeightedAverage
    
    
    WeightedRemaining
    
    
    Average
    
    
    
    
    
    
    WeightedRange of
    
    
    Number
    
    
    Contractual Life
    
    
    Exercise
    
    
    Number
    
    
    AverageExercise Prices
    
    
    Outstanding
    
    
    in Years
    
    
    Price
    
    
    Exercisable
    
    
    Exercise Price$
    6.90 -  $8.59
    
    
    
    414,200
    
    
    
    3.96
    
    
    $
    8.04
    
    
    
    284,195
    
    
    $
    7.99$
    9.63  -  $12.30
    
    
    
    247,000
    
    
    
    5.21
    
    
    $
    10.80
    
    
    
    242,000
    
    
    $
    10.78$
    17.90 -  $18.02
    
    
    
    280,000
    
    
    
    5.03
    
    
    $
    17.92
    
    
    
    280,000
    
    
    $
    17.92$
    6.90 - $18.02
    
    
    
    941,200
    
    
    
    4.61
    
    
    $
    11.70
    
    
    
    806,195
    
    
    $
    12.28
 Compensation Expense
   Financing Warrants
  58




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##### Table of Contents



MATRIXX INITIATIVES, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 9. Commitments and Contingencies
 Leases
  Year EndingDecember 31,
    
    Leases2006
    
    $
    167,1992007
    
    
    171,7712008
    
    
    2009
    
    
    2010
    
    
    Total Minimum Lease Payments
    
    $
    338,970
  Officer Indemnification
  Litigation
   Product Liability
  59




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##### Table of Contents



MATRIXX INITIATIVES, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  .
   60




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##### Table of Contents



MATRIXX INITIATIVES, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 Litigation Reserves
  Securities Litigation Matters
  10. Employee Benefit Plan
  61




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##### Table of Contents



MATRIXX INITIATIVES, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  11. Concentration of Credit Risk and Major Customers
     2005
    
    2004
    
    2003Customer A
    
    
    20.5
    %
    
    
    20.3
    %
    
    
    16.9
    %Customer B
    
    
    14.6
    %
    
    
    12.9
    %
    
    
    14.4
    %Customer C
    
    
    *
    
    
    
    11.7
    %
    
    
    *
 
 *
    
    Less than 10% 12. Fair Value of Financial Instruments
  62




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##### Table of Contents



MATRIXX INITIATIVES, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 2005
    
    2004Carrying
    
    Estimated
    
    Carrying
    
    EstimatedAmount
    
    Fair Value
    
    Amount
    
    Fair ValueFiancial AssetsCash and cash equivalents
    
    $
    12,266,671
    
    
    $
    12,266,671
    
    
    $
    12,694,486
    
    
    $
    12,694,486Restricted cash
    
    $
    5,000,000
    
    
    $
    5,000,000
    
    
    $
    5,000,000
    
    
    $
    5,000,000Financial LiabilitiesLong-term debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
  13. Selected Quarterly Financial Data (Unaudited)
  Fiscal Year 2005 Quarters1st
    
    2nd
    
    3rd
    
    4thNet sales
    
    $
    14,981,590
    
    
    $
    6,254,669
    
    
    $
    25,202,624
    
    
    $
    44,021,712Gross profit
    
    
    10,744,156
    
    
    
    4,569,849
    
    
    
    17,049,046
    
    
    
    29,896,390Net income (loss) from operations
    
    
    1,421,081
    
    
    
    (925,243
    )
    
    
    9,257,141
    
    
    
    (5,759,275
    )Net income (loss) per basic
share from operations
    
    
    0.09
    
    
    
    (0.05
    )
    
    
    0.59
    
    
    
    (0.31
    )Net income (loss) per diluted
share from operations
    
    
    0.09
    
    
    
    (0.05
    )
    
    
    0.58
    
    
    
    (0.31
    )Net income (loss)
    
    
    895,558
    
    
    
    (504,643
    )
    
    
    5,639,915
    
    
    
    (2,952,338
    )
 Fiscal Year 2004 Quarters1st
    
    2nd
    
    3rd
    
    4thNet sales
    
    $
    12,932,566
    
    
    $
    3,391,721
    
    
    $
    16,904,856
    
    
    $
    27,001,792Gross profit
    
    
    8,833,341
    
    
    
    2,320,176
    
    
    
    11,670,250
    
    
    
    19,002,346Net income (loss) from
operations
    
    
    596,638
    
    
    
    (989,396
    )
    
    
    3,676,984
    
    
    
    1,673,245Net income (loss) per
basic
share from operations
    
    
    0.06
    
    
    
    (0.10
    )
    
    
    0.39
    
    
    
    0.18Net income (loss) per
diluted
share from operations
    
    
    0.06
    
    
    
    (0.10
    )
    
    
    0.39
    
    
    
    0.17Net income (loss)
    
    
    596,638
    
    
    
    (989,396
    )
    
    
    3,676,984
    
    
    
    1,673,245
 63




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##### Table of Contents



ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (cont.)
 (a)2. Financial Statement Schedules
  (a)3. Exhibits
 Exhibit No.
    
    Title3.1
    
    Certificate of Incorporation and Amendments thereto of the
Registrant (1)3.2
    
    Bylaws of the Registrant (1)4.1
    
    Rights Agreement dated as of July 22, 2002 by and between the
Registrant and Corporate Stock Transfer, Inc. (3)10.1
    
    *1995 Stock Option Plan (5)10.1.2
    
    *Amendment to 1995 Stock Option Plan (5)10.2
    
    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)10.3
    
    *Employment Agreement between the Registrant and Carl J.
Johnson (8)10.3.1
    
    *First Amendment to Employment Agreement between the
Registrant and Carl J. Johnson (2)10.4
    
    *2001 Stock Incentive Plan (9)10.5
    
    *Summary of Matrixx Initiatives, Inc. Director Restricted
Stock Purchase Program (6)10.6
    
    Manufacturing Agreement with BioZone Laboratories (11)10.7
    
    *Summary of Revised Director Compensation Structure for
Non-Employee Directors10.8
    
    *Matrixx Initiatives, Inc. 2001 Long-Term Incentive Plan Grant
of Incentive Stock Option (12)10.9
    
    *Matrixx Initiatives, Inc. 2001 Long-Term Incentive Plan
Restricted Stock Program Agreement (12)10.10
    
    Manufacturing Agreement with
Applied Laboratories, Inc. (13)10.11
    
    Credit Agreement dated
September 27, 2005 among the Registrant, Zicam, LLC and Comerica Bank
(14)10.12
    
    **Form of Change of Control Agreement
between Registrant and Registrants Executive Officers10.13
    
    Asset Purchase Agreement dated as of October 31, 2005 by and
among Viridian Packaging Solutions, LLC, Beutlich, L.P., Frederic J. Beutlich and
Zicam Swab Products, LLC (15)21
    
    Subsidiaries of the Registrant (10)23.1
    
    **Consent of Mayer Hoffman McCann P.C., independent registered
public accounting firm
 64




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##### Table of Contents



Exhibit No.
    
    Title31.1
    
    **Certification of CEO Pursuant to Section 302 of the
Sarbanes-Oxley Act of 200231.2
    
    **Certification of CFO Pursuant to Section 302 of the
Sarbanes-Oxley Act of 200232.1
    
    **Certification of CEO pursuant to 18 U.S.C. Section 1350.32.2
    
    **Certification of CFO pursuant to 18 U.S.C. Section 1350.
 
 *
    
    Indicates management compensatory contract, plan or arrangement.**
    
    Filed with this Form 10-K.(1)
    
    Incorporated by reference to the Registrants Amendment No. 1 to Form
8-A, file No. 000-27646, as filed on June 18, 2002.(2)
    
    Incorporated by reference to the Registrants Report on Form 10-K for
the fiscal year ended December 31, 2001, file number 000-27646.(3)
    
    Incorporated by reference to the Registrants registration statement
on Form 8-A, filed July 23, 2002, file number 000-27646.(4)
    
    Incorporated by reference to the Registrants Report on Form 10-Q for
the quarter ended June 30, 2003, file number 000-27646.(5)
    
    Incorporated by reference to the Registrants Registration Statement
on Form SB-2 declared effective by the Commission on April 24, 1996,
file number 333-870.(6)
    
    Incorporated by reference to the Registrants Report on Form 10-Q for
the quarter ended June 30, 2002, file number 000-27646.(7)
    
    Incorporated by reference to the Registrants Report on Form 8-K
filed December 14, 2001, file number 000-27646.(8)
    
    Incorporated by reference to the Registrants Report on Form 10-Q for
the quarter ended June 30, 2001, file number 000-27646.(9)
    
    Incorporated by reference to the Registrants definitive proxy
statement on Schedule 14A, filed April 8, 2005, file number
001-31404.(10)
    
    Incorporated by reference to the Registrants Report on
Form 10-K for the fiscal year ended December 31, 2003, file number 001-31404.(11)
    
    Incorporated by reference to the Registrants Report on Form 8-K
filed October 28, 2004, file number 001-31404.(12)
    
    Incorporated by reference to the Registrants Report on Form 8-K
filed February 11, 2005 file number 001-31404.(13)
    
    Incorporated by reference to the Registrants Report on Form 10-Q
filed November 10, 2004 file number 001-31404.(14)
    
    Incorporated by reference to the Registrants Report on
Form 8-K filed November 7, 2005, file number 001-31404.(15)
    
    Incorporated by reference to the Registrants Report on
Form 8-K filed November 8, 2005, file number 001-31404. 65




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##### Table of Contents



SIGNATURES
  MATRIXX INITIATIVES, INC.By:
    
    /s/ Carl J. JohnsonCarl J. JohnsonPresident and Chief Executive Officer
  Signature
    
    Title
    
    Date/s/ Edward E. Faber
    
    Chairman of the Board of Directors
    
    March 13, 2006Edward E. Faber/s/ Carl J. Johnson
    
    President, Chief Executive
Officer and
    
    March 13, 2006Carl J. Johnson
    
    Director/s/ William C. Egan
    
    Director
    
    March 13, 2006William C. Egan/s/ Edward J. Walsh
    
    Director
    
    March 13, 2006Edward J. Walsh/s/ L. White Matthews, III
    
    Director
    
    March 13, 2006L. White Matthews, III/s/ Michael A. Zeher
    
    Director
    
    March 13, 2006Michael A. Zeher/s/ Samuel C. Cowley
    
    Director
    
    March 13, 2006Samuel C. Cowley/s/ John M. Clayton
    
    Director
    
    March 13, 2006John M. Clayton/s/ Lori Bush
    
    Director
    
    March 13, 2006Lori Bush/s/ William J. Hemelt
    
    Executive Vice President,
Chief Financial
    
    March 13, 2006William J. Hemelt
    
    Officer
(Principal Financial
Officer & Principal
Accounting Officer), and
Treasurer




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##### Table of Contents



Exhibit Index
 Exhibit No.
    
    Title10.12
    
    **Form of Change of Control Agreement between Registrant and
Registrants Executive Officers.23.1
    
    **Consent of Mayer Hoffman McCann P.C., independent registered
public accounting firm31.1
    
    **Certification of CEO Pursuant to Section 302 of the
Sarbanes-Oxley Act of 200231.2
    
    **Certification of CFO Pursuant to Section 302 of the
Sarbanes-Oxley Act of 200232.1
    
    **Certification of CEO pursuant to 18 U.S.C. Section 1350.32.2
    
    **Certification of CFO pursuant to 18 U.S.C. Section 1350.
 
 **
    
    Filed with this Form 10-K. 67